As filed
with the Securities and Exchange Commission on February 13, 2009
Registration
No. 333-155847
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
AMENDMENT
NO. 1
to
FORM
S-1
REGISTRATION
STATEMENT
UNDER
THE
SECURITIES
ACT OF 1933
ABC
FUNDING, INC.
(Name of
registrant as specified in its charter)
|
Nevada
|
1311
|
56-2458730
|
|
(State
or Jurisdiction of Incorporation or Organization)
|
(primary
standard industrial classification code number)
|
(IRS
Employer Identification No.)
|
6630
Cypresswood Drive, Suite 300
Spring,
Texas 77379
(832)
559-6060
(Address
and telephone number of registrant’s principal executive offices and place of
business)
Robert P.
Munn, Chief Executive Officer
ABC
Funding, Inc.
6630
Cypreswood Drive, Suite 200
Spring,
Texas 77379
(832)
559-6060
(Name,
address and telephone number of agent for service)
4606 FM 1960 West, Suite 400
Houston, Texas, Texas 77069
(Former
Name or Former Address, if Changed Since Last Report)
Copies of
communications to:
Matthew
S, Cohen, Esq.
Thompson
& Knight LLP
919 Third
Avenue, 39
th
Floor
New York,
New York 10022
(212)
751-3001
If any of
the securities being registered on this Form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act of 1933, check
the following box.
x
If this
Form is filed to register additional securities for an offering pursuant to Rule
462(b) under the Securities Act, please check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the offering.
¨
If this
Form is a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering.
¨
If this
Form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering.
¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definitions of “large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.
Large
accelerated
filer [_] Accelerated
filer [_]
Non-accelerated
filer [_] (Do not check if a smaller reporting
company)
Smaller
reporting company [X]
_____________
The
registrant hereby amends this registration statement on such date or dates as
may be necessary to delay its effective date until the registrant shall file a
further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
CALCULATION
OF REGISTRATION FEE
|
|
|
Title
of Each Class of
Securities
to be Registered
|
|
Amount
to be
Registered
|
|
|
Proposed
Maximum
Offering
Price
Per
Unit
|
|
Proposed
Maximum
Aggregate
Offering
Price
|
|
Amount
of
Registration
Fee
|
|
Common
stock, $.001 par value
|
|
|
46,288,632
|
(1)(2)
|
|
$
|
0.12
|
(3)
|
|
$
|
5,554,636
|
|
|
$
|
218.30
|
(3)
|
|
Total
|
|
|
46,288,632
|
|
|
|
|
|
$
|
5,554,636
|
|
|
$
|
218.30
|
|
|
|
|
(1)
|
Represents
shares of common stock, $.001 par value, issuable upon conversion or
exercise, as applicable, of outstanding derivative securities upon the
effectiveness in the State of Nevada of our Certificate of Amendment of
Articles of Incorporation increasing the number of authorized shares of
our common stock available for issuance, which overlying derivative
securities consist of: (i) 17,500,000 shares issuable upon conversion of
shares of Series D Preferred Stock issued on September 2, 2008; (ii)
1,363,636 shares issuable upon conversion of shares of Series E Preferred
Stock issued on September 2, 2008; (iii) 3,000,000 shares of common stock
issuable upon exercise, at an initial exercise price of $0.33 per share,
subject to adjustment, of outstanding warrants granted on May 20, 2008;
(iv) 24,199,996 shares of common stock issuable upon exercise, at an
initial exercise price of $0.35 per share, subject to adjustment, of
outstanding warrants granted on September 2, 2008; and (v) 225,000 shares
of common stock issuable upon exercise, at an initial exercise price of
$0.33 per share, subject to adjustment, of outstanding warrants granted on
September 2, 2008
|
|
(2)
|
The
number of shares of common stock issuable upon exercise of the warrants is
subject to adjustment upon the occurrence of stock dividends, stock splits
and similar transactions described in the warrants. Pursuant to
Rule 416 under the Securities Act, the amount of common stock to be
registered also includes an indeterminate number of shares that may become
issuable upon exercise of the outstanding warrants as a result of such
adjustments.
|
|
(3)
|
Estimated
solely for the purpose of calculating the registration fee pursuant to
Rule 457(c) promulgated under the Securities Act, on the basis of the
average of the high and low prices ($0.07 and $0.07) of our common
stock on the OTC Bulletin Board as reported on January 29, 2009, the
date of the last reported sale .
|
The
information in this registration statement is not complete and is subject to
change. We may not sell these securities until the registration
statement filed with the Securities and Exchange Commission of which this
registration statement is a part is declared effective. This
prospectus does not constitute an offer to sell, or a solicitation of an offer
to buy the securities in any circumstances under which the offer or solicitation
is not permitted.
Subject
to Completion, Dated February 12, 2009
ABC
FUNDING, INC.
46,288,632
Shares of Common Stock
This
prospectus relates to the resale from time to time of up to 46,288,632 shares of
our common stock, par value $.001 per share (the “
Registered Securities
”),
consisting of the following securities issued or granted by us, as the case may
be, in connection with our purchase of 100% of the capital stock of Voyager Gas
Corporation (the “Voyager Acquisition”) and the related financing:
|
·
|
17,500,000
shares underlying shares of our Series D Preferred Stock issued on
September 2, 2008, constituting partial consideration of the purchase
price in the Voyager Acquisition, as described elsewhere in this
prospectus under “
Description of Company –
Voyager Acquisition and Related Acquisition
Financing”;
|
|
·
|
up
to 1,363,636 shares underlying shares of our Series E Preferred Stock
issued on September 2, 2008 in full satisfaction of a Debenture (as
defined below), in the redemption amount of $450,000, then outstanding
from the Bridge Loan (as defined
below);
|
|
·
|
up
to 24,199,996 shares underlying a warrant, with an initial exercise price
of $0.35 per share, subject to adjustment, granted on September 2, 2008,
in further consideration for monies advanced under our term loan and
senior secured revolver (the “Credit Facility”) to fund the Voyager
Acquisition and general corporate purposes, as described elsewhere in this
prospectus under “
Description of Company –
Voyager Acquisition and Related Acquisition Financing
” and “
Management Analysis and
Discussion – Liquidity and Capital
Resources
”;
|
|
·
|
up
to 2,400,000 shares underlying warrants, with an initial exercise price of
$0.33 per share, subject to adjustment, granted on May 20, 2008 in
connection with the sale of our Secured Convertible Debentures due
September 29, 2008 (the “Debentures”), in the aggregate principal amount
of $800,000, the proceeds of which were used to fund payment of the
performance deposit in the Voyager Transaction (the “Bridge Loan”), as
described elsewhere in this prospectus under “
Description of Company –
Voyager Acquisition and Related Acquisition
Financing
”;
|
|
·
|
up
to 600,000 shares underlying warrants, with an initial exercise price of
$0.33 per share, subject to adjustment, granted on May 20, 2008, as part
of the placement fee in connection with the Bridge Loan;
and
|
|
·
|
up
to 225,000 shares underlying warrants, with an initial exercise price of
$0.33 per share, subject to adjustment, granted on September 2, 2008, as
part of the placement fee in connection with the funding of the Credit
Facility.
|
The above
transactions were previously disclosed in our Current Reports on Forms 8-K filed
with the Securities and Exchange Commission (“SEC”) on each of May 23, 2008 and
September 9, 2008, as applicable, all of which are subject to the effectiveness
in the State of Nevada of our Certificate of Amendment of Articles of
Incorporation increasing the number of authorized shares of our common stock
available for issuance from 24,000,000 to 149,000,000 (the “Charter
Amendment”). On November 28, 2008, we filed with the SEC an amended
Preliminary Information Statement on Schedule 14C with respect to the Charter
Amendment, among other items.
The
Registered Securities are being offered to the public market by those
individuals listed in the section of this prospectus entitled “
Selling Security
Holders
.” The selling security holders, by themselves or
through brokers and dealers, may offer and sell the Registered Securities being
offered for resale under this prospectus at prevailing market prices or in
transactions at negotiated prices. We will not receive any proceeds
from the sale of the Registered Securities, but will bear the costs relating to
the registration thereof.
Our
common stock is traded on the Over-the-Counter Bulletin Board (OTC BB) under the
symbol “AFDG.” On January 29, 2009, the date of the last reported
sale on the OTC BB, the closing price for our common stock on the OTC BB was
$0.07.
Investing
in the Registered Securities being offered for resale under this prospectus
involves a high degree of risk. See “Risk Factors” beginning on page
4.
Neither
the SEC nor any state securities commission has approved or disapproved of the
Registered Securities or passed upon the adequacy or accuracy of this
prospectus. Any representation to the contrary is a criminal
offense.
You
should rely only on the information contained in this prospectus or that we have
referred you to. We have not authorized anyone to provide you with
information that is differed. This prospectus does not constitute an
offer to sell, or a solicitation of an offer to buy the securities in any
circumstances under which the offer or solicitation is not
permitted.
You
should not assume that the information contained or incorporated in the
registration statement to which this prospectus is a part is accurate as of any
date other than the date hereof, regardless of the time of delivery of this
prospectus or of any sale of the Registered Securities being registered in that
registration statement of which this prospectus forms a part.
The
date of this prospectus is February 12, 1009
TABLE
OF CONTENTS
|
|
Page
|
|
Prospectus
Summary
|
1
|
|
Risk
Factors
|
3
|
|
Cautionary Note Regarding
Forward-Looking Statements
|
14
|
|
Use of
Proceeds
|
15
|
|
Determination of Offering
Price
|
15
|
|
Dilution
|
15
|
|
Selling Security
Holders
|
16
|
|
Plan of
Distribution
|
18
|
|
Description of Company
Securities
|
21
|
|
Market for Common Equity and
Related Stockholder Matters
|
26
|
|
Security Ownership of Certain
Beneficial Owners and Management
|
27
|
|
Certain Relationships and
Transactions and Corporate Governance
|
31
|
|
Description of
Company
|
33
|
|
Description of
Property
|
39
|
|
Legal
Proceedings
|
42
|
|
Management Analysis and
Discussion
|
43
|
|
Directors, Executive Officers,
Promoters and Control Persons
|
52
|
|
Executive
Compensation
|
54
|
|
Financial
Statements
|
F-1
|
|
Interests of Named Experts and
Counsel
|
55
|
|
Disclosure of Commission Position
on Indemnification for Securities Act
|
56
|
PROSPECTUS SUMMARY
This
summary highlights certain information concerning our business and this offering
and is qualified in its entirety by the more detailed information, pro forma
information, financial statements and notes thereto, and the reserve report
included elsewhere in this prospectus. A more detailed description of
the terms and conditions of the Registered Securities are contained elsewhere in
this prospectus under “Description of Company Securities”.
You
should read this prospectus carefully and should consider, among other things,
the matters set forth in “Risk Factors” before deciding to invest in shares of
our common stock covered by this prospectus. In this prospectus,
unless indicated otherwise, references to the “Company,” “our company,” “we,”
“our” and “us” refer to ABC Funding, Inc.
The
Company
We are an
independent oil and natural gas company newly engaged in the exploration,
production, development, acquisition and exploitation of natural gas and crude
oil properties, consisting of approximately 14,300 net acres located in Duval
County, South Texas, on trend with several prolific producing Frio, Jackson and
Yegua (Oligocene and Eocene) fields (the “
Duval County
Properties
”). We operate and own an approximate 100% working
interest in the proved reserve base.
On
September 2, 2008, we completed our purchase of all of the outstanding capital
stock of Voyager Gas Corporation, or the Voyager Acquisition, whereby we
succeeded to substantially all of the business operations and properties of
Voyager Gas Corporation, including all of the oil and gas properties and assets
of Voyager Gas Corporation. Consideration paid in the Voyager
Acquisition consisted of cash consideration of $35.0 million and 10,000 shares
of our Series D Preferred Stock, having a then-agreed upon value of $7.0 million
which, upon the effectiveness of the Charter Amendment, automatically convert
into 17,500,000 shares of our common stock. We funded the Voyager
Acquisition through the Bridge Loan and the Credit Facility. We
currently have $11.55 million borrowed under the Revolving Loan and $22.0
million borrowed under the Term Loan.
Prior to
our completion of the Voyager Acquisition, we were a “shell company” defined by,
and subject to, the rules and regulations promulgated under the Exchange
Act. We were incorporated as a Nevada corporation in May
2004.
Our
principal offices are located at 6630 Cypresswood Drive, Suite 200, Spring,
Texas 77379. We can be reached by phone at (832)
559-6060.
The
Offering
|
|
|
|
Securities
Offered
|
|
46,288,632
shares of our common stock, consisting of (i) 18,863,636 shares of common
stock issuable in connection with the Voyager Acquisition and related
Bridge Loan and (ii) subject to certain adjustments, up to 27,424,996
shares issuable upon the exercise of warrants granted in connection with
the financing of the Voyager Acquisition.
|
|
|
|
|
Use
of Proceeds
|
|
We
will not receive any proceeds from the sale by any selling security holder
of the Registered Securities. See “Use of
Proceeds.”
|
|
|
|
|
Plan
of Distribution
|
|
So
long as this prospectus is then current under the rules of the SEC and we
have not withdrawn the registration statement to which this prospectus
forms a part, the Registered Securities may be sold by the selling
security holders pursuant to this prospectus in the manner described under
“Plan of Distribution.”
|
|
|
|
|
Trading
and Symbol
|
|
Our
common stock currently trades on the OTC Bulletin Board under the symbol
“AFDG.”
|
|
|
|
|
Capital
Stock Outstanding
|
|
As
of February 12, 2009, we had 23,363,136 shares of common stock
outstanding. After giving effect to the Charter Amendment and
automatic conversion of overlying derivative securities as of such date,
we will have 43,351,772 shares of common stock outstanding and, on a
fully-diluted basis (after giving effect to the vesting of our outstanding
restricted stock awards and the exercise or conversion, as applicable, of
our outstanding preferred stock, warrants, options and convertible notes),
approximately 89,799,986 shares of common stock.
|
|
|
|
|
Risk
Factors
|
|
An
investment in the Registered Securities is subject to a number of
risks. You should carefully consider the information set forth
in the "Risk Factors" section below and the other sections of this
prospectus, in addition to the documents included in and/or incorporated
by reference in the registration statement to which this prospectus forms
a part.
|
Transactions
Underlying Registered Securities
|
Voyager
Acquisition
|
Our
September 2, 2008 purchase of all of the outstanding capital stock of
Voyager Gas Corporation, whereby we succeeded to substantially all of the
business operations of Voyager Gas Corporation, including all of its oil
and gas properties and assets. Voyager Gas Corporation was
designated as our predecessor as a result of the Voyager
Acquisition. Consideration paid included 17,500,000 shares of
our common stock underlying shares of our Series D Preferred Stock issued
to seller and registered in the registration statement to which this
prospectus forms a part.
|
|
|
|
|
|
|
Credit
Facility
|
Our
senior credit facility with CIT Capital USA Inc., our lender (“CIT
Capital”), executed September 2, 2008, and consisting of a $50.0 million
revolving credit facility and $22.0 million term loan, used to fund the
Voyager Acquisition and provide working capital.
|
|
|
|
|
|
|
Bridge
Loan
|
Proceeds
of $800,000 raised by sale of our Senior Secured Convertible Debentures
due September 29, 2008 (the “Debentures”), in the aggregate principal
amount of $900,000 and issued at a discount of $100,000 to fund payment of
the performance deposit in the Voyager Acquisition.
|
|
|
|
|
|
|
Registration
Rights
|
Under
registration rights granted in connection with the issuance or grant, as
applicable, of the derivative securities overlying the Restricted
Securities, our failure to timely file, have declared effective, and
maintain the effectiveness of, the registration statement to which this
prospectus forms a part, will result in the payment of liquidated
damages. See “Description of Company Securities – Registration
Rights”.
|
|
RISK
FACTORS
You
should carefully consider each of the risks described below, together with all
of the other information contained in this prospectus or included in the
registration statement to which this prospectus forms a part,, before deciding
to invest in the Registered Securities. If any of the following risks
develop into actual events, our business, financial condition or results of
operations could be materially adversely affected and you may lose all or part
of your investment.
Risks
Related to Our Business
We
are a company with limited operating history and limited resources.
Since
our inception in May 2004, we have had limited operations and nominal
revenues. To date, we have been engaged principally in organization,
capital-raising activities and early business development planning matters
related primarily to making acquisitions or participating in strategic joint
ventures in the oil and natural gas industry. Except for the Voyager
Acquisition, to date we have made no acquisitions or entered into any joint
ventures. Our prospects must be considered in light of the risks,
expenses, delays, problems and difficulties frequently encountered in the
establishment of a new business in the energy industry, given the volatile
nature of the energy markets. We also anticipate significant expenses
relating to the development of our infrastructure and business. Our
ability to realize revenues or generate net income through oil and natural gas
production from our newly-acquired interests in the Duval County Properties and
such other properties as we may acquire in the future will be strongly affected
by, among other factors, our ability to successfully drill undeveloped reserves
as well as the market price of crude oil and natural gas.
If
adequate funds are unavailable from our anticipated operations from the Duval
County Properties, the Credit Facility or additional sources of financing, we
might be forced to reduce or delay acquisitions or capital expenditures, sell
assets, reduce operating expenses, refinance all or a portion of our debt, or
delay or reduce important drilling or enhanced production
initiatives. In the future we may seek to raise any necessary
additional funds through equity or debt financings, convertible debt financings,
joint ventures with corporate partners or other sources, which may be dilutive
to our existing shareholders and may cause the price of our common stock to
decline.
We
have future capital needs and without adequate capital we may go out of
business.
As a
result of the Voyager Acquisition, we anticipate that we will experience
substantial capital needs to exploit the Duval County Properties pursuant to our
planned development program. We also expect that additional external
financing will be required in the future to fund our growth.
Under the
Credit Facility, of the initial borrowing base of $14.0 million under the
Revolving Loan, only $2.5 million is currently available to us. As of
February 12, 1009, we had borrowed $33.5 million to finance the Voyager
Acquisition, to repay the Bridge Loan and related transaction expenses, and to
fund capital expenditures generally. In connection with the Voyager
Acquisition, we drew down the full $22.0 million under the Term
Loan.
Our
growth and continued operations could be impaired by limitations on our access
to the capital markets or traditional secured sources of
credit. Because of the unprecedented volatility and disruption
experienced in the capital and credit markets, adequate capital may not be
available to us, or if available, would be adequate for the long-range growth of
the Company or obtainable by us on acceptable terms. If financing is available,
it may involve issuing securities senior to our shares or equity financings
which are dilutive to holders of our shares. In addition, in the
event we do not raise additional capital from conventional sources, such as our
existing investors or commercial banks, there is every likelihood that our
growth will be restricted and we may need to scale back or curtail implementing
our business plan. Even if we are successful in raising capital, we
will likely need to raise additional capital to continue and/or expand our
operations.
Without
adequate capital resources or funding on acceptable terms, we may be forced to
limit our planned oil and natural gas acquisition and development activities and
thereby adversely affect the recoverability and ultimate value of our oil and
natural gas properties. If we are unable to service our indebtedness,
we may also be forced to adopt an alternative strategy that may include actions
such as reducing or delaying acquisitions and capital expenditures, selling
assets, restructuring or refinancing our indebtedness or seeking equity
capital. Because of today’s deteriorating capital market conditions,
these alternative strategies may fail to yield sufficient funds to make required
payments on our indebtedness.
If
we are unable to realize the perceived potential of the Voyager Acquisition or
successfully integrate such other companies or assets we acquire in the future
into our operations on a timely basis, our profitability could be negatively
affected.
Our
growth and operating strategies for businesses or assets we acquire, including
the Voyager Acquisition, may be different from the strategies currently pursued
by such businesses or the current owners of such assets. If our
strategies are not successful for the Duval County Properties or such company or
other assets we acquire, it could have a material adverse effect on our
business, financial condition and results of operations. In addition,
our strategies may fail to maintain or enhance the profitability of any acquired
business or consolidate the operations of any acquired business to achieve cost
savings.
In
addition, there may be risks and liabilities that we failed, or were unable, to
discover in the course of performing due diligence investigations in the Voyager
Acquisition or with respect to any other business or property we may acquire in
the future. Such risks include the possibility of title defects or
liabilities not discovered by our due diligence review. Such
liabilities could include those arising from employee benefits contribution
obligations of a prior owner or non-compliance with, or liability pursuant to,
applicable federal, state or local environmental requirements by prior owners
for which we, as a successor owner, may be responsible. We cannot
assure you that rights to indemnification, even if obtained, will be
enforceable, collectible or sufficient in amount, scope or duration to fully
offset the possible liabilities associated with the business or property
acquired, including the Voyager Acquisition. Any such liabilities,
individually or in the aggregate, could have a material adverse effect on our
business.
Our
failure to realize any perceived value from the Duval County Properties or to
integrate acquired properties successfully into our existing business, or the
expense incurred in consummating future acquisitions, could result in our
incurring unanticipated expenses and losses. In addition, we may have
to assume cleanup or reclamation obligations or other unanticipated liabilities
in connection with these acquisitions, and the scope and cost of these
obligations may ultimately be materially greater than estimated at the time of
the acquisition.
We
depend on successful exploration, development and acquisitions to maintain
revenue in the future.
In
general, the volume of production from natural gas and oil properties declines
as reserves are depleted, with the rate of decline depending on reservoir
characteristics. Except to the extent that we conduct successful
exploration and development activities with respect to the Duval County
Properties or acquire properties containing proved reserves, or both, our proved
reserves will decline as reserves are produced. Our future natural
gas and oil production is, therefore, highly dependent on our level of success
in finding or acquiring additional reserves. Additionally, the
business of exploring for, developing, or acquiring reserves is capital
intensive. Recovery of our reserves, particularly undeveloped
reserves, will require significant additional capital expenditures and
successful drilling operations. To the extent cash flow from
operations is reduced and external sources of capital become limited or
unavailable, our ability to make the necessary capital investment to maintain or
expand our asset base of natural gas and oil reserves would be
impaired. In addition, we may be required to find partners for any
future exploratory activity. To the extent that others in the
industry do not have the financial resources or choose not to participate in our
exploration activities, we will be adversely affected.
The
Duval County Properties and our future acquired properties may yield revenues or
production that varies significantly from our projections.
Our
assessments of the recoverable reserves, future natural gas and oil prices,
operating costs, potential liabilities and other factors relating to the Duval
County Properties and other producing properties that may be acquired in the
future are necessarily inexact and their accuracy is inherently
uncertain. A review of properties will not reveal all existing or
potential problems or permit us to become sufficiently familiar with the
property to assess fully its deficiencies and capabilities. We may
not inspect every well, and we may not be able to identify structural and
environmental problems even when we do inspect a well. If problems
are identified, the seller may be unwilling or unable to provide effective
contractual protection against all or part of those problems. Any
acquisition of property interests may not be economically successful, and
unsuccessful acquisitions may have a material adverse effect on our financial
condition and future results of operations.
If
our access to markets is restricted, it could negatively impact our production,
our income and ultimately our ability to retain our leases.
Market
conditions or the unavailability of satisfactory oil and natural gas
transportation arrangements may hinder our access to oil and natural gas markets
or delay our production. The availability of a ready market for our
oil and natural gas production depends on a number of factors, including the
demand for and supply of oil and natural gas and the proximity of reserves to
pipelines and terminal facilities. Our ability to market our
production depends in substantial part on the availability and capacity of
gathering systems, pipelines and processing facilities owned and operated by
third parties. Our failure to obtain such services on acceptable
terms could materially harm our business.
Our
productive properties may be located in areas with limited or no access to
pipelines, thereby necessitating delivery by other means, such as trucking, or
requiring compression facilities. Such restrictions on our ability to
sell our oil or natural gas could have several adverse affects, including higher
transportation costs, fewer potential purchasers (thereby potentially resulting
in a lower selling price) or, in the event we were unable to market and sustain
production from a particular lease for an extended time, possibly causing us to
lose a lease due to lack of production.
If
oil and natural gas prices decrease, we may be required to take write-downs of
the carrying values of our oil and natural gas properties, potentially reducing
funds available under the Credit Facility and negatively impacting the trading
value of our securities.
Accounting
rules require that we periodically review the carrying value of our oil and
natural gas properties for possible impairment. Based on specific
market factors and circumstances at the time of prospective impairment reviews,
and the continuing evaluation of development plans, production data, economics
and other factors, we may be required to write down the carrying value of our
oil and natural gas properties. Because our properties will serve as
collateral for advances under the Credit Facility, a write-down in the carrying
values of our properties could require us to repay debt earlier than would
otherwise be required. A write-down would also constitute a non-cash
charge to earnings. It is likely that the effect of such a write-down
could also negatively impact the trading price of our securities.
We
account for our oil and gas properties using the full cost method of
accounting. Under this method, all costs associated with the
acquisition, exploration and development of oil and natural gas properties,
including costs of undeveloped leasehold, geological and geophysical expenses,
dry holes, leasehold equipment and overhead charges directly related to
acquisition, exploration and development activities, are
capitalized. Proceeds received from disposals are credited against
accumulated cost except when the sale represents a significant disposal of
reserves, in which case a gain or loss is recognized. The sum of net
capitalized costs and estimated future development and dismantlement costs for
each cost center is depleted on the equivalent unit-of-production method, based
on proved oil and natural gas reserves as determined by independent petroleum
engineers. Excluded from amounts subject to depletion are costs
associated with unevaluated properties. We evaluate impairment of our
proved oil and natural gas properties whenever events or changes in
circumstances indicate an asset’s carrying amount may not be
recoverable. The risk that we will be required to write down the
carrying value of our oil and natural gas properties increases when oil and
natural gas prices are low or volatile. In addition, write-downs
would occur if we were to experience sufficient downward adjustments to our
estimated proved reserves or the present value of estimated future net
revenues.
Hedging
activities we engage in may prevent us from benefiting from price increases and
may expose us to other risks.
Following
our entry into the Credit Facility on September 2, 2008, we executed
arrangements to use derivative instruments to hedge the impact of market
fluctuations on crude oil and natural gas prices. To the extent that
we engage in hedging activities, we may be prevented from realizing the benefits
of future price increases above the levels of the hedges. This is
particularly relevant given the precipitous drop in natural gas prices in the
weeks prior to our September 2
nd
entry
into such hedging arrangements. In addition, we will be subject to
risks associated with differences in prices received at different locations,
particularly where transportation constraints restrict our ability to deliver
oil and natural gas volumes to the delivery point to which the hedging
transaction is indexed.
Our
Credit Facility imposes significant operating and financial restrictions on us
that may prevent us from pursuing certain business opportunities and restrict
our ability to operate our business.
The
Credit Facility contains covenants that restrict our ability and the ability of
our subsidiaries to take various actions, such as:
|
·
|
incurring
or generating additional indebtedness or issuing certain preferred
stock;
|
|
·
|
paying
dividends on our capital stock or redeeming, repurchasing or retiring our
capital stock or subordinated indebtedness or making other restricted
payments;
|
|
·
|
entering
into certain transactions with affiliates;
|
|
·
|
creating
or incurring liens on our assets;
|
|
·
|
transferring
or selling assets;
|
|
·
|
incurring
dividend or other payment restrictions affecting certain of our future
subsidiaries; and
|
|
·
|
consummating
a merger, consolidation or sale of all or substantially all of our
assets.
|
In
addition, the Credit Facility includes other and more restrictive covenants
including those that will restrict our ability to prepay our other indebtedness,
while borrowings under the Credit Facility remain outstanding. The
Credit Facility also requires us to achieve specified financial and operating
results and maintain compliance with specified financial ratios. Our
ability to comply with these ratios may be affected by events beyond our
control.
The
restrictions contained in the Credit Facility could:
|
·
|
limit
our ability to plan for or react to market conditions or meet capital
needs or otherwise restrict our activities or business plans;
and
|
|
·
|
adversely
affect our ability to finance our operations, strategic acquisitions,
investments or alliances or other capital needs or to engage in other
business activities that would be in our best
interest.
|
A breach
of any of the restrictive covenants or our inability to comply with the required
financial ratios could result in a default under the Credit
Facility.
If a
default occurs, the lenders under the Credit Facility may elect to:
|
·
|
declare
all borrowings outstanding thereunder, together with accrued interest and
other fees, to be immediately due and payable; or
|
|
·
|
exercise
their remedies against our assets subject to their first
liens.
|
The
lenders under the Credit Facility would also have the right in these
circumstances to terminate any commitments they have to provide us with further
borrowings.
Our
principal stockholder and one of our directors possess significant control over
our operations based, in large part, upon their respective ownership of our
capital stock, and because of this they could choose a plan of action which
could devalue our outstanding securities.
At
February 12, 2009, one of our directors, Alan D. Gaines, holds 11,151,000 shares
of common stock, or 47.7% of our outstanding shares. Accordingly,
until such time as his ownership is sufficiently diluted by the issuance of
additional shares of common stock, Mr. Gaines could significantly influence the
Company on matters submitted to the stockholders for approval. These
matters include the election of directors, mergers, consolidations, the sale of
all or substantially all of our assets, and also the power to prevent or cause a
change in control.
The
amount of control yielded by Mr. Gaines gives him the ability to determine the
future of the Company, and as such, he could cause us to close the business,
change the business plan or make any number of other major business decisions
without the approval of other stockholders. This control may
significantly reduce the value of our shares.
We
may not be able to retain the services of our Chief Executive Officer, Chief
Financial Officer and Senior Vice President of Operations, or we may be unable
to successfully recruit qualified managerial and field personnel having
experience in oil and gas exploration and development.
Our
success also depends to a significant extent upon the continued services of
Robert P. Munn, our Chief Executive Officer, Carl A. Chase, our Chief Financial
Officer, and Jim B. Davis, our Senior Vice President of
Operations. Loss of the services of any of Mr. Munn, Mr. Chase or Mr.
Davis could have a material adverse effect on our growth, revenues, and
prospective business. We do not have key-man insurance on the lives
of Messrs. Munn, Chase and Davis. In addition, in order to
successfully implement and manage our business plan, we will be dependent upon,
among other things, successfully recruiting qualified managerial and field
personnel having experience in the oil and gas exploration and production
business. Competition for qualified individuals is intense and we may
be unable to retain existing employees or find, attract and retain qualified
personnel on acceptable terms.
Our
Articles of Incorporation provide for indemnification of officers and directors
at our expense and limit their liability.
Our
Articles of Incorporation and applicable Nevada law provide for the
indemnification of our directors, officers, employees, and agents, under certain
circumstances, against attorney's fees and other expenses incurred by them in
any litigation to which they become a party arising from their association with
or activities on behalf of the Company. We will also bear the
expenses of such litigation for any of our directors, officers, employees, or
agents, upon such person's promise to repay us therefore if it is ultimately
determined that any such person shall not have been entitled to
indemnification. This indemnification policy could result in
substantial expenditures by us which we will be unable to recoup.
We have
been advised that in the opinion of the SEC, this type of indemnification is
against public policy as expressed in the Securities Act of 1933, as amended,
(the “Securities Act’), and is, therefore, unenforceable. In the
event that a claim for indemnification against these types of liabilities, other
than the payment by us of expenses incurred or paid by a director, officer or
controlling person in the successful defense of any action, suit or proceeding,
is asserted by a director, officer or controlling person in connection with the
securities being registered, we will (unless in the opinion of our counsel, the
matter has been settled by controlling precedent) submit to a court of
appropriate jurisdiction, the question whether indemnification by us is against
public policy as expressed in the Securities Act and will be governed by the
final adjudication of such issue.
Risk
Factors Related to the Oil and Gas Industry
Oil
and Natural Gas Prices are Volatile.
The
prices we receive for future oil and natural gas production will heavily
influence our revenue, profitability, access to capital and rate of
growth. Oil and natural gas are commodities and their prices are
subject to wide fluctuations in response to relatively minor changes in supply
and demand or global macroeconomic disruptions. Historically, the
markets for oil and natural gas have been volatile. These markets
will likely continue to be volatile in the future. The prices we may
receive for any future production, and the levels of this production, depend on
numerous factors beyond our control. These factors include the
following:
|
·
|
changes
in global supply and demand for oil and natural gas;
|
|
·
|
the
actions of the Organization of Petroleum Exporting Countries, or
OPEC;
|
|
·
|
the
price and quantity of imports of foreign oil and natural gas in the
U.S.;
|
|
·
|
political
conditions, including embargoes, which affect other oil-producing
activities;
|
|
·
|
the
level of global oil and natural gas exploration and production
activity;
|
|
·
|
the
level of global oil and natural gas inventories;
|
|
·
|
weather
conditions affecting energy consumption;
|
|
·
|
technological
advances affecting energy consumption; and
|
|
·
|
the
price and availability of alternative
fuels.
|
Lower oil
and natural gas prices may not only decrease our revenues on a per unit basis
but also may reduce the amount of oil and natural gas that we can produce
economically. Lower prices will also negatively impact the value of
our proved reserves. A substantial or extended decline in oil or
natural gas prices may materially and adversely affect our future business,
financial condition, results of operations, liquidity or ability to finance
planned capital expenditures.
Competition
in the oil and natural gas industry is intense.
We
operate in a highly competitive environment for developing properties, marketing
of oil and natural gas and securing trained personnel. Many of our
competitors possess and employ financial, technical and personnel resources
substantially greater than ours, which can be particularly important in the
areas in which we operate. Those companies may be able to pay more
for productive oil and natural gas properties and prospects and to evaluate, bid
for and purchase a greater number of properties and prospects than our financial
or personnel resources permit. Our ability to acquire additional
prospects and to find and develop reserves in the future will depend on our
ability to evaluate and select suitable properties and to consummate
transactions in a highly competitive environment. In addition, there
is substantial competition for capital available for investment in the oil and
natural gas industry. We may not be able to compete successfully in
the future in acquiring prospective reserves, developing reserves, marketing oil
and natural gas, attracting and retaining quality personnel and raising
additional capital.
Drilling
for and producing oil and natural gas are high risk activities with many
uncertainties that could adversely affect our business, financial condition or
results of operations.
Oil and
natural gas exploration and production activities are subject to numerous risks
beyond our control, including the risk that drilling will not result in
commercially viable oil or natural gas production. Decisions to
purchase, explore, develop or otherwise exploit prospects or properties depend
in part on the evaluation of data obtained through geophysical and geological
analyses, production data and engineering studies, the results of which are
often inconclusive or subject to varying interpretations. Please read
"- Reserve estimates depend on
many assumptions that may turn out to be inaccurate
" below for a
discussion of the uncertainties involved in these processes. Costs of
drilling, completing and operating wells are often uncertain before drilling
commences. Overruns in budgeted expenditures are common risks that
can make a particular project uneconomical. Further, many factors may
curtail, delay or cancel drilling, including the following:
|
·
|
delays
imposed by or resulting from compliance with regulatory
requirements;
|
|
·
|
pressure
or irregularities in geological formations;
|
|
·
|
shortages
of or delays in obtaining equipment and qualified
personnel;
|
|
·
|
equipment
failures or accidents;
|
|
·
|
adverse
weather conditions;
|
|
·
|
reductions
in oil and natural gas prices;
|
|
·
|
oil
and natural gas property title problems; and
|
|
·
|
market
limitations for oil and natural
gas.
|
In
addition, there is no way to predict in advance of drilling and testing whether
any particular prospect will yield oil or natural gas in sufficient quantities
to recover drilling or completion costs or to be economically
viable. The use of seismic data and other technologies and the study
of producing fields in the same area do not permit conclusive knowledge prior to
drilling whether oil or natural gas will be present or, if present, whether oil
or natural gas will be present in commercial quantities. Seismic
indications of hydrocarbon saturation are generally not reliable indicators of
productive reservoir rock and modern technologies such as well logs are not
always reliable indicators of hydrocarbon productivity or drilling
prospects.
Reserve
estimates depend on many assumptions that may turn out to be
inaccurate. Any material inaccuracies in these reserve estimates or
underlying assumptions will materially affect the quantities and present value
of our reserves acquired under the Voyager Acquisition.
The
process of estimating oil and natural gas reserves is complex. It
requires interpretations of available technical data and many assumptions,
including assumptions relating to economic factors. Any significant
inaccuracies in these interpretations or assumptions could materially affect the
estimated quantities and present value of our reported reserves. In
order to prepare our estimates, we must project production rates and the timing
of development expenditures. We must also analyze available
geological, geophysical, production and engineering data. The extent,
quality and reliability of this data can vary. The process also
requires that economic assumptions be made about matters such as oil and natural
gas prices, drilling and operating expenses, capital expenditures, taxes and
availability of funds. Therefore, estimates of oil and natural gas
reserves are inherently imprecise.
Actual
future production, oil and natural gas prices received, revenues, taxes,
development expenditures, operating expenses and quantities of recoverable oil
and natural gas reserves most likely will vary from our
estimates. Any significant variance could materially affect the
estimated quantities and present value of our reported reserves. In
addition, we may adjust estimates of proved reserves to reflect production
history, results of exploration and development, prevailing oil and natural gas
prices and other factors, many of which are beyond our control.
We
may incur substantial losses and be subject to substantial liability claims as a
result of our oil and natural gas operations.
Losses
and liabilities arising from uninsured and underinsured events could materially
and adversely affect our business, financial condition or results of
operations. Our oil and natural gas exploration and production
activities will be subject to all of the operating risks associated with
drilling for and producing oil and natural gas, including the possibility
of:
|
·
|
environmental
hazards, such as uncontrollable flows of oil, natural gas, brine, well
fluids, toxic gas or other pollution into the environment, including
groundwater and shoreline contamination;
|
|
·
|
abnormally
pressured formations;
|
|
·
|
mechanical
difficulties, such as stuck oil field drilling and service tools and
casing collapses;
|
|
·
|
fires
and explosions;
|
|
·
|
personal
injuries and death; and
|
|
·
|
natural
disasters.
|
Any of
these risks could adversely affect our ability to conduct operations or result
in substantial losses to the Company. We may elect not to obtain
insurance if we believe that the cost of available insurance is excessive
relative to the risks presented. In addition, pollution and
environmental risks generally are not fully insurable. If a
significant accident or other event occurs and is not fully covered by
insurance, then that accident or other event could adversely affect our results
of operations, financial condition and cash flows.
In
accordance with customary industry practices, we maintain insurance coverage
against some, but not all, potential losses in order to protect against the
risks we face. We do not carry business interruption
insurance. We may elect not to carry insurance if our management
believes that the cost of available insurance is excessive relative to the risks
presented. In addition, we cannot insure fully against pollution and
environmental risks. The occurrence of an event not fully covered by
insurance could have a material adverse effect on our financial condition and
results of operations.
Our
operations may cause us to incur substantial liabilities for failure to comply
with environmental laws and regulations.
Oil and
natural gas operations are subject to stringent federal, state and local laws
and regulations relating to the release or disposal of materials into the
environment or otherwise relating to environmental protection. These
laws and regulations may require the acquisition of a permit before drilling
commences, restrict the types, quantities and concentration of substances that
can be released into the environment in connection with drilling and production
activities, limit or prohibit drilling activities on certain lands lying within
wilderness, wetlands and other protected areas, and impose substantial
liabilities for pollution resulting from operations. Failure to
comply with these laws and regulations may result in the assessment of
administrative, civil and criminal penalties, incurrence of investigatory or
remedial obligations or the imposition of injunctive relief. Changes
in environmental laws and regulations occur frequently, and any changes that
result in more stringent or costly waste handling, storage, transport, disposal
or cleanup requirements could require us to make significant expenditures to
maintain compliance, and may otherwise have a material adverse effect on our
results of operations, competitive position or financial condition as well as
the industry in general. Under these environmental laws and
regulations, we could be held strictly liable for the removal or remediation of
previously released materials or property contamination regardless of whether we
were responsible for the release or if our operations were standard in the
industry at the time they were performed.
We
are subject to complex laws that can affect the cost, manner or feasibility of
doing business.
The
exploration, development, production and sale of oil and natural gas are subject
to extensive federal, state, local and international regulation. We
may be required to make large expenditures to comply with such governmental
regulations. Matters subject to regulation include:
|
·
|
permits
for drilling operations;
|
|
·
|
drilling
and plugging bonds;
|
|
·
|
reports
concerning operations;
|
|
·
|
the
spacing and density of wells;
|
|
·
|
unitization
and pooling of properties;
|
|
·
|
environmental
maintenance and cleanup of drill sites and surface facilities;
and
|
|
·
|
taxation.
|
Under
these laws, we could be liable for personal injuries, property damage and other
damages. Failure to comply with these laws also may result in the
suspension or termination of our operations and subject us to administrative,
civil and criminal penalties. Moreover, these laws could change in
ways that substantially increase our costs. Any such liabilities,
penalties, suspensions, terminations or regulatory changes could materially
adversely affect our financial condition and results of operations.
We
may not be able to keep pace with technological developments in our
industry.
The oil
and natural gas industry is characterized by rapid and significant technological
advancements and introduction of new products and services which utilize new
technologies. As others use or develop new technologies, we may be
placed at a competitive disadvantage or competitive pressures may force us to
implement those new technologies at substantial costs. In addition,
other oil and natural gas companies may have greater financial, technical, and
personnel resources that allow them to enjoy technological advantages and may in
the future allow them to implement new technologies before we are able
to. We may not be able to respond to these competitive pressures and
implement new technologies on a timely basis or at an acceptable
cost. If one or more of the technologies we use now or in the future
were to become obsolete or if we are unable to use the most advanced
commercially available technology, our business, financial condition, and
results of operations could be materially adversely affected.
Risks
Related to Our Shares of Common Stock
We
have not and do not anticipate paying any cash dividends on our common stock,
because of this our securities could face devaluation in the
market.
We have
paid no cash dividends on our common stock to date and it is not anticipated
that any cash dividends will be paid to holders of our common stock in the
foreseeable future. The Credit Facility disallows us paying
dividends, except under certain circumstances. While our dividend
policy will be based on the operating results and capital needs of the business,
it is anticipated that any earnings will be retained to finance our future
expansion. As an investor, you should take note of the fact that a
lack of a dividend can further affect the market value of our stock, and could
significantly affect the value of any investment in the Company.
We
will continue to incur significant increased costs as a result of operating as a
public company and our management will be required to devote substantial time to
new compliance requirements.
In
January 2006, we registered our common stock under the Securities Exchange Act
of 1934, as amended (the “Exchange Act”), and thereby became subject to the
reporting requirements promulgated by the SEC thereunder. As a public
company, we incur significant legal, accounting and other expenses under the
Sarbanes-Oxley Act of 2002, together with rules implemented by the SEC and
applicable market regulators. These rules impose various requirements
on public companies, including requiring certain corporate governance
practices. Our management and other personnel will need to devote a
substantial amount of time to these new compliance
requirements. Moreover, these rules and regulations will increase our
legal and financial compliance costs and will make some activities more
time-consuming and costly.
In
addition, the Sarbanes-Oxley Act requires, among other things, that we maintain
effective internal controls for financial reporting and disclosure controls and
procedures. In particular, for fiscal years ending on or after
December 15, 2007, we must perform system and process evaluation and testing of
our internal controls over financial reporting to allow management to report on
the effectiveness of our internal controls over financial reporting, as required
by Section 404 of the Sarbanes-Oxley Act. For fiscal years ending on
or after December 15, 2008, we must perform system and process evaluation and
testing of our internal controls over financial reporting to allow management
and our independent registered public accounting firm to report on the
effectiveness of our internal controls over financial reporting, as required by
Section 404 of the Sarbanes-Oxley Act. Our testing, or the subsequent
testing by our independent registered public accounting firm, may reveal
deficiencies in our internal controls over financial reporting that are deemed
to be material weaknesses. Compliance with Section 404 may require
that we incur substantial accounting expense and expend significant management
efforts. If we are not able to comply with the requirements of
Section 404 in a timely manner or if our independent registered public
accounting firm later identifies deficiencies in our internal controls over
financial reporting that are deemed to be material weaknesses, the market price
of our stock could decline and we could be subject to sanctions or
investigations by the SEC or other applicable regulatory
authorities.
Our
common stock is listed on the OTC Bulletin Board.
Our
common stock is not quoted on the NASDAQ National Market System or listed on a
national securities exchange. The NASDAQ National Market System and
national securities exchanges require companies to fulfill certain requirements
in order for their shares to be listed and to continue to be
listed. The securities of a company may be ineligible for listing or,
if listed, may be considered for delisting if the company fails to meet certain
financial thresholds, including if the company has sustained losses from
continuing operations and/or net losses in recent fiscal years. Our
current losses preclude us from listing or having our common stock quoted on the
NASDAQ National Market or a national securities exchange, which may adversely
affect our ability to raise capital in the future by issuing common stock or
securities convertible into or exercisable for our common stock.
The
resale of our common stock by you may be limited because of its low price which
could make it more difficult for broker-dealers to sell our common
stock.
The
Securities Enforcement and Penny Stock Reform Act of 1990 requires additional
disclosure relating to the market for penny stocks in connection with trades in
any stock defined as a penny stock. Regulations enacted by the SEC
generally define a penny stock as an equity security that has a market price of
less than $5.00 per share, subject to some exceptions. Unless an exception
applies, a disclosure schedule explaining the penny stock market and the risks
associated with investing in penny stocks must be delivered before any
transaction in a penny stock can occur.
Our
common stock is currently subject to the Securities and Exchange Commission's
"penny stock" rules and it is anticipated that trading in our common stock will
continue to be subject to the penny stock rules for the foreseeable
future. Until such time as our common stock meets an exception to the
penny stock regulations cited above, trading in our securities is covered by
Rule 15g-9 promulgated under the Securities Exchange Act of 1934. Under
this rule, broker/dealers who recommend penny stocks to persons other than
established customers and accredited investors, which are generally institutions
with assets in excess of $5,000,000, or individuals with net worth in excess of
$1,000,000 or annual income exceeding $200,000, or $300,000 jointly with their
spouse, must make a special determination in writing for the
purchaser that the investment is suitable, and must also obtain the purchaser's
written agreement to a transaction before the sale. Consequently, the
rule may affect the ability of broker/dealers to sell our securities, and also
may affect the ability of purchasers of our common stock to sell their shares in
the secondary market. It may also cause fewer broker/dealers to be willing
to make a market in our common stock, and it may affect the level of news
coverage we receive.
Our
Board of Directors has the authority, without stockholder approval, to issue
preferred stock with terms that may not be beneficial to common stock holders
and with the ability to adversely affect stockholder voting power and perpetuate
our Board's control over the Company.
Our
Articles of Incorporation authorizes the issuance of up to 1,000,000 shares of
preferred stock, par value $ .001 per share, of which up to 522,000 aggregate
shares have been designated as Series A, B, C, D and E preferred
stock. As such, our Board of Directors (the “Board”) is currently
entitled to authorize the issuance of an additional 478,000 shares of preferred
stock in one or more series with such designations; preferences; conversion
rights; cumulative, relative; participating; and optional or other rights,
including: voting rights; qualifications; limitations; or restrictions as may be
determined in its sole discretion, with no further authorization by security
holders required for the issuance thereof.
The
issuance of additional preferred stock from the shares available could adversely
affect the voting power and other rights of the holders of common
stock. Preferred stock may be issued quickly with terms calculated to
discourage, make more difficult, delay or prevent a change in control of the
Company or make removal of management more difficult. As a result,
our Board's ability to issue preferred stock may discourage the potential
hostile acquirer, possibly resulting in beneficial
negotiations. Negotiating with an unfriendly acquirer may result in,
among other things, terms more favorable to us and our
stockholders.
We
may issue securities that could dilute your ownership.
We may
decide to raise additional funds through public or private debt or equity
financing to fund our operations. If we raise funds by issuing equity
securities, the percentage ownership of our current stockholders will be reduced
and the new equity securities may have rights prior to those of the common stock
issuable upon conversion of public or private debt. We may not obtain
sufficient financing on terms that are favorable to you or us. We may
also issue equity securities as consideration for acquisitions we may
make.
Holders
of our common stock may experience dilution of their ownership interests due to
(1) our registration for resale of the Registered Securities and (2) any future
issuance of additional shares of our common stock.
We are
currently registering for resale up to 46,288,632 shares of our common stock,
consisting of 18,863,636 shares underlying outstanding convertible preferred
stock and 27,424,996 warrants exercisable upon the effectiveness of the Charter
Amendment.
The total
number of securities currently being registered or registerable for resale under
this registration statement is greater than the number of shares of our common
stock currently issued and outstanding, which at February 12, 2009, consists of
only 23,363,136 shares of issued common stock and an additional 46,948,210
shares of common stock issuable under conversion or exercise, as the case may
be, of outstanding shares of preferred stock, options, warrants and convertible
notes, and will result in an immediate dilution of the ownership interests of
the holders of our common stock. Upon the effectiveness of the
Charter Amendment, we will have 149,000,000 shares of common stock
authorized.
In
addition to the foregoing, certain warrants included in the Registered
Securities also contain provisions that will result in the issuance of
additional shares in the event we sell shares of common stock at prices less
than the applicable conversion prices set forth therein. We may also
in the future issue additional shares of our authorized and unissued common
stock in connection with the hiring of personnel, future acquisitions, future
private placements of our securities for capital raising purposes, or for other
business purposes, all of which will result in the dilution of the ownership
interests of holders of our common stock. Issuance of additional
shares of common stock may also create downward pressure on the trading price of
our existing common stock that may in turn require us to issue additional shares
to raise funds through sales of our securities. This will further
dilute the holders of our common stock.
Our
common stock may experience price volatility and, as a result, its market value
may also be volatile. The limited trading volume of our common stock
may contribute to this price volatility.
The
trading price of our common stock is highly volatile. We believe the
volatility of the trading price of our common stock is due to, among other
things, the results of our drilling program, current expectations of our future
financial performance, prices of oil and natural gas and the volatility of the
stock market in general.
Moreover,
our common stock does not have substantial trading volume. As a
result, relatively small trades of our common stock may have a significant
impact on the price of our common stock and, therefore, may contribute to the
price volatility of our common stock.
Because
of the limited trading volume of our common stock and the price volatility of
our common stock, you may be unable to sell your shares of our common stock when
you desire or at the price you desire. Moreover, the inability to
sell your shares of our common stock in a declining market because of such
illiquidity or at a price you desire may substantially increase your risk of
loss.
The
trading price of our common stock could be adversely affected by sales and
issuances of our common stock in the public markets.
At
February 12, 2009, our largest stockholder beneficially owned approximately
47.7% and our directors and executive officers, as a group, beneficially owned
approximately 52.4%, of the then-outstanding shares of our common stock
(inclusive of options and warrants currently exercisable into shares of our
common stock). After giving effect to the Charter Amendment, our
largest stockholders will beneficially own approximately 37.9%, 34.4% and 24.2%,
respectively, and our directors and executive officers, as a group, will
beneficially own approximately 28.3%, of the then-outstanding shares of our
common stock (inclusive of options and warrants exercisable into shares of our
common stock). Sales of our common stock by these stockholders, or
the perception that such sales might occur, could have a material adverse effect
on the trading price of our common stock or could impair our ability to obtain
capital through future offerings of equity securities.
Provisions
in our Articles of Incorporation may inhibit a takeover of the
Company.
Under our
certificate of incorporation, our Board of Directors is authorized to issue
shares of our capital stock without the approval of our
stockholders. Issuance of such shares could make it more difficult to
acquire the Company without the approval of our Board of Directors as more
shares would have to be acquired to gain control. This may deter
hostile takeover attempts that could result in an acquisition of us that would
have been financially beneficial to our stockholders.
We
have not previously paid dividends on the shares of our common stock and do not
anticipate doing so in the foreseeable future.
Under the
Nevada Revised Statutes, cash dividends on capital stock may not be paid if,
after given effect to any such dividend, we would not be able to pay our debts
as they become due in the usual course of business or our total assets would be
less than the sum of our total liabilities plus any amount needed to satisfy
preferential rights upon dissolution of the Company.
In
addition, our Credit Facility and other financing agreements that we may enter
into in the future may limit our ability to pay cash dividends on our capital
stock, including shares of the Registered Securities.
Moreover,
we have not in the past paid any dividends on the shares of our common stock and
do not anticipate that we will pay any dividends on our common stock in the
foreseeable future. Any future decision to pay a dividend on our
common stock and the amount of any dividend paid, if permitted, will be made at
the discretion of our Board of Directors.
CAUTIONARY NOTE REGARDING FORWARDING-LOOKING
STATEMENTS
This
prospectus contains a number of forward-looking statements that reflect
management's current views and expectations with respect to our business,
strategies, future results and events and financial performance. All
statements made in this prospectus other than statements of historical fact,
including statements that address operating performance, events or developments
that management expects or anticipates will or may occur in the future,
including statements related to future reserves, cash flows, revenues,
profitability, adequacy of funds from operations, statements expressing general
optimism about future operating results and non-historical information, are
forward-looking statements. In particular, the words "believe," "expect,"
"intend," " anticipate," "estimate," "may," "will," variations of such words and
similar expressions identify forward-looking statements, but are not the
exclusive means of identifying such statements and their absence does not mean
that the statement is not forward-looking. These forward-looking statements
are subject to certain risks and uncertainties, including those discussed
below. Our actual results, performance or achievements could differ
materially from historical results as well as those expressed in, anticipated or
implied by these forward-looking statements. We do not undertake any
obligation to revise these forward-looking statements to reflect any future
events or circumstances.
Readers
should not place undue reliance on these forward-looking statements, which are
based on management's current expectations and projections about future events,
are not guarantees of future performance, are subject to risks, uncertainties
and assumptions (including those described below) and apply only as of the date
of this Registration Statement. Our actual results, performance or
achievements could differ materially from the results expressed in, or implied
by, these forward-looking statements. Factors that could cause or
contribute to such differences include, but are not limited to those discussed
elsewhere in this report, and the risks discussed in our press releases and
other communications to shareholders issued by us from time to time, which
attempt to advise interested parties of the risks and factors that may affect
our business. We undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
USE OF PROCEEDS
All sales
of the Registered Securities will be by or for the account of the selling
security holders listed in this prospectus and any prospectus
supplement. We will not receive any proceeds from the sale by any
selling security holder of the Registered Securities.
DETERMINATION OF OFFERING PRICE
The
shares of common stock offered by this prospectus will be sold by the selling
security holders listed in this prospectus. The selling security
holders may sell the common stock at the market price as of the date of sale or
a price negotiated in a private sale. Our common stock is traded on
the OTC Bulletin Board under the symbol "AFDG". On January 29, 2009,
the date of the last reported sale, the closing price for our common stock on
the OTC Bulletin Board was $0.07.
We have
agreed to pay certain expenses in connection with the registration of the
Registered Securities offered by the selling security holders for resale
pursuant to this prospectus.
DILUTION
Our net
tangible book value as of September 30, 2008 was $7,059,872 or $0.28572 per
share of common stock. Net tangible book value per share is
determined by dividing our tangible book value (total tangible assets less total
liabilities) by the number of outstanding shares of our common
stock. Since this offering is being made solely by the selling
stockholders and none of the proceeds will be paid to us, our net tangible book
value will be unaffected by this offering. Our net tangible book
value and our net tangible book value per share, however, will be impacted by
the common stock to be issued pursuant to this prospectus.
The
following table illustrates the per share dilution:
|
Net
tangible book value per share before this offering
|
|
$
|
0.30218
|
|
|
Decrease
attributable to new investors
|
|
|
(0.15252
|
)
|
|
Net
tangible book value per share after this offering
|
|
$
|
0.14966
|
|
|
|
|
|
|
|
|
Dilution
per share to new stockholders
|
|
$
|
0.15252
|
|
|
|
|
|
|
|
SELLING SECURITY HOLDERS
The table
set forth below contains certain information as of February 12, 2009, after
giving effect to the issuance of common stock following the conversion or
exercise, as applicable, of the overlying derivative securities upon the
effectiveness of the Charter Amendment unless otherwise noted, regarding the
selling security holders. All information in the following table and
related footnotes has been supplied to us by the selling security holders, and
we have relied on their representations.
Percentage
ownership of common stock is based on 43,351,772 shares of our common stock
outstanding after giving effect to the issuance of common stock following the
conversion or exercise, as applicable, of the overlying derivative securities
upon the effectiveness of the Charter Amendment. In addition, the
following table assumes, for calculating each selling security holder’s
beneficial ownership, that options, warrants and convertible securities, as
applicable, held by such security holder (but not, unless otherwise noted, those
held by any other person) that would be exercisable within sixty (60) days of
the date of this prospectus, have been exercised and converted and the shares
underlying them added to the number of shares of our common stock deemed to be
outstanding. For purposes of calculating the beneficial ownership
after resale of each selling security holder, the table also assumes that each
selling security holder will exercise all overlying warrants and sell all of the
Registered Securities owned by the selling security holder and covered by this
prospectus.
Next to
the name of each selling security holder listed below that is not a natural
person (or the name of which is not identified with a natural person), we have
set forth in parentheses the name of the natural person(s) who has the power to
exercise voting and/or investment power over the shares owned by such selling
security holder, or a footnote providing the reader with the name of such
person(s). Each of those selling security holders identified by
footnotes (A) and (B) as a registered broker-dealer or as an affiliate of a
broker-dealer have represented to us, among other things, that (i) it acquired
the securities to be resold under the registration statement of which this
prospectus is a part in the ordinary course of business and (ii) it does not
have any agreements, understandings or arrangements with any persons, either
directly or indirectly, to dispose of such securities. None of the
selling security holders has held any position or office, or has had any other
material relationship with us or any of our affiliates within the past three
years.
The
aggregate number of shares of common stock that may actually be issued upon the
exercise of outstanding warrants held by certain selling security holders and
the actual number of shares of common stock that may actually be sold by each
selling security holder will be determined by such selling security
holder. In addition, warrants included in the Registered Securities
contain provisions that would result in an adjustment to the exercise price and
the issuance of additional shares when exercised in the event we sell shares of
our common stock, or derivative securities exercisable or convertible into
shares of our common stock, at prices less than the applicable exercise prices
set forth in these warrants. Based upon the foregoing, and because
each selling security holder may exercise all, some or none of their warrants
for shares of our common stock and each selling security holder may sell all,
some or none of such underlying shares of common stock, no estimate can be given
as to the aggregate number of shares of common stock issuable upon exercise of
warrants that will be held by the selling security holders upon termination of
the offering. In addition, the selling security holders listed below
may have acquired, sold or transferred, in transactions exempt from the
registration requirements of the Securities Act, some or all of the shares of
common stock since the date on which they provided the information regarding
their holdings.
If, from
time to time, additional security holders notify us of their intent to use this
prospectus to dispose of the shares of our common stock issuable upon exercise
of the warrants overlying the Registered Securities, we may file a prospectus
supplement to include those additional security holders’ information even if,
because we have not been notified of any prior exempt sales, the table below
continues to list shares of our common stock issuable upon exercise of warrants
previously proposed to be sold by the additional security holders’
transferors.
|
Name
of Security Holder
|
|
Beneficial
Ownership Before Offering
|
|
|
%
|
|
|
Shares
of
Common
Stock Being Registered
|
|
|
Beneficial
Ownership After Offering
|
|
|
%
|
|
|
Natural
Gas Partners VII, LP
(1)
|
|
|
17,500,000
|
(1)
|
|
|
40.4
|
%
|
|
|
17,500,000
|
|
|
|
--
|
|
|
|
n/a
|
|
|
CIT
Capital USA Inc.
(2)
|
|
|
24,199,996
|
(3)
|
|
|
35.8
|
%
|
|
|
24,299,996
|
|
|
|
--
|
|
|
|
n/a
|
|
|
Whalehaven
Capital Fund Limited
(4)
|
|
|
2,563,636
|
(5)
|
|
|
5.8
|
%
|
|
|
2,563,636
|
|
|
|
--
|
|
|
|
n/a
|
|
|
Alpha
Capital Anstalt
(6)
|
|
|
1,200,000
|
(7)
|
|
|
2.7
|
%
|
|
|
1,200,000
|
|
|
|
--
|
|
|
|
n/a
|
|
|
Libra
Finance
(8)
|
|
|
600,000
|
(8)
|
|
|
1.4
|
%
|
|
|
600,000
|
|
|
|
--
|
|
|
|
n/a
|
|
|
Global
Hunter Securities, LLC
(9)
|
|
|
225,000
|
(10)
|
|
|
*
|
|
|
|
225,000
|
|
|
|
--
|
|
|
|
n/a
|
|
|
Totals
|
|
|
46,288,632
|
|
|
|
*
|
|
|
|
46,288,632
|
|
|
|
--
|
|
|
|
n/a
|
|
____________________
|
(*)
|
Less
than one percent.
|
|
(A)
|
Indicates
a registered broker-dealer.
|
|
(B)
|
Indicates
an affiliate of a registered broker-dealer.
|
|
(1)
|
Represents
17,500,000 shares of our Common Stock underlying 10,000 shares of Series D
Preferred issued by us in the Voyager Acquisition which automatically
convert upon the effectiveness of the Charter
Amendment. Holder’s address is c/o Natural Gas Partners, 125 E.
John Carpenter Fwy., Ste. 600, Irving, TX 75062. Kenneth A.
Hersh and David R. Albin are Authorized Members of the ultimate general
partner of Natural Gas Partners VII, L.P. and may be deemed to share
dispositive and voting power over the securities owned by Natural Gas
Partners VII, L.P.
|
|
(2)
|
Indicates
grant of dispositive authority over the listed securities to Brian
Kerrigan, as vice president of the listed entity.
|
|
(3)
|
Represents
shares of common stock underlying the CIT Warrant held by the selling
security holder, based on an initial exercise price of $0.35 per share,
subject to adjustment under certain circumstances as described in this
prospectus under
“Description of Company
Securities – Warrants and Exercise Price Adjustments – CIT Warrant.”
As a result, the number of shares of our common stock issuable upon
exercise of the warrant may increase in the future.
|
|
(4)
|
Indicates
grant of dispositive authority over the listed securities to Brian
Mazzella, as Chief Financial Officer of the selling security
holder.
|
|
(5)
|
Represents
1,200,000 shares of common stock underlying a Bridge Warrant held by the
selling security holder, based on an initial exercise price of $0.33 per
share, subject to adjustment under certain circumstances as described in
this prospectus under
“Description of the Company
Securities – Warrants and Exercise Price Adjustments – Bridge
Warrants.”
As a result, the number of shares of our
common stock issuable upon exercise of the warrant may increase in the
future.
|
|
(6)
|
Indicates
grant of dispositive authority over the listed securities to Konrad
Ackerman, as Director of the selling security holder.
|
|
(7)
|
Represents
shares of common stock underlying a Bridge Warrant held by the selling
security holder, based on an initial exercise price of $0.33 per share,
subject to adjustment under certain circumstances as described in this
prospectus under
“Description of the Company
Securities – Warrants and Exercise Price Adjustments – Bridge
Warrants.”
As a result, the number of shares of our
common stock issuable upon exercise of the warrant may increase in the
future.
|
|
(8)
|
Represents
shares of common stock underlying Bridge Placement Warrant held by the
selling security holder, based on an initial exercise price of $0.33 per
share, subject to adjustment under certain circumstances as described in
this prospectus under
“Description of the Company
Securities – Warrants and Exercise Price Adjustments – Bridge Placement
Warrant.”
As a result, the number of shares of our
common stock issuable upon exercise of the warrant may increase in the
future.
|
|
(9)
|
Indicates
grant of dispositive authority over the listed securities to Ed
Lainfiesta, as president of the selling security
holder.
|
|
(10)
|
Represents
shares of common stock underlying GHS Warrant held by the selling security
holder, at an exercise price of $0.33 per
share.
|
PLAN OF DISTRIBUTION
We are
registering for resale a total of 46,288,632 shares of our common stock,
including up to 18,863,636 shares issuable upon conversion of outstanding shares
of the Series D Preferred and Series E Preferred and 27,424,996 shares initially
issuable upon exercise of outstanding warrants, issued or granted, as the case
may be, in connection with the Voyager Acquisition and the related
financing.
All fees,
costs, expenses and fees in connection with the registration of the shares of
common stock offered for resale under this prospectus will be borne by
us. Brokerage commissions, if any, attributable to the sale of shares
of Registered Securities will be borne by the selling security
holders.
The
selling security holders may sell the Registered Securities directly or through
brokers, dealers or underwriters who may act solely as agents or may acquire the
Registered Securities as principals. The selling security holders may
distribute the Registered Securities in one or more of the following
methods:
|
|
•
|
ordinary
brokers transactions, which may include long or short
sales;
|
|
|
•
|
transactions
involving cross or block trades or otherwise on the open
market;
|
|
|
•
|
purchases
by brokers, dealers or underwriters as principal and resale by these
purchasers for their own accounts under this
prospectus;
|
|
|
•
|
to
the extent applicable, “at the market” to or through market makers or into
an existing market;
|
|
|
•
|
in
other ways not involving market makers or established trading markets,
including direct sales to purchasers or sales made through
agents;
|
|
|
•
|
through
transactions in options, swaps or other derivatives (whether exchange
listed or otherwise); or
|
|
|
•
|
any
combination of the above, or by any other legally available
means.
|
Selling
security holders will not be restricted as to the price or prices at which the
selling security holders may sell their shares of Registered Securities covered
by this prospectus and any sales may be made at market prices prevailing at the
time of the sale, at negotiated prices, at fixed prices, or at varying prices
determined at the time of the sale. Sales of the shares of common
stock covered by this prospectus by the selling security holders may depress the
market price of our common stock since the number of shares which may be sold by
the selling security holders is very large compared to the historical average
weekly trading volume of our common stock, which has been quite
low. Accordingly, if the selling security holders were to sell, or
attempt to sell, all of such securities at once or during a short time period,
we believe such a transaction would dramatically adversely affect the market
price of our common stock.
From time
to time a selling security holder may pledge shares of common stock covered
hereby under margin provisions of customer agreements with its brokers or under
loans with third parties. Upon a default by the selling security
holder, the broker or such third party may offer and sell any pledged securities
from time to time.
In
effecting sales, brokers and dealers engaged by a selling security holder may
arrange for other brokers or dealers to participate in the sales as agents or
principals. Brokers or dealers may receive commissions or discounts
from the selling security holder or, if the broker-dealer acts as agent for the
purchaser of the Registered Securities, from the purchaser in amounts to be
negotiated, which compensation as to a particular broker-dealer might be in
excess of customary commissions customary in the types of transactions
involved. Broker-dealers may agree with the selling security holders
to sell a specified number of shares of Registered Securities at a stipulated
price, and to the extent the broker-dealer is unable to do so acting as agent
for the selling security holders, to purchase as principal any unsold securities
at the price required to fulfill the broker-dealer commitment to the selling
security holder. Broker-dealers who acquire securities as principal
may then resell those securities from time to time in transactions: in the
over-the counter market or otherwise; at prices and on terms prevailing at the
time of sale; at prices related to the then-current market price; or in
negotiated transactions.
Resales
may involve block transactions or sales to and through other broker-dealers,
including any of the transactions described above. In connection with
these sales, these broker-dealers may pay to or receive from the purchasers of
the Registered Securities commissions as described above.
The
selling security holders may also sell the shares of common stock covered by
this prospectus, which qualify for sale pursuant to Rule 144 of the Securities
Act, may be sold in open market transactions under Rule 144 under the Securities
Act, rather than under this prospectus. In addition, a selling
security holder may transfer, devise or gift the Registered Securities by other
means not described in this prospectus.
The
selling security holders and any broker-dealers or agents that participate with
the selling security holders in sales of the Registered Securities may be deemed
to be “underwriters” within the meaning of the Securities Act in connection with
these sales. In this event, any profits on the sale of the underlying
common stock by selling security holders and any discounts, commissions or
concessions received by any broker-dealers or agents might be deemed to be
underwriting discounts and commissions under the Securities
Act. Selling security holders who are deemed to be “underwriters”
within the meaning of the Securities Act will be subject to the prospectus
delivery requirements of the Securities Act. To the extent the
selling security holders may be deemed to be “underwriters,” they may be subject
to statutory liabilities, including, but not limited to, Sections 11, 12 and 17
of the Securities Act. We know of no existing arrangements between
stockholders and any other stockholder, broker, dealer, underwriter or agent
relating to the sale or distribution of the Registered Securities being offered
under this prospectus.
NASD
Notice to Members 88-101 states that in the event a selling shareholder intends
to sell any of the shares registered for resale in this prospectus through a
member of the National Association of Securities Dealers (NASD) participating in
a distribution of our securities, such member is responsible for insuring that a
timely filing is first made with the Corporate Finance Department of the NASD
and disclosing to the NASD the following:
|
|
•
|
it
intends to take possession of the registered securities or to facilitate
the transfer of such certificates;
|
|
|
•
|
the
complete details of how the selling shareholders shares are and will be
held, including location of the particular accounts;
|
|
|
•
|
whether
the member firm or any direct or indirect affiliates thereof have entered
into, will facilitate or otherwise participate in any type of payment
transaction with the selling shareholders, including details regarding any
such transactions; and
|
|
|
•
|
in
the event any of the securities offered by the selling shareholders are
sold, transferred, assigned or hypothecated by any selling shareholder in
a transaction that directly or indirectly involves a member firm of the
NASD or any affiliates thereof, that prior to or at the time of said
transaction the member firm will timely file all relevant documents with
respect to such transaction(s) with the Corporate Finance Department of
the NASD for review.
|
The
selling security holders are subject to applicable provisions of the Exchange
Act and the SEC’s rules and regulations, including Regulation M, which
provisions may limit the timing of purchases and sales of the Registered
Securities by the selling security holders.
We have
advised the selling shareholders that the anti-manipulation rules of Regulation
M under the Exchange Act may apply to sales of shares in the market and to the
activities of the selling shareholders and their affiliates. In
addition, we will make copies of this prospectus available to the selling
shareholders for the purpose of satisfying the prospectus delivery requirements
of the Securities Act.
In order
to comply with certain states’ securities laws, if applicable, the Registered
Securities may be sold in those jurisdictions only through registered or
licensed brokers or dealers. In certain states the securities may not
be sold unless they have been registered or qualified for sale in such state, or
unless an exemption from registration or qualification is available and is
obtained. There can be no assurance that any selling security holder
will sell any or all of the Registered Securities.
The
selling security holders may agree to indemnify any agent, dealer or
broker-dealer that participates in transactions involving sales of the
Registered Securities against certain liabilities, including liabilities arising
under the Securities Act. We and the selling security holders have
each agreed to indemnify the other against certain liabilities, including
liabilities under the Securities Act or the Exchange Act arising out of or based
upon any untrue statement or alleged untrue statement of any material fact
contained in the registration statement of which this prospectus is a part, any
preliminary prospectus, final prospectus or summary prospectus contained
therein, or any amendment or supplement thereto, or any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading.
Our
obligation to use reasonable efforts to keep the registration statement to which
this prospectus relates effective is subject to specified, permitted exceptions,
each as set forth in the registration rights agreements entered into by us with
each of CIT Capital and Voyager Gas Holdings, L.P. and its permitted assignees,
and with the recipients of the Bridge Warrants, each in the form previously
included as Exhibits 99.10 and 99.14 to our Current Reports on Forms 8-K
previously filed with the SEC on May 23, 2008 and September 9, 2008,
respectively. However, in no event will we be required to keep the
registration statement effective beyond such date as all Registered Securities
covered by the registration statement have been sold, or may be sold without
volume or manner-of-sale restrictions pursuant to Rule 144, without the
requirement for the Company to be in compliance with the current public
information requirement under Rule 144.
In
addition, we may suspend the use of this prospectus for offers and sales of the
Registered Securities under certain circumstances, including circumstances
relating to pending corporate developments, for a period not to exceed sixty
(60) days (which need not be consecutive) in any twelve-month period and, in the
case of Registered Securities held by CIT Capital and Voyager Partnership, as
designee of Voyager Gas Holdings, L.P., for any additional fifteen (15)
consecutive calendar days or twenty-five (25) calendar days during any
twelve-month period outside any permitted “blackout period” as defined
therein.
DESCRIPTION OF COMPANY SECURITIES
The
following summary is a description of the material terms of our capital
stock. This summary is not intended to be a complete description of
our capital stock, and it is subject in all respects to the applicable
provisions of Nevada law and of our constituent documents and of the constituent
documents of our subsidiaries. For more information, please review
our Articles of Incorporation, as amended, and Bylaws incorporated by reference
in the registration statement to which this prospectus forms a
part.
General
The
authorized capital stock of the Company consists of 24,000,000 shares of common
stock, $0.001 par value, and 1,000,000 shares of “blank check” preferred stock,
$0.001 par value. As of February 12, 2009, there are a total of
23,363,136 shares of common stock issued and outstanding and 157,495 shares of
preferred stock currently outstanding.
After
giving effect to automatic conversion of shares of the Series D Preferred and
Series E Preferred upon the effectiveness of the Charter Amendment, there will
be a total of 42,226,772 shares of common stock issued and outstanding and
137,495 shares of preferred stock outstanding.
At
February 12, 2009, there are: (i) 21,911,854 shares of common stock issuable
upon conversion pursuant to outstanding shares of Series A, B, D and E
Preferred, 18,863,636 of which are Registered Securities being registered
hereby; (ii) 17,050,000 shares of common stock issuable (subject to vesting
schedules in some instances) pursuant to outstanding restricted stock awards and
stock options, (iii) 27,424,996 shares of common stock issuable pursuant to
outstanding warrants, all of which are Registered Securities being registered
hereby, and (iv) an outstanding promissory note convertible into approximately
50,000 shares of common stock.
Common
Stock
Holders
of outstanding shares of common stock are entitled to one vote for each share of
stock in his or her name on the records of the Company on all matters submitted
to a vote of stockholders, including the election of directors. The
holders of common stock do not have cumulative voting
rights. Dividends may be paid to holders of common stock when, as and
if declared by the Board of Directors out of funds legally available
therefore. Holders of common stock have no conversion, redemption or
preemptive rights. All shares of commons stock, when validly issued
and fully paid, will be non-assessable. In the event of any
liquidation, dissolution or winding up of the Company, holders of common stock
are entitled to share ratably in the assets of the Company remaining after
provision for payment of creditors and after the liquidation preference, if any,
of any preferred stock outstanding at the time.
Preferred
Stock
The Board
may, by resolution, issue preferred stock in one or more series at such time or
times and for such consideration as the Board may determine. The
Board is expressly authorized to provide for such designations, preferences,
voting power (or no voting power), relative, participating, optional or other
special rights and privileges, and such qualifications, limitations or
restrictions thereof, as it determines in the resolutions providing for the
issue of such class or series of preferred stock prior to the issuance of any
shares thereof.
At
February 12, 2009, our Board had authorized (i) 300,000 shares of Series A
Preferred, of which 99,395 are issued and outstanding, (ii) 200,000 shares of
Series B Preferred, of which 37,100 are issued and outstanding, (iii) 2,000
shares of Series C Preferred, of which 1,000 are issued and outstanding, (iv)
10,000 shares of Series D Preferred, all of which are convertible into
17,500,000 shares of common stock upon the effectiveness of the Charter
Amendment, and (v) 10,000 shares of Series E Preferred, all of which are
convertible into 1,363,636 shares of common stock upon the effectiveness of the
Charter Amendment. Except for the Series C Preferred which is not
convertible, the outstanding shares of Series A Preferred and Series B Preferred
stock are convertible into an aggregate of 3,048,218 shares of our common
stock. Except as provided by law, holders of preferred stock do not
have voting rights.
Series A Preferred
During
May 2008, we exchanged 99,395 shares of our Series A Preferred in full
satisfaction of outstanding convertible promissory notes, in the then aggregate
principal amount of $965,000 plus $28,950 interest accrued
thereon. The notes, as extended previously, carried an interest rate
of 12% per annum, payable in either cash or shares, and were convertible into
shares of common stock at a conversion rate of $0.50 per share at the option of
the investor. Each of the Series A Preferred issued is convertible
into 20 shares of our common stock, for an aggregate of 1,987,900 shares of our
common stock, upon the effectiveness of the Charter Amendment.
The
exchange transaction pursuant to which we issued the Series A Preferred,
together with the governing Certificate of Designations, was previously
disclosed by us in our Current Report on Form 8-K filed with the SEC on May 23,
2008.
Series
B Preferred
During
May 2008, we exchanged 37,100 shares of our Series B Preferred in full
satisfaction of outstanding convertible promissory notes, in the then aggregate
principal amount of $350,000 plus $21,000 interest accrued
thereon. The notes carried a 10% interest rate payable in shares of
our common stock based upon a conversion price of $ 0.35 per
share. Each of the Series B Preferred issued is convertible into
28.58 shares of our common stock, for an aggregate of 1,060,318 shares of our
common stock, upon the effectiveness of the Charter Amendment.
The
exchange transaction pursuant to which we issued the Series B Preferred,
together with the governing Certificate of Designations, was previously
disclosed by us in our Current Report on Form 8-K filed with the SEC on May 23,
2008.
Series
D Preferred
As part
of the purchase price in the Voyager Acquisition, on September 2, 2008, we
issued 10,000 shares of our newly designated Series D Preferred to the seller of
Voyager. As set forth in the Certificate of Designations with respect
to the Series D Preferred, upon the effectiveness of the Charter Amendment each
share of Series D Preferred will automatically convert into 1,750 shares of
common stock for an aggregate of 17,500,000 shares of our common
stock. The shares of Series D Preferred rank senior to all other
shares of the Company’s capital stock and in parity with the Series E Preferred
(discussed below). The Certificate of Designation provides that if
the Charter Amendment is not declared effective within one hundred fifty (150)
days from the closing of the Voyager Acquisition, then holders of our Series D
Preferred shall be entitled to the same voting rights and vote with (and in the
same class as) the holders of common stock with respect to every matter voted on
by the holders of common stock, on an “as if converted” basis.
The
issuance of the Series D Preferred, together with governing Certificate of
Designations, was previously disclosed by us in our Current Report on Form 8-K
filed with the SEC on September 9, 2008.
Series
E Preferred
Concurrent
with the closing of the Voyager Acquisition, on September 2, 2008, we issued
10,000 shares of our newly designated Series E Preferred to Whalehaven Capital
Fund Limited, a purchaser of our Debentures in the Bridge Loan, in satisfaction
in full of the redemption price thereof, in the amount of
$450,000. As set forth in the Certificate of Designations with
respect to the Series E Preferred, upon the effectiveness of the Charter
Amendment each share of Series E Preferred will automatically convert into
136.3636 shares of common stock for an aggregate of 1,363,636 shares of our
common stock. The shares of Series E Preferred rank senior to all
other shares of the Company’s capital stock and are on parity with the Series D
Preferred. The Certificate of Designation provides that if the
Charter Amendment is not declared effective within one hundred fifty (150) days
from the closing of the Voyager Acquisition, then holders of our Series E
Preferred Stock shall be entitled to the same voting rights and vote with (and
in the same class as) the holders of common stock with respect to every matter
voted on by the holders of common stock, on an “as if converted”
basis.
The
issuance of the Series E Preferred, together with governing Certificate of
Designations, and the grant of the warrant, together with the form of warrant,
were previously disclosed by us in our Current Reports on Form 8-K filed with
the SEC on May 23, 2008 and September 9, 2008, respectively.
Warrants
and Exercise Price Adjustments
CIT
Warrant
On
September 2, 2008, we issued a warrant to CIT Capital, the lender and
administrative agent under the Credit Facility (the “CIT Warrant”), exercisable
upon the effectiveness of the Charter Amendment to purchase up to 24,199,996
shares of our common stock initially, or approximately 27.5% of our common stock
on a fully-diluted basis at the grant date, at an exercise price of $0.35 per
share. The CIT Warrant is exercisable for a period of seven (7) years
and affords the holder(s) thereof full anti-dilution protection in the event we
issue future shares or derivative instruments exercisable for less than the then
applicable exercise price, as well as other adjustments under certain
circumstances.
The
exercise price and number of shares of common stock to be delivered upon
exercise of the CIT Warrants is subject to adjustment to reflect certain events,
including the payment of certain dividends, stock splits, certain issuances of
common stock or rights to purchase common stock and other events. In
addition, the CIT Warrant contains full-ratchet anti-dilution protection
pursuant to which, if we issue shares of our common stock or grant options,
warrants or securities convertible into our common stock at a price per share of
common stock less than the $0.35 exercise price of the CIT Warrant (other than
shares of common stock issuable to our employees, consultants or non-employee
directors pursuant to employee benefit plans), then the exercise price under the
CIT Warrant will be adjusted to equal the price per share of any such future
issuance.
The grant
of the CIT Warrant, together with the form of CIT Warrant, was previously
disclosed by us in our Current Report on Form 8-K filed with the SEC on
September 9, 2008.
GHS
Warrant
In
connection with our entering into the Credit Facility, on September 2, 2008, we
issued a warrant to Global Hunter Securities LLC (the “GHS Warrant”),
exercisable upon the effectiveness of the Charter Amendment to purchase up to
225,000 shares of our common stock, at an exercise price of $0.33 per
share. The GHS Warrant is exercisable for a period of five (5)
years. We had previously retained the services of Global Hunter
Securities LLC to assist us in arranging the debt facility, for which services
we agreed to pay a cash fee based upon a percentage of any debt raised through
it. The exercise price and number of shares of common stock to be
delivered upon exercise of the GHS Warrant is subject to adjustment to reflect
certain events, including the payment of certain dividends, stock splits,
certain issuances of common stock or rights to purchase common stock and other
events.
The grant
of the GHS Warrant, together with form of GHS Warrant, was previously disclosed
by us in our Current Report on Form 8-K filed with the SEC on September 9,
2008.
Bridge
Warrants
On May
21, 2008, as part of our sale of the Debentures we granted warrants (the “Bridge
Warrants”) initially exercisable for up to 3,000,000 aggregate shares of our
common stock, based upon an exercise price of $0.33 per share. The
Bridge Warrants are exercisable for a period of five (5) years and were granted
as additional consideration to the purchasers of our Debentures in the Bridge
Loan and, with respect to 600,000 shares underlying the Bridge Warrant, the
placement agent in the Bridge Loan.
The
exercise price and number of shares of common stock to be delivered upon
exercise of the Bridge Warrants are subject to adjustment to reflect certain
events, including the payment of certain dividends, stock splits, certain
issuances of common stock or rights to purchase common stock and other
events. In addition, the Bridge Warrants contain full-ratchet
anti-dilution protection pursuant to which, if we issue shares of our common
stock or grant options, warrants or securities convertible into our common stock
at a price per share of common stock less than the $0.33 exercise price of the
Bridge Warrants (other than shares of common stock issuable to our employees,
consultants or non-employee directors pursuant to employee benefit plans), then
the exercise price under the Bridge Warrants will be adjusted to equal the price
per share of any such future issuance.
The grant
of the Bridge Warrants, together with the form of Bridge Warrants, was
previously disclosed by us in our Current Report on Form 8-K filed with the SEC
on September 9, 2008.
Registration
Rights
The
Registered Securities are not registered under state or federal securities laws
and, as provided below with respect to certain of the Registered Securities, are
subject to registration rights as agreed between us and such selling security
holders.
By that
registration rights agreement dated May 21, 2008, between us and the purchasers
of the Debentures in the Bridge Loan, we agreed, subject to certain cutbacks as
applicable, to file a registration statement covering the shares of common stock
underlying the Debentures, if applicable, and the Bridge Warrants within 90 days
from the closing of the Voyager Acquisition, and to cause such registration
statement to become effective within 180 days following such closing
date. Upon the occurrence of certain events described in our
registration rights agreement with such purchasers, we will be obligated to pay
certain penalties. The shares of common stock underlying the Series E
Preferred Stock issued by us in satisfaction of a Debenture, in the redemption
amount of $450,000, is a beneficiary of the foregoing registration
rights.
By
another registration rights agreement dated September 2, 2008, executed by us
and each of CIT Capital and Voyager Partnership in connection with the Voyager
Acquisition and related financing, we agreed, subject to certain cutbacks as
applicable, to file a registration statement covering the shares of common stock
underlying the Series D Preferred Stock issued in the Voyager Acquisition and
the CIT Warrant within 90 days from the closing of the Voyager Acquisition, and
to cause such registration statement to become effective within 180 days
following such closing date. Upon the occurrence of certain events
described in the registration rights agreement, we will be obligated to pay
certain penalties.
We also
granted “piggy-back” registration rights with respect to the shares of common
stock underlying the GHS Warrant, affording the warrant holder the opportunity
to include for sale in any registration statement under the Securities Act
(other than in connection with a Form S-8 or any successor form registering any
employee benefit plan) we propose to file with respect to our securities,
provided, however, that if our underwriter, if applicable, shall advise us in
writing that in its opinion the number of shares to be included in such
registration is too large, then we will include only such number of underlying
shares of common stock as such underwriter shall so advise
.
Our
failure to timely file, have declared effective, and maintain the effectiveness
of, the registration statement to which this prospectus forms a part, will
subject us to partial liquidation damages under the respective registration
rights agreements. Specifically, under our agreement with holders of
the Bridge Warrants, we will be obligated to pay to each such holder an amount
in cash equal to 2% of the aggregate purchase price paid by such holder in the
Bridge Loan to purchase its respective Debenture multiplied by the Registered
Securities held by such holders and affected by our failure to so file, have
declared effective or maintain the effectiveness; provided, that (i) no penalty
shall be payable for Bridge Warrants not then exercised and (ii) the maximum
amount payable shall not exceed 18% of the aggregate purchase price paid by such
holder for its Debentures under the Bridge Loan.
Under our
agreement with holders of the CIT Warrant, if the underlying Registered
Securities are not yet eligible to sell pursuant to Rule 144 under the
Securities Act, we will be obligated to pay to each such holder an amount in
cash equal to 0.8855% of the product of (A) $0.35 and (B) the number of
Registered Securities held by such holder and affected by our failure to so
file, have declared effective or maintain the effectiveness; provided, that, if
such failure shall not have been cured by the first ninety (90) day anniversary
thereof, then we will pay an amount in cash equal to 2.48% of the product of (A)
$0.35 and (B) the number of Registered Securities held by such holders on such
90
th
day anniversary date; and
With
respect to the Registered Securities held by Voyager Partnership and its
permitted assignees, our agreement provides, if such Registered Securities are
not yet eligible to sell pursuant to Rule 144 under the Securities Act, that we
will be obligated to pay to each such holder an amount in cash equal to two
percent (2%) of the product of (A) $0.40 and (B) the number of Registered
Securities held by such holder and affected by our failure to so file, have
declared effective or maintain the effectiveness; provided, that, if such
failure shall not have been cured by the first ninety (90) day anniversary
thereof, then we will pay an amount in cash equal to three percent (3%) of the
product of (A) $0.40 and (B) the number of Registered Securities held by such
holders on such 90
th
day
anniversary date;
In
addition to the foregoing, our registration rights agreement with CIT Capital
and Voyager Partnership subjects us to additional liquidated damages if we fail
to file and maintain a registration statement even after the applicable
Registered Securities are eligible to sell under Rule 144 in the following
circumstances:
|
§
|
if
we become eligible to use Form S-3, then within ninety (90) days following
the date of such eligibility, we shall, upon the written request of either
(i) those holding a majority of the Registered Securities held by Voyager
Partnership and its permitted assignees or (ii) those holding a majority
of the Registered Securities underlying the CIT Warrants (each a “Shelf
Demand”), file with the SEC a registration statement on Form S-3 relating
to the resale by all such holders of their Registered Securities and if
such registration statement on Form S-3 does not become effective within
180 days after our receipt of such Shelf Demand, then on such date and on
each ninety (90) day anniversary thereof until our failure to file and
cause to become effective such a registration statement on Form S-3 we
shall pay to holders of CIT Warrants an amount in cash equal to 2.48% of
the product of (A) $0.35 and (B) the number of Registered Securities then
held by such holders and to the Voyager Partnership an amount in cash
equal to three percent (3%) of the product of (A) $0.40 and (B) the number
of Registered Securities then held by such holders;
|
|
§
|
if
the percentage of outstanding shares of our common stock held by the
Voyager Partnership falls below 20%, and our failure to file and maintain
the registration statement is continuing, we shall deliver to the Voyager
Partnership as partial liquidated damages, and not as a penalty, cash, in
the aggregate amount equal to three percent (3%) of the product of (A)
$0.40 and (B) the number of Registered Securities held by such partnership
on such ninety (90) day anniversary date; and
|
|
§
|
if
the percentage of outstanding shares of common stock held by the holders
of CIT Warrants falls below 20%, and our failure to file and maintain the
registration statement is continuing, we shall deliver to such holders as
partial liquidated damages, and not as a penalty, cash, in the aggregate
amount equal 2.48% of the product of (A) $0.35 and (B) the number of
Registered Securities held by such holders on such ninety (90) day
anniversary date.
|
Regardless
of the foregoing, we may suspend the use of this prospectus for offers and sales
of the Registered Securities under certain circumstances, including
circumstances relating to pending corporate developments, for a period not to
exceed 60 days (which need not be consecutive) in any twelve-month period and,
in the case of Registered Securities held by CIT Capital and Voyager
Partnership, as designee of Voyager Gas Holdings, L.P., for any additional 15
consecutive calendar days or 25 calendar days during any 12-month period outside
any permitted “blackout period” as defined therein.
In no
event will we be required to keep any registration statement effective beyond
such date as all Registered Securities covered by such Registration Statement
have been sold, or may be sold without volume or manner-of-sale restrictions
pursuant to Rule 144, without the requirement for the Company to be in
compliance with the current public information requirement under Rule
144.
Restrictions
on Ownership – Nevada law
The
Nevada statutory law applicable to private corporations such as us contains
provisions that impose certain restrictions on the ability of stockholders
owning a specific percentage or more of shares of a Nevada corporation's voting
stock to engage in a combination transaction with that corporation, and on the
ability to certain persons or entities to acquire a controlling interest in a
Nevada corporation. Because our Articles of Incorporation and Bylaws
do not prohibit the application of these provisions, these laws may have the
effect of inhibiting the acquisition of shares of common stock or any
combination transaction with us.
MARKET FOR COMMON EQUITY AND
RELATED
STOCKHOLDER MATTERS
Market
Information.
Our
common stock is quoted on the OTC Bulletin Board under the trading symbol
"AFDG". The prices set forth below reflect the quarterly high and low
sale information for shares of our common stock for the last two fiscal years
ended June 30, 2008 and 2007, respectively, and the interim quarterly periods
ended September 30 and December 31, 2008. These quotations reflect
inter-dealer prices, without retail markup, markdown or commission, and may not
represent actual transactions.
|
|
|
High
|
|
|
Low
|
|
|
|
|
|
|
|
|
|
|
2008-2009
Quarter Ended:
|
|
|
|
|
|
|
|
December
31, 2008
|
|
$
|
0.75
|
|
|
$
|
0.07
|
|
|
September
30, 2008
|
|
$
|
0.92
|
|
|
$
|
0.25
|
|
|
|
|
|
|
|
|
|
|
|
|
2007-2008
Quarter Ended:
|
|
|
|
|
|
|
|
|
|
June
30, 2008
|
|
$
|
0.76
|
|
|
$
|
0.46
|
|
|
March
31, 2008
|
|
$
|
0.60
|
|
|
$
|
0.35
|
|
|
December
31, 2007
|
|
$
|
0.50
|
|
|
$
|
0.30
|
|
|
September
30, 2007
|
|
$
|
0.57
|
|
|
$
|
0.37
|
|
|
|
|
|
|
|
|
|
|
|
|
2006-2007
Quarter Ended:
|
|
|
|
|
|
|
|
|
|
June
30, 2007
|
|
$
|
0.51
|
|
|
$
|
0.28
|
|
|
March
31, 2007
|
|
$
|
0.55
|
|
|
$
|
0.35
|
|
|
December
31, 2006
|
|
$
|
0.60
|
|
|
$
|
0.21
|
|
|
September
30, 2006
|
|
$
|
0.65
|
|
|
$
|
0.25
|
|
Our
common stock is covered by an SEC rule that imposes additional sales practice
requirements on broker-dealers who sell such securities to persons other than
established customers and accredited investors, which are generally institutions
with assets in excess of $5,000,000, or individuals with net worth in excess of
$1,000,000 or annual income exceeding $200,000 or $300,000 jointly with their
spouse. For transactions covered by the rule, the broker-dealer must
make a special suitability determination for the purchaser and transaction prior
to the sale. Consequently, the rule may affect the ability of
broker-dealers to sell our securities, and also may affect the ability of
purchasers of our common stock to sell their shares in the secondary
market. It may also cause fewer broker-dealers to be willing to make
a market in our common stock, and it may affect the level of news coverage we
receive.
Holders
of Securities.
At
February 12, 2009, there were approximately 151 holders of record of our common
stock.
We have
outstanding as of February 12, 2009: (i) stock options exercisable, subject to
vesting schedules in some cases, to purchase up to an aggregate 13,675,000
shares of common stock, (ii) warrants exercisable to purchase up to 27,424,996
shares of common stock, (ii) shares of preferred stock convertible into an
aggregate of 21,911,854 shares of common stock and (iv) a convertible promissory
note in the principal amount of $25,000, convertible into shares of common stock
at $0.50 per share. At February 12, 2009, we also had outstanding
restricted stock agreements for the issuance of an aggregate of 3,375,000 shares
of common stock.
After
giving effect to the Charter Amendment, we will have: (i) stock options
exercisable, subject to vesting schedules in some cases, to purchase up to an
aggregate 13,675,000 shares of common stock, (ii) warrants exercisable to
purchase up to 27,424,996 shares of common stock, (iii) shares of preferred
stock convertible into an aggregate of 3,048,218 shares of common stock and (iv)
a convertible promissory note in the principal amount of $25,000, convertible
into shares of common stock at $0.50 per share. Under our outstanding
restricted stock agreements which provide for the issuance of an aggregate of
3,375,000 shares of common stock to our executive officers, 1,125,000 will
automatically vest upon the effectiveness of the Charter Amendment.
Dividends.
We have
not declared or paid any cash dividends on our common stock since our inception,
and our Board of Directors currently intends to retain all earnings for use in
the business for the foreseeable future. Any future payment of
dividends will depend upon our results of operations, financial condition, cash
requirements and other factors deemed relevant by our Board of
Directors. Pursuant to the Credit Facility, as long as there is
outstanding indebtedness thereunder, we may not declare or pay a cash dividend
on our common stock without the consent of our lender.
Equity
Compensation Plan Information
The
following table provides information as of our fiscal year ended June 30, 2008,
about our equity compensation plans and arrangements:
|
|
|
Number
of Securities to be Issued Upon Exercise of Outstanding Options, Warrants
and Rights
|
|
|
Weighted
Average Exercise Price of Outstanding Options, Warrants and
Rights
|
|
|
Number
of Securities Remaining Available for Future Issuance Under Equity
Compensation Plans (Excluding Securities Reflected in Column
(a))
|
|
|
Plan
Category
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
|
Equity
compensation plans approved by security holders
|
|
|
--
|
|
|
|
--
|
|
|
|
1,500,000
|
|
|
Equity
compensation plans not approved by security holders
|
|
|
10,050,000
|
(1)
|
|
$
|
0.41
|
|
|
|
5,250,000
|
(2)
|
|
Total
|
|
|
10,050,000
|
|
|
$
|
0.41
|
|
|
|
6,750,000
|
|
__________________
|
(1)
|
Consists
of warrants and options granted to our employees, officers, directors and
consultants, to the extent vested and exercisable (within the meaning of
Rule 13d-3(d)(1) promulgated by the Commission under the Securities and
Exchange Act of 1934, as amended) as of [June 30,
2008].
|
|
(2)
|
Includes
an aggregate of: (i) 2,625,000 shares of our Common Stock underlying
restrictive stock awards not yet vested with respect to such shares
pursuant to Restricted Stock Agreements, each dated May 22, 2008, between
us and our Chief Executive Officer and Chief Financial Officer,
respectively, which awards vest with respect to one-third of the shares on
each of the effective date of the Charter Amendment and the first and
second year anniversary of the grant date; and (ii) 2,625,000 shares of
our common stock underlying options granted but not yet vested with
respect to such shares pursuant to Option Agreements, each dated May 22,
2008, between us and our Chief Executive Officer and Chief Financial
Officer, respectively, which options vest with respect to one-third of the
shares on each of the effective date of the Charter Amendment and the
first and second year anniversary of the grant
date.
|
Set forth
below is a description of the individual compensation arrangements or equity
compensation plans not currently approved by our security holders pursuant to
which the 10,925,000 shares of our common stock included in the chart above were
issuable as of June 30, 2008:
|
·
|
Option
granted by Energy Venture on March 1, 2006 (and assumed by us under the
May 2006 Merger) to a non-employee in consideration of services performed,
which option expires five years from grant date and is currently
exercisable to purchase up to 350,000 shares of our common stock at an
exercise price of $0.05 per share;
|
|
·
|
Option
granted by Energy Venture on March 1, 2006 (and assumed by us under the
May 2006 Merger) to two non-employees in consideration of services
performed, which options expire five years from grant date and are
currently exercisable to purchase up to 750,000 shares of our common stock
at an exercise price of $0.60 per share;
|
|
·
|
Options
granted on December 28, 2006 to four non-employees in consideration of
services performed, which options expire five years from grant date and
are currently exercisable to purchase up to 1,500,000 shares of our common
stock at an exercise price of $0.25 per share;
|
|
·
|
Options
granted on May 22, 2007 to two non-employees in consideration of services
performed, which options expire five years from grant date and are
currently exercisable to purchase up to 900,000 shares of our common stock
at an exercise price of $0.30 per share;
|
|
·
|
Option
granted on May 22, 2007 to our former Chief Financial Officer in
consideration of services performed, which option expires five years from
grant date and is currently exercisable to purchase up to 150,000 shares
of our common stock at an exercise price of $0.30 per
share;
|
|
·
|
Options
granted on October 22, 2007 to two non-employees in consideration of
services performed, which options expire five years from grant date and
are currently exercisable to purchase up to 1,000,000 shares of our common
stock at an exercise price of $0.35 per share;
|
|
·
|
Option
granted on October 22, 2007 to our former Chief Financial
Officer in consideration of services performed, which option expires five
years from grant date and is currently exercisable to purchase up to
250,000 shares of our common stock at an exercise price of $0.35 per
share;
|
|
·
|
Options
granted on December 19, 2007 to two non-employees in consideration of
services performed, which options expire five years from grant date and
are currently exercisable to purchase up to 1,100,000 shares of our common
stock at an exercise price of $0.35 per share;
|
|
·
|
Option
granted on December 29, 2007 to our former Chief Executive Officer in
consideration of services performed, which option expires five years from
grant date and is currently exercisable to purchase up to 500,000 shares
of our common stock at an exercise price of $0.35 per
share;
|
|
·
|
Option
granted on February 28, 2008 to a non-employee in consideration of
services performed, which options expire five years from grant date and is
currently exercisable to purchase up to 3,300,000 shares of our common
stock at an exercise price of $0.54 per share; and
|
|
·
|
Option
granted on February 28, 2008 to our former Chief Executive Officer in
consideration of services performed, which option expires five years from
grant date and is currently exercisable to purchase up to 250,000 shares
of our common stock at an exercise price of $0.54 per
share.
|
SECURITY OWNERSHIP OF
CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The
following table sets forth certain information regarding the beneficial
ownership of our common stock as of December 1, 2008 and (2) the Effective Date,
giving pro forma effect only with respect to those additional shares of common
stock issued under the outstanding derivative securities which automatically
convert upon the effectiveness of the Charter Amendment (e.g. outstanding shares
of preferred stock and restricted stock awards) by (i) each person who, to our
knowledge, beneficially owns more than five percent (5%) of the outstanding
shares of our common stock; (ii) each of our current directors and executive
officers; and (iii) all of our current directors and executive officers as a
group. Unless otherwise noted below, we believe that all persons
named in the table have sole voting and investment power with respect to all
shares of Common Stock beneficially owned by them.
|
|
|
February
12, 2009
(1)
|
|
|
At
Effective Date
(2)
|
|
|
Name
of Beneficial Owner
|
|
Amount
(3)
|
|
|
Percent
of Class
|
|
|
Amount
(3)
|
|
|
Percent
of Class
|
|
|
Directors
and Executive Officers
(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert
P. Munn, President, Chief Executive Officer and
Director
|
|
|
1,000,000
|
(5)
|
|
|
4.1
|
%
|
|
|
1,000,000
|
(5A)
|
|
|
2.1
|
%
|
|
Alan
D. Gaines, Director
|
|
|
11,151,000
|
(6)
|
|
|
47.7
|
%
|
|
|
11,151,000
|
(6)
|
|
|
24.2
|
%
|
|
Carl
A. Chase, Chief Financial Officer
|
|
|
750,000
|
(7)
|
|
|
3.1
|
%
|
|
|
750,000
|
(7A)
|
|
|
1.6
|
%
|
|
Jim
B. Davis, Senior Vice President of Operations
|
|
|
583,334
|
(8)
|
|
|
2.4
|
%
|
|
|
583,334
|
(8A)
|
|
|
1.2
|
%
|
|
Officers
and Directors as a Group (4 persons)
|
|
|
13,484,334
|
(5) (6)
(7)(8)
|
|
|
52.4
|
%
|
|
|
13,484,334
|
(5A) (6)
(7A)(8A)
|
|
|
28.3
|
%
|
|
Holders
of 5% or Greater
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amiel
David
|
|
|
5,000,000
|
(9)
|
|
|
17.8
|
%
|
|
|
5,000,000
|
(9)
|
|
|
9.8
|
%
|
|
Walehaven
Capital Fund Limited
|
|
|
2,563,636
|
(10)
|
|
|
9.9
|
%
|
|
|
2,563,636
|
(10A)
|
|
|
5.4
|
%
|
|
Natural
Gas Partners VII, LP
|
|
|
17,500,000
|
(11)
|
|
|
42.8
|
%
|
|
|
17,500,000
|
(11)
|
|
|
37.9
|
%
|
|
CIT
Capital USA Inc.
|
|
|
24,199,996
|
(12)
|
|
|
50.9
|
%
|
|
|
24,199,996
|
(12)
|
|
|
34.4
|
%
|
____________________
|
(1)
|
At
February 12, 2009, a total of 23,363,136 shares of our common stock were
issued and outstanding.
|
|
(2)
|
Assumes
issuance of 21,911,854 shares underlying Series A, B, D and E Preferred
and 1,125,000 shares underlying Munn, Chase and Davis restricted stock
awards upon the effectiveness of the Charter Amendment, for a total of
46,399,990 shares of our common stock issued and
outstanding.
|
|
(3)
|
For
purposes hereof, a person is deemed to be the beneficial owner of
securities that can be acquired by such person within sixty (60) days from
the Record Date, upon the exercise of warrants or options or the
conversion of convertible securities. Each beneficial owner's
percentage ownership is determined by assuming that any warrants, options
or convertible securities that are held by such person (but not those held
by any other person) and which are exercisable or convertible within sixty
(60) days from the Record Date have been exercised or converted, as the
case may be.
|
|
(4)
|
The
address for each of our officers and directors is 4606 FM 1960 West, Suite
400, Houston, Texas 77069.
|
|
(5)
|
Represents
(i) option exercisable to purchase 500,000 shares of our Common Stock at a
purchase price of $0.52 per share, which option will be exercisable upon
the effectiveness of the Charter Amendment and (ii) 500,000 shares of
restricted stock awarded May 22, 2008, issuable upon the effectiveness of
the Charter Amendment. Excludes (i) options to purchase 500,000
shares at $0.57 per share and options to purchase 500,000 shares at $0.62,
per share, which options become exercisable on May 22, 2009 and 2010,
respectively, and (ii) 500,000 shares of restricted stock that vest on May
22, 2009 and 500,000 shares of restricted stock that vest on May 22,
2010.
|
|
|
(5A)
|
Includes
option exercisable to purchase 500,000 shares of our Common Stock at a
purchase price of $0.52 per share, which option will be exercisable upon
the effectiveness of the Charter
Amendment. Excludes (i) options to purchase 500,000
shares at $0.57 per share and options to purchase 500,000 shares at $0.62,
per share, which options become exercisable on May 22, 2009 and 2010,
respectively, and (ii) 500,000 shares of restricted stock that vest on May
22, 2009 and 500,000 shares of restricted stock that vest on May 22,
2010.
|
|
(6)
|
Excludes
an aggregate of 3,000,000 shares of Common Stock held by two sons and a
daughter of Mr. Gaines, each of whom is greater than 18 years of age,
which shares Mr. Gaines may be deemed a beneficial owner thereof because
of such relationship. Mr. Gaines expressly disclaims beneficial
ownership of these securities, and this report shall not be deemed to be
an admission that he is the beneficial owner of these securities for
purposes of Sections 13(d) or 16 or for any other
purpose.
|
|
(7)
|
Represents
(i) option exercisable to purchase 375,000 shares of our Common Stock at a
purchase price of $0.52 per share, which option will be exercisable upon
the effectiveness of the Charter Amendment and (ii) 375,000 shares of
restricted stock awarded May 22, 2008, issuable upon the effectiveness of
the Charter Amendment. Excludes (i) options to purchase 375,000
shares at $0.57 per share and options to purchase 375,000 shares at $0.62
per share, which options become exercisable on May 22, 2009 and 2010,
respectively, and (ii) 375,000 shares of restricted stock that vest on May
22, 2009 and 375,000 shares of restricted stock that vest on May 22,
2010.
|
|
|
(7A)
|
Includes
option exercisable to purchase 375,000 shares of our Common Stock at a
purchase price of $0.52 per share, which option will be exercisable upon
the effectiveness of the Charter Amendment. Excludes (i)
options to purchase 375,000 shares at $0.57 per share and options to
purchase 375,000 shares at $0.62 per share, which options become
exercisable on May 22, 2009 and 2010, respectively, and (ii) 375,000
shares of restricted stock that vest on May 22, 2009 and 375,000 shares of
restricted stock that vest on May 22, 2010.
|
|
(8)
|
Represents
(i) option exercisable to purchase 333,334 shares of our Common Stock at a
purchase price of $0.54 per share, which option will be exercisable upon
the effectiveness of the Charter Amendment and (ii) 250,000 shares of
restricted stock awarded October 1, 2008, issuable upon the effectiveness
of the Charter Amendment. Excludes (i) options to purchase
333,333 shares at $0.59 per share and options to purchase 333,333 shares
at $0.65 per share, which options become exercisable on October 1, 2009
and 2010, respectively, and (ii) 250,000 shares of restricted stock that
vest on October 1, 2009 and 250,000 shares of restricted stock that vest
on October 1, 2010.
|
|
|
(8A)
|
Includes
option exercisable to purchase 333,334 shares of our Common Stock at a
purchase price of $0.54 per share, which option will be exercisable upon
the effectiveness of the Charter Amendment. Excludes (i)
options to purchase 333,333 shares at $0.59 per share and options to
purchase 333,333 shares at $0.65 per share, which options become
exercisable on October 1, 2009 and 2010, respectively, and (ii) 250,000
shares of restricted stock that vest on October 1, 2009 and 250,000 shares
of restricted stock that vest on October 1, 2010.
|
|
(9)
|
Includes
(i) options currently exercisable at $0.35 per share for an aggregate of
1,500,000 shares of Common Stock and (ii) option currently exercisable at
$0.53 per share for 3,300,00 shares of Common Stock. Mr.
David’s address is 5707 Spanish Oak Drive, Houston, Texas
77066.
|
|
(10)
|
Represents
(i) 1,363,636 shares of our Common Stock underlying 10,000 shares of
Series E Preferred issued by us in satisfaction of the Bridge Loan which
automatically convert upon the effectiveness of the Charter Amendment (ii)
up to 1,200,000 shares of our Common Stock underlying a warrant granted by
us in the Bridge Loan, at an exercise price of $0.33 per share, subject to
adjustments and full-ratchet protection under certain
circumstances. Whalehaven Capital Fund Limited’s address is 160
Summit Avenue, Montvale, NJ 07645.
|
|
(10A)
|
Includes
warrant exercisable to purchase up to 1,200,000 shares of our Common Stock
at a warrant purchase price of $0.33 per share subject to adjustments and
full-ratchet protection under certain circumstances.
|
|
(11)
|
Represents
17,500,000 shares of our Common Stock underlying 10,000 shares of Series D
Preferred issued by us in the Voyager Acquisition which automatically
convert upon the effectiveness of the Charter
Amendment. Holder’s address is c/o Natural Gas Partners, 125 E.
John Carpenter Fwy., Ste. 600, Irving, TX
75062.
|
|
(12)
|
Represents
up to 24,199,996 shares of our Common Stock underlying a warrant granted
by us in connection with the CIT Credit Facility, which warrant is
exercisable upon the effectiveness of the Charter Amendment at an exercise
price of $0.35 per share, subject to adjustments and full-ratchet
protection under certain circumstances. CIT Capital USA Inc.’s
address is 505 Fifth Avenue, 10
th
Floor, New York, NY 10017.
|
Change
in Control
As
disclosed elsewhere in this prospectus, in connection with the Voyager
Acquisition we issued 10,000 shares of our Series D Preferred, which shares will
automatically convert into 17,500,000 shares of our common stock upon the
effectiveness of the Charter Amendment. After giving effect to the
issuance of shares of common stock under the Series D Preferred, and assuming no
additional issuance of our securities, the shares of common stock issuable upon
conversion of the Series D Preferred represents an ownership interest of
approximately 37.9% of our then issued and outstanding shares.
CERTAIN RELATIONSHIPS AND TRANSACTIONS AND
CORPORATE
GOVERNANCE
Relationships
and Related Transactions.
Except as
set forth below, since July 1, 2007, there have been no transactions, or
currently proposed transactions, of an amount exceeding or to exceed $120,000,
to which we were or are to be a party, in which any of our executive officers,
directors or other Related Party (as defined below) had or is to have a direct
or indirect material interest.
As
previously disclosed in our Current Report filed with the SEC on May 23, 2008,
on May 22, 2008 we entered into a Stock Purchase and Sale Agreement with Voyager
Partnership to purchase all of the capital stock held by it in Voyager Gas
Corporation. As part of that transaction, on September 2, 2008, we
paid $35 million in cash and issued 10,000 shares of our then outstanding Series
D Preferred Stock, having an agreed upon value of $7 million, to Natural Gas
Partners VII, LP, as the designee of the seller. Upon the
effectiveness of the Charter Amendment, the shares of Series D Preferred Stock
will be automatically converted into 17,500,000 shares of our common stock,
making Natural Gas Partners VII, LP one of our principal stockholders, with
approximately 37.9% of our shares of common stock outstanding at the effective
date of the Charter Amendment.
As
previously disclosed in our Current Report filed with the SEC on September 9,
2008, on September 2, 2008 we entered into the Credit Facility with CIT Capital,
as lender and administrative agent for the lenders from time to time who are
party to the credit agreement of even date therewith. As part of our
entry into the Credit Facility, we paid CIT Capital fees in the amount of
$510,000 and granted the CIT Warrant, currently exercisable to purchase up to
24,199,996 shares of our common stock at an initial exercise price of $0.35 per
share, subject to adjustment. Giving effect to the exercise of such
warrants, CIT Capital will hold 34.4% of our outstanding shares of common
stock.
As
previously disclosed in our Current Report filed with the SEC on August 21,
2008, on August 20, 2008 we issued 500 shares of our newly designated Series C
Preferred (defined below) to Alan D. Gaines, our largest stockholder and a
director of the Company, in exchange for the cancellation of a promissory note
made by us in favor of Mr. Gaines, in the principal amount of
$50,000. In addition to these shares of Series C Preferred, on August
20, 2008 we also issued an additional 500 shares of Series C Preferred to Mr.
Gaines for cash consideration of $50,000. The Series C Preferred are
automatically redeemable by the Company at the rate of $100 for every one (1)
share of Series C Preferred being redeemed upon the closing of a debt or equity
financing whereby we realize gross proceeds in excess of
$5,000,000. Our lender in the Credit Facility did not permit us to
redeem the Series C Preferred upon funding, with the understanding that, based
upon the success of our workover program and increased production resulting from
the Voyager Acquisition, the lender would permit a subsequent distribution to
Mr. Gaines for his Series C Preferred. Shares of preferred stock,
$.001 par value, designated out of our authorized “blank check preferred stock”
by our Board as “Series C Preferred Stock” (the “Series C Preferred”), have the
rights, preferences, powers, restrictions and obligations set forth in the
Certificate of Designation filed with the Secretary of State of the State of
Nevada on August 20, 2008, including the automatic redemption rights referenced
above. However, holders of the Series C Preferred are not entitled to
any dividends, preemption, voting, conversion or other rights as a stockholder
of the Company.
Pursuant
to the April 2006 Stock Transaction, Energy Venture acquired 8,200,000 of the
issued and outstanding shares of our common stock. After giving
effect to the stock transaction, Mr. Gaines, one of our directors, became an
indirect owner of 8,200,000 shares of the common stock acquired (or otherwise
previously owned) by Energy Venture as a result of his controlling interest in
Energy Venture, in which he served as a director and owned a majority of the
issued and outstanding shares of its capital stock. Such securities
ownership represented 82% of the then issued and outstanding shares of our
common stock and a controlling interest. In connection with the April
2006 Stock Transaction, Mr. Gaines became a director of the
Company.
For
purposes hereof, “Related Party” includes (a) any person who is or was (at any
time during the last fiscal year) an executive officer, director or nominee for
election as a director; (b) any person or group who is a beneficial owner of
more than 5% of the Company’s voting securities; (c) any immediate family member
of a person described in provisions (a) or (b) of this sentence; or (d) any
entity in which any of the foregoing persons is employed, is a partner or has a
greater than 5% beneficial ownership interest.
The
foregoing transactions, by which the person became a Related Party in all but
one of the transactions, were the product of arms-length negotiations resulting
in terms we believe to have been no less favorable than could have been obtained
from non-affiliated parties.
Director
Independence.
The OTC
Bulletin Board, on which our common stock is currently traded, does not maintain
director independence standards.
DESCRIPTION OF COMPANY
Overview
We
were incorporated as a Nevada corporation in May 2004. With us
succeeding to substantially all of the business of Voyager Gas Corporation in
the Voyager Acquisition on September 2, 2008, we became an independent oil and
natural gas company engaged in the exploration, production, development,
acquisition and exploitation of natural gas and crude oil
properties. Our oil and natural gas operations and assets are
situated with Voyager Gas Corporation, now our wholly-owned subsidiary, acquired
in the Voyager Acquisition.
Corporate
Background
Prior to
the Voyager Acquisition on September 2, 2008, we were a “shell company” as that
term is defined under Rule 12b-2 under the Exchange Act, and as such, were
subject to rules of the SEC applicable to shell companies. We had
only conducted nominal operations and had only nominal assets during this
time. To date, our activities primarily had involved capital-raising
activities and business planning, with the stated intention to engage in the oil
and natural gas industry by (i) acquiring established oil and gas properties and
exploiting them through the application of conventional and specialized
technology to increase production, ultimate recoveries, or both, and (ii)
participating in joint venture drilling programs with repeatable low risk
results.
We were
initially incorporated to be a mortgage brokerage firm and prior to April 2006,
our operations as a mortgage broker consisted of originating or locating
possible mortgage loans, including, conventional loans, jumbo loans, home equity
and second mortgages, non-conforming loans, sub-prime loans and construction
loans that we would refer to lending sources to fund. However, we
never funded any loans.
On April
28, 2006, Energy Venture, Inc., a privately-held Delaware corporation (“Energy
Venture”) consummated its acquisition of shares of our common stock in
accordance with the terms of a stock purchase agreement among Energy Venture and
certain selling stockholders named therein. Under the stock purchase
agreement, Energy Venture acquired a total of 8,200,000 shares of our common
stock, constituting, in the aggregate, 82% of our then issued and outstanding
shares of common stock.
On May
26, 2006, we and our wholly-owned subsidiary, EVI Acquisition Corp., a
newly-formed Nevada corporation, entered into, and consummated, an agreement and
plan of merger with Energy Venture. Pursuant to the merger agreement,
Energy Venture merged with and into EVI Acquisition Corp. and, in return: (i)
each share of common stock of Energy Venture, par value $.0001 per share, then
issued and outstanding was exchanged for one share of our common stock; (ii)
each outstanding option to purchase shares of common stock of Energy Venture was
exchanged for an option to purchase, at the same exercise price, an equal number
of shares of our common stock; and (iii) all of the obligations and liabilities
of Energy Venture were assumed by us. As part of the merger, EVI
Acquisition Corp. amended its Articles of Incorporation to change its name to
“Energy Venture, Inc.” As a result of the merger, the former
stockholders of Energy Venture became our controlling stockholders.
Since we
had no substantial assets immediately prior to the merger, the transaction was
treated for accounting purposes as a reverse acquisition and was accounted for
as a recapitalization of Energy Venture rather than a business
combination. Consequently, the historical financial statements of
Energy Venture became the historical financial statements of the
Company.
Voyager
Acquisition and Financing; Description of Voyager Business
On
September 2, 2008, we consummated the Voyager Acquisition, whereby we purchased
pursuant to the Purchase Agreement all of the outstanding capital stock of
Voyager Gas Corporation and succeeded to substantially all of its business
operations and properties, including, interests in oil and gas lease blocks
located on approximately 14,300 net acres located in Duval County, Texas, as
more particularly described elsewhere in this prospectus
“– Description of Property,
”
including working and other interests in oil and gas leases, producing wells,
and properties, together with rights under related operating, marketing, and
service contracts and agreements, seismic exploration licenses and rights, and
personal property, equipment and facilities. The purchase price in
the Voyager Acquisition consisted of cash consideration of $35.0 million and
10,000 shares of our Series D Preferred, having an agreed upon value of $7.0
million.
We
financed the Voyager Acquisition with proceeds from the Bridge Loan and our
senior credit facility, the terms and conditions of which are more particularly
set forth elsewhere in this Information Statement under
“Management Discussion &
Analysis – Liquidity and Capital Resources.”
Voyager
Gas Corporation (“Voyager”) was formed in May 2004 as a Delaware
corporation. All of Voyager’s issued and outstanding common stock was
owned by Voyager Gas Holdings, LP. Voyager is engaged in the
acquisition, development, production and sale of oil and natural
gas. On March 22, 2005, Voyager entered into a three year asset-based
borrowing facility with Bank of Texas with an original commitment of $75
million. The borrowing base was set by the bank every March 1
st
and
September 1
st
of each
year and was based on the present value of the future net income accruing to
properties acquired by Voyager. During April 2005, Voyager acquired
the “Garza Lease” located in Garza County, Texas for an approximate purchase
price of $13.6 million which was funded with funds from the Bank of Texas credit
facility. On July 7, 2006, Voyager acquired the Duval County
Properties from Magnum Producing, LP for a purchase price of approximately $35.5
million. Voyager South Texas Holdings, LLC (“VST”) was formed in May
2006 in order to facilitate a Section 1031 exchange of certain oil and natural
gas lease properties. Voyager borrowed and guaranteed funds under its
Bank of Texas credit facility to fund the acquisition of the Duval County
Properties.
To complete the IRS Section 1031
exchange, during January 2007, Voyager sold its interests in the Garza Lease to
a non-affiliated third party for cash consideration of $29 million and recorded
a gain on the sale of approximately $13 million. Proceeds from the
sale of the Garza Lease were used to reduce the amounts owed on Voyager’s credit
facility with Bank of Texas. In February 2007, VST was merged with
Voyager. As a result of the economic dependencies and debt guarantees
between Voyager and VST, the financial statements of VST were combined for
financial statement presentation purposes.
Please refer to the audited
financial statements of Voyager for the years ended December 31, 2007 and 2006,
and its unaudited financial statements for the three and six months ended June
30, 2008 and 2007, included elsewhere in this prospectus under “
Financial Statements”
and a
discussion of its results of operations for the years ended December 31, 2007
and 2006, and six months ended June 30, 2008 under
“Management Analysis and
Discussion.”
A more
detailed description of the Voyager Acquisition, the business and properties of
Voyager to which we succeeded, as well as financial information of Voyager, as
our predecessor, up to September 2, 2008, the date of the Voyager Acquisition,
and thereafter, of us, on a consolidated basis through September 30, 2008,
including pro forma data giving effect to the Voyager Acquisition as of June 30,
2008 and September 30, 2008 and 2007, are included elsewhere in this prospectus
under “
Description of
Property
,” “
Financial
Statements
” and “
Management Discussion and
Analysis
.”
Employees
We
currently have four employees, Robert P. Munn, our Chief Executive Officer, Carl
A. Chase, our Chief Financial Officer, Jim B. Davis, our Senior Vice President
of Operations, and Steven Barrenechea, our former CEO, who serves as an
advisor. Going forward, it is our intention to add additional
employees as required to provide the technical expertise and administrative
support to fully develop and implement the properties acquired from
Voyager.
Competition
The oil
and natural gas industry is a highly competitive environment. Many of
our competitors are large, well-established companies that have been engaged in
the natural gas and oil business for much longer than we have and possess
substantially larger operating staffs and greater capital resources than we
do. Our ability to explore for oil and natural gas reserves and to
acquire additional properties in the future will be dependent upon our ability
to conduct our operations, to evaluate and select suitable properties and to
consummate transactions in this highly competitive environment. Our
ability to acquire additional prospects and to find and develop reserves in the
future will depend on our ability to evaluate and select suitable properties and
to consummate transactions in a highly competitive environment. In
addition, there is substantial competition for capital available for investment
in the oil and natural gas industry. We may not be able to compete
successfully in the future in acquiring prospective reserves, developing
reserves, marketing oil and natural gas, attracting and retaining quality
personnel and raising additional capital.
Regulation
of the Oil and Natural Gas Industry
With the
acquisition of the Duval County Properties under the Voyager Acquisition, our
future operations will be subject to the regulatory regime affecting the oil and
natural gas industry.
Regulation
of Transportation and Sale of Oil
Sales of
crude oil, condensate and natural gas liquids are not currently regulated and
are made at negotiated prices. Nevertheless, Congress could reenact
price controls in the future. Our sales of crude oil will be affected
by the availability, terms and cost of transportation. The
transportation of oil in common carrier pipelines is also subject to rate
regulation. The Federal Energy Regulatory Commission, or the FERC,
regulates interstate oil pipeline transportation rates under the Interstate
Commerce Act. In general, interstate oil pipeline rates must be
cost-based, although settlement rates agreed to by all shippers are permitted
and market-based rates may be permitted in certain
circumstances. Effective January 1, 1995, the FERC implemented
regulations establishing an indexing system (based on inflation) for
transportation rates for oil that allowed for an increase or decrease in the
cost of transporting oil to the purchaser. A review of these
regulations by the FERC in 2000 was successfully challenged on appeal by an
association of oil pipelines. On remand, the FERC in February 2003
increased the index slightly, effective July 2001. Intrastate oil
pipeline transportation rates are subject to regulation by state regulatory
commissions. The basis for intrastate oil pipeline regulation, and
the degree of regulatory oversight and scrutiny given to intrastate oil pipeline
rates, varies from state to state. Insofar as effective interstate
and intrastate rates are equally applicable to all comparable shippers, the
regulation of oil transportation rates are not anticipated to affect our
operations in any way that is of material difference from those of our
competitors.
Further,
interstate and intrastate common carrier oil pipelines must provide service on a
non-discriminatory basis. Under this open access standard, common
carriers must offer service to all similarly situated shippers requesting
service on the same terms and under the same rates. When oil
pipelines operate at full capacity, access is governed by prorationing
provisions set forth in the pipelines’ published
tariffs. Accordingly, we believe that access to oil pipeline
transportation services generally will be available to us to the same extent as
to our competitors.
Regulation
of Transportation and Sale of Natural Gas
Historically,
the transportation and sale for resale of natural gas in interstate commerce
have been regulated pursuant to the Natural Gas Act of 1938, the Natural Gas
Policy Act of 1978 and regulations issued under those Acts by the
FERC. In the past, the federal government has regulated the prices at
which natural gas could be sold. While sales by producers of natural
gas can currently be made at uncontrolled market prices, Congress could reenact
price controls in the future. Deregulation of wellhead natural gas
sales began with the enactment of the Natural Gas Policy Act. In
1989, Congress enacted the Natural Gas Wellhead Decontrol Act. The
Decontrol Act removed all Natural Gas Act and Natural Gas Policy Act price and
non-price controls affecting wellhead sales of natural gas effective January 1,
1993.
FERC
regulates interstate natural gas transportation rates and service conditions,
which affects the marketing of natural gas that we produce, as well as the
revenues we receive for sales of our natural gas. Since 1985, the
FERC has endeavored to make natural gas transportation more accessible to
natural gas buyers and sellers. The FERC has stated that open access
policies are necessary to improve the competitive structure of the interstate
natural gas pipeline industry and to create a regulatory framework that will put
natural gas sellers into more direct contractual relations with natural gas
buyers by, among other things, unbundling the sale of natural gas from the sale
of transportation and storage services. Beginning in 1992, the FERC
issued Order No. 636 and a series of related orders to implement its open access
policies. As a result of the Order No. 636 program, the marketing and
pricing of natural gas have been significantly altered. The
interstate pipelines’ traditional role as wholesalers of natural gas has been
eliminated and replaced by a structure under which pipelines provide
transportation and storage service on an open access basis to others who buy and
sell natural gas. Although the FERC’s orders do not directly regulate
natural gas producers, they are intended to foster increased competition within
all phases of the natural gas industry.
In 2000,
the FERC issued Order No. 637 and subsequent orders, which imposed a number of
additional reforms designed to enhance competition in natural gas
markets. Among other things, Order No. 637 effected changes in FERC
regulations relating to scheduling procedures, capacity segmentation, penalties,
rights of first refusal and information reporting.
We cannot
accurately predict whether the FERC’s actions will achieve the goal of
increasing competition in markets in which natural gas may be sold by
us. Additional proposals and proceedings that might affect the
natural gas industry are pending before the FERC and the courts. The
natural gas industry historically has been very heavily
regulated. Therefore, we cannot provide any assurance that the less
stringent regulatory approach recently established by the FERC will
continue. However, we do not believe that any action taken will
affect us in a way that materially differs from the way it affects other natural
gas producers.
Gathering
service, which occurs upstream of jurisdictional transmission services, is
regulated by the states onshore and in state waters. Although its
policy is still in flux, the FERC has reclassified certain jurisdictional
transmission facilities as non-jurisdictional gathering facilities, which has
the tendency to increase our costs of getting natural gas to point of sale
locations.
Intrastate
natural gas transportation is also subject to regulation by state regulatory
agencies. The basis for intrastate regulation of natural gas
transportation and the degree of regulatory oversight and scrutiny given to
intrastate natural gas pipeline rates and services varies from state to
state. Insofar as such regulation within a particular state will
generally affect all intrastate natural gas shippers within the state on a
comparable basis, we believe that the regulation of similarly situated
intrastate natural gas transportation in any states in which we operate and ship
natural gas on an intrastate basis will not affect our operations in any way
that is of material difference from those of our competitors. Like
the regulation of interstate transportation rates, the regulation of intrastate
transportation rates affects the marketing of natural gas that we produce, as
well as the revenues we receive for sales of our natural gas.
Regulation
of Production
The
production of oil and natural gas is subject to regulation under a wide range of
local, state and federal statutes, rules, orders and
regulations. Federal, state and local statutes and regulations
require permits for drilling operations, drilling bonds and reports concerning
operations. All of the states in which we own and operate properties
have regulations governing conservation matters, including provisions for the
unitization or pooling of oil and natural gas properties, the establishment of
maximum allowable rates of production from oil and natural gas wells, the
regulation of well spacing, and plugging and abandonment of
wells. The effect of these regulations is to limit the amount of oil
and natural gas that we can produce from our wells and to limit the number of
wells or the locations at which we can drill, although we can apply for
exceptions to such regulations or to have reductions in well
spacing. Moreover, each state generally imposes a production or
severance tax with respect to the production and sale of oil, natural gas and
natural gas liquids within its jurisdiction.
The
failure to comply with these rules and regulations can result in substantial
penalties. Our competitors in the oil and natural gas industry are
subject to the same regulatory requirements and restrictions that affect our
operations.
Environmental
Matters and Other Regulation
Our
currently anticipated business operations will be subject to stringent and
complex federal, state and local laws and regulations governing environmental
protection as well as the discharge of materials into the
environment. These laws and regulations may, among other
things:
|
·
|
require
the acquisition of various permits before drilling
commences;
|
|
·
|
restrict
the types, quantities and concentration of various substances that can be
released into the environment in connection with oil and natural gas
drilling and production activities;
|
|
·
|
limit
or prohibit drilling activities on certain lands lying within wilderness,
wetlands and other protected areas; and
|
|
·
|
require
remedial measures to mitigate pollution from former and ongoing
operations, such as requirements to close pits and plug abandoned
wells.
|
These
laws and regulations may also restrict the rate of oil and natural gas
production below the rate that would otherwise be possible. The
regulatory burden on the oil and gas industry increases the cost of doing
business in the industry and consequently affects
profitability. Additionally, Congress and federal and state agencies
frequently revise environmental laws and regulations, and any changes that
result in more stringent and costly waste handling, disposal and cleanup
requirements for the oil and gas industry could have a significant impact on our
operating costs.
The
following is a summary of some of the pertinent laws, rules and regulations to
which our business operations will be subject.
Waste
Handling
The Resource Conservation and Recovery Act, or RCRA,
and comparable state statutes, regulate the generation, transportation,
treatment, storage, disposal and cleanup of hazardous and non-hazardous
wastes. Under the auspices of the federal Environmental Protection
Agency, or EPA, the individual states administer some or all of the provisions
of RCRA, sometimes in conjunction with their own, more stringent
requirements. Drilling fluids, produced waters and most of the other
wastes associated with the exploration, development and production of crude oil
or natural gas are currently regulated under RCRA or state non-hazardous waste
provisions. Releases or spills of these regulated materials may
result in remediation liabilities under these statutes. It is
possible that certain oil and natural gas exploration and production wastes now
classified as non-hazardous could be classified as hazardous wastes in the
future. Any such change could result in an increase in our costs to
manage and dispose of wastes, which could have a material adverse effect on our
currently projected results of operations and financial position.
Comprehensive Environmental
Response, Compensation, and Liability Act
The Comprehensive
Environmental Response, Compensation, and Liability Act, or CERCLA, also known
as the Superfund Law, imposes joint and several liability, without regard to
fault or legality of conduct, on classes of persons who are considered to be
responsible for the release of a hazardous substance into the
environment. These persons include the current or former owner or
operator of the site where the release occurred and anyone who disposed or
arranged for the disposal of a hazardous substance released at the
site. Under CERCLA, such persons may be subject to joint and several
liability for the costs of cleaning up the hazardous substances that have been
released into the environment, for damages to natural resources and for the
costs of certain health studies. In addition, it is not uncommon for
neighboring landowners and other third parties to file claims for personal
injury and property damage allegedly caused by the hazardous substances released
into the environment.
In the
course of our future operations, we expect to generate wastes that may fall
within CERCLA’s definition of hazardous substances. As a result of
the Voyager Acquisition, we now own, lease or operate properties that have been
used for oil and natural gas exploration and production for many
years. Hazardous substances or petroleum may have been released on,
at or under the Duval County Properties or on, at or under other locations,
including off-site locations, where such hazardous substances or other wastes
have been taken for disposal. In addition, to the extent the Duval
County Properties have been operated by third parties or by previous owners or
operators whose handling, treatment and disposal of hazardous substances,
petroleum, or other materials or wastes were not under our control, such
properties and the substances or materials disposed or released on, at or under
them may be subject to CERCLA, RCRA or analogous or other state
laws. Under such laws, we could be required to remove previously
disposed substances and wastes or released petroleum, remediate contaminated
property or perform remedial plugging or pit closure operations to prevent
future contamination.
Water
Discharges
The Federal Water Pollution Control Act, or the
Clean Water Act, and analogous state laws, impose restrictions and strict
controls with respect to the discharge of pollutants, including spills and leaks
of oil and other substances into waters of the United States or state
waters. Under these laws, the discharge of pollutants into regulated
waters is prohibited except in accordance with the terms of a permit issued by
EPA or an analogous state agency. Federal and state regulatory
agencies can impose administrative, civil and criminal penalties for
non-compliance with discharge permits or other requirements of the Clean Water
Act and analogous state laws and regulations. The Oil Pollution Act
of 1990, or OPA, which amends and augments the Clean Water Act, establishes
strict liability for owners and operators of facilities that are the site of a
release of oil into waters of the United States. In addition, OPA and
regulations promulgated pursuant thereto impose a variety of regulations on
responsible parties related to the prevention of oil spills and liability for
damages resulting from such spills. OPA also requires certain oil and
natural gas operators to develop, implement and maintain facility response
plans, conduct annual spill training for certain employees and provide varying
degrees of financial assurance.
At this
time, it is not possible to accurately estimate how potential future laws or
regulations addressing greenhouse gas emissions would impact our
business. We are not aware of any environmental claims existing as of
the date of this prospectus, which would have a material impact on our financial
position or results of operations. There can be no assurance,
however, that current regulatory requirements will not change, or past
non-compliance with environmental laws will not be discovered on our
properties.
DESCRIPTION OF PROPERTY
With the
completion of the Voyager Acquisition, the oil and natural gas properties of our
newly-acquired subsidiary consist of approximately 14,300 net acres located in
Duval County, South Texas, on trend with several prolific producing Frio,
Jackson and Yegua (Oligocene and Eocene) fields (the “Duval County
Properties”).
The
Duval County Properties have established production over a substantial acreage
position with proved reserves from over ten different horizons located at depths
ranging from 4,000 to 7,500 feet. The designated field name by the
Railroad Commission of Texas is the Orcones (Frio Vicksburg Consolidated)
Field. The primary producing reservoirs are the Frio,
Vicksburg and Yegua formations and the acreage has potential in the
Queen City and Wilcox formations. We currently have approximately 3,822
net productive acres. As of April 1, 2008, the Duval County
Properties had independently engineered proved reserves of 16.2
Bcfe. Our independent third party engineering report was prepared by
Ralph E. Davis Associates, Inc. located in Houston, Texas. By
category, this includes 5.2 Bcfe of proved developed producing, 5.6 Bcfe of
proved developed non-producing, and 5.4 Bcfe of proved undeveloped
reserves. Approximately 69% of total proved reserves are natural
gas. Net daily production averaged approiximately 2.1 Mmcfe for the
three months ended December 31, 2008.
Natural
Gas and Oil Reserves
The SEC
net present value of proved reserves (PV10) as of April 1, 2008 totaled $75.6
million as per the Reserve Report with respect to Voyager Gas Corporation, now a
wholly-owned subsidiary of ours. We are the operator and own an
approximate 100% working interest in its proved reserve base.
The following table represents
proved reserves acquired in the Voyager Acquisition as of April 1 and September
30, 2008:
|
|
|
September
30, 2008
|
|
|
April
1, 2008
|
|
|
|
|
Oil
|
|
|
Natural
Gas
|
|
|
Oil
|
|
|
Natural
Gas
|
|
|
|
|
(Mbbls)
|
|
|
(Mmcf)
|
|
|
(Mbbls)
|
|
|
(Mmcf)
|
|
|
Beginning
balance:
|
|
|
828
|
|
|
|
11,228
|
|
|
|
1,172
|
|
|
|
19,213
|
(1)
|
|
Revisions
|
|
|
(20
|
)
|
|
|
--
|
|
|
|
(322
|
)
|
|
|
(7,754
|
)
|
|
Extensions/discoveries
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
Purchases
in place
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
Sales
in place
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
Production
|
|
|
(27
|
)
|
|
|
(360
|
)
|
|
|
(22
|
)
|
|
|
(231
|
)
|
|
Ending
balance
|
|
|
780
|
|
|
|
10,867
|
|
|
|
828
|
|
|
|
11,228
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prices
|
|
$
|
101.66
|
|
|
$
|
8.46
|
|
|
$
|
105.56
|
|
|
$
|
9.59
|
|
|
(1)
|
As
of December 31, 2007.
|
The
process of estimating oil and natural gas reserves is complex and it requires
interpretations of available technical data and many assumptions, including
assumptions relating to economic factors. Any significant
inaccuracies in these interpretations or assumptions could materially affect the
estimated quantities and present value of our reported reserves. In
order to prepare our estimates, we must project production rates and the timing
of development expenditures, analyze available geological, geophysical,
production and engineering data, as well as make economic assumptions about
matters such as oil and natural gas prices, drilling and operating expenses,
capital expenditures, taxes and availability of funds. Due to the
inherent uncertainties and the limited nature of reservoir data, proved reserves
are subject to change as additional information becomes
available. Our use of a 10% discount factor for reporting purposes
may not necessarily represent the most appropriate discount factor, given actual
interest rates and risks to which our business or the oil and natural gas
industry in general are subject.
Natural
Gas and Oil Volumes, Prices and Operating Expense
The following tables set forth
certain information regarding production volumes, revenue, average prices
received and average production costs associated with Voyager Gas Corporation’s
sale of oil and natural gas for the two years ended December 31, 2007 and
2006.
|
|
|
Year
Ended December 31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Net
production:
|
|
|
|
|
|
|
|
Oil
(Mbbls)
|
|
|
46
|
|
|
|
135
|
|
|
Natural
gas (Mmcf)
|
|
|
1,068
|
|
|
|
992
|
|
|
Natural
gas equivalent (Mmcfe)
|
|
|
1,344
|
|
|
|
1,802
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural
gas and oil sales:
|
|
|
|
|
|
|
|
|
|
Oil
|
|
$
|
4,052,803
|
|
|
$
|
9.696,268
|
|
|
Natural
gas
|
|
|
6,686,549
|
|
|
|
5,674,170
|
|
|
Total
|
|
$
|
10,739,352
|
|
|
$
|
15,370,438
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
sales prices:
|
|
|
|
|
|
|
|
|
|
Oil
($ per Bbl)
|
|
$
|
88.10
|
|
|
$
|
71.82
|
|
|
Natural
gas ($ per Mcf)
|
|
|
6.26
|
|
|
|
5.72
|
|
|
Natural
gas equivalent ($ per Mcfe
|
|
$
|
7.99
|
|
|
$
|
8.53
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural
gas and oil costs:
|
|
|
|
|
|
|
|
|
|
Lease
operating
|
|
$
|
2,464,653
|
|
|
$
|
2,936,265
|
|
|
Production
taxes
|
|
|
836,349
|
|
|
|
721,510
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
production cost per Mcfe
|
|
$
|
2.46
|
|
|
$
|
2.03
|
|
Exploration,
Development and Acquisition Capital Expenditures
The following table sets forth
certain information regarding the gross costs incurred in the purchase of proved
and unproved properties and in development and exploration
activities.
|
|
|
Year
Ended December 31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Property
acquisition costs:
|
|
|
|
|
|
|
|
Proved
|
|
$
|
--
|
|
|
$
|
27,574,085
|
|
|
Unproved
|
|
|
--
|
|
|
|
13,298,590
|
|
|
Total
acquisition costs
|
|
|
--
|
|
|
|
40,872,675
|
|
|
Unproved
acreage
|
|
|
--
|
|
|
|
--
|
|
|
Development
costs
|
|
|
7,195,160
|
|
|
|
3,784,093
|
|
|
Exploration
costs
|
|
|
9,399
|
|
|
|
391,482
|
|
|
|
|
$
|
7,204,559
|
|
|
$
|
45,048,250
|
|
Drilling
Activity
The following table sets forth
Voyager’s drilling activity during the twelve month periods ended December 31,
2007 and 2006 (excluding wells in progress at the end of the
period). In the table, “gross” refers to the total number of wells in
which Voyager has a working interest and “net” refers to gross wells multiplied
by Voyager’s working interest therein.
|
|
|
Year
Ended December 31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Gross
|
|
|
Net
|
|
|
Gross
|
|
|
Net
|
|
|
Development
wells:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Productive
|
|
|
2
|
|
|
|
2
|
|
|
|
6
|
|
|
|
6
|
|
|
Non-productive
|
|
|
2
|
|
|
|
2
|
|
|
|
--
|
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exploratory
wells:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Productive
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
Non-productive
|
|
|
--
|
|
|
|
--
|
|
|
|
1
|
|
|
|
1
|
|
Productive
Wells
The following table sets forth the
number of productive natural gas and oil wells in which Voyager owned an
interest as of December 31, 2007. Productive wells are wells that are
capable of producing natural gas or oil.
|
|
|
Company
Operated
|
|
|
Non-operated
|
|
|
Total
|
|
|
|
|
Gross
|
|
|
Net
|
|
|
Gross
|
|
|
Net
|
|
|
Gross
|
|
|
Net
|
|
|
Oil
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
Natural
gas
|
|
|
16
|
|
|
|
16
|
|
|
|
--
|
|
|
|
--
|
|
|
|
16
|
|
|
|
16
|
|
|
Total
|
|
|
16
|
|
|
|
16
|
|
|
|
--
|
|
|
|
--
|
|
|
|
16
|
|
|
|
16
|
|
Acreage
Data
The following table summarizes
Voyager’s gross and net developed and undeveloped natural gas and oil acreage
under lease as of December 31, 2007.
|
|
|
Developed
Acres
|
|
|
Undeveloped
Acres
|
|
|
|
|
Gross
|
|
|
Net
|
|
|
Gross
|
|
|
Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Duvall
County Properties
|
|
|
3,822.0
|
|
|
|
3,822.0
|
|
|
|
10,889.6
|
|
|
|
10,827.1
|
|
|
Total
|
|
|
3,822.0
|
|
|
|
3,822.0
|
|
|
|
10,889.6
|
|
|
|
10,827.1
|
|
As is customary in the oil and
natural gas industry, we can generally retain our interest in undeveloped
acreage by drilling activity that establishes commercial production sufficient
to maintain the leases or by paying delay rentals during the remaining primary
term of leases. The oil and natural gas leases in which Voyager has
an interest are for varying terms, and if production under a lease continues
from Voyager’s developed lease acreage beyond the primary term, Voyager is
entitled to hold the lease for as long as oil or natural gas is
produced.
Our
Corporate Office
We
have entered into a new twelve month lease agreement effective February 1, 2009,
to lease approximately 3,500 square feet of office space at a lease rate of
$5,907, $20 per square foot, per month through January 31,
2010. Our new corporate offices are located at 6630 Cypresswood
Drive, Suite 200, Spring, Texas 77379. We have an option available to
us to extend the lease for either a three or five year period at lease rates of
$19 and $18 per square foot, respectively. In order to exercise our
option to extend the lease, we must provide notice of our desire to extend the
lease during November 2009. Our new corporate offices provide space
for the technical and administrative employees we intend to employ to develop
our Voyager Acquisition and implement our business plan of
growth.
LEGAL PROCEEDINGS
There are
no pending legal proceedings, and we are not aware of any threatened legal
proceedings, to which we are a party or to which our property is
subject.
MANAGEMENT ANALYSIS AND DISCUSSION
General
Overview
On
September 2, 2008, we completed the Voyager Acquisition, whereby Voyager was
designated as our predecessor and we succeeded to substantially all of its
business operations and properties, including ownership interests in oil and
natural gas lease blocks in the Duval County, Texas (the “Duval County
Properties”) covering approximately 14,300 net acres. We paid cash
consideration of $35.0 million, plus 10,000 shares of our Series D Preferred,
having an agreed upon value of $7.0 million, in the Voyager
Acquisition. We fair valued the preferred stock on September 2, 2008,
and recorded the fair value of the preferred stock of $9.1
million.
Having
consummated the Voyager Acquisition, we intend to engage in the exploration,
production, development, acquisition and exploitation of the crude oil and
natural gas properties located in the Duval County Properties. We
believe that these properties and other assets acquired in the Voyager
Acquisition will provide us a number of opportunities to realize increased
production and revenues. We also believe that the reserve base
located in the Duval County Properties can be further developed through infill
and step-out drilling of new wells, workovers targeting proved reserves and
stimulating existing wells. As such, we plan to investigate and
evaluate various formations therein to potentially recover significant
incremental oil and natural gas reserves and to create new drilling programs to
exploit the full reserve potential of the reservoirs located
therein.
To date,
management has identified four non-productive wells with immediate capital
recompletion or expense workover potential to new and/or existing
formations. We have prepared capital recompletion and expense
workover procedures on three of these non-productive wells and have begun
operations to return them to a productive status. In addition, we
have identified two currently producing wells whereby we intend to add
additional perforations to the currently producing and/or new zones in
anticipation of increasing production. Our total estimated cost to
perform the well work on these five identified projects is approximately
$410,000. Our estimated capital expenditures for the one remaining
capital recompletion we have identified is $100,000. In addition to
the recompletions and workovers, we have identified drilling opportunities for
six proved undeveloped locations and seven potential exploratory
locations. Total estimated capital expenditures for drilling of these
13 wells is $11.7 million. These recompletions and drilling
opportunities will be funded through a combination of cash flow from the Duval
County Properties and borrowings under our Credit Facility.
We
intend to utilize 3-D seismic analysis from our acquired seismic database and
other modern technologies and production techniques to enhance our production
and returns, and, although seismic indications of hydrocarbon saturation are
generally not reliable indicators of productive reservoir rock and other modern
technologies such as well logs are not always reliable indicators of hydrocarbon
productivity, we believe use of such technologies and production techniques in
exploring for, developing and exploiting oil and natural gas properties will
help us reduce drilling risks, lower finding costs and provide for more
efficient production of oil and natural gas from our
properties.
We will
continue to review opportunities to acquire additional producing properties,
leasehold acreage and drilling prospects that are located in and around the
Duval County Properties, or which might result in the establishment of new
drilling areas. When identifying acquisition candidates, we focus
primarily on underdeveloped assets with significant growth
potential. We seek acquisitions which allow us to absorb, enhance and
exploit properties without taking on significant geologic, exploration or
integration risk.
The
implementation of our foregoing strategy will require that we make significant
capital expenditures in order to replace current production and find and develop
new oil and gas reserves. In order to finance our capital program, we
will depend on cash flow from anticipated operations, cash or cash equivalents
on hand, or committed credit facilities, as discussed below in “
Liquidity and Capital
Resources
.”
If we are
unable to raise additional capital from conventional sources, including lines of
credit and sales of stock in the future, we may be forced to curtail or cease
our business operations. We may also be required to seek additional
capital by selling debt or equity securities, selling assets, or otherwise be
required to bring cash flows in balance when we approach a condition of cash
insufficiency. We cannot assure you, however, that financing will be
available in amounts or on terms acceptable to us, or at all. This is
particularly a concern in light of the current illiquidity in the credit
markets, as well as the current suppressed oil and natural gas pricing
levels. Even if we are able to continue our operations, the failure
to obtain sufficient financing could have a substantial adverse effect on our
business prospects and financial results.
Our
forecasted operating needs and funding requirements, as well as our projected
ability to obtain adequate financial resources, involve risks and uncertainties,
and actual results could vary as a result of a number of factors.
Our
business and prospects must also be considered in light of the risks and
uncertainties frequently encountered by companies in the oil and gas
industry. The successful development of oil and natural gas fields is
highly uncertain and we cannot reasonably estimate or know the nature, timing
and estimated expenses of the efforts necessary to complete the development of,
or the period in which material net cash inflows are expected to commence from,
any oil and natural gas production from our existing fields or other fields, if
any, acquired in the future. Risks and uncertainties associated with
oil and natural gas production include:
|
·
|
reservoir
performance and natural field decline;
|
|
·
|
changes
in operating conditions and costs, including costs of third party
equipment or services such as drilling rigs and
shipping;
|
|
·
|
the
occurrence of unforeseen technical difficulties, including technical
problems that may delay start-up or interrupt
production;
|
|
·
|
the
outcome of negotiations with co-venturers, governments, suppliers, or
other third party operators;
|
|
·
|
our
ability to manage expenses successfully;
|
|
·
|
regulatory
developments, such as deregulation of certain energy markets or
restrictions on exploration and production under laws and regulations
related to environmental or energy security matters;
and
|
|
·
|
volatility
in crude oil and natural gas prices, actions taken by the Organization of
Petroleum Exporting Countries to increase or decrease production and
demand for oil and gas affected by general economic growth rates and
conditions, supply disruptions, new supply sources and the competitiveness
of alternative hydrocarbon or other energy
sources.
|
Revenue
and Expense Drivers
Revenue
Drivers
Crude Oil and Natural Gas
Sales.
Our revenues are generated from production of crude oil
and natural gas which are substantially dependent upon prevailing
prices. Our future production is impacted by our drilling success,
acquisitions and decline curves on our existing production. Prices
for oil and natural gas are subject to large fluctuations in response to
relatively minor changes in the supply of or demand for oil and natural gas,
market uncertainty and a variety of additional factors beyond our
control. We enter into derivative instruments for a portion of our
oil and natural gas production to achieve a more predictable cash flow and to
reduce our exposure to adverse fluctuations in the prices of oil and natural
gas.
We
generally sell our oil and natural gas at current market prices determined at
the wellhead. We are required to pay gathering, compression and
transportation costs with respect to substantially all of our products or incur
such costs to deliver our products to a sales point. We market our
products in several different ways depending upon a number of factors, including
the availability of purchasers for the product at the wellhead, the availability
and cost of pipelines near the well, market prices, pipeline constraints and
operational flexibility.
Operating
Expenses
Our
operating expenses primarily involve the expense of operating and maintaining
our wells.
|
·
|
Lease
Operating
Our lease operating expenses include repair
and maintenance costs, contract labor and supervision, salt water disposal
costs, expense workover costs, compression, electrical power and fuel
costs and other expenses necessary to maintain our
operations. Our lease operating expenses are driven in part by
the type of commodity produced and the level of maintenance
activity. Ad valorem taxes represent property taxes on our
properties.
|
|
|
·
|
Production
Taxes.
Production taxes represent the taxes paid on
produced oil and gas on a percentage of market (our price received from
the purchaser) or at fixed rates established by federal, state or local
taxing authorities.
|
|
|
·
|
General and Administrative
Expenses.
General and administrative expenses include
employee compensation and benefits, professional fees for legal,
accounting and advisory services and corporate
overhead.
|
|
·
|
Depreciation, Depletion and
Amortization
. Depreciation, depletion and amortization
represent the expensing of the capitalized cost of our oil and gas
properties using the unit of production method and our other property and
equipment.
|
Other
Income and Expenses
Other
income and expenses consist of the following:
Interest
Income.
We generate interest income from our cash
deposits.
Interest
Expense
Our interest expense reflects our borrowings
under our CIT Credit Facility, other short-term notes and amortization of debt
discounts.
Risk
Management
The results of operations and operating cash flows
are impacted by changes in market prices for oil and natural gas. To
mitigate a portion of this exposure, we have entered into certain derivative
instruments which have not been elected to be designated as cash flow hedges for
financial reporting purposes. Generally, our derivative instruments
are comprised of fixed price swaps as defined in the
instrument. These instruments are recorded at fair value and changes
in fair value, including settlements, have been reported as risk management in
the statements of operations.
Change in Fair Value of
Derivatives.
We mark-to-market our derivative liabilities each
reporting period and record the change in the derivative liability to change in
fair value of derivatives in the statements of operations.
Oil
and Natural Gas Properties – Impact of Petroleum Prices on Ceiling
Test
We review
the carrying value of our oil and natural gas properties under the successful
efforts accounting rules of the SEC on a quarterly and annual
basis. This review is referred to as a ceiling test. Under
the ceiling test, capitalized costs, less accumulated depletion and related
deferred income taxes, may not exceed an amount equal to the sum of the present
value of estimated future net revenues less estimated future expenditures to be
incurred in developing and producing the proved reserves, less any related
income tax effects. Any excess of the net book value, less deferred
income taxes, is generally written off to expense as an impairment.
Results
of Operations
Three
Months Ended September 30, 2008 vs. Three Months Ended September 30,
2007
|
|
|
Successor
|
|
|
Predecessor
|
|
|
Combined
|
|
|
Predecessor
|
|
|
|
|
Period
July 1, Through
September
30,
2008
|
|
|
Period
July 1, Through
September
2,
2008
|
|
|
Period
July 1, Through September 30, 2008
|
|
|
Period
July 1, Through
September
30,
2007
|
|
|
|
|
(Restated)
|
|
|
|
|
|
|
|
|
|
|
|
Oil
and gas revenue
|
|
$
|
794,184
|
|
|
$ 3,851,191`
|
|
|
$
|
4,645,375
|
|
|
$
|
2,556,516
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease
operating expenses
|
|
|
154,373
|
|
|
|
242,516
|
|
|
|
396,889
|
|
|
|
598,339
|
|
|
Production
taxes
|
|
|
55,361
|
|
|
|
290,295
|
|
|
|
345,656
|
|
|
|
156,970
|
|
|
General
and administrative expenses
|
|
|
707,345
|
|
|
|
158,306
|
|
|
|
865,651
|
|
|
|
192,669
|
|
|
Depreciation,
depletion and amortization
|
|
|
206,451
|
|
|
|
758,151
|
|
|
|
964,602
|
|
|
|
1,774,952
|
|
|
Total
operating costs and expenses
|
|
|
1,123,530
|
|
|
|
1,449,268
|
|
|
|
2,572,798
|
|
|
|
2,722,930
|
|
|
Income
(loss) from operations
|
|
|
(329,346
|
)
|
|
|
2,401,923
|
|
|
|
2,072,577
|
|
|
|
(166,414
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
1,397
|
|
|
|
--
|
|
|
|
1,397
|
|
|
|
--
|
|
|
Interest
expense
|
|
|
(1,297,426
|
)
|
|
|
(237,412
|
)
|
|
|
(1,534,838
|
)
|
|
|
(194,782
|
)
|
|
Risk
management
|
|
|
683,391
|
|
|
|
--
|
|
|
|
683,391
|
|
|
|
--
|
|
|
Loss
on extinguishment of debt
|
|
|
(804,545
|
)
|
|
|
--
|
|
|
|
(804,545
|
)
|
|
|
--
|
|
|
Change
in fair value of derivatives
|
|
|
(7,970,436
|
)
|
|
|
--
|
|
|
|
(7,970,436
|
)
|
|
|
--
|
|
|
Total
other income (expense)
|
|
|
(9,387,619
|
)
|
|
|
(237,412
|
)
|
|
|
(9,625,031
|
)
|
|
|
(194,782
|
)
|
|
Net
income (loss) before taxes
|
|
|
(9,716,965
|
)
|
|
|
2,164,511
|
|
|
|
(7,552,454
|
)
|
|
|
(361,196
|
)
|
|
Income
tax expense
|
|
|
--
|
|
|
|
(757,579
|
)
|
|
|
(757,579
|
)
|
|
|
--
|
|
|
Net
income (loss)
|
|
$
|
(9,716,965
|
)
|
|
$
|
1,406,932
|
|
|
$
|
(8,310,033
|
)
|
|
$
|
(361,196
|
)
|
Revenues.
Combined revenue for the
three months ended September 30, 2008, was $4,645,375 compared to $2,556,516 for
the three months ended September 30, 2007, an increase of $2,088,859, or
82%. Sales of oil for the 2008 period increased over the 2007 period,
primarily due to the successful recompletion of the Marchbanks-Cadena "B"
Well No. 15 during the fourth quarter of 2007. Sales of natural gas for
the three months ended September 30, 2008 decreased when compared to the 2007
period, primarily due to normal production declines from the Duval County
Properties. We also experienced an increase in prices received for both
oil and natural gas during the 2008 period when compared to the 2007
period.
Lease Operating
Expenses.
Lease operating expenses for the three months ended
September 30, 2008, were $396,889. The primary components of lease
operating expenses are salt water disposal, natural gas compression and
generla lease and well maintenance and repair.
Production
Taxes.
Production taxes for the three months ended September
30, 2008 were $345,656 compared to $156,970 for the 2007 period.
Production taxes increased due to the increase in revenue. All of our
revenue is attributable to the State of Texas. Severance taxes in the
State of Texas are based upon the value of crude oil sold and natural gas
produced. Crude oil is taxed at the rate of 4.6% of the value sold
and natural gas is taxed at the rate of 7.5% of the natural gas
produced.
Depreciation, depletion and
amortization.
Depreciation, depletion and amortization for the
three months ended September 30, 2008 was $964,602 compared to $1,774,952 for
the 2007 period. We experienced a decrease in the depletion rate per Mcfe
during the 2008 period as a result of additions to our reserves during the
fourth quarter of 2007.
General and Administrative
Expenses.
General and administrative expenses were $865,651
for the three months ended September 30, 2008, compared to $192,669 for the
three months ended September 30, 2007. We experienced an increase in
payroll and related costs when compared to the 2007 period due to the addition
of three employees during the 2008 period. In addition, during the
2008 period we incurred $337,984 for non-cash stock expense pursuant to stock
options and restricted stock awards granted to our CEO and CFO. We
incurred professional fees during the 2008 period of $161,336 comprised of
legal, accounting and engineering fees. The increase in professional
fees was a result of increased activity primarily attributable to the Voyager
Acquisition and public company reporting.
Interest
Expense.
Interest expense for the three months ended September
30, 2008, totaled $1,534,838 and was comprised of interest expense incurred
pursuant to our CIT Credit Facility of $190,375, amortization of deferred
financing costs and amortization of debt discounts. Interest
expense for the 2007 period was $194,782 which was comprised of accrued interest
on Voyager's credit facility.
Risk
Management.
The gain recorded from our risk management
position for the three months ended September 30, 2008, was
$683,391. We mark-to-market our open swap positions at the end of
each period and record the net unrealized gain or loss during the period in
derivative gains or losses in our statements of operations. For the
three months ended September 30, 2008, we recorded gains of $634,528, related to
our swap contracts. These swap contracts are related to an agreement
entered into on September 2, 2008, with Macquarie Bank Limited. In
the first contract we agreed to be the floating price payer (based on Inside
FERC Houston Ship Channel) on specific quantities of natural gas over the period
beginning October 1, 2008 through December 31, 2011 and receive a fixed payment
of $7.82 per MMBTU. In the second contract we agreed to be the
floating price payer (based on the NYMEX WTI Nearby Month Future Contract) on
specific monthly quantities of oil over the period beginning October 1, 2008
through December 31, 2011 and receive a fixed payment of $110.35 per
barrel.
Fair
value is estimated based on forward market prices and approximates the net gains
and losses that would have been realized if the contracts had been closed out at
period-end. When forward market prices are not available, they are
estimated using spot prices adjusted based on risk-free rates, carrying costs,
and counterparty risk.
In
addition to the above, we were required to unwind Voyager Gas Corporation’s
hedge positions upon closing of the Voyager Acquisition on September 2,
2008. We recorded a gain from unwinding Voyager’s hedge position of
$48,863.
Loss on Extinguishment of
Debt.
On August 31, 2008, we converted $450,000 principal
amount of the Debentures to 10,000 shares of our Series E Preferred stock which
will convert into 1,363,636 shares of our common stock upon the effectiveness of
our Charter Amendment to be filed with the State of Nevada. We fair
valued the common stock at August 31, 2008, and recorded a loss on
extinguishment of debt of $804,545.
Change in Fair Value of
Derivatives.
We mark-to-market our derivative liabilities each
period to report the change in fair value. For the three months ended
September 30, 2008, the change in fair value of our derivative liabilities was a
loss of $7,970,436. The derivative liabilities exist because we have
insufficient authorized and unissued shares of our common stock to settle our
contracts including the outstanding preferred stock (Series A, B, D, and E), our
outstanding warrants and stock options and our outstanding convertible
debt. Upon the effectiveness of the Charter Amendment to increase our
number of authorized shares of common stock from 24,000,000 to 149,000,000, we
will have sufficient authorized and unissued shares to settle these
contracts. At that point, the derivative liability will be eliminated
and we will record a gain on the change in fair value of
derivatives.
Six
Months Ended June 30, 2008 vs. Six Months Ended June 30, 2007
Revenues:
During
January 2007, Voyager sold its property known as the Garza Lease located in
Garza County, Texas and the following represents Voyager’s remaining operations
from its Duval County Properties. Revenue for the six months ended
June 30, 2008, was $6,828,541 compared to $4,596,748 for the six months ended
June 30, 2007. Sales of oil for the 2008 period was 39,625 barrels
compared to 24,862 barrels during the 2007 period, an increase of 14,763
barrels, or 59%. The increase in oil sales was primarily attributable
to the successful recompletion of the Marchbanks-Cadena “B” Well No. 15 during
the second half of fiscal 2007. Sales of natural gas for the six
months ended June 30, 2008 was 430.9 Mmcf compared to 589.1 Mmcf for the 2007
period. This was a reduction of 158.2 Mmcf, or 27%. The
reduced sales volumes of natural gas during the 2008 period when compared to the
2007 period was primarily attributable to normal production declines from the
Duval County Properties.
Costs and
expenses:
Total costs and expenses for the six months ended
June 30, 2008 were $5,273,259 compared to $7,297,075 for the six months ended
June 30, 2007. Lease operating expenses for the 2008 period increased
to $2,326,418 from $1,299,093 for the 2007 period. Voyager continued
its program of performing remedial workovers of certain wells located on the
Duval County Properties in order to increase production from marginal and low
producing wells. The cost incurred for the workover program increased
from $1,064,044 during the 2007 period to $1,618,332 during the 2008
period. Incremental costs incurred during the 2008 period over the
2007 period were plugging costs of uneconomic properties of approximately
$148,000, replacement of equipment and equipment repairs of approximately
$123,000 and increased ad valorem taxes on the oil and gas
properties.
Depletion, depreciation and
amortization decreased from $4,824,815 during the six months ended June 30,
2007, to $1,699,409 during the six months ended June 30,
2008. Voyager experienced a decrease in its depletion rate per
equivalent Mcf (“Mcfe”) for $6.54 per Mcfe during the 2007 period to $2.54
during the 2008 period. During fiscal 2007, Voyager drilled three
successful wells and performed multiple recompletions to new zones which
increased proved reserves resulting in a reduction in the depletion rate per
Mcfe.
Interest expense increased from
$308,224 for the six months ended June 30, 2007 to $401,707 for the six months
ended June 30, 2008. Voyager experienced a lower amount of borrowings
from its credit facility during the 2008 period, but incurred higher interest
ratesduring the period, resulting in increased interest
expense. General and administrative expenses for the period ended
June 30, 2008, were $475,387, a reduction of $22,817 when compared to the 2007
period of $498,204.
Gain on sale of oil and gas
properties:
During January 2007 Voyager sold its Garza Lease
located in Garza County for cash proceeds of $29 million and recorded a gain on
the sale of $12,702,811. Proceeds from the sale were used to reduce
Voyager’s borrowings under its credit facility.
Income tax
expense:
Income tax expense for the six months ended June 30,
2007 were $4,402,795 which represented the taxes incurred resulting from the
sale of its Garza Lease.
Net income
(loss):
For the six months ended June 30, 2008, Voyager
reported net income of $1,555,282 compared to net income of $5,599,689 for the
six months ended June 30, 2007.
Twelve
Months Ended December 31, 2007 vs. Twelve Months Ended December 31,
2006
Revenues:
Revenues
for the year ended December 31, 2007 was $10,739,352 which was a decrease of
$4,631,086 from the year ended December 31, 2006 revenue of
$15,370,438. Oil sales for the 2007 period were 45,960 barrels, a
decrease of 89,040 barrels when compared to the year ended December 31, 2006 of
135,000 barrels. During January 2007, Voyager sold its Garza Lease
located in Garza County, Texas which was primarily an oil producing
property. The sale of this property was primarily attributable to the
decrease in the sale of oil. Sales of natural gas during the year
ended December 31, 2007 were 1,068.0 Mmcf compared to 992.0 Mmcf for the year
ended December 31, 2006. In May 2006, Voyager acquired the Duval
County Properties, which properties primarily produce natural
gas. The sales volumes of natural gas during 2007 represent twelve
months of sales compared to seven months for the year ended December 31,
2006. The company experienced a decline in natural gas production on
a daily basis when comparing 2007 with 2006 as a result of normal well
production declines which was partially offset by increases in production as a
result of successful recompletions the drilling of two wells during
2007.
Costs and
expenses:
Costs and expenses for the year ended December 31,
2007, were $10,095,286 compared to $12,204,198 for the year ended December 31,
2006. Lease operating expenses, which are comprised of the cost of
operating the wells, utilities, salt water disposal, natural gas compression and
transportation, ad valorem taxes and well workover expenses. Lease
operating expenses for the year ended December 31, 2007 were $2,464,652, a
decrease of $471,612 when compared to the year ended December 31, 2006 totaling
$2,936,265. Voyager experienced a decrease in equipment repairs,
utilities and ad valorem taxes during 2007 which was partially offset by an
increase in well workover expenses and natural gas compression and
transportation. The Garza Lease properties were primarily oil
producing properties which required increased expenditures in the areas of
equipment repairs, utilities to produce the wells and increased values for ad
valorem taxation purposes. During May 2006, the company acquired the
Duval County Properties and, since they were primarily natural gas producing
properties, incurred increased costs for natural gas compression and
transportation. In addition, the company initiated a well workover
program which increased its workover costs when compared to the year ended
December 31, 2006.
Production taxes for the year ended
December 31, 2007, were $836,349 compared to $721,510 for the year ended
December 31, 2006. Severance tax rates in the State of Texas are
based upon the value of the oil and natural gas produced with the rate for oil
being 4.6% and natural gas being 7.5%. Even though revenue from the
sale of oil and natural gas for the year ended December 31, 2007, was
considerably less than revenue for the year ended December 31, 2006, a majority
of the revenue for 2007 was attributable to natural gas sales and taxed at a
higher rate than revenue for the 2006 period.
Depletion, depreciation and
amortization expense for the year ended December 31, 2007 was $4,834,352
compared to $5,440,973 for the year ended December 31, 2006. The
depletion rate per equivalent Mcf for the 2007 period was $3.60 per Mcfe
compared to $3.02 per Mcfe for the 2006 period.
Interest expense for the year ended
December 31, 2007 was $979,832 compared to $1,928,909 for the year ended
December 31, 2006. As previously discussed, Voyager sold its Garza
Lease during January 2007 and received proceeds of approximately $29 million,
proceeds it used to pay down its existing credit facility. This
resulted in the reduction in interest expense for 2007.
General and administrative expenses
for the year ended December 31, 2007 were $970,701 compared to $785,059 for the
year ended December 31, 2006, an increase of $185,642, or 24%. The
primary components of the increase were increased salaries, insurance and
professional fees.
Gain on sale of oil and gas
properties:
During January 2007 Voyager sold its Garza Lease
located in Garza County for cash proceeds of $29 million and recorded a gain on
the sale of $12,702,811. Proceeds from the sale were used to reduce
Voyager’s borrowings under its credit facility.
Income tax
expense:
Income tax expense for the year ended December 31,
2007 were $4,764,334 which primarily represented the taxes incurred resulting
from the sale of its Garza Lease.
Net income:
For
the year ended December 31, 2007, Voyager reported net income of $8,582,543
compared to net income of $2,360,737 for the year ended December 31,
2006.
Liquidity
and Capital Resources
Our main
sources of liquidity and capital resources for the fiscal year 2009 will be
cash, short-term cash equivalent investments on hand , anticipated internally
generated cash flows from operations following the Voyager Acquisition and
committed credit facilities.
Credit
Facility
On
September 2, 2008 we entered into the Credit Facility, consisting of a $50
million senior secured revolving loan (“Revolving Loan”) and a $22 million term
loan (“Term Loan”).
The
Revolving Loan is subject to an initial borrowing base of $14.0 million, or an
amount determined based on semi-annual reviews of our proved oil and gas
reserves. As of September 2, 2008, we had borrowed $11.5 million
under the Revolving Loan to finance the Voyager Acquisition, to repay the
related bridge loan and transaction expenses, and to fund capital expenditures
generally. Monies advanced under the Revolving Loan mature on
September 1, 2011 and bear interest at a rate equal to LIBOR plus 1.75% to
2.50%, as the case may be. On September 4, 2008, we obtained a three
month LIBOR rate expiring December 4, 2008, resulting in an annual interest rate
of 5.31%. On September 30, 2008, we repaid $1 million of principal on
the Revolving Loan and on October 22, 2008, we borrowed $1 million on the
Revolving Loan.
The Term
Loan provides for a one-time advance to us of $22.0 million. We drew
down the full amount on September 2, 2008, to finance the Voyager Acquisition
and to repay the related bridge loan and transaction expenses. Monies
borrowed under the Term Loan mature on March 1, 2012 and bear interest at a rate
equal to LIBOR plus 5% during the first twelve months after closing and LIBOR
plus 7.50%, thereafter. On September 4, 2008, we obtained a three
month LIBOR rate expiring December 4, 2008, resulting in an annual interest rate
of 7.81%.
All
borrowings under the Revolving Loan are secured by a first lien on all of our
assets and those of our subsidiaries. All borrowings under the Term
Loan are secured by a second lien on all of our assets and those of our
subsidiaries.
The loan
instruments evidencing the Revolving Loan contain various restrictive covenants,
including financial covenants requiring that we will not: (i) as of the last day
of any fiscal quarter, permit our ratio of EBITDAX for the period of four fiscal
quarters then ending to interest expense for such period to be less than 2.0 to
1.0; (ii) at any time permit our ratio of total debt as of such time to EBITDAX
for the four fiscal quarters ending on the last day of the fiscal quarter
immediately preceding the date of determination for which financial statements
are available to be greater than 4.0 to 1.0; and (iii) permit, as of the last
day of any fiscal quarter, our ratio of (a) consolidated current assets
(including the unused amount of the total commitments, but excluding non-cash
assets under FAS 133) to (b) consolidated current liabilities (excluding
non-cash obligations under SFAS No. 133 and current maturities under the Credit
Facility) to be less than 1.0 to 1.0.
The loan
instruments evidencing the Term Loan also contain various restrictive covenants,
including financial covenants requiring that we will not: (i) permit, as of the
last day of any fiscal quarter, our ratio of (a) consolidated current assets
(including the unused amount of the total commitments, but excluding non-cash
assets under SFAS No. 133) to (b) consolidated current liabilities (excluding
non-cash obligations under FAS 133 and current maturities under the Credit
Facility) to be less than 1.0 to 1.0; and (ii) as of the date of any
determination permit our ratio of total reserve value as in effect on such date
of determination to total debt as of such date of determination to be less than
2.0 to 1.0
Upon our
failure to comply with covenants, the lender has the right to refuse to advance
additional funds under the revolver and/or declare any outstanding principal and
interest immediately due and payable. We were in compliance with all
covenants as of September 30, 2008.
CIT
Capital, as lender, is entitled to a one percent (1%) overriding royalty
interest (“ORRI”) of our net revenue interest in the oil and gas properties
acquired in the Voyager Acquisition. The overriding royalty interest
is applicable to any renewal, extension or new lease taken by us within one year
after the date of termination of the ORRI Properties, as defined in the
overriding royalty agreement covering the same property, horizons and
minerals.
CIT
Capital also received, and is entitled to receive in its capacity as
administrative agent, various fees from us while monies advanced or loaned
remain outstanding, including an annual administrative agent fee of $20,000 for
each of the Revolving Loan and Term Loan and a commitment fee ranging from
0.375% to 0.5% of any unused portion of the borrowing base available under the
Revolving Loan.
Under the
Credit Facility, we were required to enter into hedging arrangements mutually
agreeable between us and CIT Capital. On September 2, 2008 and
effective October 1, 2008, we entered into hedging arrangements with a bank
whereby we hedged 65% of our proved developed producing natural gas production
and 25% of our proved developed producing oil production from October 1, 2008
through December 31, 2011 at $7.82 per Mmbtu and $110.35 per barrel,
respectively.
Convertible
Debentures (Bridge Loan)
On May
21, 2008, we entered into the Bridge Loan, whereby we issued the Debentures and
used the proceeds to fund our payment of the deposit required under the Voyager
Acquisition.
The
Debentures matured the earlier of September 29, 2008 and the completion of the
Voyager Acquisition, and may be satisfied in full by our payment of the
aggregate redemption price of $900,000 or, at the election of the purchasers, by
the conversion of the Debentures into shares of our common stock, at an initial
conversion price of $0.33 subject to adjustments and full-ratchet protection
under certain circumstances.
On
September 2, 2008, we repaid $450,000 principal amount of the Debentures in cash
from our Credit Facility and issued, in full satisfaction of our obligation with
respect to the other $450,000 principal amount, 10,000 shares of our Series E
Preferred. Each share of preferred stock automatically converted into
136.3636 shares of our common stock, for an aggregate of 1,363,636 shares of our
common stock, on the Charter Amendment Effective Date, as provided by the
Certificate of Designation governing the Series E Preferred.
2007
Convertible Notes
On
November 1, 2007, we sold $350,000 in convertible notes (the "2007 Notes"),
which 2007 Notes mature on October 31, 2008 and bear interest at 10% per annum,
payable in either cash or shares of our common stock based upon a conversion
price of $0.35 per share. The investors in the 2007 Notes also
received 200,004 shares of common stock. During May 2008, we
exchanged 37,100 shares of our Series B Preferred in full satisfaction of our
obligation under the 2007 Notes to pay $350,000 of principal and $21,000 of
interest, with each share of such preferred stock becoming convertible into
28.58 shares of our common stock, for an aggregate of 1,060,318 shares of our
common stock, on the Charter Amendment Effective Date.
2006
Convertible Notes
As a
result of the May 2006 Merger, we assumed $1,500,000 of convertible promissory
notes (the "2006 Notes") previously sold by Energy Venture. The 2006
Notes had an original maturity date of August 31, 2007, carried an interest rate
of 10% per annum, payable in either cash or shares, and were convertible into
shares of common stock at a conversion price of $0.50 per share at the option of
the investor. Each investor also received a number of shares of
common stock equal to 20% of his or her investment divided by
$0.50. Thus, a total of 600,000 shares were initially issued to
investors in the 2006 Notes.
On August
31, 2007 (the original maturity date), we repaid in cash six of the holders of
the 2006 Notes an aggregate amount of $424,637, of which $410,000 represented
principal and $14,637 represented accrued interest. On September 4,
2007, an additional $44,624 of accrued and current period interest was repaid
through the issuance of 89,248 shares of our common stock. The
remaining holders of the 2006 Notes entered into an agreement with us whereby
the maturity date of the 2006 Notes was extended to February 28, 2008 and,
beginning September 1, 2007 until the 2006 Notes are paid in full, the interest
rate on the outstanding principal increased to 12% per annum. In
addition, we agreed to issue to the remaining holders of the 2006 Notes, 218,000
shares of our common stock with a value of $98,100 as consideration for
extending the 2006 Note's maturity date.
On
February 28, 2008, $1,090,000 of the 2006 Notes came due and we were unable to
repay them. We continued to accrue interest on the notes at 12%, the
agreed upon rate for the extension period. On March 6, 2008, we
issued 130,449 shares of common stock in lieu of cash in payment of $65,221 of
accrued and current period interest to holders of 2006 Notes. On
April 22, 2008, we repaid $100,000 principal amount in cash to one of the
holders of the 2006 Notes in satisfaction thereof. During May 2008,
we exchanged 99,395 shares of our Series A Preferred for the remaining 2006
Notes in payment of the $965,000 of principal and $28,950 of interest
thereunder. Each share of Series A Preferred is automatically
convertible into 20 shares of our common stock, for an aggregate of 1,987,900
shares of our common stock, upon the Charter Amendment Effective Date, as
provided by the Certificate of Designation with respect to the Series A
Preferred filed with the State of Nevada on May 15, 2008. At
September 30, 2008, $25,000 principal amount of the 2006 Notes held by one note
holder remained outstanding.
We
believe our short-term and long-term liquidity is adequate to fund operations,
including capital expenditures and interest during our fiscal year ending June
30, 2009.
Should
our estimated capital needs prove to be greater than we currently anticipate,
our cash flow from operating activities be less than we currently anticipate or
should we change our current operations plan in a manner that will increase or
accelerate our anticipated costs and expenses, the depletion of our working
capital would be accelerated. Although we anticipate that adequate
funds will remain available to us under the Credit Facility, if we were unable
to access such funding by reason of our failure to satisfy borrowing covenants
thereunder we would have to use other alternative resources. To the
extent it becomes necessary to raise additional cash in the future if our
current cash and working capital resources are depleted, we will seek to raise
it through the public or private sale of debt or our equity securities, funding
from joint venture or strategic partners, or a combination of the
foregoing. We may also seek to satisfy indebtedness without any cash
outlay through the private issuance of debt or equity securities. The
sale of additional equity securities or convertible debt securities would result
in dilution to our shareholders. We cannot give you any assurance
that we will be able to secure the additional cash or working capital we may
require to continue our operations in such circumstances. Any
assurance as to our present ability to raise additional capital outside of our
existing credit facility and business operations is particularly uncertain given
the current instability in the financial and equity markets and current oil and
natural gas pricing levels.
Recent
Accounting and Reporting Pronouncements
In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities – an amendment of FASB Statement No. 133” (SFAS No.
161”). SFAS No. 161 requires additional disclosures about derivative
and hedging activities and is effective for fiscal years and interim periods
beginning after November 15, 2008. The Company is evaluating the
impact the adoption of SFAS No. 161 will have on its financial statement
disclosures. The Company’s adoption of SFAS No. 161 will not affect
its current accounting for derivative and hedging activities.
In
December 2007, the FASB issued SFAS No. 141(R), “Business
Combinations”. This statement requires assets acquired and
liabilities assumed to be measured at fair value as of the acquisition date,
acquisition-related costs incurred prior to the acquisition to be expensed and
contractual contingencies to be recognized at fair value as of the acquisition
date. This statement is effective for financial statements issued for
fiscal years beginning after December 15, 2008. The Company is
currently assessing the impact, if any, the adoption of this statement will have
on its financial position, results of operations or cash flows.
Off-Balance-Sheet
Arrangements.
We
currently have no off balance sheet arrangements that have or are reasonably
likely to have a current or future effect on our financial condition, changes in
financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures, or capital resources that is material to any investor in
our securities.
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL
PERSONS
The
following table sets forth as of February 12, 2009 certain information regarding
our directors and executive officers:
|
Name
of Individual
|
Age
|
Position
with the Company
|
|
Robert
P. Munn
|
50
|
President,
Chief Executive Officer, Chairman and Director
|
|
Carl
A. Chase
|
59
|
Chief
Financial Officer and Secretary
|
|
Jim
B. Davis
|
46
|
Senior
Vice-President of Operations
|
|
Alan
D. Gaines
|
52
|
Director
|
The
business experience of each director and named executive officer of the Company
is set forth below:
Robert P.
Munn.
Mr. Munn joined the Company on May 22, 2008, as Chief
Executive Officer and also serves as a member of our Board, and
Chairman. His work experience spans over 27 years' involvement in the
United States and International oil and gas arenas, where he has worked for both
small and large independent E&P companies in different basins throughout the
United States, the Gulf of Mexico and offshore West Africa. Prior to
joining us, Mr. Munn served as President, Chief Executive Officer and a director
of Striker Oil & Gas, Inc. (formerly Unicorp, Inc.), a publicly traded
independent E&P company from September 2007 until his resignation in
February 2008. In 2003, he opened the U.S. office for Sterling
Energy, PLC and, until September 2007, served as Executive Vice-President and
director for Sterling, where he managed the growth of its U.S. operations by
successfully adding oil and gas reserves through drilling and acquiring
producing properties. Prior to his tenure with Sterling, Mr. Munn
served as Vice-President of Exploration for FW Oil. From 1987 through
2001, he served in supervisory and senior technical roles with Amerada Hess
working in oil and gas basins located both onshore and offshore the United
States. From 1981 to 1987, Mr. Munn worked as an exploration and
exploitation geologist for Buckhorn Petroleum and Harper Oil Company in Denver,
Colorado. Mr. Munn received a B.A. degree in Geology from the
University of Colorado in 1981.
Carl A. Chase
. Mr.
Chase joined the Company on May 22, 2008, as Chief Financial Officer, Secretary
and Treasurer. He has over 33 years' experience with major and
independent E&P companies and has held various financial and administrative
positions with publicly traded companies. Most recently, he served as
Chief Financial Officer and a director of Striker Oil & Gas, Inc. (formerly
Unicorp, Inc.), a publicly traded independent E&P company from August 2004
until his resignation in April 2008. From May 2007 until March 2008,
he served as a consultant and director of Oncolin Therapeutics, Inc., a
publicly-traded bio-technology company involved in developing products to treat
cancer, infectious diseases and other medical conditions associated with
compromised immune systems. From August 2000 to May 2006, Mr. Chase
served as both a consultant and senior vice president to Rockport Healthcare
Group, Inc., a publicly-traded preferred provider organization (PPO) for
work-related injuries and illnesses. From 2003 until 2006, Mr. Chase
served as a director of eLinear, Inc., an integrated technology solutions
provider of security, IP telephony and network and storage solutions
infrastructure. In September 2006, eLinear filed a voluntary petition
in the United States Bankruptcy Court for the Southern District of Texas,
Houston Division, seeking relief under Chapter 7 of the United States
Code. From August 1999 to May 2000, Mr. Chase was Chief Financial
Officer of ClearWorks.net, Inc., an information technology company providing IT
consulting and computer hardware and software solutions. From
December 1992 to August 1999, Mr. Chase served as Chief Financial Officer of
Bannon Energy Incorporated, a privately held, independent E&P company, where
his responsibilities included acquisitions, financing and accounting and
administration. Mr. Chase has held various financial and
administrative positions with various oil and gas companies, including Amoco
Production Company and Union Pacific Resources Corporation. Mr. Chase
received a Bachelor of Accountancy degree from the University of Oklahoma in
1975.
Jim B. Davis.
Mr.
Davis joined the Company on October 1, 2008, as Senior Vice-President of
Operations. He has over 21 years’ experience with major and
independent E&P companies. From September 2007 until joining us,
Mr. Davis served as an independent consulting drilling engineer for Apache
Australia Ltd., designing wells in the Gippsland and Carnorvoran Basins located
offshore Australia, and for El Paso Corp., designing and drilling high
pressure/high temperature wells in Duval, Lavaca, Starr and Hidalgo counties of
South Texas, as well as supervising two to three drilling rigs. From
April 2002 until his resignation in August 2007, Mr. Davis held positions of
increasing responsibility as manager, vice president and senior vice president
of engineering and operations for Goodrich Petroleum Corp. Mr. Davis
was instrumental in growing Goodrich, both through increased reserves and cash
flow, during his tenure at Goodrich. From May 2001 until March 2002,
Mr. Davis consulted as the senior drilling engineer (and acting drilling manager
during the Forest Oil acquisition) for Forcenergy, Inc. and from January 2000 to
May 2001 was responsible for Forcenergy’s daily drilling and engineering
activities for its Gulf of Mexico projects. From November 1987 until
December 1999, Mr. Davis held various production, development and drilling
engineering positions with Texaco E&P, Inc. in fields throughout Southeast
Louisiana and the Gulf of Mexico. Mr. Davis is a licensed
Professional Engineer in the States of Louisiana and Texas and received a Master
of Engineering Degree and a Bachelor of Science Degree in Petroleum Engineering
in 1987 and 1985, respectively, from Louisiana State University.
Alan D.
Gaines.
Mr. Gaines served as our Chief Executive Officer from
April 2006 to September 2007, as Chairman from April 2006 to May 2008 and a
director of the Company since April 2006. He is currently the
Chairman of the Board, a position he has held since May 2001, of Dune Energy,
Inc., an independent E&P company engaged in the development, exploration and
acquisition of oil and gas properties, with operations presently concentrated
onshore the Louisiana and Texas Gulf Coasts. From May 2001 to April
17, 2007, Mr. Gaines served as Chief Executive Officer of Dune Energy,
Inc. He served from April 2005 until August 2008 as Vice-Chairman and
from April 2005 until July 18, 2008 as a director of Baseline Oil & Gas
Corp., a public company engaged in the development, exploration and acquisition
of oil and gas properties. Mr. Gaines has 25 years’ of experience as
an energy investment and merchant banker. In 1983, he co-founded
Gaines, Berland Inc., an investment bank and brokerage firm, specializing in
global energy markets, with particular emphasis given to small to medium
capitalization companies involved in exploration and production, pipelines,
refining and marketing, and oilfield services. Prior to selling his
interest in Gaines, Berland, the firm managed or co-managed, and participated in
$4 billion of equity and debt financings during a three year
period. He has acted as an advisor to financier Carl Icahn during
such corporate takeovers as USX Corporation (Marathon Oil) and
Texaco. Mr. Gaines has provided funding and/or advisory services to
Parker & Parsley (now -NYSE listed Pioneer Natural Resources), Lomak
Petroleum (now NYSE - listed Range Resources), Devon Energy (now NYSE - listed),
and Comstock Resources (now NYSE - listed). Mr. Gaines holds a BBA in
Finance from Baruch College, and an MBA in Finance (with distinction) from Zarb
School, Hofstra University School of Graduate Management.
EXECUTIVE COMPENSATION
The
following sets forth the annual and long-term compensation received by (i) our
Chief Executive Officer ("CEO"), (ii) our two most highly compensated executive
officers, if any, other than the CEO, whose total compensation during our fiscal
year ended June 1, 2008 exceeded $100,000 and who were serving as executive
officers at the end of such 2008 fiscal year and (iii) the two most highly
compensated former officers (collectively, the "Named Executive Officers"), at
our fiscal years ended June 30, 2008 and 2007:
|
Summary
Compensation Table
|
|
|
Name
and Principal Position
|
Year
|
|
Salary
($)
|
|
|
Bonus
($)
|
|
|
Stock
Awards
($)
|
|
|
Option
Awards
($)
|
|
|
Non-Equity
Incentive Plan Compensation
($)
|
|
|
Change
in
Pension
Value
and
Nonqualified
Deferred
Compensation
Earnings
($)
|
|
|
All
Other
Compensation
($)
|
|
|
Total
($)
|
|
|
Robert
P. Munn
Chief
Executive Officer
(1)
|
2008
|
|
|
24,716
|
|
|
|
--
|
|
|
|
780,000
|
|
|
|
738,674
|
|
|
|
--
|
|
|
|
--
|
|
|
|
650
|
(2)
|
|
|
1,544,040
|
|
|
Carl
A. Chase
Chief
Financial Officer
(3)
|
2008
|
|
|
19,773
|
|
|
|
--
|
|
|
|
585,000
|
|
|
|
554,006
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
1,158,779
|
|
|
Steven
Barrenechea
Chief
Executive Officer
(4)
|
2008
|
|
|
27,000
|
|
|
|
--
|
|
|
|
--
|
|
|
|
239,423
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
266,423
|
|
|
Richard
Cohen
Chief
Financial Officer
(4)
|
2008
|
|
|
36,000
|
|
|
|
--
|
|
|
|
--
|
|
|
|
72,564
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
108,564
|
|
|
|
2007
|
|
|
72,000
|
|
|
|
--
|
|
|
|
--
|
|
|
|
294,623
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
366,623
|
|
_______________
|
A
|
See
Note 6 to ABC Funding, Inc.'s audited financial statements for the
assumptions used in the valuation of the stock and option awards
listed above.
|
|
(1)
|
Mr.
Munn was employed as our Chief Executive Officer on May 22,
2008.
|
|
(2)
|
Includes
$650 monthly car allowance.
|
|
(3)
|
Mr.
Chase was employed as our Chief Financial Officer on May 22,
2008.
|
|
(4)
|
Mr.
Barrenechea served as our Chief Executive Officer and a director from
September 2007 until his resignation on May 22, 2008, and continues to be
employed by us as an advisor.
|
|
(5)
|
Mr.
Cohen served as our Chief Financial Officer until his resignation in
January 2008.
|
The
following table indicates the total number and value of exercisable stock
options and restricted stock awards held by the Named Executive Officers during
the 2008 fiscal year:
|
Outstanding
Equity Awards at June 30, 2008
|
|
|
Name
|
|
Number
of Securities Underlying Unexercised Options
(#)
Exercisable
|
|
|
Number
of Securities Underlying Unexercised Options
(#)
Unexercisable
|
|
|
Equity
Incentive Plan Awards: Number of Securities Underlying Unexercised
Unearned Options
(#)
|
|
|
Option
Exercise Price
($)
|
|
Option
Expiration Date
|
|
Number
of Shares or Units of Stock That Have Not Vested
(#)
|
|
|
|
|
|
Market
Value of Shares or Units of Stock That Have Not Vested
($)
|
|
|
Equity
Incentive Plan Awards: Number of Unearned Shares, Units or Rights That
Have Not Vested
(#)
|
|
|
Equity
Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or
Other Rights That Have Not Vested
($)
|
|
|
(a)
|
|
(b)
|
|
|
(c)
|
|
|
(d)
|
|
|
(e)
|
|
(f)
|
|
(g)
|
|
|
|
|
|
(h)
|
|
|
(i)
|
|
|
(j)
|
|
|
Robert
P. Munn,
Chief
Executive
Officer
(1)
|
|
|
--
|
|
|
|
500,000
|
|
|
|
--
|
|
|
$
|
0.52
|
|
5/20/15
|
|
|
1,500,000
|
|
|
|
|
(2)
|
|
|
825,000
|
|
|
|
--
|
|
|
|
--
|
|
|
|
|
--
|
|
|
|
500,000
|
|
|
|
--
|
|
|
$
|
0.57
|
|
5/20/15
|
|
|
--
|
|
|
|
|
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
--
|
|
|
|
500,000
|
|
|
|
--
|
|
|
$
|
0.62
|
|
5/20/15
|
|
|
--
|
|
|
|
|
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
Carl
A. Chase,
Chief
Financial
Officer
(3)
|
|
|
--
|
|
|
|
375,000
|
|
|
|
--
|
|
|
$
|
0.52
|
|
5/20/15
|
|
|
1,125,000
|
|
|
|
|
(4)
|
|
|
618,750
|
|
|
|
--
|
|
|
|
--
|
|
|
|
|
--
|
|
|
|
375,000
|
|
|
|
--
|
|
|
$
|
0.57
|
|
5/20/15
|
|
|
--
|
|
|
|
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
|
--
|
|
|
|
375,000
|
|
|
|
--
|
|
|
$
|
0.62
|
|
5/20/15
|
|
|
--
|
|
|
|
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
Steven
Barrenechea,
Chief
Executive
Officer
(5)
|
|
|
--
|
|
|
|
500,000
|
|
|
|
--
|
|
|
$
|
0.35
|
|
12/29/12
|
|
|
--
|
|
|
|
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
|
--
|
|
|
|
250,000
|
|
|
|
--
|
|
|
$
|
0.52
|
|
2/27/13
|
|
|
--
|
|
|
|
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
Richard
Cohen,
Chief
Financial
Officer
(6)
|
|
|
--
|
|
|
|
250,000
|
|
|
|
--
|
|
|
$
|
0.30
|
|
5/22/12
|
|
|
--
|
|
|
|
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
|
--
|
|
|
|
250,000
|
|
|
|
--
|
|
|
$
|
0.35
|
|
10/26/12
|
|
|
--
|
|
|
|
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
____________
|
(1)
|
Mr.
Munn was employed as our Chief Executive Officer on May 22,
2008.
|
|
(2)
|
Restricted
Stock Awards vest with respect to 1/3
rd
of the total shares, or 500,000 shares, awarded on each of the
effectiveness of the Charter Amendment and the first and second year
anniversary of the grant date.
|
|
(3)
|
Mr.
Chase was employed as our Chief Financial Officer on May 22,
2008.
|
|
(4)
|
Restricted
Stock Awards vest with respect to 1/3
rd
of the total shares, or 375,000 shares, awarded on each of the
effectiveness of the Charter Amendment and the first and second year
anniversary of the grant date.
|
|
(5)
|
Mr.
Barrenechea served as our Chief Executive Officer and a director from
September 2007 until his resignation on May 22, 2008, and continues to be
employed by us as an advisor.
|
|
(6)
|
Mr.
Cohen served as our Chief Financial Officer until his resignation in
January 2008.
|
On May
22, 2008, Steven Barrenechea resigned as our President, Chief Executive Officer
and acting Chief Financial Officer and Robert P. Munn and Carl A. Chase were
appointed our President and Chief Executive Officer, and Chief Financial
Officer, respectively. Mr. Barrenechea currently serves as an advisor
to the Company.
We
currently have in place employment agreements with respect to our principal
executive and financial officers, providing for the following:
|
·
|
Robert
P. Munn to serve as our President and Chief Executive Officer, at an
initial annual base salary of $225,000, which base salary shall increase
to $260,000 at the first anniversary date of his employment, subject to
increase upon review of our Board;
|
|
·
|
Carl
A. Chase to serve as our Chief Financial Officer, at an initial annual
base salary of $180,000, which base salary shall increase to $210,000 at
the first anniversary date of his employment, subject to increase upon
review of our Board; and
|
|
·
|
Jim
B. Davis to serve as our Senior Vice President of Operations, at an
initial annual base salary of $190,000, which base salary shall be subject
to increase at the first anniversary date of his employment upon review of
our Board.
|
The
initial term of employment under their respective employment agreements is two
(2) years, unless earlier terminated by us or the executive officer by reason of
death, disability, without cause, for cause, for "good reason," change of
control or otherwise.
In
addition to their base salaries, Messrs. Munn, Chase and Davis are guaranteed an
annual bonus of $45,000, $36,000 and $38,000, respectively, on the first year
anniversary and an amount up to 100%, 75% and 75%, respectively, of such
officer's then applicable base salary, as determined by our Board or committee
thereof, based on such officer's performance and achievement of quantitative and
qualitative criteria set by our Board, for such year. Each of Messrs.
Munn, Chase and Davis is further eligible under his employment agreement to
participate, subject to any eligibility, co-payment and waiting period
requirements, in all employee health and/or benefit plans offered or made
available to our senior officers.
Upon
termination of an officer without "cause", upon the resignation of either
officer for "good reason", or upon his termination following a "change of
control" (each as defined in the employment agreements), such officer will be
entitled to receive from us, in addition to his then current base salary through
the date of resignation or termination, as applicable, and pro rata bonus and
fringe benefits otherwise due and unpaid at the time of resignation or
termination, a severance payment equal to twelve (12) months base salary at the
then current rate plus pro rata performance bonus earned and unpaid through the
date of termination or resignation, as applicable. Each such officer
shall also be entitled to any unpaid bonus from the preceding year of
employment, and any restricted stock granted to him shall immediately vest and
all other stock options or grants, if any, made to him pursuant to any incentive
or benefit plans then in effect shall vest and be exercisable, as applicable, in
accordance with the terms of any such plans or agreements.
We have
also agreed to pay Mr. Munn and Mr. Chase an additional gross-up amount equal to
all federal, state or local taxes that may be imposed upon them by reason of the
severance payments.
Each of
Messrs. Munn, Chase and Davis have agreed that, during the respective term of
his employment and for a one-year period after his termination (other than
termination by him for good reason or by us without cause or following a change
of control), not to engage, directly or indirectly, as an owner, employee,
consultant or otherwise, in any business engaged in the exploration, drilling or
production of natural gas or oil within any five (5) mile radius from any
property that we then have an ownership, leasehold or participation
interest. Each officer is further prohibited during the above time
period from soliciting or inducing, directly or indirectly, any of our
then-current employees or customers, or any customers of ours during the one
year preceding the termination of his employment.
Restricted
Stock Agreements
Pursuant
to the restricted stock agreements, we agreed to grant upon the effectiveness of
the Charter Amendment restricted stock awards to each of Messrs. Munn, Chase and
Davis, as follows:
|
·
|
1,500,000
shares of our Common Stock to Mr. Munn, which vest equally as to one-third
of the shares over a two year period, commencing on the effective date of
the Charter Amendment in the State of Nevada and each of the first and
second year anniversary of the grant date;
|
|
·
|
1,125,000
shares of our Common Stock to Mr. Chase, which vest equally as to
one-third of the shares over a two year period, commencing on the
effective date of the Charter Amendment in the State of Nevada and each of
the first and second year anniversary of the grant date;
and
|
|
·
|
750,000
shares of our Common Stock to Mr. Davis, which vest equally as to
one-third of the shares over a two year period, commencing on the
effective date of the Charter Amendment in the State of Nevada and at each
of the first and second year anniversary of the grant
date.
|
The above
vesting schedule is subject to the officer being continuously employed by us at
the applicable vesting date.
As
provided in the restricted stock agreements, we have also agreed to pay Messrs.
Munn and Chase an additional gross-up amount equal to all federal, state or
local taxes imposed upon him by reason of the restricted stock
awards.
Each
officer has, with respect to all of the restricted shares (whether then vested
or not), all of the rights of a holder of our Common Stock, including the right
to vote such shares and to receive dividends as may be
declared. Notwithstanding the preceeding sentence, the restricted
stock shall not be transferable until and unless they have become vested in
accordance with the vesting schedule.
Option
Agreements
As part
of the employment agreement with Mr. Munn, on May 22, 2008, we granted stock
options, exercisable for up to 1,500,000 shares of our Common Stock, as
follows:
|
·
|
option
exercisable for up to 500,000 shares, at an exercise price of $0.52 per
share (the closing price of our Common Stock, as reported by the OTC
Bulletin Board on May 22, 2008), which option vests with respect to these
shares on the effective date of the Charter Amendment in the State of
Nevada;
|
|
·
|
option
exercisable for up to 500,000 shares, at an exercise price of $0.57 per
share, which option vests with respect to these shares on May 22, 2009;
and
|
|
·
|
option
exercisable for up to 500,000 shares, at an exercise price of $0.62 per
share, which option vests with respect to these shares on May 22,
2010.
|
As part
of the Employment Agreement with Mr. Chase, on May 22, 2008 we granted stock
options, exercisable for up to 1,125,000 shares of our Common Stock, as
follows:
|
·
|
option
to Mr. Chase for up to 375,000 shares, at an exercise price of $0.52 per
share (the closing price of our Common Stock, as reported by the OTC
Bulletin Board on May 22, 2008), which option vests with respect to these
shares upon the effective date of the Charter Amendment in the State of
Nevada;
|
|
·
|
option
to Mr. Chase for up to 375,000 shares, at an exercise price of $0.57 per
share, which option vests with respect to these shares on May 22, 2009;
and
|
|
·
|
option
to Mr. Chase for up to 375,000 shares, at an exercise price of $0.62 per
share, which option vests with respect to these shares on May 22,
2010.
|
As part
of the Employment Agreement with Mr. Davis, on October 1, 2008 we granted stock
options, exercisable for up to 1,000,000 shares of our common stock, as
follows:
|
·
|
option
to Mr. Davis for up to 333,334 shares, at an exercise price of $0.54 per
share (the closing price of our common stock, as reported by the OTC
Bulletin Board on October 1, 2008), which option vests with respect to
these shares upon the effective date of the Charter
Amendment;
|
|
·
|
option
to Mr. Davis for up to 333,333 shares, at an exercise price of $0.59 per
share, which option vests with respect to these shares on October 1, 2009;
and
|
|
·
|
option
to Mr. Davis for up to 333,333 shares, at an exercise price of $0.65 per
share, which option vests with respect to these shares on October 1,
2010.
|
Options
vesting on May 22 and October 1, 2009 and May 22 and October 1, 2010 are subject
to acceleration in the event we undergo a "change of control" while such
executive officer is still employed by us. All options expire on May
22, 2015 and October 1, 2015.
The
holders of the options shall have none of the rights and privileges of a
stockholder of the Company with respect to any of the underlying shares of
Common Stock, in whole or in part, prior to the exercise of the options with
respect to such underlying shares.
We
granted "piggy-back" registration rights to Messrs. Munn and Chase affording
each of them the opportunity to include for sale in any registration statement
under the Securities Act (other than in connection with a Form S-8 or any
successor form registering any employee benefit plan ) we propose to file with
respect to our securities any time during the next five (5) years, commencing
May 22, 2009.
2004
Non-Statutory Stock Option Plan
Pursuant
to the May 14, 2004 Board’s approval and subsequent stockholder approval, the
Company adopted our 2004 Non-Statutory Stock Option Plan (the "2004 Plan")
whereby we reserved for issuance up to 1,500,000 shares of our Common
Stock. On September 22, 2008, our Board terminated the 2004 Plan in
favor of the 2008 Plan. As of the date of this prospectus, no options
had been issued under the 2004 Plan.
2008
Stock Incentive Plan
On
September 19, 2008 our Board authorized the adoption of the ABC Funding, Inc.
2008 Stock Incentive Plan (the “2008 Plan”).
As of
February 12, 2009, no options have been issued under the 2008 Plan other than
options and restricted stock award issued to Mr. Davis, our Senior Vice
President of Operations, on October 1, 2008.
The
purpose of the Plan is to provide directors, officers and employees of, as well
as consultants, attorneys and advisors to, the Company and our subsidiaries,
with additional incentives by increasing their ownership interest in the
Company. Directors, officers and other employees of the Company are
eligible to participate in the Plan. In addition, individuals who
have agreed to become an employee of, director of or an attorney, consultant or
advisor to us and/or our subsidiaries are eligible for option grants,
conditional in each case on actual employment, directorship or attorney, advisor
and/or consultant status
The 2008
Plan is initially to be administered by our Board until such time as replaced by
a compensation committee to be appointed by our Board. Under the 2008
Plan, we may grant any one or a combination of incentive options, non-qualified
stock options, restricted stock, stock appreciation rights and phantom stock
awards, as well as purchased stock, bonus stock and other performance awards
(collectively, “Awards”). The Board or committee, as appropriate,
shall set the terms and conditions of the Awards. Except for
Incentive Options which may only be granted to our employees, Awards under the
2008 Plan may be granted to employees and non-employee directors (as such terms
are defined in the 2008 Plan). The aggregate number of shares of
common stock that may be issued or transferred to grantees under the 2008 Plan
shall not exceed 8,500,000 shares.
The
principal terms of the 2008 Plan are summarized below; however, it is not
intended to be a complete description thereof and such summary is qualified in
its entirety by the actual text of the 2008 Plan, a copy of which was previously
filed as Exhibit B to our Amendment No. 2 to our Information Statement on
Schedule 14C filed with the SEC on December 24, 2008.
Awards
under the 2008 Plan include:
|
·
|
options
qualifying as incentive stock options under the Internal Revenue Code of
1986, as amended (the “Code”) and nonqualified stock options, provided
that no option price shall be less than the fair market value of our
common stock on the date of grant or, in the case of an award of incentive
options to an employee possessing more than 10% of the total combined
voting power of the Company, not less than 110% of the fair market value
of the common stock on the date of
grant;
|
|
·
|
restricted
stock (within the meaning of Rule 144 of the Securities Act), typically
subject to a vesting schedule during which the grantee must remain in our
employ in order to retain the shares under
grant;
|
|
·
|
stock
appreciation rights (“SARs”), either singly or in combination with an
underlying stock option under the 2008 Plan, entitling the recipient to
receive, upon exercise, the excess of the fair market value per share on
the date of exercise over the grant price, subject to a specified cap
amount, and are designed to give the grantee the same economic value that
would have been derived from exercise of an
option;
|
|
·
|
phantom
stock awards granted to a recipient to receive cash or common stock equal
to the fair market value of a specified number of shares of common stock
at the end of a specified deferral
period;
|
|
·
|
bonus
stock in consideration of services performed or performance awards, under
which payment may be made in shares of our common stock, a combination of
shares and cash or cash if the performance of the Company meets certain
goals established during an award period;
and
|
|
·
|
shares
of common stock or performance based Awards on the terms and conditions we
determine in our discretion, as well as other rights not an Award
otherwise described in the 2008 Plan but is denominated or payable in,
valued in whole or in part by reference to, or otherwise based on or
related to, shares of common stock or cash as are deemed by the Board to
be consistent with the purposes of the 2008
Plan.
|
Our Board
may amend, suspend or terminate the 2008 Plan at any time, but such amendment,
suspension or termination shall not adversely affect any Award then outstanding
without the participant’s consent. Any amendment that would be a
“material amendment” of the 2008 Plan (as determined by the Committee, in their
sole discretion, subject to the rules and regulations of the OTC Bulletin Board,
if any, governing the use of such term in the context of an employee benefit
plan), as amended, shall be subject to stockholder
approval. Likewise, if the Exchange Act requires the Company to
obtain stockholder approval, then such approval will be sought.
Director
Compensation
Directors
of the Company are not compensated in cash for their services but are reimbursed
for out-of-pocket expenses incurred in furtherance of our
business. Directors are also eligible to Awards under our 2008 Plan
or otherwise, as offered by the Company from time to time.
FINANCIAL STATEMENTS
Set
forth below are: (i) consolidated financial statements of the Company
and financial state,emts of Voyager Gas Corporation, as our predecessor, for the
quarter ended September 30, 2008; (ii) consolidated financial statements of
the Company for the years ended June 30, 2008 and 2007; (iii)
financial statements of Voyager Gas Corporation, as our predecessor, for the
years ended December 31, 2007 and 2006 and for the six month stub period ended
June 30, 2008 and 2007; and (iv) our pro forma condensed consolidated financial
statements for the year ended June 30, 2008 and quarters ended September 30,
2008 and 2007, giving effect to the Voyager Acquisition on September 2, 2008,
(collectively, the “Financial Statements’).
Index
to Financial Statements
|
|
Page
|
|
(a)
Financial
Statements of ABC Funding, Inc.
|
|
|
Unaudited
Consolidated Balance Sheets at September 30, 2008, September 2, 2008
(predecessor) and
December
31, 2007 (predecessor)
|
F-2
|
|
Unaudited
Consolidated Statements of Operations for the Periods July 1 through
September
30, 2008 and September 2, 2008 (predecessor) and July 1, 2007 through
September 30, 2007 (predecessor)
|
F-3
|
|
Unaudited
Consolidated Statements of Cash Flows for the Periods July 1
through
September
30, 2008 and September 2, 2008 (predecessor) and July 1, 2007 through
September 30, 2007 (predecessor)
|
F-4
|
|
Notes
to Unaudited Consolidated Financial Statements
|
F-6
|
|
|
|
|
Report
of Independent Registered Public Accounting Firm
|
F-20
|
|
Consolidated
Balance Sheets at June 30, 2008 and 2007 (successor)
|
F-21
|
|
Consolidated
Statements of Operations for the Years Ended June 30, 2008 and 2007 and
the Period February 21, 2006 (Inception) through June 30, 2008
(successor)
|
F-22
|
|
Consolidated
Statement of Changes in Stockholders’ Deficit for the
Period
February 21, 2006 (Inception) through June 30, 2008
(successor)
|
F-23
|
|
Consolidated
Statements of Cash Flows for the Years Ended June 30, 2008 and 2007 and
the
Period
February 21, 2006 (Inception) through June 30, 2008
(successor)
|
F-24
|
|
Notes to Consolidated Financial Statements
|
F-26
|
|
|
|
|
(b)
Financial
Statements of Voyager Gas Corporation (Predecessor)
|
F-40
|
|
Report
of Independent Registered Public Accounting Firm
|
F-41
|
|
Balance
Sheets at December 31, 2007 and 2006
|
F-42
|
|
Statements
of Operations for the Years Ended December 31, 2007 and
2006
|
F-43
|
|
Statement
of Changes in Stockholders’ Equity for the Years Ended December 31,
2007
and
2006
|
F-44
|
|
Statements
of Cash Flows for the Years Ended December 31, 2007 and
2006
|
F-45
|
|
Notes
to Financial Statements
|
F-46
|
|
|
|
|
Balance
Sheets at June 30, 2008 and December 31, 2007 (unaudited)
|
F-59
|
|
Statements
of Operations for the Three and Six Month Periods Ended June 30,
2008
and
2007 (unaudited)
|
F-60
|
|
Statements
of Cash Flows for the Six Months Ended June 30, 2008 and 2007
(unaudited)
|
F-61
|
|
Notes to Unaudited Financial Statements
|
F-62
|
|
|
|
|
(c) Pro Forma Financial Information
of ABC Funding, Inc.
|
F-65
|
|
Unaudited
Pro Forma Condensed Consolidated Balance Sheet at September 30,
2008
|
F-66
|
|
Unaudited
Pro Forma Condensed Consolidated Statement of Operations for the Year
Ended
June
30, 2008
|
F-68
|
|
Unaudited
Pro Forma Condensed Consolidated Statement of Operations for the Three
Months
Ended
September 30, 2008
|
F-69
|
|
Unaudited Pro Forma Condensed Consolidated Statement of
Operations for the Three Months
Ended
September 30, 2007
|
F-70
|
|
Notes
to Unaudited Pro Forma Condensed Consolidated Financial
Statements
|
F-71
|
ABC
FUNDING, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
(Unaudited)
|
|
|
Successor
|
|
|
Predecessor
|
|
|
|
|
September
30,
2008
|
|
|
September
2,
2008
|
|
|
December
31,
2007
|
|
|
ASSETS
|
|
(Restated)
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
774,805
|
|
|
$
|
1,794,956
|
|
|
$
|
--
|
|
|
Restricted
cash
|
|
|
50,000
|
|
|
|
802,719
|
|
|
|
--
|
|
|
Accounts
receivable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
oil and gas production revenue, net of allowance of $0
|
|
|
1,059,541
|
|
|
|
1,365,827
|
|
|
|
1,791,519
|
|
|
Other
|
|
|
92,116
|
|
|
|
49,200
|
|
|
|
--
|
|
|
Option
contracts
|
|
|
--
|
|
|
|
--
|
|
|
|
205,639
|
|
|
Prepaid
expenses and other current assets
|
|
|
26,984
|
|
|
|
9,124
|
|
|
|
7,933
|
|
|
Total
current assets
|
|
|
2,003,446
|
|
|
|
4,021,826
|
|
|
|
2,005,091
|
|
|
Oil
and gas properties, using successful efforts method:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proved
properties
|
|
|
33,447,300
|
|
|
|
35,488,597
|
|
|
|
34,412,680
|
|
|
Unevaluated
properties
|
|
|
7,291,249
|
|
|
|
13,336,340
|
|
|
|
13,299,340
|
|
|
Less
accumulated depletion
|
|
|
(205,959
|
)
|
|
|
(11,388,581
|
)
|
|
|
(8,936,029
|
)
|
|
Net
oil and gas properties
|
|
|
40,532,590
|
|
|
|
37,436,356
|
|
|
|
38,775,991
|
|
|
Fixed
assets, net
|
|
|
9,461
|
|
|
|
18,198
|
|
|
|
22,456
|
|
|
Deferred
financing costs, net of accumulated amortization of
$45,485
|
|
|
1,864,865
|
|
|
|
--
|
|
|
|
|
|
|
Derivative
assets
|
|
|
634,528
|
|
|
|
--
|
|
|
|
|
|
|
Other
assets
|
|
|
--
|
|
|
|
--
|
|
|
|
16,728
|
|
|
|
|
|
2,508,854
|
|
|
|
18,198
|
|
|
|
39,184
|
|
|
Total
assets
|
|
$
|
45,044,890
|
|
|
$
|
41,476,380
|
|
|
$
|
40,820,266
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued liabilities
|
|
$
|
1,626,796
|
|
|
$
|
2,221,905
|
|
|
$
|
1,517,811
|
|
|
Accounts
payable – related parties
|
|
|
10,671
|
|
|
|
--
|
|
|
|
--
|
|
|
Bank
overdraft
|
|
|
--
|
|
|
|
--
|
|
|
|
316,239
|
|
|
Earnest
money deposit
|
|
|
--
|
|
|
|
802,719
|
|
|
|
--
|
|
|
Convertible
debt
|
|
|
25,000
|
|
|
|
--
|
|
|
|
--
|
|
|
Notes
payable, net
|
|
|
542,948
|
|
|
|
11,239,193
|
|
|
|
--
|
|
|
Current
income taxes payable
|
|
|
--
|
|
|
|
686,115
|
|
|
|
771,352
|
|
|
Derivative
liabilities
|
|
|
28,717,058
|
|
|
|
--
|
|
|
|
--
|
|
|
Total
current liabilities
|
|
|
30,922,473
|
|
|
|
14,649,932
|
|
|
|
2,605,402
|
|
|
Credit
facility – revolving loan
|
|
|
10,500,000
|
|
|
|
--
|
|
|
|
15,116,287
|
|
|
Credit
facility - term loan, net of unamortized discount
of $10,022,642
|
|
|
11,977,358
|
|
|
|
--
|
|
|
|
--
|
|
|
Deferred
income taxes
|
|
|
--
|
|
|
|
4,876,267
|
|
|
|
4,876,267
|
|
|
Asset
retirement obligations
|
|
|
765,658
|
|
|
|
765,658
|
|
|
|
--
|
|
|
Total liabilities
|
|
|
54,165,489
|
|
|
|
20,291,857
|
|
|
|
22,597,956
|
|
|
Commitments
and contingencies
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
Series
C Preferred stock , $0.001 par value, 1,000 shares authorized and
outstanding at
September
30, 2008, with mandatory redemption
|
|
|
100,000
|
|
|
|
--
|
|
|
|
--
|
|
|
Stockholders’ equity
(deficit):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock, $0.001 par value, 1,000,000 shares authorized, 842,505
undesignated
authorized
at September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series
A Preferred stock, $0.001 par value, 99,395 shares authorized and
outstanding at
September
30, 2008
|
|
|
99
|
|
|
|
--
|
|
|
|
--
|
|
|
Series
B Preferred stock, $0.001 par value, 37,100 shares authorized and
outstanding at
September
30, 2008
|
|
|
37
|
|
|
|
--
|
|
|
|
--
|
|
|
Series
D Preferred stock, $0.001 par value, 10,000 shares authorized and
outstanding at
September
30, 2008
|
|
|
10
|
|
|
|
--
|
|
|
|
--
|
|
|
Series
E Preferred stock, $0.001 par value, 10,000 shares authorized and
outstanding at
September
30, 2008
|
|
|
10
|
|
|
|
--
|
|
|
|
--
|
|
|
Common
stock, $0.001 par value, 24,000,000 shares authorized, 24,709,198
issued
and outstanding at September 30, 2008
|
|
|
24,709
|
|
|
|
--
|
|
|
|
--
|
|
|
Additional
paid-in capital
|
|
|
12,560,783
|
|
|
|
7,140,000
|
|
|
|
7,140,000
|
|
|
Retained
earnings (deficit)
|
|
|
(21,806,247
|
)
|
|
|
13,744,523
|
|
|
|
11,082,310
|
|
|
Total
stockholders’ equity (deficit)
|
|
|
(9,220,599
|
)
|
|
|
20,884,523
|
|
|
|
18,222,310
|
|
|
Total
liabilities and stockholders' equity (deficit)
|
|
$
|
45,044,890
|
|
|
$
|
41,476,380
|
|
|
$
|
40,820,266
|
|
The
accompanying notes are an integral part of these financial
statements.
ABC
FUNDING, INC.
AND
SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
(Unaudited)
|
|
|
Successor
|
|
|
Predecessor
|
|
|
|
|
Period
from July 1,
Through
|
|
|
Period
from July 1
Through
|
|
|
|
|
September
30,
2008
|
|
|
September
2,
2008
|
|
|
September
30,
2007
|
|
|
|
|
(Restated)
|
|
|
|
|
|
|
|
|
Oil
and gas revenue
|
|
$
|
794,184
|
|
|
$ 3,851,191`
|
|
|
$
|
2,556,516
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease
operating expenses
|
|
|
154,373
|
|
|
|
242,516
|
|
|
|
598,339
|
|
|
Production
taxes
|
|
|
55,361
|
|
|
|
290,295
|
|
|
|
156,970
|
|
|
General
and administrative expenses
|
|
|
707,345
|
|
|
|
158,306
|
|
|
|
192,669
|
|
|
Depreciation,
depletion and amortization
|
|
|
206,451
|
|
|
|
758,151
|
|
|
|
1,774,952
|
|
|
Total
operating costs and expenses
|
|
|
1,123,530
|
|
|
|
1,449,268
|
|
|
|
2,722,930
|
|
|
Income
(loss) from operations
|
|
|
(329,346
|
)
|
|
|
2,401,923
|
|
|
|
(166,414
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
1,397
|
|
|
|
--
|
|
|
|
--
|
|
|
Interest
expense
|
|
|
(1,297,426
|
)
|
|
|
(237,412
|
)
|
|
|
(194,782
|
)
|
|
Risk
management
|
|
|
683,391
|
|
|
|
--
|
|
|
|
--
|
|
|
Loss
on extinguishment of debt
|
|
|
(804,545
|
)
|
|
|
--
|
|
|
|
--
|
|
|
Change
in fair value of derivatives
|
|
|
(7,970,436
|
)
|
|
|
--
|
|
|
|
--
|
|
|
Total
other income (expense)
|
|
|
(9,387,619
|
)
|
|
|
(237,412
|
)
|
|
|
(194,782
|
)
|
|
Income
(loss) before taxes
|
|
|
(9,716,965
|
)
|
|
|
2,164,511
|
|
|
|
(361,196
|
)
|
|
Income
tax expense
|
|
|
--
|
|
|
|
(757,579
|
)
|
|
|
--
|
|
|
Net
income (loss)
|
|
$
|
(9,716,965
|
)
|
|
$
|
1,406,932
|
|
|
$
|
(361,196
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss per share:
basic
and diluted
|
|
$
|
(0.40
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding:
basic
and diluted
|
|
|
24,487,451
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these financial
statements.
ABC
FUNDING, INC.
AND
SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
|
Successor
|
|
|
Predecessor
|
|
|
|
|
Period
from July 1,
Through
|
|
|
Period
from July 1,
Through
|
|
|
|
|
September
30,
2008
|
|
|
September
2,
2008
|
|
|
September
30,
2007
|
|
|
Cash
flows from operating activities:
|
|
(Restated)
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(9,716,965
|
)
|
|
$
|
1,406,932
|
|
|
$
|
(361,196
|
)
|
|
Adjustments
to reconcile net income (loss) to cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation,
depletion and amortization
|
|
|
206,450
|
|
|
|
758,151
|
|
|
|
1,774,952
|
|
|
Share
based compensation
|
|
|
337,984
|
|
|
|
--
|
|
|
|
--
|
|
|
Amortization
of deferred financing costs
|
|
|
188,956
|
|
|
|
--
|
|
|
|
--
|
|
|
Amortization
of debt discounts
|
|
|
916,481
|
|
|
|
--
|
|
|
|
--
|
|
|
Change
in fair value of derivatives
|
|
|
7,970,436
|
|
|
|
--
|
|
|
|
--
|
|
|
Loss
on extinguishment of debt
|
|
|
804,545
|
|
|
|
--
|
|
|
|
--
|
|
|
(Gain)
loss on derivatives
|
|
|
(634,528
|
)
|
|
|
(1,850,081
|
)
|
|
|
122,045
|
|
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(1,191,068
|
)
|
|
|
(838,813
|
)
|
|
|
98,537
|
|
|
Prepaid
and other current assets
|
|
|
610
|
|
|
|
--
|
|
|
|
--
|
|
|
Accounts
payable, related parties and accrued liabilities
|
|
|
1,598,781
|
|
|
|
1,092,503
|
|
|
|
93,269
|
|
|
Bank
overdraft
|
|
|
--
|
|
|
|
--
|
|
|
|
(294,396
|
)
|
|
Income
taxes payable
|
|
|
--
|
|
|
|
(3,000
|
)
|
|
|
2,191
|
|
|
Other
assets
|
|
|
--
|
|
|
|
48,364
|
|
|
|
--
|
|
|
Net
cash provided by operating activities
|
|
|
481,682
|
|
|
|
2,184,421
|
|
|
|
1,435,402
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid for acquisition of oil and gas properties, net of acquisition
costs
|
|
|
(30,590,707
|
)
|
|
|
--
|
|
|
|
--
|
|
|
Oil
and gas properties capital investment
|
|
|
--
|
|
|
|
(99,357
|
)
|
|
|
(1,102,116
|
)
|
|
Purchase
of fixed assets
|
|
|
(2,071
|
)
|
|
|
--
|
|
|
|
--
|
|
|
Restricted
cash
|
|
|
(50,000
|
)
|
|
|
1,525
|
|
|
|
--
|
|
|
Net
cash used in investing activities
|
|
|
(30,642,778
|
)
|
|
|
(97,832
|
)
|
|
|
(1,102,116
|
)
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from issuance of mandatorily redeemable preferred
stock
|
|
|
100,000
|
|
|
|
--
|
|
|
|
--
|
|
|
Repayment
of convertible debenture
|
|
|
(450,000
|
)
|
|
|
--
|
|
|
|
--
|
|
|
Proceeds
from credit facility
|
|
|
33,500,000
|
|
|
|
--
|
|
|
|
--
|
|
|
Repayment of credit facility
|
|
|
(1,000,000
|
)
|
|
|
(1,000,000
|
)
|
|
|
(333,286
|
)
|
|
Debt
issuance costs
|
|
|
(1,226,257
|
)
|
|
|
--
|
|
|
|
--
|
|
|
Net
cash provided by (used in) financing activities
|
|
|
30,923,743
|
|
|
|
(1,000,000
|
)
|
|
|
(333,286
|
)
|
|
Net
increase in cash
|
|
|
762,647
|
|
|
|
1,086,589
|
|
|
|
--
|
|
|
Cash
at beginning of period
|
|
|
12,158
|
|
|
|
708,367
|
|
|
|
--
|
|
|
Cash
at end of period
|
|
$
|
774,805
|
|
|
$
|
1,794,956
|
|
|
$
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
15,768
|
|
|
176,894
|
|
|
819,454
|
|
|
Cash
paid for income taxes
|
|
|
--
|
|
|
|
3,000
|
|
|
|
--
|
|
The
accompanying notes are an integral part of these financial
statements.
ABC
FUNDING, INC.
AND
SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Unaudited)
(Continued)
|
|
|
Successor
|
|
|
Predecessor
|
|
|
|
|
Period
from July 1,
Through
|
|
|
Period
from July 1,
Through
|
|
|
|
|
September
30,
2008
|
|
|
September
2,
2008
|
|
|
September
30,
2007
|
|
|
|
|
(Restated)
|
|
|
|
|
|
|
|
|
Non-cash
investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
Preferred
shares issued for acquisition of oil and gas
properties
|
|
$
|
9,100,000
|
|
|
$
|
--
|
|
|
$
|
--
|
|
|
Current
assets acquired with acquisition
|
|
|
43,032
|
|
|
|
--
|
|
|
|
--
|
|
|
Current
liabilities assumed with acquisition
|
|
|
531,132
|
|
|
|
--
|
|
|
|
--
|
|
|
Preferred
shares issued in payment of convertible debenture
|
|
|
450,000
|
|
|
|
--
|
|
|
|
--
|
|
|
Note
issued for debt issuance costs
|
|
|
557,500
|
|
|
|
--
|
|
|
|
--
|
|
|
Removal
of derivative liability due to repayment of debt
|
|
|
1,099,287
|
|
|
|
--
|
|
|
|
--
|
|
|
Debt
discount due to imputed interest
|
|
|
16,977
|
|
|
|
--
|
|
|
|
--
|
|
|
Debt
discount due to overriding revenue royalty interest
|
|
|
206,000
|
|
|
|
--
|
|
|
|
--
|
|
|
Asset
retirement obligation assumed
|
|
|
765,658
|
|
|
|
--
|
|
|
|
--
|
|
|
Debt
issuance costs accrued
|
|
|
143,569
|
|
|
|
--
|
|
|
|
--
|
|
|
Debt discount due to warrant issued with debt
|
|
|
9,952,336
|
|
|
|
--
|
|
|
|
--
|
|
The
accompanying notes are an integral part of these financial
statements.
ABC
FUNDING, INC.
AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2008
NOTE
1.
ORGANIZATION AND BASIS OF PREPARATION
Headquartered
in Houston, Texas, ABC Funding, Inc. (the “Company” or “ABC”), is incorporated
under the laws of the State of Nevada, with its primary business focus to engage
in the acquisition, exploitation and development of properties for the
production of crude oil and natural gas. The Company intends to
explore for oil and gas reserves through the drill bit and acquire established
oil and gas properties. ABC intends then to exploit such properties
through the application of conventional and specialized technology to increase
production, ultimate recoveries, or both, and participate in joint venture
drilling programs with repeatable low risk results.
The
Company’s stock is traded on the OTC Bulletin Board (“OTCBB”) under the ticker
symbol AFDG. Upon the effectiveness of an amendment to its Articles
of Incorporation increasing the number of authorized shares of common stock that
it may issue and changing its name (the “Charter Amendment”), the Company will
change its name to Cross Canyon Energy Corp. and obtain a new ticker symbol for
trading of its stock on the OTCBB. The name change will better
reflect its business model.
On
September 2, 2008, the Company consummated the acquisition of Voyager Gas
Corporation, a Delaware corporation, (the “Voyager Acquisition”), whereby it
purchased all of the outstanding capital stock of Voyager Gas Corporation and
succeeded to substantially all of the business operations and properties of
Voyager Gas Corproation, including working and other interests in oil and gas
lease blocks located in Duval County, Texas, producing wells, and properties,
together with rights under related operating, marketing, and service contracts
and agreements, seismic exploration licenses and rights, and personal property,
equipment and facilities. Upon the completion of the Voyager
Acquisition, Voyager Gas Corporation became a wholly-owned subsidiary of
ABC (See Note. 3) and the Company no longer qualified as a
development stage enterprise as defined under SFAS No. 7 “Accounting and
Reporting by Development State Enterprises”.
The acquisition of Voyager Gas
Corporation described in Note 3 is referred to as the Voyager
Acquisition. The term “Successor” refers to ABC funding, Inc.
following the Voyager Acquisition and the term “Predecessor” refers to Voyager
Gas Corporation prior to the acquisition date on September 2,
2008.
As of
September 30, 2008, the Company has two subsidiaries, Energy Venture, Inc., and
Voyager Gas Corporation. Energy Venture, Inc. currently has no
operations, assets or liabilities. However, the Company has begun
using this subsidiary as an operating company to perform the operations of its
oil and gas business.
The
consolidated financial statements herein have been prepared in accordance with
generally accepted accounting principles (“GAAP”) and include the accounts of
ABC Funding, Inc. and its subsidiaries, which are wholly owned. All
inter-company transactions are eliminated upon consolidation.
NOTE
2. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Interim Financial
Statements.
The accompanying unaudited interim financial
statements of the Company have been prepared in accordance with accounting
principles generally accepted in the Unites States of America for interim
financial information and with the instructions to Form 10-Q as prescribed by
the SEC for smaller reporting companies and do not include all of the financial
information and disclosures required by GAAP. The financial
information as of September 2 and 30, 2008, and for the periods from July 1
through September 2 and 30, 2008 and the three months ended September 30, 2007,
is unaudited. In the opinion of management, such information contains
all adjustments, consisting only of normal recurring accruals, considered
necessary for a fair presentation of the results of the interim
periods. The results of operations for the periods presented are not
necessarily indicative of the results of operations that will be realized for
the fiscal year ended June 30, 2009. The interim financial statements
should be read in conjunction with the financial statements as of June 30, 2008,
and notes thereto, included in the Company’s Amendment No. 1 to Form 10-KSB/A
filed with the SEC on November 28, 2008 and Voyager’s audited financial
statements for the years ended December 31, 2007 and 2006, included elsewhere in
this filing..
Use of
Estimates.
The preparation of financial statements in
conformity with GAAP 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 reporting
period. Actual results could differ from these
estimates. Significant estimates affecting these financial statements
include estimates for quantities of proved oil and gas reserves, period end oil
and gas sales and expenses and asset retirement obligations, and are subject to
change.
Cash and Cash
Equivalents.
For purposes of the statement of cash flows, the
Company considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents.
Revenue and Cost
Recognition.
The Company uses the sales method of accounting
for oil and natural gas revenues. Under this method, revenues are
recognized based on the actual volumes of natural gas and oil sold to
purchasers. The volume sold may differ from the volumes to which the
Company is entitled based on its interest in the properties. Costs
associated with production are expensed in the period incurred.
Income
Taxes
. Pursuant to Statement of Financial Accounting Standards
(“SFAS”) No. 109, “Accounting for Income Taxes,” (“SFAS No. 109”), the Company
follows the asset and liability method of accounting for income taxes, under
which the Company recognizes deferred tax assets and liabilities for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using the
enacted tax rates expected to apply to taxable income in the years in which the
Company expects to recover or settle those temporary differences.
As
changes in tax laws or rates are enacted, deferred income tax assets and
liabilities are adjusted through the provision for income
taxes. Deferred tax assets are reduced by a valuation allowance if,
based on available evidence, it is more likely than not that some portion or all
of the deferred tax assets will not be realized. The classification
of current and noncurrent deferred tax assets and liabilities is based primarily
on the classification of the assets and liabilities generating the
difference.
Basic and Diluted Net Loss per
Share.
The Company computes net income (loss) per share
pursuant to SFAS No. 128 “Earnings per Share”. Basic net income
(loss) per share is computed by dividing income or loss applicable to common
shareholders by the weighted average number of shares of the Company’s common
stock outstanding during the period. Diluted net income (loss) per
share is determined in the same manner as basic net income (loss) per share
except that the number of shares is increased assuming exercise of dilutive
stock options, warrants and convertible debt using the treasury stock method and
dilutive conversion of the Company’s convertible preferred stock.
Stock Based
Compensation
. In December 2004, the Financial Accounting
Standards Board (“FASB”) issued SFAS No. 123R, "Share-Based
Payments". The Company adopted the disclosure requirements of SFAS
123R as of July 1, 2006, using the modified prospective transition method
approach as allowed under SFAS 123R. SFAS 123R establishes standards
for the accounting for transactions in which an entity exchanges its equity
instruments for goods or services. SFAS 123R focuses primarily on
accounting for transactions in which an entity obtains employee services in
share-based payment transactions. SFAS 123R requires that the fair
value of such equity instruments be recognized as expense in the historical
financial statements as services are performed. The Company did not
issue any stock options or restricted stock awards during the quarterly period
ended September 30, 2008.
Oil and Natural Gas
Properties.
The Company follows the successful efforts method
for accounting for its oil and gas properties. Oil and gas
exploration and production companies choose one of two acceptable accounting
methods, successful efforts or full cost. The most significant
difference between the two methods relates to the accounting treatment of
drilling costs for unsuccessful exploration wells and exploration
costs. Under the successful efforts method, exploration costs and dry
hole costs (the primary uncertainty affecting this method) are recognized as
expenses when incurred and the costs of successful exploration wells are
capitalized as oil and gas properties. Entities that follow the full
cost method capitalize all drilling and exploration costs including dry hole
costs into one pool of total oil and gas property costs.
The
calculation of depreciation, depletion and amortization of capitalized costs
under the successful efforts method of accounting differs from the full cost
method in that the successful efforts method requires the Company to calculate
depreciation, depletion and amortization expense on individual properties rather
than one pool of costs. In addition, under the successful efforts method
the Company assesses its properties individually for impairment compared to one
pool of costs under the full cost method.
Depreciation, Depletion and
Amortization of Oil and Gas Properties.
The unit-of-production
method of depreciation, depletion and amortization of oil and gas properties
under the successful efforts method of accounting is applied pursuant to the
simple multiplication of units produced by the costs per unit on a field by
field basis. Leasehold cost per unit is calculated by dividing the
total cost by the estimated total proved oil and gas reserves associated with
that field. Well cost per unit is calculated by dividing the total
cost by the estimated total proved producing oil and gas reserves associated
with that field. The volumes or units produced and asset costs are
known and while the proved reserves have a high probability of recoverability,
they are based on estimates that are subject to some
variability.
Impairment of Oil and Gas
Properties
.
The Company tests for
impairment of its properties based on estimates of proved reserves. Proved
oil and gas properties are reviewed for impairment whenever events or
circumstances indicate that the carrying amount may not be
recoverable. The Company estimates the future undiscounted cash flows
of the affected properties to judge the recoverability of the carrying amounts.
Initially this analysis is based on proved reserves. However, when
the Company believes that a property contains oil and gas reserves that do not
meet the defined parameters of proved reserves, an appropriately risk adjusted
amount of these reserves may be included in the impairment evaluation.
These reserves are subject to much greater risk of ultimate
recovery. An asset would be impaired if the undiscounted cash flows were
less than its carrying value. Impairments are measured by the amount by
which the carrying value exceeds its fair value.
Impairment
analysis is performed on an ongoing basis. In addition to using estimates
of oil and gas reserve volumes in conducting impairment analysis, it is also
necessary to estimate future oil and gas prices. The impairment evaluation
triggers include a significant long-term decrease in current and projected
prices, or reserve volumes, an accumulation of project costs significantly in
excess of the amount originally expected, and historical and current negative
operating losses. Although the Company evaluates future oil and gas prices
as part of the impairment analysis, it does not view short-term decreases in
prices, even if significant, as impairment triggering events.
Asset Retirement
Obligations.
The Company records a liability for legal
obligations associated with the retirement of tangible long-lived assets in the
period in which they are incurred in accordance with SFAS No. 143 “Accounting
for Asset Retirement Obligations.” Under this method, when
liabilities for dismantlement and abandonment costs (“ARO”) are initially
recorded, the carrying amount of the related oil and natural gas properties are
increased. Accretion of the liability is recognized each period using
the interest method of allocation, and the capitalized cost is depleted over the
useful life of the related asset. Revisions to such estimates are
recorded as adjustments to the ARO, capitalized asset retirement costs and
charges to operations during the periods in which they become
known. At the time the abandonment cost is incurred, the Company will
be required to recognize a gain or loss if the actual costs do not equal the
estimated costs included in ARO.
Valuation of the Embedded and
Warrant Derivatives.
The valuation of the Company’s embedded
derivatives and warrant derivatives is determined primarily by a lattice model
using probability weighted discounted cash flow based upon future projections
over a range of potential outcomes and the Black-Scholes option pricing
model. An embedded debenture derivative is a derivative instrument
that is embedded within a contract, which under the convertible debenture (the
host contract) includes the right to convert the debenture by the holder, reset
provisions with respect to the conversion provisions, call/redemption options
and liquidated damages. In accordance with SFAS No. 133, as amended,
“Accounting for Derivative Instruments and Hedging Activities”, these embedded
derivatives are marked-to-market each reporting period, with a corresponding
non-cash gain or loss charged to the current period. A warrant
derivative liability is determined in accordance with Emerging Issues Task Force
Issue No. 00-19, “Accounting for Derivative Financial Instruments Indexed to,
and Potentially Settled in, a Company’s Own Stock” (“EITF
00-19”). Based on EITF 00-19, warrants which are determined to be
classified as derivative liabilities are marked-to-market each reporting period,
with a corresponding non-cash gain or loss charged to the current
period. The practical effect of this has been that when the Company’s
stock price increases so does its derivative liability, resulting in a non-cash
loss charge that reduces earnings and earnings per shares. When the
Company’s stock price declines, it records a non-cash gain, increasing its
earnings and earnings per share.
To determine the fair
value of its embedded derivatives, management evaluates assumptions regarding
the probability of certain events. Other factors used to determine
fair value include the Company’s period end stock price, historical stock
volatility, risk free interest rate and derivative term. The fair
value recorded for the derivative liability varies from period to
period. This variability may result in the actual derivative
liability for a period either above or below the estimates recorded on the
Company’s consolidated financial statements, resulting in significant
fluctuations in other income or expense because of the corresponding non-cash
gain or loss recorded.
Fair Value of Financial
Instruments
. The Company’s financial instruments consist of
cash and cash equivalents, accounts receivable, accounts payable, notes payable
and derivative liabilities/assets associated with the Company’s oil and gas
hedging activities and certain instruments issued by the Company that are
convertible into common stock (see Note 5). The carrying amounts of
cash and cash equivalents, accounts receivable, accounts payable and notes
payable approximate fair value due to the highly liquid nature of these
short-term instruments. The derivative liabilities/assets have been
marked-to-market as of September 30, 2008.
New Accounting
Pronouncements
. In March 2008, the FASB issued SFAS No. 161,
“Disclosures about Derivative Instruments and Hedging Activities – an amendment
of SFAS No. 133” (“SFAS No. 161”). SFAS No. 161 requires additional
disclosures about derivative and hedging activities and is effective for fiscal
years and interim periods beginning after November 15, 2008. The
Company is evaluating the impact the adoption of SFAS No. 161 will have on its
financial statement disclosures. The Company’s adoption of SFAS No.
161 will not affect its current accounting for derivative and hedging
activities.
In
December 2007, the FASB issued SFAS No. 141(R), “Business
Combinations”. This statement requires assets acquired and
liabilities assumed to be measured at fair value as of the acquisition date,
acquisition-related costs incurred prior to the acquisition to be expensed and
contractual contingencies to be recognized at fair value as of the acquisition
date. This statement is effective for financial statements issued for
fiscal years beginning after December 15, 2008. The Company is
currently assessing the impact, if any, the adoption of this statement will have
on its financial position, results of operations or cash flows.
NOTE
3.
RESTATEMENT
In connection with
our review of the financing transaction with CIT on September 2, 2008, we
identified an error in the accounting for stock warrants issued in connection
with our term loan credit facility. The fair value of these warrants was
initially recorded as an expense under “Change in fair value of derivatives.” We
determined that the fair value of these warrants should have been recorded as a
discount to the related term loan and amortized over the life of the loan using
the effective interest rate method.
The
effects of the restatement on reported amounts for the three months ended
September 30, 2008 are presented below in the following tables:
|
|
|
Three
months ended September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As Reported
|
|
|
|
Adjustments
|
|
|
|
As Restated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
$
|
(1,167,454)
|
|
|
$
|
(129,972)
|
|
|
$
|
(1,297,426)
|
|
|
Change
in fair value of derivatives
|
|
|
(17,922,772)
|
|
|
|
9,952,336
|
|
|
|
(7,970,436)
|
|
|
Total
other expense
|
|
|
(19,209,983)
|
|
|
|
9,822,364
|
|
|
|
(9,387,619)
|
|
|
Net
loss
|
|
$
|
(19,539,329)
|
|
|
$
|
9,822,364
|
|
|
$
|
(9,716,965)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
$
|
(0.80)
|
|
|
$
|
0.40
|
|
|
$
|
(0.40)
|
|
|
Weighted
average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
|
24,487,451
|
|
|
|
24,487,451
|
|
|
|
24,487,451
|
|
|
|
|
September
30, 2008
|
|
|
|
As Reported
|
|
|
Current Year
Adjustments
|
|
As Restated
|
|
LIABILITIES
AND STOCKHOLDERS’ DEFICIT
|
|
|
|
|
|
|
|
|
|
|
|
Credit
facility – term loan, net of unamortized discount of
$10,022,642
|
|
$
|
21,799,722
|
|
|
$
|
(9,822,364)
|
|
$
|
11,977,358
|
|
Total
liabilities
|
|
|
63,987,853
|
|
|
|
(9,822,364)
|
|
|
54,165,489
|
|
Stockholders’
deficit
|
|
|
|
|
|
|
|
|
|
|
|
Retained
earnings (deficit)
|
|
|
(31,628,611)
|
|
|
|
9,822,364
|
|
|
(21,806,247
|
|
Total
stockholders’ deficit
|
|
|
(19,042,963)
|
|
|
|
9,822,364
|
|
|
(9,220,599)
|
|
Total
liabilities and stockholders’ deficit
|
|
$
|
45,044,890
|
|
|
$
|
-
|
|
$
|
45,044,890
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE
4. ACQUISITION
OF BUSINESS
On
September 2, 2008, the Company consummated the acquisition of Voyager Gas
Corporation, a Delaware corporation, (the “Voyager Acquisition”), whereby it
purchased all of the outstanding capital stock of Voyager Gas Corporation, the
owner of interests in oil and gas lease blocks located in Duval County, Texas,
including working and other interests in oil and gas leases, producing wells,
and properties, together with rights under related operating, marketing, and
service contracts and agreements, seismic exploration licenses and rights, and
personal property, equipment and facilities.
Upon the
completion of the Voyager Acquisition, Voyager Gas Corporation became a
wholly-owned subsidiary of ABC. The newly acquired subsidiary’s
properties consist of approximately 14,300 net acres located in Duval County,
Texas. The purchase price also included a proprietary 3-D seismic
data base covering a majority of the acquired properties.
The
purchase price paid in the Voyager Acquisition consisted of cash consideration
of $35.0 million and 10,000 newly issued shares of the Company’s preferred stock
designated as Series D preferred stock having an agreed upon value of $7.0
million. The Company performed a fair value valuation of the
preferred on the date of the acquisition and recorded the fair value of the
preferred stock at $9.1 million. Upon the effectiveness of an
amendment to the Company’s Articles of Incorporation increasing the number of
shares of common stock that it may issue (the “Charter Amendment”), the Series D
Preferred will automatically convert into 17.5 million shares of ABC’s common
stock.
The
acquired properties have established production over a substantial acreage
position with proved reserves from over ten different horizons located at depths
ranging from 4,000 to 7,500 feet. As of April 1, 2008, the Duval
County Properties had independently engineered proved reserves of 16.2
Bcfe. By category, this includes 5.2 Bcfe of proved developed
producing, 5.6 Bcfe of proved developed non-producing, and 5.4 Bcfe of proved
undeveloped reserves. Approximately 69% of total proved reserves is
natural gas. In addition to proved reserves, the Company’s management
has identified additional exploration opportunities on the acquired acreage
utilizing its acquired 3-D seismic data base.
Depletion expense per equivalent Mcf for the periods presented
was $2.35 for the three months ended September 30, 2008, $4.01 for the period
July 1 through September 2, 2008, and $5.88 for the period July 1 through
September 30, 2007.
The
preliminary allocation of the purchase price and the estimated fair market
values of the assets acquired and liabilities assumed are subject to
modification and are shown below.
|
Cash
|
|
$
|
1,864,446
|
|
|
Accounts
receivables
|
|
|
39,410
|
|
|
Security
deposit
|
|
|
3,622
|
|
|
Oil
and gas property
|
|
|
40,738,549
|
|
|
Total assets acquired
|
|
|
42,646,027
|
|
|
Severance
tax payable
|
|
|
65,418
|
|
|
Royalties
payable
|
|
|
405,714
|
|
|
Ad
valorem taxes payable
|
|
|
60,000
|
|
|
Asset
retirement obligations
|
|
|
765,658
|
|
|
Total liabilities assumed
|
|
|
1,296,790
|
|
|
Net assets acquired
|
|
$
|
41,349,237
|
|
The
following summary presents unaudited pro forma consolidated results for the
three months ended September 30, 2008 and 2007, respectively, as if the Voyager
Acquisition had occurred as of July 1, 2007. The pro forma results
are for illustrative purposes only and include adjustments in addition to the
pre-acquisition historical results, such as increased depreciation, depletion
and amortization expense resulting from the allocation of fair value to oil and
gas properties acquired. The unaudited pro forma information is not
necessarily indicative of the operating results that would have occurred if the
acquisition had been consummated at that date, nor is it necessarily indicative
of future operating results.
|
|
|
Pro
Forma
|
|
|
|
|
Three
Months Ended September 30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
(Restated)
|
|
|
|
|
|
Revenues
|
|
$
|
4,645,375
|
|
|
$
|
2,556,515
|
|
|
Operating
costs and expenses
|
|
|
2,189,797
|
|
|
|
1,866,534
|
|
|
Income
from operations
|
|
|
2,455,578
|
|
|
|
689,981
|
|
|
Other
income (expense)
|
|
|
(10,177,606
|
)
|
|
|
(1,343,270
|
)
|
|
Net loss
|
|
$
|
(7,722,028
|
)
|
|
$
|
(653,289
|
)
|
|
Loss
per share – basic and diluted
|
|
$
|
(0.32
|
)
|
|
$
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Production
volumes:
|
|
|
|
|
|
|
|
|
|
Natural
gas (Mcf)
|
|
|
166,041
|
|
|
|
259,291
|
|
|
Oil
(Bbls)
|
|
|
11,868
|
|
|
|
7,129
|
|
|
Mcfe
|
|
|
237,249
|
|
|
|
302,065
|
|
|
Mcfe/day
|
|
|
2,579
|
|
|
|
3,283
|
|
NOTE
5. ACCRUED
LIABILITIES
Accrued
liabilities consisted of the following at September 30 and June 30,
2008:
|
|
|
September
30,
2008
|
|
|
Royalties
payable
|
|
$
|
610,392
|
|
|
Severance
taxes payable
|
|
|
108,815
|
|
|
Accrued
interest payable
|
|
|
176,492
|
|
|
Accrued
ad valorem taxes payable
|
|
|
166,178
|
|
|
Other
|
|
|
389
|
|
|
|
|
$
|
1,062,266
|
|
NOTE
6. NOTES
PAYABLE
Notes
payable consisted of the following at September 30:
|
|
|
September
30,
2008
|
|
|
2006
convertible notes, convertible at $0.25 into 50,000 shares of common
stock due February 28, 2008
|
|
$
|
25,000
|
|
|
Senior
secured convertible debentures due September 29, 2008
|
|
|
--
|
|
|
Short-term,
interest free note payable due March 15, 2009
|
|
|
557,500
|
|
|
First
lien revolving credit facility with CIT Capital USA Inc., as
administrative agent, bearing interest at an adjusted rate as defined
in the agreement (5.31313% at September 30, 2008) payable quarterly,
principal and unpaid interest due on August 31, 2011, collateralized
by a first mortgage on the Company’s oil and gas
properties.
|
|
|
10,500,000
|
|
|
Second
lien term credit facility with CIT Capital USA Inc., as administrative
agent, bearing interest at an adjusted rate as defined in the
agreement (7.81313% at September 30, 2008) payable quarterly,
principal and unpaid interest due on March 31, 2012, collateralized
by a second mortgage on the Company’s oil and gas
properties.
|
|
|
22,000,000
|
|
|
Unamortized
discount on senior secured convertible debentures
|
|
|
--
|
|
|
Unamortized
discount on second lien term credit facility
|
|
|
(10,022,642
|
)
|
|
Unamortized
discount on short-term note payable due March 15, 2009
|
|
|
(14,552
|
)
|
|
|
|
$
|
23,045,306
|
|
CIT
Credit Facility
On
September 2, 2008, the Company entered into (i) a credit agreement (the
“Revolving Loan”) among the Company, CIT Capital USA Inc. (“CIT Capital”), as
Administrative Agent and the lender named therein and (ii) a second lien term
loan agreement (the “Term Loan”) among the Company, CIT Capital and the
lender. The Revolving Loan and Term Loan are collectively referred to
herein as the “CIT Credit Facility.”
The
Revolving Loan provides for a $50.0 million senior secured revolving credit
facility which is subject to an initial borrowing base of $14.0 million, or an
amount determined based on semi-annual review of the Company’s proved oil and
gas reserves. As of September 30, 2008, the Company had $10.5 million
borrowed to finance the Voyager Acquisition, to repay the related bridge loan
and transaction expenses, and to fund capital expenditures
generally. Monies advanced under the Revolving Loan mature on September 1,
2011, and bear interest at a rate equal to LIBOR plus 1.75% to 2.50%, as the
case may be.
The Term
Loan provides for a one-time advance to the Company of $22.0 million. The
Company drew down the full amount on September 2, 2008 to finance the Voyager
Acquisition and to repay the related bridge loan and transaction
expenses. Monies borrowed under the Term Loan mature on March 1, 2012, and
bear interest at a rate equal to LIBOR plus 5% during the first twelve months
after closing and LIBOR plus 7.50%, thereafter. In connection with the
Term Loan the Company issued CIT Capital 24,199,996 warrants to purchase the
Company's common stock at an exercise price of $0.35 per share. The
Company recorded a discount to the Term Loan of 9,952,336 and is amortizing the
debt discount over the life of the loan using the effective interest rate
method.
The loan
instruments evidencing the Revolving Loan contain various restrictive covenants,
including financial covenants requiring that the Company will not: (i) as of the
last day of any fiscal quarter, permit its ratio of EBITDAX for the period of
four fiscal quarters then ending to interest expense for such period to be less
than 2.0 to 1.0; (ii) at any time permit its ratio of total debt as of such time
to EBITDAX for the four fiscal quarters ending on the last day of the fiscal
quarter immediately preceding the date of determination for which financial
statements are available to be greater than 4.0 to 1.0; and (iii) permit, as of
the last day of any fiscal quarter, its ratio of (a) consolidated current assets
(including the unused amount of the total commitments, but excluding non-cash
assets under FASB Statement No. 133) to (b) consolidated current liabilities
(excluding non-cash obligations under FAS 133 and current maturities under the
CIT Credit Facility) to be less than 1.0 to 1.0.
The loan
instruments evidencing the Term Loan contain various restrictive covenants,
including financial covenants requiring that the Company will not: (i) permit,
as of the last day of any fiscal quarter, its ratio of (a) consolidated current
assets (including the unused amount of the total commitments, but excluding
non-cash assets under FASB Statement No. 133) to (b) consolidated current
liabilities (excluding non-cash obligations under FAS 133 and current maturities
under the CIT Credit Facility) to be less than 1.0 to 1.0; and (ii) as of the
date of any determination permit its ratio of total reserve value as in effect
on such date of determination to total debt as of such date of determination to
be less than 2.0 to 1.0
Upon the
Company’s failure to comply with covenants, the lender has the right to refuse
to advance additional funds under the revolver and/or declare any outstanding
principal and interest immediately due and payable. As of September 30,
2008, the Company is in compliance with all of the restrictive covenants of the
CIT Credit Facility.
All
borrowings under the Revolving Loan are secured by a first lien on all of the
Company’s assets and those of its subsidiaries. All borrowings under the
Term Loan are secured by a second lien on all of the Company’s assets and those
of its subsidiaries.
Under the
CIT Credit Facility, the Company was required to enter into hedging arrangements
mutually agreeable between the Company and CIT Capital. On September
2, 2008, the Company entered into hedging arrangements with a bank whereby
effective October 1, 2008, the Company hedged 65% of its proved developed
producing natural gas production and 25% of its proved developed producing oil
production through December 2011 at $7.82 per Mmbtu and $110.35 per barrel,
respectively. (See Note 6).
CIT
Capital is entitled to one percent (1%) overriding royalty interest of the
Company’s net revenue interest in the oil and gas properties acquired in the
Voyager Acquisition. The overriding royalty interest is applicable to any
renewal, extension or new lease taken by the Company within one year after the
date of termination of the ORRI Properties, as defined in the overriding
royalty agreement covering the same property, horizons and minerals. The
Company recorded a discount of $206,000 based upon the estimated fair value of
the overriding royalty interest that was conveyed to the lender upon
closing. The Company is amortizing this discount to interest expense over
the term of the Term Loan. As of September 30, 2008, $5,722 of this
discount had been amortized as a component of interest expense.
CIT
Capital also received, and is entitled to receive in its capacity as
administrative agent, various fees from the Company while monies advanced or
loaned remain outstanding, including an annual administrative agent fee of
$20,000 for each of the Revolving Loan and Term Loan and a commitment fee
ranging from 0.375% to 0.5% of any unused portion of the borrowing base
available under the Revolving Loan.
In
connection with the Company’s entering into the CIT Credit Facility, upon
closing the Voyager Acquisition, the Company paid its investment banker, Global
Hunter Securities, LLC (“GHS”), the sum of $557,500 and delivered to GHS a
non-interest bearing promissory note, payable on or before March 15, 2009, in
the principal amount of $557,500.
The
Company incurred debt issuance costs of $1,910,350 associated with the CIT
Credit Facility. These costs were capitalized as deferred financing costs
and are being amortized over the life of the CIT Credit Facility using the
effective interest method. Amortization expense related to the CIT Credit
Facility was $45,485 for the period September 2, 2008 (inception) through
September 30, 2008.
Convertible
Debentures
On May
21, 2008, the Company entered into a Securities Purchase Agreement with those
purchasers identified therein (the “Bridge Financing”), whereby the Company
received proceeds of $800,000 evidenced by senior secured convertible debentures
(the “Debentures”). The proceeds from the Debentures were used to fund the
Company’s payment of the deposit for the Voyager Acquisition.
The
Debentures were to mature the earlier of September 29, 2008, or the closing date
under the Voyager Agreement, and were to be satisfied in full by the Company’s
payment of the aggregate redemption price of $900,000 or, at the election of the
purchasers, by the conversion of the Debentures into shares of the Company’s
common stock (the “Conversion Shares”), at an initial conversion price of $0.33,
subject to adjustments and full-ratchet protection under certain
circumstances.
As
additional consideration for the bridge loan evidenced by the Debentures, the
Company issued common stock purchase warrants to the purchasers and their
affiliates, exercisable to purchase up to 3,000,000 shares of the Company’s
common stock (the “Warrant Shares”), based upon an initial exercise price of
$0.33 subject to adjustments and full-ratchet protection under certain
circumstances. These warrants remain outstanding as of September 30,
2008.
The
Company incurred debt issuance costs of $199,343 associated with the issuance of
the Debentures. These costs were capitalized as deferred financing costs
and were being amortized over the life of the Debentures using the effective
interest method. Amortization expense related to the deferred financing
costs was $55,871 for the period May 21, 2008 (inception) through June 30, 2008
and the remaining balance of $143,472 was charged to expense during the three
months ended September 30, 2008.
The
Debentures and the other outstanding convertible instruments of the Company,
specifically the Series A, B, D and E Preferred and the convertible note, if
converted, would exceed the number of authorized shares the Company has
available for issuance. In addition, the Debentures contain more than one
embedded derivative feature which would individually warrant separate accounting
as derivative instruments under SFAS No. 133, “Accounting for Derivative
Instruments and Hedging Activities” and EITF 00-19, “Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in, a Company's Own
Stock”. The Company evaluated the application of SFAS No. 133 and EITF
00-19 and determined the various embedded derivative features have been bundled
together as a single, compound embedded derivative instrument that has been
bifurcated from the debt host contract, and referred to as the "Single Compound
Embedded Derivatives within Convertible Note". The single compound embedded
derivative features include the conversion feature with the reset provisions
within the Debentures, the call/redemption options, the interest rate adjustment
and liquidated damages. The value of the single compound embedded
derivative liability was bifurcated from the debt host contract and recorded as
a derivative liability, which results in a reduction of the initial carrying
amount (as unamortized discount) of the Debentures of the value at
inception. The value of the embedded derivative at issuance exceeded the
notional amount of the loan, and the excess amount was expensed to interest in
the amount of $1,468,316. The unamortized discount has been amortized to
interest expense using the effective interest method over the life of the
Debentures. At June 30, 2008, $121,638 had been amortized and the remaining
balance of $778,362 was charged to expense during the three months ended
September 30, 2008.
Due to
the insufficient unissued authorized shares to settle the Debentures, other
outstanding convertible instruments of the Company, specifically the Series A,
B, D and E Preferred, convertible note and non-employee stock options, have been
classified as derivative liabilities under SFAS No. 133. Each reporting
period, this derivative liability is marked-to-market with the non-cash gain or
loss recorded in the period as a gain or loss on derivatives. At September
30, 2008, the aggregate derivative liability was $28,717,058.
On
September 2, 2008, the Company satisfied in full the Debentures by repayment of
$450,000 of principal with funds advanced under the CIT Credit Facility and by
delivery of shares of the Company’s Series E Preferred in exchange for the
principal amount of $450,000, which shares of preferred stock automatically
convert into an aggregate of 1,363,636 shares of the Company’s common stock,
based upon an implied conversion price of $0.33 per share of common stock upon
the effectiveness of the Charter Amendment. The fair value of the
underlying shares of common stock on August 31, 2008, the date of the conversion
into Series E Preferred exceeded the conversion price of $0.33 per share and the
company recorded a loss on the extinguishment of debt of $804,545 during the
three months ended September 30, 2008.
Probability
- Weighted Expected Cash Flow Methodology
Assumptions: Single
Compound Embedded Derivative within Debentures
|
|
|
Inception
|
|
|
As
of
|
|
|
|
|
May
21, 2008
|
|
|
September
30, 2008
|
|
|
Risk
free interest rate
|
|
|
4.53
|
%
|
|
|
4.43
|
%
|
|
Timely
registration
|
|
|
95.00
|
%
|
|
|
95.00
|
%
|
|
Default
status
|
|
|
5.00
|
%
|
|
|
5.00
|
%
|
|
Alternative
financing available and exercised
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
Trading
volume, gross monthly dollars monthly rate increase
|
|
|
1.00
|
%
|
|
|
1.00
|
%
|
|
Annual
growth rate stock price
|
|
|
29.14
|
%
|
|
|
29.05
|
%
|
|
Future
projected volatility
|
|
|
150.00
|
%
|
|
|
60.00
|
%
|
The stock
purchase warrants are freestanding derivative financial instruments which were
valued using the Black-Scholes method. The fair value of the derivative
liability of the compound embedded derivatives, the warrants issued with the
Debentures and the other tainted convertible instruments was recorded at
$1,470,868 and $5,967,587, respectively, on May 21, 2008. The unamortized
discount was accreted to interest expense using the effective interest method
over the life of the Debentures. The total accretion expense was $1,060,366
for the period May 21, 2008 through September 30, 2008. The remaining value
of $1,468,316 was expensed at inception to interest expense since the total fair
value of the derivatives at inception exceeded the face value of the
Debentures. The effective interest rate on the Debentures was
1,551.9%.
The
Debentures were settled in September 2008; however, as long as the other
outstanding convertible instruments of the Company, specifically the Series A,
B, D and E Preferred and the convertible note are outstanding, they are
potentially convertible into an unlimited number of common shares, resulting in
the Company no longer having the control to physically or net share settle
existing non-employee stock options. Thus under EITF 00-19, all
non-employee stock options that are exercisable during the period that these
instruments are outstanding are required to be treated as derivative liabilities
and recorded at fair value until the provisions requiring this treatment have
been settled.
As of the
date of issuance of the Debentures on May 21, 2008, the fair value of options to
purchase 8,900,000 shares and other tainted convertible instruments totaling
$5,856,395 was reclassified to the liability caption “Derivative liabilities”
from additional paid-in capital. The change in fair value of $17,922,772 as
of September 30, 2008, has been included in earnings under the caption “Change
in fair value of derivatives.”
Variables
used in the Black-Scholes option-pricing model include: (1) 4.53% to 4.59%
risk-free interest rate; (2) expected warrant life is the actual remaining life
of the warrant as of each period end; (3) expected volatility is 150.00%; and
(4) zero expected dividends.
Both the
embedded and freestanding derivative financial instruments were recorded as
liabilities in the consolidated balance sheet and measured at fair
value. These derivative liabilities will be marked-to-market each quarter
with the change in fair value recorded as either a gain or loss in the income
statement.
The
impact of the application of SFAS No. 133 and EITF 00-19 in regards to the
derivative liabilities on the balance sheet and statements of operations as of
inception (May 21, 2008) and through September 30, 2008 are as
follows:
|
|
|
Transaction
Date
|
|
|
Liability
As
of
|
|
|
|
|
May
21, 2008
|
|
|
Sept.
30, 2008
|
|
|
Derivative
liability – single compound embedded derivatives within the
debentures
|
|
$
|
797,447
|
|
|
$
|
--
|
|
|
Derivative
liability – other tainted convertible instruments
|
|
|
7,438,455
|
|
|
|
10,794,286
|
|
|
Derivative
liability - warrants issued in connection with Term Loan
|
|
|
--
|
|
|
|
9,952,336
|
|
|
Net
change in fair value of derivatives
|
|
|
--
|
|
|
|
7,970,436
|
|
|
Derivative
liabilities
|
|
$
|
8,235,902
|
|
|
$
|
28,717,058
|
|
2006
Convertible Notes
During
2006, EV Delaware sold $1,500,000 of convertible promissory notes (the "2006
Notes") which were expressly assumed by the Company in the May 2006 merger of EV
Delaware into our wholly-owned subsidiary. The 2006 Notes had an original
maturity date of August 31, 2007, carried an interest rate of 10% per annum,
payable in either cash or shares, and were convertible into shares of Common
Stock at a conversion rate of $0.50 per share at the option of the
investor. Each investor also received a number of shares of Common Stock
equal to 20% of his or her investment divided by $0.50. Thus, a total of
600,000 shares were initially issued to investors in the 2006 Notes. The
relative fair value of these shares was $250,000 and was recorded as a debt
discount and as additional paid-in capital. The debt discount was amortized
over the original term of the notes payable using the effective interest
method. The original issue discount rate was 23.44%. During the period
from February 21, 2006 (inception) to August 31, 2007, the entire discount of
$250,000 was amortized and recorded as interest expense.
The
Company evaluated the application of SFAS No. 133 and EITF 00-19. Based on
the guidance of SFAS No. 133 and EITF 00-19, the Company concluded that these
instruments were not required to be accounted for as derivatives.
On August
31, 2007 (the original Maturity Date), the Company repaid in cash six of the
holders of the 2006 Notes an aggregate amount of $424,637, of which $410,000
represented principal and $14,637 represented accrued interest. On
September 4, 2007, an additional $44,624 of accrued and current period interest
was repaid through the issuance of 89,248 shares of Common Stock. The
remaining holders of the 2006 Notes entered into an agreement with the Company
whereby the maturity date of the 2006 Notes was extended to February 28, 2008
and, beginning September 1, 2007 until the 2006 Notes are paid in full, the
interest rate on the outstanding principal increased to 12% per annum. In
addition, the Company agreed to issue to the remaining holders of the 2006
Notes, 218,000 shares of Common Stock with a value of $98,100 as consideration
for extending the 2006 Note's maturity date. The Company evaluated the
application of EITF 96-19, "Debtor's Accounting for a Modification or Exchange
of Debt Instruments" and concluded that the revised terms constituted a debt
modification rather than a debt extinguishment and accordingly, the value of the
common stock has been treated as interest expense in the accompanying statements
of operations.
On
February 28, 2008, $1,090,000 of the 2006 Notes came due and the Company was
unable to repay them. The Company continued to accrue interest on the
notes at 12%, the agreed upon rate for the extension period. On March 6,
2008, the Company issued 130,449 shares of common stock in lieu of cash in
payment of $65,221 of accrued and current period interest to the holders of 2006
Notes. On April 22, 2008, the Company repaid $100,000 principal amount
in cash to one of the holders of the notes. During May 2008, the Company
exchanged 99,395 shares of its Series A Preferred in full satisfaction of its
obligation under the notes to pay $965,000 of principal and $28,950 of interest,
with each share of such preferred stock being automatically convertible into 20
shares of the Company’s common stock, for an aggregate of 1,987,900 shares of
its common stock. The Series A Preferred will automatically convert into
shares of the Company’s Common Stock upon the effectiveness of the Charter
Amendment. At September 30, 2008, the Company has outstanding $25,000
principal amount of the 2006 Notes with one note holder.
NOTE
7.
FAIR
VALUE
Due to the
insufficient unissued authorized shares to settle the Debentures, other
outstanding convertible instruments of the Company, specifically the Series
A, B, D and E Preferred, convertible note and non-employee stock options, have
been classified as derivative liabilities under SFAS No. 133. Each
reporting period, this derivative liability is marked-to-market with the
non-cash gain or loss recorded in the period as a gain or loss
on derivatives. At September 30, 2008, the aggregate derivative
liability was $28,717,058. The valuation of the Company's embedded
derivatives and warrant derivatives are determined primarily by the
Black-Scholes option pricing model.
Effective
January 1, 2008, the Company adopted the provisions of SFAS No. 157,
Fair Value measurements, for all financial instruments. SFAS 157 establishes a
three-level valuation hierarchy for disclosure of fair value measurements. The
valuation hierarchy is based upon the transparency of inputs to the valuation of
an asset or liability as of the measurement date. The three levels are defined
as follows:
|
|
Level
1
|
Quoted
prices (unadjusted) for identical assets or liabilities in active
markets.
|
|
|
Level
2
|
Quoted
prices for similar assets or liabilities in active markets; quoted prices
for identical or similar assets or liabilities in markets that are not
active; and model-derived valuations whose inputs or significant value
drivers are observable.
|
|
|
Level
3
|
Significant
inputs to the valuation model are
unobservable.
|
|
|
Level
1
|
|
Level
2
|
|
Level
3
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
Derivative
liabilities
|
-
|
|
$
|
28,717,058
|
|
-
|
|
$
|
28,717,058
|
|
NOTE
8. DERIVATIVE
FINANCIAL INSTRUMENTS
The
Company, in an effort to manage its natural gas and crude oil commodity price
risk exposures utilizes derivative financial instruments. The Company, from
time to time, enters into over-the-counter swap transactions that convert its
variable-based oil and natural gas sales arrangements to fixed-price
arrangements. The Company accounts for its derivative instruments in
accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging
Activities,” as amended. SFAS No. 133 requires the recognition of all
derivatives as either assets or liabilities in the consolidated balance sheet
and the measurement of those instruments at fair value. The Company entered
into various derivative instruments during the period ended September 30,
2008. These swap contracts are not being accounted for as cash flow hedges
under SFAS No. 133, but are recognized as derivatives and fair
valued.
The
Company marks-to-market its open swap positions at the end of each period and
records the net unrealized gain or loss during the period in derivative gains or
losses in the consolidated statements of operations. For the three months
ended September 30, 2008, the Company recorded gains of $634,528, related to its
swap contracts in the consolidated statements of operations. These swap
contracts were related to an agreement entered into on September 2, 2008, with
Macquarie Bank Limited, and were entered into as a condition of the CIT Credit
Facility. In the first contract the Company agreed to be the floating price
payer (based on Inside FERC Houston Ship Channel) on specific quantities of
natural gas over the period beginning October 1, 2008 through December 31, 2011
and receive a fixed payment of $7.82 per MMBTU. In the second contract the
Company agreed to be the floating price payer (based on the NYMEX WTI Nearby
Month Future Contract) on specific monthly quantities of crude oil over the
period beginning October 1, 2008 through December 31, 2011 and receive a fixed
payment of $110.35 per barrel.
Fair
value is estimated based on forward market prices and approximates the net gains
and losses that would have been realized if the contracts had been closed out at
period-end. When forward market prices are not available, they are
estimated using spot prices adjusted based on risk-free rates, carrying costs,
and counterparty risk.
As of
September 30, 2008, the Company had the following hedge contracts
outstanding:
|
Instrument
|
Beginning
Date
|
Ending
Date
|
|
Fixed
|
|
|
Total
Bbls
2008
|
|
|
Total
Bbls
2009
|
|
|
Total
Bbls
2010
|
|
|
Total
Bbls
2011
|
|
|
|
Swap
|
Oct-08
|
Dec-11
|
|
$
|
110.35
|
|
|
|
3,522
|
|
|
|
10,762
|
|
|
|
7,575
|
|
|
|
5,712
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indexed
to NYMEX WTI
|
|
|
Instrument
|
Beginning
Date
|
Ending
Date
|
|
Fixed
|
|
|
Total
MMBtu
2008
|
|
|
Total
MMBtu
2009
|
|
|
Total
MMBtu
2010
|
|
|
Total
MMBtu
2011
|
|
|
Swap
|
Oct-08
|
Dec-11
|
|
$
|
7.82
|
|
|
|
131,781
|
|
|
|
427,953
|
|
|
|
328,203
|
|
|
|
262,080
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indexed
to Inside FERC Houston Ship Channel
|
|
NOTE
9. PREFERRED
STOCK AND COMMON STOCK
Preferred
Stock
On August
20, 2008 the Company issued 500 shares of its newly designated Series C
Preferred to Alan D. Gaines, the Company’s largest stockholder and a director of
the Company, in exchange for the cancellation of a promissory note made by the
Company in favor of Mr. Gaines, in the principal amount of $50,000. In
addition to these shares of Series C Preferred, on August 20, 2008, the Company
also issued an additional 500 shares of Series C Preferred to Mr. Gaines for
cash consideration of $50,000. The Series C Preferred are automatically
redeemable by the Company at the rate of $100 for every one (1) share of Series
C Preferred being redeemed upon the closing of a debt or equity financing
whereby the Company realizes gross proceeds in excess of $5,000,000. The
Company’s lender in the CIT Credit Facility did not permit the Company to redeem
the Series C Preferred upon funding, with the understanding that, based upon the
success of the Company’s workover program and increased production resulting
from the Voyager Acquisition, the lender would permit a subsequent distribution
to Mr. Gaines for his Series C Preferred.
As set
forth above in Note. 3, the Company issued 10,000 shares of Series D Preferred
to the seller in the Voyager Acquisition. As set forth in the Certificate
of Designations filed with the State of Nevada on August 27, 2008 with respect
to the Series D Preferred, upon the effectiveness of the Charter Amendment, each
share of Series D Preferred will automatically convert into 1,750 shares of
common stock for an aggregate of 17,500,000 shares of the Company’s common
stock.
Concurrent
with the closing of the Voyager Acquisition, the Company issued 10,000 shares of
its newly designated Series E Preferred to the former holder of a $450,000
Debenture in satisfaction of the Company’s obligations under such Debenture. As
set forth in the Certificate of Designations filed with the State of Nevada on
August 29, 2008, with respect to the Series E Preferred, upon the
effectiveness of the Charter Amendment, each share of Series E Preferred will
automatically convert into 136.3636 shares of common stock for an aggregate of
1,363,636 shares of the Company’s common stock.
The
shares of Series D and Series E Preferred rank senior to all other shares of the
Company’s capital stock and are on parity with each other.
Common
Stock
On March
4, 2008, the Company’s Board of Directors approved the Charter Amendment
providing for, among other things, an increase in the number of authorized
common shares that the Company may issue from 24,000,000 to 149,000,000
shares. The holders of a majority of the Company’s outstanding shares of
common stock consented to the Charter Amendment on March 4, 2008, which consent
was subsequently ratified on August 29, 2008. As of November 19, 2008, the
number of authorized shares of common stock that the Company may issue remained
at 24,000,000 shares, pending the effectiveness of the Charter
Amendment.
NOTE
10. GRANTS
OF WARRANTS AND OPTIONS
The
Company uses the Black-Scholes option-pricing model to estimate option fair
values. The option-pricing model requires a number of assumptions, of
which the most significant are: expected stock price volatility, the expected
pre-vesting forfeiture rate and the expected option term (the amount of time
from the grant date until the options are exercised or expire).
Volatilities
are based on the historical volatility of the Company’s closing common stock
price. Expected term of options and warrants granted represents the period
of time that options and warrants granted are expected to be
outstanding. The risk-free rate for periods within the contractual life of
the options and warrants is based on the comparable U.S. Treasury rates in
effect at the time of each grant.
None of
the stock options or warrants which have been granted are exercisable until such
time as the Company files its Charter Amendment with the State of Nevada to
increase its authorized shares of common stock from the current authorized of
24,000,000 shares to 149,000,000 shares.
As part
of the consideration for entry into the CIT Credit Facility, on September 2,
2008 the Company granted CIT Capital a warrant, exercisable for up to 24,199,996
shares of the Company’s common stock, at an exercise price of $0.35 per share
(the “CIT Warrant”). The CIT Warrant expires on September 2, 2013 and is
exercisable upon the effectiveness of the Charter Amendment.
NOTE
11. ASSET
RETIREMENT OBLIGATIONS
The
Company’s asset retirement obligations relate to estimated future plugging and
abandonment expenses or disposal of its oil and gas properties and related
facilities. These obligations to abandon and restore properties are based
upon estimated future costs which may change based upon future inflation rates
and changes in statutory remediation rules. The following table provides a
summary of the Company’s asset retirement obligations:
|
|
|
Three
Months Ended
|
|
|
|
|
September
30, 2008
|
|
|
Balance
as of June 30, 2008
|
|
$
|
--
|
|
|
Liabilities
incurred in current period
|
|
|
--
|
|
|
Liabilities
assumed in business combination
|
|
|
765,658
|
|
|
Accretion
expense
|
|
|
--
|
|
|
Balance
September 30, 2008
|
|
$
|
765,658
|
|
NOTE
12. RELATED
PARTY TRANSACTION
See
Note. 9 for a discussion of Series C Preferred stock issued to a director
for cash consideration of $100,000.
NOTE 13. COMMITMENTS
AND CONTINGENCIES
Commencing
August 1, 2008, Voyager Gas Corporation (“Tenant”) entered into an office lease
agreement with GPI Tollway – Madison, LLC (“Landlord”) to provide office space
in Addison, Texas. The lease provides for approximately 2,173 rentable
square feet at monthly rental rates ranging from $3,622 to $3,803 per month and
terminates on October 31, 2011. Effective November 1, 2008, Voyager Gas
Corporation executed an Assignment of Lease between Voyager Gas Corporation as
Tenant, GPI Tollway – Madison, LLC as Landlord and Addison Oil, LLC as Assignee
pursuant to which Addison Oil, LLC assumed and agreed to make all payments and
to perform and keep all promises, covenants and conditions and agreements
of the lease by Tenant to be made, kept and performed from and after the
assignment date. Pursuant to the Assignment of Lease, Voyager Gas
Corporation does hereby remain liable for the performance of all covenants,
agreements and conditions contained in the lease should Addison Oil LLC default
on its obligations.
NOTE
14. SUBSEQUENT
EVENTS
Repayment
of Note Payable
On
October 6, 2008, pursuant to a mutual agreement between the Company and Global
Hunter Securities, LLC, (“GHS”) the Company made a cash payment in the amount of
$300,000 as full settlement of the non-interest bearing promissory note in the
principal amount of $575,500 originally due March 15, 2009.
2008
Stock Incentive Plan
On
September 19, 2008, the Company’s Board of Directors authorized the adoption of
the ABC Funding, Inc. 2008 Stock Incentive Plan (the “2008 Plan”). The 2008
Plan was approved by holders of a majority of the Company’s outstanding shares
of common stock on September 19, 2008, effective on the twenty-first (21st ) day
after mailing to all stockholders of record the Company’s definitive Information
Statement on Schedule 14C relating to adoption of the 2008 Plan, in compliance
with Regulation 14C under the Securities Exchange Act of 1934, as
amended. The 2008 Plan provides for the issuance of up to 8,500,000 shares
of the Company’s common stock to employees, non-employee directors and
consultants through the issuance of stock options, restricted stock awards,
stock appreciation rights and bonus stock. The Company’s Board of Directors
feel the stock options and stock-based incentives offered under the 2008 Plan
play an important role in retaining the services of outstanding personnel and in
encouraging such personnel, together with existing employees, to have a greater
financial investment in the Company.
Issuance
of Stock Options and Restricted Stock Awards
On
October 1, 2008, the Company entered into an employment agreement pursuant to
which the Company, effective as of October 1, 2008, engaged Jim B. Davis, to
serve as its Senior Vice President of Operations. The Company also entered
into a restricted stock agreement and option agreements with Mr. Davis, pursuant
to which the Company has agreed to issue up to an aggregate of 1,750,000 shares
of its common stock to Mr. Davis, subject to the effectiveness of the Charter
Amendment in the State of Nevada.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
To the
Board of Directors
ABC
Funding, Inc.
(a
Development Stage Company)
Houston,
Texas
We have
audited the accompanying consolidated balance sheet of ABC Funding, Inc. ("the
Company") (a Development Stage Company) as of June 30, 2008 and 2007, and the
related consolidated statements of operations, cash flows and changes in
stockholders' deficit for the years ended June 30, 2008 and 2007, and for the
period from February 21, 2006 (inception) through June 30, 2008,
respectively. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our
audit.
We
conducted our audit in accordance with 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. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. 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 consolidated financial position of the Company as
of June 30, 2008 and 2007, and the consolidated results of its operations and
its cash flows for the periods described in conformity with accounting
principles generally accepted in the United States of America.
/s/
Malone & Bailey, PC
www.malone-bailey.com
Houston,
Texas
September
8, 2008
ABC
FUNDING, INC.
AND
SUBSIDIARY
(A
DEVELOPMENT STAGE COMPANY)
CONSOLIDATED
BALANCE SHEETS
JUNE
30, 2008 AND 2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
12,158
|
|
|
$
|
550,394
|
|
|
Prepaid
expenses and other current assets
|
|
|
31,215
|
|
|
|
30,428
|
|
|
Deferred
financing costs, net of amortization of $55,871
|
|
|
143,472
|
|
|
|
--
|
|
|
Total
current assets
|
|
|
186,845
|
|
|
|
580,822
|
|
|
Acquisition
costs
|
|
|
976,284
|
|
|
|
--
|
|
|
Fixed
assets, net of accumulated depreciation of $183
|
|
|
7,881
|
|
|
|
--
|
|
|
Total
assets
|
|
$
|
1,171,010
|
|
|
$
|
580,822
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' DEFICIT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
404,027
|
|
|
$
|
7,180
|
|
|
Accounts
payable – related parties
|
|
|
20,825
|
|
|
|
--
|
|
|
Accrued
liabilities
|
|
|
1,397
|
|
|
|
188,996
|
|
|
Convertible
debt, net of unamortized discount of $0 and $36,973
at June 30, 2008 and 2007, respectively
|
|
|
25,000
|
|
|
|
1,463,027
|
|
|
Senior
secured convertible debentures, net of unamortized discount of
$778,362
|
|
|
121,638
|
|
|
|
--
|
|
|
Derivative
liabilities
|
|
|
11,893,573
|
|
|
|
--
|
|
|
Total
current liabilities
|
|
|
12,466,460
|
|
|
|
1,659,203
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
--
|
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ deficit:
|
|
|
|
|
|
|
|
|
|
Preferred
stock - 863,505 undesignated authorized, $0.001 par value at June 30, 2008
and 2007
|
|
|
|
|
|
|
|
|
|
Series A Preferred stock, $0.001 par value, 99,395 authorized and
outstanding at June 30, 2008
|
|
|
99
|
|
|
|
--
|
|
|
Series B Preferred stock, $0.001 par value, 37,100 authorized and
outstanding at June 30, 2008
|
|
|
37
|
|
|
|
--
|
|
|
Common
stock, $0.001 par value, 24,000,000 shares authorized, 24,378,376 and
22,065,000 issued and outstanding at June 30, 2008 and 2007,
respectively
|
|
|
24,378
|
|
|
|
22,065
|
|
|
Additional
paid-in capital
|
|
|
769,318
|
|
|
|
1,244,765
|
|
|
Deficit
accumulated during the development stage
|
|
|
(12,089,282
|
)
|
|
|
(2,345,211
|
)
|
|
Total
stockholders’ deficit
|
|
|
(11,295,450
|
)
|
|
|
(1,078,381
|
)
|
|
Total
liabilities and stockholders' deficit
|
|
$
|
1,171,010
|
|
|
$
|
580,822
|
|
See the
accompanying summary of accounting policies and notes to financial
statements.
ABC
FUNDING, INC.
AND
SUBSIDIARY
(A
DEVELOPMENT STAGE COMPANY)
CONSOLIDATED
STATEMENTS OF OPERATIONS
FOR
THE YEARS ENDED JUNE 30, 2008 AND 2007 AND
THE
PERIOD FEBRUARY 21, 2006 (INCEPTION) THROUGH JUNE 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Inception)
|
|
|
|
|
|
|
|
Through
|
|
|
|
|
Years
Ended June 30,
|
|
|
June
30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative:
|
|
|
|
|
|
|
|
|
|
|
Payroll
and related expenses
|
|
$
|
3,593,652
|
|
|
$
|
589,346
|
|
|
$
|
4,608,516
|
|
|
Office
and administration
|
|
|
40,263
|
|
|
|
72,216
|
|
|
|
123,491
|
|
|
Professional
fees
|
|
|
307,508
|
|
|
|
267,945
|
|
|
|
732,294
|
|
|
Depreciation
expense
|
|
|
183
|
|
|
|
--
|
|
|
|
183
|
|
|
Other
|
|
|
110,755
|
|
|
|
14,319
|
|
|
|
567,414
|
|
|
Total
general and administrative
|
|
|
4,052,361
|
|
|
|
943,826
|
|
|
|
6,031,898
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
5,174
|
|
|
|
31,163
|
|
|
|
41,523
|
|
|
Interest
expense
|
|
|
(2,039,213
|
)
|
|
|
(332,329
|
)
|
|
|
(2,441,236
|
)
|
|
Change
in fair value of derivatives
|
|
|
(3,657,671
|
)
|
|
|
--
|
|
|
|
(3,657,671
|
)
|
|
Total
other expense
|
|
|
(5,691,710
|
)
|
|
|
(301,166
|
)
|
|
|
(6,057,384
|
)
|
|
Net
loss
|
|
$
|
(9,744,071
|
)
|
|
$
|
(1,244,992
|
)
|
|
$
|
(12,089,282
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss per share: basic and diluted
|
|
$
|
(0.42
|
)
|
|
$
|
(0.06
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding: basic and diluted
|
|
|
23,067,241
|
|
|
|
22,065,000
|
|
|
|
|
|
See the
accompanying summary of accounting policies and notes to financial
statements.
ABC
FUNDING, INC.
AND
SUBSIDIARY
(A
DEVELOPMENT STAGE COMPANY)
CONSOLIDATED
STATEMENT OF CHANGES IN STOCKHOLDERS’ DEFICIT
FOR
THE YEARS ENDED JUNE 30, 2008 AND 2007 AND
THE
PERIOD FEBRUARY 21, 2006 (INCEPTION) THROUGH JUNE 30, 2008
|
|
|
Series
A Preferred
|
|
|
Series
B Preferred
|
|
|
Common
Stock
|
|
|
Additional
Paid-in
|
|
|
Deficit
Accumulated
During
Development
|
|
|
Total
Stockholders'
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Stage
|
|
|
Deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
February 21, 2006
|
|
|
--
|
|
|
$
|
--
|
|
|
|
--
|
|
|
$
|
--
|
|
|
|
--
|
|
|
$
|
--
|
|
|
$
|
--
|
|
|
$
|
--
|
|
|
$
|
--
|
|
|
Proceeds
from issuance of
common stock
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
19,665,000
|
|
|
|
19,665
|
|
|
|
(17,698
|
)
|
|
|
--
|
|
|
|
1,967
|
|
|
Proceeds
from issuance of
common
stock to note holders
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
600,000
|
|
|
|
600
|
|
|
|
249,400
|
|
|
|
--
|
|
|
|
250,000
|
|
|
Shares
issued in reverse merger
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
1,800,000
|
|
|
|
1,800
|
|
|
|
(1,800
|
)
|
|
|
--
|
|
|
|
--
|
|
|
Stock
based compensation
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
425,518
|
|
|
|
--
|
|
|
|
425,518
|
|
|
Net
loss
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
(1,100,219
|
)
|
|
|
(1,100,219
|
)
|
|
Balance,
June 30, 2006
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
22,065,000
|
|
|
|
22,065
|
|
|
|
655,420
|
|
|
|
(1,100,219
|
)
|
|
|
(422,734
|
)
|
|
Stock
based compensation
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
589,345
|
|
|
|
--
|
|
|
|
589,345
|
|
|
Net
loss
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
(1,244,992
|
)
|
|
|
(1,244,992
|
)
|
|
Balance,
June 30, 2007
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
22,065,000
|
|
|
|
22,065
|
|
|
|
1,244,765
|
|
|
|
(2,345,211
|
)
|
|
|
(1,078,381
|
)
|
|
Shares
issued for services
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
1,365,240
|
|
|
|
1,365
|
|
|
|
672,060
|
|
|
|
--
|
|
|
|
673,425
|
|
|
Stock
based compensation
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
2,865,196
|
|
|
|
--
|
|
|
|
2,865,196
|
|
|
Convertible
debenture tainted
warrants
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
(5,856,395
|
)
|
|
|
--
|
|
|
|
(5,856,395
|
)
|
|
Stock
issued for note extensions
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
218,000
|
|
|
|
218
|
|
|
|
97,882
|
|
|
|
--
|
|
|
|
98,100
|
|
|
Stock
issued with convertible
notes
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
200,004
|
|
|
|
200
|
|
|
|
58,133
|
|
|
|
--
|
|
|
|
58,333
|
|
|
Beneficial
conversion feature
related
to convertible notes
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
58,333
|
|
|
|
--
|
|
|
|
58,333
|
|
|
Stock
issued for payment of
interest
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
530,132
|
|
|
|
530
|
|
|
|
264,530
|
|
|
|
--
|
|
|
|
265,060
|
|
|
Preferred
stock issued for note
conversions
|
|
|
96,500
|
|
|
|
96
|
|
|
|
35,000
|
|
|
|
35
|
|
|
|
--
|
|
|
|
--
|
|
|
|
1,314,869
|
|
|
|
--
|
|
|
|
1,315,000
|
|
|
Preferred
stock issued for
payment
of interest
|
|
|
2,895
|
|
|
|
3
|
|
|
|
2,100
|
|
|
|
2
|
|
|
|
--
|
|
|
|
--
|
|
|
|
49,945
|
|
|
|
--
|
|
|
|
49,950
|
|
|
Net
loss
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
(9,744,071
|
)
|
|
|
(9,744,071
|
)
|
|
Balance,
June 30, 2008
|
|
|
99,395
|
|
|
$
|
99
|
|
|
|
37,100
|
|
|
$
|
37
|
|
|
|
24,378,376
|
|
|
$
|
24,378
|
|
|
$
|
769,318
|
|
|
$
|
(12,089,282
|
)
|
|
$
|
(11,295,450
|
)
|
See the
accompanying summary of accounting policies and notes to financial
statements.
A
BC FUNDING, INC.
AND
SUBSIDIARY
(A
DEVELOPMENT STAGE COMPANY)
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR
THE YEARS ENDED JUNE 30, 2008 AND 2007 AND
THE
PERIOD FEBRUARY 21, 2006 (INCEPTION) THROUGH JUNE 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Inception)
|
|
|
|
|
|
|
|
|
|
|
Through
|
|
|
|
|
Years
Ended June 30,
|
|
|
June
30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(9,744,071
|
)
|
|
$
|
(1,244,992
|
)
|
|
$
|
(12,089,282
|
)
|
|
Adjustments
to reconcile net loss to cash used in operating
activities:
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
183
|
|
|
|
--
|
|
|
|
183
|
|
|
Share
based compensation
|
|
|
3,538,621
|
|
|
|
589,345
|
|
|
|
4,553,484
|
|
|
Common
stock issued for interest
|
|
|
225,704
|
|
|
|
--
|
|
|
|
225,704
|
|
|
Preferred
stock issued for interest
|
|
|
49,950
|
|
|
|
--
|
|
|
|
49,950
|
|
|
Common
stock issued for loan extensions
|
|
|
98,100
|
|
|
|
--
|
|
|
|
98,100
|
|
|
Amortization
of deferred financing costs
|
|
|
55,871
|
|
|
|
--
|
|
|
|
55,871
|
|
|
Amortization
of debt discounts
|
|
|
1,743,593
|
|
|
|
182,482
|
|
|
|
1,956,620
|
|
|
Change
in fair value of derivatives
|
|
|
3,657,671
|
|
|
|
--
|
|
|
|
3,657,671
|
|
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid
and other current assets
|
|
|
896
|
|
|
|
36,033
|
|
|
|
(29,532
|
)
|
|
Accounts
payable, related parties and other
|
|
|
417,672
|
|
|
|
(56,407
|
)
|
|
|
424,852
|
|
|
Accrued
liabilities
|
|
|
(148,245)
|
|
|
|
134,417
|
|
|
|
40,751
|
|
|
Net
cash used in operating activities
|
|
|
(104,055
|
)
|
|
|
(359,122
|
)
|
|
|
(1,055,628
|
)
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition
costs of oil and gas properties
|
|
|
(976,284
|
)
|
|
|
--
|
|
|
|
(976,284
|
)
|
|
Purchase
of fixed assets
|
|
|
(8,064
|
)
|
|
|
--
|
|
|
|
(8,064
|
)
|
|
Deposits
|
|
|
(1,682
|
)
|
|
|
--
|
|
|
|
(1,682
|
)
|
|
Net
cash used in investing activities
|
|
|
(986,030
|
)
|
|
|
--
|
|
|
|
(986,030
|
)
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from sale of common stock
|
|
|
--
|
|
|
|
--
|
|
|
|
1,967
|
|
|
Proceeds
from convertible debentures
|
|
|
800,000
|
|
|
|
--
|
|
|
|
800,000
|
|
|
Debt
issuance costs
|
|
|
(88,151
|
)
|
|
|
--
|
|
|
|
(88,151
|
)
|
|
Proceeds
from convertible notes
|
|
|
350,000
|
|
|
|
15,000
|
|
|
|
1,850,000
|
|
|
Repayment
of convertible notes
|
|
|
(510,000
|
)
|
|
|
--
|
|
|
|
(510,000
|
)
|
|
Net
cash provided by financing activities
|
|
|
551,849
|
|
|
|
15,000
|
|
|
|
2,053,816
|
|
|
Net
increase (decrease) in cash
|
|
|
(538,236
|
)
|
|
|
(344,122
|
)
|
|
|
12,158
|
|
|
Cash
at beginning of period
|
|
|
550,394
|
|
|
|
894,516
|
|
|
|
--
|
|
|
Cash
at end of period
|
|
$
|
12,158
|
|
|
$
|
550,394
|
|
|
$
|
12,158
|
|
|
Supplemental
information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
14,637
|
|
|
$
|
--
|
|
|
$
|
14,637
|
|
|
Cash
paid for income taxes
|
|
$
|
--
|
|
|
$
|
--
|
|
|
$
|
--
|
|
See the
accompanying summary of accounting policies and notes to financial
statements.
ABC
FUNDING, INC.
AND
SUBSIDIARY
(A
DEVELOPMENT STAGE COMPANY)
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR
THE YEARS ENDED JUNE 30, 2008 AND 2007 AND
THE
PERIOD FEBRUARY 21, 2006 (INCEPTION) THROUGH JUNE 30, 2008
(Continued)
|
|
|
Years
Ended June 30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
Non-cash
investing and financing activities:
|
|
|
|
|
|
|
|
Common
shares issued in payment of interest
|
|
$
|
39,355
|
|
|
$
|
--
|
|
|
Preferred
shares issued in payment of principal
|
|
$
|
1,315,000
|
|
|
$
|
--
|
|
|
Warrants
issued for convertible debenture commission
|
|
$
|
111,192
|
|
|
$
|
--
|
|
|
Discount for beneficial conversion feature and debt
discount
|
|
$
|
116,666
|
|
|
$
|
--
|
|
See the
accompanying summary of accounting policies and notes to financial
statements.
ABC
FUNDING, INC.
AND
SUBSIDIARY
(A
DEVELOPMENT STAGE COMPANY)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2008
NOTE
1. ORGANIZATION
AND BASIS OF PREPARATION
Headquartered
in Houston, Texas, ABC Funding, Inc. (the “Company”, “ABC”, “we” or “us”),
is a development stage company incorporated in Nevada, with our primary
business focus to engage in the acquisition, exploitation and development
of properties for the production of crude oil and natural gas. We intend to
explore for oil and gas reserves through the drill bit and acquire established
oil and gas properties. We intend to exploit oil and gas properties
through the application of conventional and specialized technology to increase
production, ultimate recoveries, or both, and participate in joint venture
drilling programs with repeatable low risk results.
We were
incorporated in Nevada on May 13, 2004. In May 2006, Energy Venture,
Inc., a Delaware corporation ("EV Delaware") merged into EVI Acquisition Corp.
("EVI"), a wholly-owned subsidiary of ABC. In connection with the merger,
EVI, a Nevada corporation, changed its name to Energy Venture, Inc. ("EV
Nevada"). The merger transaction was accounted for as a reverse merger with
EV Delaware being deemed the acquiring entity for financial accounting
purposes. Thus, the historical financial statements of the Company prior to
the effective date of the merger have been restated to be those of EV
Delaware. Since the merger, we have primarily been involved in conducting
business planning and capital-raising activities.
As of
June 30, 2008, we have one subsidiary, Energy Venture, Inc., a Nevada
corporation. Energy Venture, Inc. currently has no operations, assets or
liabilities. However, we intend to use this subsidiary in the future as an
operating company to perform the operations of our oil and gas
business.
The
consolidated financial statements include the accounts of ABC Funding, Inc. and
its subsidiary, which is wholly owned. All inter-company transactions are
eliminated upon consolidation.
NOTE
2. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates.
In preparing financial
statements, management makes estimates and assumptions that affect the reported
amounts of assets and liabilities in the balance sheet and revenue and expenses
in the statement of operations. Actual results could differ from those
estimates.
Cash and Cash
Equivalents.
For purposes of the
statement of cash flows, we consider all highly liquid investments purchased
with an original maturity of three months or less to be cash
equivalents.
Revenue Recognition.
Revenue is recognized
when persuasive evidence of an arrangement exists, services have been rendered,
the sales price is fixed or determinable, and collectability is reasonably
assured. There were no revenues from inception (February 21, 2006) through
June 30, 2008.
Income Taxes
. We
recognize deferred tax assets and liabilities based on differences between the
financial reporting and tax bases of assets and liabilities using the enacted
tax rates and laws that are expected to be in effect when the differences are
expected to be recovered. We provide a valuation allowance for deferred tax
assets for which we do not consider realization of such assets to be more likely
than not.
Basic and Dilut
ed Net Loss Per Share.
We compute net income
(loss) per share pursuant to Statement of Financial Accounting Standards No. 128
“Earnings per Share”. Basic net income (loss) per share is computed by
dividing income or loss applicable to common shareholders by the weighted
average number of shares of our Common Stock outstanding during the
period. Diluted net income (loss) per share is determined in the same
manner as basic net income (loss) per share except that the number of shares is
increased assuming exercise of dilutive stock options, warrants and convertible
debt using the treasury stock method and dilutive conversion of our convertible
preferred stock.
During
the year ended June 30, 2008, convertible preferred stock convertible into
3,048,218 shares of common stock; a convertible note and accrued interest
convertible into 52,000 shares of common stock; vested options to purchase
11,150,000 shares of common stock; convertible debt convertible into 2,777,273
shares of common stock; and warrants to purchase 3,225,000 shares of common
stock were excluded from the calculation of net loss per share since their
inclusion would have been anti-dilutive. During the year ended June 30,
2007, convertible debt and accrued interest, convertible into 3,377,992 shares
of common stock and vested stock options to purchase 3,650,000 shares of common
stock were excluded from the calculation of net loss per share since their
inclusion would have been anti-dilutive. During the year ended June 30,
2007, there was no convertible preferred stock outstanding.
Stock Based
Compensation
. In December 2004, the FASB issued SFAS No. 123R,
"Share-Based Payments" ("FAS 123R"). We adopted the disclosure requirements
of FAS 123R as of July 1, 2006 using the modified prospective transition method
approach as allowed under FAS 123R. FAS 123R establishes standards for the
accounting for transactions in which an entity exchanges its equity instruments
for goods or services. FAS 123R focuses primarily on accounting for
transactions in which an entity obtains employee services in share-based payment
transactions. FAS 123R requires that the fair value of such equity
instruments be recognized as expense in the historical financial statements as
services are performed.
Valuation of the Emb
edded and Warrant
Derivatives
The valuation of our
embedded derivatives and warrant derivatives is determined primarily by a
lattice model using probability weighted discounted cash flow based upon future
projections over a range of potential outcomes and the Black-Scholes option
pricing model. An embedded debenture derivative is a derivative instrument
that is embedded within a contract, which under the convertible debenture (the
host contract) includes the right to convert the debenture by the holder, reset
provisions with respect to the conversion provisions, call/redemption options
and liquidated damages. In accordance with FASB Statement 133, as amended,
Accounting for Derivative Instruments and Hedging Activities, these embedded
derivatives are marked-to-market each reporting period, with a corresponding
non-cash gain or loss charged to the current period. A warrant derivative
liability is determined in accordance with Emerging Issues Task Force ("EITF")
Issue No. 00-19, "Accounting for Derivative Financial Instruments Indexed to,
and Potentially Settled in, a Company's Own Stock" ("EITF 00-19"). Based
on EITF 00-19, warrants which are determined to be classified as derivative
liabilities are marked-to-market each reporting period, with a corresponding
non-cash gain or loss charged to the current period. The practical effect
of this has been that when our stock price increases so does our derivative
liability, resulting in a non-cash loss charge that reduces earnings and
earnings per share. When our stock price declines, we record a non-cash
gain, increasing our earnings and earnings per share.
To
determine the fair value of our embedded derivatives, management evaluates
assumptions regarding the probability of certain events. Other factors
used to determine fair value include our period end stock price, historical
stock volatility, risk free interest rate and derivative term. The fair
value recorded for the derivative liability varies from period to period.
This variability may result in the actual derivative liability for a period
either above or below the estimates recorded on our consolidated financial
statements, resulting in significant fluctuations in other income or expense
because of the corresponding non-cash gain or loss recorded.
Fa
ir Value of Financial
Instruments
. Our financial instruments consist of cash and cash
equivalents, accounts payable and notes payable. The carrying amounts of
cash and cash equivalents, accounts payable and notes payable approximate fair
value due to the highly liquid nature of these short-term
instruments.
Reclassifications.
Certain prior period
amounts have been reclassified to conform to the current year
presentation.
New Accounting
Pronouncements
. During February 2007, the Financial Accounting
Standards Board (“FASB”) issued FASB Statement of Accounting Standards (“SFAS”)
No 159, “The Fair Value Option for Financial Assets and Financial Liabilities”
(“SFAS No. 159”) which permits all entities to choose, at specified election
dates, to measure eligible items at fair value. SFAS No. 159 permits
entities to choose to measure many financial instruments and certain other items
at fair value that are not currently required to be measured at fair value, and
thereby mitigate volatility in reported earnings caused by measuring related
assets and liabilities differently without having to apply complex hedge
accounting provisions. This Statement also establishes presentation and
disclosure requirements designed to facilitate comparisons between entities that
choose different measurement attributes for similar types of assets and
liabilities. SFAS No. 159 is effective as of the beginning of an entity’s
first fiscal year that begins after November 15, 2007. We are evaluating
the impact that this Statement will have on our financial
statements.
During
September 2006, the FASB issued FASB Statement of Accounting Standards (“SFAS”)
No. 157, "Fair Value Measurements." This Statement defines fair value,
establishes a framework for measuring fair value in generally accepted
accounting principles, and expands disclosures about fair value
measurements. This Statement applies under other accounting pronouncements
that require or permit fair value measurements, where fair value has been
determined to be the relevant measurement attribute. This Statement is
effective for fiscal years beginning after November 15, 2007. We are
evaluating the impact that this Statement will have on our financial
statements.
NOTE
3. ACQUISITION
COSTS
We have
entered into a stock purchase and sale agreement to acquire from Voyager Gas
Holdings, L.P. all of the issued and outstanding shares of common stock of
Voyager Gas Corporation, a Delaware corporation. (See Note 8. “Subsequent
Events”). The following table summarizes costs incurred pursuant to the
acquisition as of June 30, 2008.
|
Acquisition
costs:
|
|
|
|
|
Earnest
money deposit
|
|
$
|
800,000
|
|
|
Legal
fees
|
|
|
99,731
|
|
|
Third
party engineering fees
|
|
|
71,915
|
|
|
Other
|
|
|
4,638
|
|
|
Total
acquisition costs
|
|
$
|
976,284
|
|
NOTE
4. NOTES
PAYABLE
Convertible
Debentures
On May
21, 2008, we entered into a Securities Purchase Agreement with those purchasers
identified therein (the “Bridge Financing”), whereby we received proceeds of
$800,000 evidenced by senior secured convertible debentures (the “Debentures”)
with a principal amount of $900,000, issued at a discount of $100,000. The
proceeds from the Debentures were used to fund our payment of the deposit under
the Voyager Gas Corporation stock purchase and sale agreement (the “Voyager
Agreement”).
The
Debentures mature the earlier of September 29, 2008, or the closing date under
the Voyager Agreement, and may be satisfied in full by our payment of the
aggregate redemption price of $900,000 or, at the election of the purchasers, by
the conversion of the Debentures into shares of our common stock (the
“Conversion Shares”), at an initial conversion price of $0.33, subject to
adjustments and full-ratchet protection under certain
circumstances. Alternatively, the purchasers may elect to participate in a
Subsequent Financing (as such term is defined in the Securities Purchase
Agreement) by exchanging all or some of their Debentures for securities issued
in the Subsequent Financing, upon the same terms being offered under the
Subsequent Financing.
Under the
Debentures, so long as any portion of the Debentures remain outstanding, we are
precluded from incurring additional indebtedness or suffering additional liens
on our property, subject to limited exceptions therein, including, without
limitation, such indebtedness incurred by us in connection with the financing of
the consideration owing under the Voyager Agreement.
As
additional consideration for the bridge loan evidenced by the Debentures, we
issued common stock purchase warrants to the purchasers and their affiliates,
exercisable to purchase up to 3,000,000 shares of our common stock (the “Warrant
Shares”), based upon an initial exercise price of $0.33 subject to adjustments
and full-ratchet protection under certain circumstances.
Our
performance under the Debentures, including payment of the redemption amount
thereof or conversion thereunder, is secured by (i) our grant of a security
interest and first lien on all of our existing and after-acquired assets, (ii)
the guarantee of our wholly-owned subsidiary, Energy Venture, Inc., and (iii)
the pledge of an aggregate of 14,151,000 shares of our common stock currently
held by Mr. Alan D. Gaines, one of our directors, and his affiliates, which
pledged shares represent approximately 60.6% of the shares of our common stock
issued and outstanding as of the grant date.
We
incurred debt issuance costs of $199,343 associated with the issuance of the
Debentures. These costs were capitalized as deferred financing costs and
are being amortized over the life of the Debentures using the effective interest
method. Amortization expense related to the deferred financing costs was
$55,871 for the period May 21, 2008 through June 30, 2008.
Common
shares issuable if the Debentures were converted would exceed the number of
authorized shares we have available for issuance. In addition, the
Debentures contain more than one embedded derivative feature which would
individually warrant separate accounting as derivative instruments under SFAS
No. 133 and EITF 00-19. We evaluated the application of SFAS No. 133 and
EITF 00-19 and determined the various embedded derivative features have been
bundled together as a single, compound embedded derivative instrument that has
been bifurcated from the debt host contract, and referred to as the "Single
Compound Embedded Derivatives within Convertible Note". The single compound
embedded derivative features include the conversion feature with the reset
provisions within the Debentures, the call/redemption options and liquidated
damages. The value of the single compound embedded derivative liability was
bifurcated from the debt host contract and recorded as a derivative liability,
which results in a reduction of the initial carrying amount (as unamortized
discount) of the Debentures of the value at inception. The value of the
embedded derivative at issuance exceeded the notional amount of the loan, and
the excess amount was expensed to interest in the amount of $1,468,316. The
unamortized discount has been amortized to interest expense using the effective
interest method over the life of the Debentures. At June 30, 2008, $121,638
has been amortized with an unamortized discount balance remaining of
$778,362.
Due to
the insufficient unissued authorized shares to share settle the Debentures, this
caused other convertible instruments, specifically the Series A and B Preferred,
the convertible note and non-employee stock options, to also be classified as
derivative liabilities under FAS 133. Each reporting period, this
derivative liability is marked-to-market with the non-cash gain or loss recorded
in the period as a gain or loss on derivatives. At June 30, 2008, the
aggregate derivative liability was $11,893,573.
On
September 2, 2008, we satisfied in full the Debentures by repayment of $450,000
of principal with funds advanced under the CIT Credit Facility (as defined in
Note 8 hereto) and by delivery of shares of our Series E Preferred in exchange
for the principal amount of $450,000, which shares of preferred stock
automatically convert into an aggregate of 1,363,636 shares of our common stock,
based upon an implied conversion price of $0.33 per share of common stock upon
the effectiveness of the Charter Amendment.
Probability
- Weighted Expected Cash Flow Methodology
Assumptions: Single
Compound Embedded Derivative within Debentures
|
|
|
Transaction
Date
|
|
|
As
of
|
|
|
|
|
May
21, 2008
|
|
|
June
30, 2008
|
|
|
Risk
free interest rate
|
|
|
4.53
|
%
|
|
|
4.59
|
%
|
|
Timely
registration
|
|
|
95.00
|
%
|
|
|
95.00
|
%
|
|
Default
status
|
|
|
5.00
|
%
|
|
|
5.00
|
%
|
|
Alternative
financing available and exercised
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
Trading
volume, gross monthly dollars monthly rate increase
|
|
|
1.00
|
%
|
|
|
1.00
|
%
|
|
Annual
growth rate stock price
|
|
|
29.14
|
%
|
|
|
29.20
|
%
|
|
Future
projected volatility
|
|
|
150.00
|
%
|
|
|
150.00
|
%
|
The stock
purchase warrants are freestanding derivative financial instruments which were
valued using the Black-Scholes method. The fair value of the derivative
liability of the single compound embedded derivatives, the warrants issued with
the Debentures and the other tainted convertible instruments and options was
recorded at $1,470,868 and $5,967,587, respectively, on May 21, 2008.
Consequently, the Debentures were initially recorded at zero, after application
of the discounts. The unamortized discount will be accreted to
interest expense using the effective interest method over the life of the
Debentures. The total accretion expense was $121,638 for the period
May 21, 2008 through June 30, 2008. The remaining value of $1,468,316 was
expensed at inception to interest expense since the total fair value of the
derivatives at inception exceeded the face value of the Debentures. The
effective interest rate on the Debentures is 1,441.9%.
So long
as the Debentures were outstanding, they were potentially convertible into an
unlimited number of common shares, resulting in us no longer having the control
to physically or net share settle existing non-employee stock options. Thus
under EITF 00-19, all non-employee stock options that are exercisable during the
period that the Debentures are outstanding are required to be treated as
derivative liabilities and recorded at fair value until the provisions requiring
this treatment have been settled.
As of the
date of issuance of the notes on May 21, 2008, the fair value of options to
purchase 8,900,000 shares and other tainted convertible
instruments totaling $5,856,395 were reclassified to the liability caption
“Derivative liabilities” from additional paid-in capital. The change in
fair value of $2,703,694 as of June 30, 2008, has been included in earnings
under the caption “Change in fair value of derivatives.”
Variables
used in the Black-Scholes option-pricing model include: (1) 4.53% to 4.59%
risk-free interest rate; (2) expected warrant life is the actual remaining life
of the warrant as of each period end; (3) expected volatility is 150.00%; and
(4) zero expected dividends.
Both the
embedded and freestanding derivative financial instruments were recorded as
liabilities in the consolidated balance sheet and measured at fair
value. These derivative liabilities will be marked-to-market each quarter
with the change in fair value recorded as either a gain or loss in the income
statement.
The
impact of the application of SFAS No. 133 and EITF 00-19 in regards to the
derivative liabilities on the balance sheet and statements of operations as of
inception (May 21, 2008) and through June 30, 2008 are as follows:
|
|
|
|
|
|
Liability
a
s
of
|
|
|
|
|
May
21, 2008
|
|
|
June
30, 2008
|
|
|
Derivative
liability – single compound embedded derivatives within the
debentures
|
|
$
|
797,447
|
|
|
$
|
797,447
|
|
|
Derivative
liability – warrants, non-employee options and other tainted convertible
instruments
|
|
|
7,438,455
|
|
|
|
7,438,455
|
|
|
Net
change in fair value of derivatives
|
|
|
--
|
|
|
|
3,657,671
|
|
|
Derivative
liabilities
|
|
$
|
8,235,902
|
|
|
$
|
11,893,573
|
|
The
following summarizes the financial presentation of the Debentures at inception
(May 21, 2008) and at June 30, 2008:
|
|
|
At
Inception
|
|
|
As
of
|
|
|
|
|
May
21, 2008
|
|
|
June
30, 2008
|
|
|
Notional
amount of debentures
|
|
$
|
900,000
|
|
|
$
|
900,000
|
|
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
Discount
for single compounded embedded derivatives within debentures and
original issue discount
|
|
|
(900,000
|
)
|
|
|
(900,000
|
)
|
|
Amortized discount on debentures
|
|
|
--
|
|
|
|
121,638
|
|
|
Convertible
debentures balance, net
|
|
$
|
--
|
|
|
$
|
121,638
|
|
Convertible
Notes
At June
30, 2008 and 2007, convertible short-term debt consisted of the
following:
|
|
|
June
30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
12%
convertible notes due February 28, 2008
|
|
$
|
25,000
|
|
|
$
|
1,500,000
|
|
|
Unamortized
discount
|
|
|
--
|
|
|
|
(36,973
|
)
|
|
Total
convertible debt
|
|
$
|
25,000
|
|
|
$
|
1,463,027
|
|
2006
Convertible Notes
During
2006, EV Delaware sold $1,500,000 of convertible promissory notes (the "2006
Notes") which were expressly assumed by us. The 2006 Notes had an original
maturity date of August 31, 2007, carried an interest rate of 10% per annum,
payable in either cash or shares, and were convertible into shares of Common
Stock at a conversion rate of $0.50 per share at the option of the
investor. Each investor also received a number of shares of Common Stock
equal to 20% of his or her investment divided by $0.50. Thus, a total of
600,000 shares were initially issued to investors in the 2006 Notes. The
relative fair value of these shares was $250,000 and was recorded as a debt
discount and as additional paid-in capital. The debt discount was amortized
over the original term of the notes payable using the effective interest
method. The original issue discount rate was 23.44%. During the period
from February 21, 2006 (inception) to August 31, 2007, the entire discount of
$250,000 was amortized and recorded as interest expense.
We
evaluated the application of SFAS No. 133 and EITF 00-19. Based on the
guidance of SFAS No. 133 and EITF 00-19, we concluded that these instruments
were not required to be accounted for as derivatives.
On August
31, 2007 (the original Maturity Date), we repaid in cash six of the holders of
the 2006 Notes an aggregate amount of $424,637, of which $410,000 represented
principal and $14,637 represented accrued interest. On September 4, 2007,
an additional $44,624 of accrued and current period interest was repaid through
the issuance of 89,248 shares of our Common Stock. The remaining holders of
the 2006 Notes entered into an agreement with us whereby the maturity date of
the 2006 Notes was extended to February 28, 2008 and, beginning September 1,
2007 until the 2006 Notes are paid in full, the interest rate on the outstanding
principal increased to 12% per annum. In addition, we agreed to issue to
the remaining holders of the 2006 Notes, 218,000 shares of our common stock with
a value of $98,100 as consideration for extending the 2006 Note's maturity
date. We evaluated the application of EITF 96-19, "Debtor's Accounting for
a Modification or Exchange of Debt Instruments" and concluded that the revised
terms constituted a debt modification rather than a debt extinguishment and
accordingly, the value of the common stock has been treated as interest expense
in the accompanying statements of operations.
On
February 28, 2008, $1,090,000 of the 2006 Notes came due and we were unable to
repay them. We continued to accrue interest on the notes at 12%, the agreed
upon rate for the extension period. On March 6, 2008, we issued 130,449
shares of common stock in lieu of cash in payment of $65,221 of accrued and
current period interest to holders of 2006 Notes. On April 22, 2008, we
repaid $100,000 principal amount in cash to one of the holders of the
notes. During May 2008, we exchanged 99,395 shares of our Series A
Preferred in full satisfaction of our obligation under the notes to pay $965,000
of principal and $28,950 of interest, with each share of such preferred stock
being automatically convertible into 20 shares of our common stock, for an
aggregate of 1,987,900 shares of our common stock. The Series A Preferred
will automatically convert into shares of our Common Stock upon the
effectiveness of the Charter Amendment. At June 30, 2008, we have
outstanding $25,000 principal amount of the 2006 Notes with one
note holder.
2007
Convertible Notes
On
November 1, 2007, we sold $350,000 in convertible notes (the "2007 Notes") on
the following terms: each note matures October 31, 2008 and a 10% interest rate
payable in shares of our Common Stock based upon a conversion price of $ 0.35
per share. The investors in the 2007 Notes also received 200,004 shares of
Common Stock. The total proceeds from the sale of the 2007 Notes were
allocated between the 2007 Notes and the related common stock based upon the
relative fair value, which resulted in the allocation of $58,333 to the common
stock and $291,667 to the 2007 Notes. The $58,333 was recorded as a
discount to the 2007 Notes and as additional paid in capital. The debt
discount was being amortized over the term of the 2007 Notes using the effective
interest method.
We
evaluated the application of SFAS 133 and EITF 00-19 for the 2007 Notes and
concluded these instruments were not required to be accounted for as
derivatives. We also evaluated the application of EITF 98-05, "Accounting
for Convertible Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios," and EITF 00-27, "Application of Issue No. 98-5 to
Certain Convertible Instruments" and concluded that the conversion option was a
beneficial conversion feature with intrinsic value. After allocation of the
proceeds between the 2007 Notes and the common stock, the conversion option had
an intrinsic value of $58,333. This resulted in an additional discount to
be amortized over the term of the 2007 Notes as additional interest expense
using the effective interest method. The original issue discount rate was
53.83%.
During
May 2008, we exchanged 37,100 shares of our Series B Preferred in full
satisfaction of our obligation under the notes to pay $350,000 of principal and
$21,000 of interest, with each share of such preferred stock being automatically
convertible into 28.58 shares of our common stock, for an aggregate of
1,060,318 shares of our common stock. The Series B Preferred will
automatically convert into shares of our Common Stock upon the effectiveness of
the Charter Amendment.
NOTE
5. PREFERRED
STOCK AND COMMON STOCK
Preferred
Stock
Certain
of our outstanding (i) convertible promissory notes, in the aggregate principal
amount of $965,000 and bearing interest at 12% per annum from September 1, 2007
and (ii) convertible promissory notes, in the aggregate principal amount of
$350,000 and bearing interest of 10% per annum, due October 31, 2008, were
exchanged for shares of our Series A and Series B Preferred stock in full
satisfaction of our obligations under the notes including, without limitation,
the repayment of principal and accrued unpaid interest thereon.
Pursuant
to the exchange transaction, we issued 99,395 shares of Series A Preferred in
exchange for the redemption of $965,000 of principal and $28,950 of accrued
interest on the 12% notes, with each share of such preferred stock being
automatically convertible into 20 shares of our common stock, for an aggregate
of 1,987,900 shares of our common stock. Additionally, we issued 37,100
shares of Series B Preferred in exchange for the redemption of $350,000 of
principal and $21,000 of accrued interest on the 10% notes, with each share of
such preferred stock being automatically convertible into 28.58 shares of our
common stock, for an aggregate of 1,060,318 shares of our common stock. The
Series A and Series B Preferred stock will automatically convert into shares of
our common stock upon the effectiveness of the Charter Amendment. The 12%
notes matured on February 28, 2008 and the 10% notes were due to mature on
October 31, 2008.
Common
Stock
On August
21, 2007, we issued 100,000 shares of common stock with a value of $45,000 to a
non-employee as compensation for services rendered.
On
September 4, 2007, we issued 89,248 shares of common stock in lieu of cash in
payment of $44,624 of accrued and current period interest to noteholders who
chose to redeem their notes. (See Note 4.)
On
September 4, 2007, we issued 218,000 shares of common stock with a value of
$98,100 as consideration to those noteholders who chose to extend the maturity
date of their notes to February 28, 2008. (See Note 4.)
On
September 17, 2007, we issued 100,000 shares of common stock with a value of
$45,000 to a non-employee as compensation for services rendered.
On
September 19, 2007, our Board of Directors approved the issuance of 150,000
shares of common stock with a value of $55,500 to a former member of our Board
of Directors as compensation for assuming the role of Chief Executive
Officer.
On
November 1, 2007, we issued 200,004 shares of common stock with a relative fair
market value of $58,333 to purchasers of $350,000 of our newly issued
convertible notes. (See Note 4.)
On
November 7, 2007, we issued 310,435 shares of common stock in lieu of cash in
payment of $155,215 of accrued interest to holders of convertible notes issued
in 2006 who chose to extend the maturity date of their notes through February
28, 2008. (See Note 4.)
On March
4, 2008, our Board of Directors and the holders of a majority of the Company's
outstanding shares of common stock, approved an increase in the number of
authorized common shares that the Company may issue to 149,000,000
shares. As of the date hereof, the number of shares of common stock that
the Company may issue is 24,000,000, pending the effectiveness of the Charter
Amendment.
On March
6, 2008, we issued 130,449 shares of common stock in lieu of cash in payment of
$65,221 of accrued and current period interest to holders of our 2006
Notes. (See Note 4.)
Pursuant to restricted stock agreements entered into with Robert P. Munn, our
Chief Executive Officer and Carl A. Chase, our Chief Financial Officer, we have
agreed upon the effectiveness of the Charter Amendment to grant restricted stock
to each of Messrs. Munn and Chase. Mr. Munn is to receive 1,500,000 shares
and Mr. Chase is to receive 1,125,000 shares of our Common Stock, each which
vests equally as to one-third of the shares over a two year period, commencing
on the effectiveness of the Charter Amendment and each of the first and second
year anniversary of the grant dates. We valued the restricted stock
issuances on the grant date of their respective restricted stock agreements, May
22, 2008, at $0.52 per share and recorded compensation expense for Mr. Munn of
$301,671 and Mr. Chase of $226,254 for the vested portion of their
restricted stock awards. In addition, we represent on our consolidated
balance sheets and consolidated statement of changes in stockholders’ deficit
the issuance 580,137 shares of the restricted stock to Mr. Munn and 435,103
shares of restricted stock to Mr. Chase.
NOTE
6. GRANTS
OF WARRANTS AND OPTIONS
Effective
July 1, 2006, we adopted the fair value recognition provisions of Statement of
Financial Accounting Standard 123(R) “
Share-Based Payment”
(“SFAS
123(R)”) using the modified prospective transition method. In addition, the
Securities and Exchange Commission issued Staff Accounting Bulletin No. 107
“
Share-Based Payment
”
(“SAB 107”) in March 2005, which provides supplemental SFAS 123(R) application
guidance based on the views of the SEC. Under the modified prospective
transition method, compensation cost recognized in the fiscal year ended June
30, 2007, includes: (a) compensation cost for all share-based payments granted
prior to, but not yet vested as of July 1, 2006, based on the grant date fair
value estimated in accordance with the original provisions of SFAS No. 123, and
(b) compensation cost for all share-based payments granted beginning July 1,
2006, based on the grant date fair value estimated in accordance with the
provisions of SFAS 123(R). In accordance with the modified prospective
transition method, results for prior periods have not been
restated.
We use
the Black-Scholes option-pricing model to estimate option fair values. The
option-pricing model requires a number of assumptions, of which the most
significant are: expected stock price volatility, the expected pre-vesting
forfeiture rate and the expected option term (the amount of time from the grant
date until the options are exercised or expire).
Volatilities
are based on the historical volatility of our closing common stock
price. Expected term of options and warrants granted represents the period
of time that options and warrants granted are expected to be
outstanding. The risk-free rate for periods within the contractual life of
the options and warrants is based on the comparable U.S. Treasury rates in
effect at the time of each grant. The weighted average grant-date fair
value of options granted during the years ended June 30, 2008 and 2007 was $2.26
and $3.56, respectively. The weighted average grant date fair value of
warrants granted during the years ended June 30, 2008 and 2007 was $2.36 and
$4.39, respectively. There have been no options or warrants exercised
during the period May 12, 2006 through June 30, 2008.
None of
the stock options or warrants listed below are exercisable until such time as we
file our Articles of Amendment to our Articles of Incorporation with the State
of Nevada to increase our authorized shares of common stock from the current
authorized of 24,000,000 shares to 149,000,000 shares.
On
December 28, 2006, we granted two non-employees warrants to purchase up to an
aggregate of 1,500,000 shares of our common stock at an exercise price of $0.25
per share for services rendered. The options vested immediately and
terminate on December 28, 2011. The fair value of the warrants was
determined utilizing the Black-Scholes stock option valuation model. The
significant assumptions used in the valuation were: the exercise price as noted
above; the market value of our common stock on December 28, 2006, $0.25;
expected volatility of 105%; risk free interest rate of 4.69%; and a term of
five years. T he fair value of the warrants was $294,722 at December 28,
2006 and was recorded as share based compensation.
On May
22, 2007, we granted three non-employees warrants to purchase up to an aggregate
of 1,050,000 shares of our common stock at an exercise price of $0.30 per share
for services rendered. The warrants vested immediately and terminate on
May 22, 2012. The fair value of the warrants was determined utilizing the
Black-Scholes option-pricing model. The significant assumptions used in
the valuation were: the exercise price as noted above; the market value of our
common stock on May 22, 2007, $0.30; expected volatility of 160%; risk free
interest rate of 4.76%; and a term of five years. The fair value of the
warrants was $294,623 at May 22, 2007 and was recorded as share based
compensation.
On
October 26, 2007, we granted 250,000 employee options and 1,000,000 warrants to
two non-employees to purchase up to an aggregate of 1,250,000 shares of our
common stock at an exercise price of $0.35 per share for services
rendered. The options and warrants vested immediately and terminate on
October 26, 2012. The fair value of the options and warrants of $362,822,
which was expensed immediately due to the vesting provisions and the lack of a
future service requirement, was determined utilizing the Black-Scholes
option-pricing model. The significant assumptions used in the valuation
were: the exercise price as noted above; the market value of our common stock on
October 26, 2007, $0.35; expected volatility of 170%; risk free interest rate of
4.04%; and an expected term of 2.5 years. Due to the limited trading
history of our common stock, the volatility assumption was estimated by
averaging the volatility of two active companies that have operations similar to
ours. The warrants qualify as “plain vanilla” warrants under the provisions
of Staff Accounting Bulletin No. 107 ("SAB 107") and, due to limited warrant
exercise data available to us, the term was estimated pursuant to the provisions
of SAB 107.
On
December 19, 2007, we granted our former CEO, options to purchase up to 500,000
shares of our common stock at an exercise price of $0.35 per share for services
rendered. The options vested immediately and terminate on December 19,
2012. The fair value of the options of $124,997, which was expensed
immediately due to the vesting provisions and the lack of a future service
requirement, was determined utilizing the Black-Scholes option-pricing
model. The significant assumptions used in the valuation were: the exercise
price as noted above; the market value of ABC's common stock on December 19,
2007, $0.30; expected volatility of 177%; risk free interest rate of 3.46%; and
a term of 2.5 years. Due to the limited trading history of our common
stock, the volatility assumption was estimated by averaging the volatility of
two active companies that have operations similar to ours. The options
qualify as “plain vanilla” options under the provisions of Staff Accounting
Bulletin No. 107 ("SAB 107") and, due to limited option exercise data available
to us, the term was estimated pursuant to the provisions of SAB
107.
On
December 19, 2007, we granted two non-employees warrants to purchase up to an
aggregate of 1,100,000 shares of our common stock at an exercise price of $0.35
per share for services rendered. The warrants vested immediately and
terminate on December 19, 2012. The fair value of the warrants of $274,993,
which was expensed immediately due to the vesting provisions and the lack of a
future service requirement, was determined utilizing the Black-Scholes
option-pricing model. The assumptions and term utilized in the valuation
were identical to those described above for valuation of the options granted to
our former CEO on December 19, 2007.
On
February 28, 2008, we granted our former CEO, additional options to purchase up
to 250,000 shares of our common stock at an exercise price of $0.54 per share
for services rendered. The options vested immediately and terminate on
February 27, 2013. The fair value of the options of $114,425, which was
expensed immediately due to the vesting provisions and the lack of a future
service requirement, was determined utilizing the Black-Scholes option-pricing
model. The significant assumptions used in the valuation were: the exercise
price as noted above; the market value of our common stock on February 28, 2007,
$0.54; expected volatility of 178%; risk free interest rate of 2.73%; and a term
of 2.5 years. Due to the limited trading history of our common stock, the
volatility assumption was estimated by averaging the volatility of two active
companies that have operations similar to ours. The options qualify as
“plain vanilla” options under the provisions of Staff Accounting Bulletin No.
107 ("SAB 107") and, due to limited option exercise data available to us, the
term was estimated pursuant to the provisions of SAB 107.
On
February 28, 2008, we granted a non-employee a warrant to purchase up to an
aggregate of 3,300,000 shares of our common stock at an exercise price of $0.54
per share for services rendered. The warrants vested immediately and
terminate on February 27, 2013. The fair value of the warrants of
$1,510,408, which was expensed immediately due to the vesting provisions and the
lack of a future service requirement, was determined utilizing the Black-Scholes
option-pricing model. The assumptions and term utilized in the valuation
were identical to those described above for valuation of the options granted to
our former CEO on February 28, 2008.
As part
of our employment agreement with Mr. Munn, our CEO, we granted stock options,
exercisable for up to 500,000 shares of our common stock, at an exercise price
of $0.52 per share, which option vests with respect to these shares on the
effectiveness of the Articles of Amendment to the Articles of Incorporation,
500,000 shares, at an exercise price of $0.57 per share, which option vests on
May 22, 2009, and 500,000 shares, at an exercise price of $0.62 per share, which
option vests on May 22, 2010. The fair value of the $0.52 options of
$232,369, which was expensed immediately due to the vesting provisions; the
$0.57 options of $252,090 which is being amortized over the one year vesting
period and the $0.62 options of $254,215 which is being amortized over the two
year vesting period, was determined using the Black-Scholes option-pricing
model. The significant assumptions used in the valuation were: (i) for the
$0.52 options; the exercise price, the market value of our common stock on May
22, 2007, $0.52; expected volatility of 169%; risk free interest rate of 3.52%;
and a term of 3.5 years; (ii) for the $0.57 options; the exercise price, the
market value of our common stock on May 22, 2007, $0.52; expected volatility of
216%; risk free interest rate of 3.52%; and a term of 4.0; and (iii) for the
$0.62 options; the exercise price, the market value of our common stock on May
22, 2007, $0.52; expected volatility of 216%; risk free interest rate of 3.52%;
and a term of 4.5 years. The options qualify as “plain vanilla” options
under the provisions of Staff Accounting Bulletin No. 107 ("SAB 107") and, due
to limited option exercise data available to us, the term was estimated pursuant
to the provisions of SAB 107.
As part
of our employment agreement with Mr. Chase, our CFO, we granted stock options,
exercisable for up to 375,000 shares of our common stock, at an exercise price
of $0.52 per share, which option vests with respect to these shares on the
effectiveness of the Articles of Amendment to the Articles of Incorporation,
375,000 shares, at an exercise price of $0.57 per share, which option vests on
May 22, 2009, and 375,000 shares, at an exercise price of $0.62 per share, which
option vests on May 22, 2010. The fair value of the $0.52 options of
$174,277, which was expensed immediately due to the vesting provisions; the
$0.57 options of $189,068 which is being amortized over the one year vesting
period and the $0.62 options of $190,661 which is being amortized over the two
year vesting period, was determined using the Black-Scholes option-pricing
model. The assumptions and term utilized in the valuation were identical to
those described above for valuation of the options granted to our CEO on May 22,
2008.
As part
of a commission due to the investment banking firm that identified the holders
of the Convertible Debentures, we have agreed to grant warrants, exercisable for
up to 225,000 shares of our common stock, at an exercise price of $0.33 per
share. The warrants vested immediately and terminate on May 22,
2013. The fair value of the warrants of $111,192, which was
capitalized as deferred financing costs to be amortized over the life of the
Debentures using the effective interest rate method, was determined
utilizing the Black-Scholes option-pricing model. The significant
assumptions used in the valuation were: the exercise prices as noted above; the
market value of our common stock on May 22, 2008, $0.52; expected volatility of
216%; risk free interest rate of 3.24%; and a term of 2.5 years. The
options qualify as “plain vanilla” options under the provisions of Staff
Accounting Bulletin No. 107 ("SAB 107") and, due to limited option exercise data
available to us, the term was estimated pursuant to the provisions of SAB
107.
Due to
the limited trading history of our common stock, the volatility assumption was
estimated by using the volatility of two active companies that have operations
similar to ours.
A summary of stock option transactions for the years ended June 30, 2008
and 2007 is as follows:
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Options
|
|
|
Wtd.
Avg.
Exercise
Price
|
|
|
Options
|
|
|
Wtd.
Avg.
Exercise
Price
|
|
|
Outstanding
beginning of year
|
|
|
150,000
|
|
|
$
|
0.30
|
|
|
|
--
|
|
|
$
|
--
|
|
|
Granted
|
|
|
3,625,000
|
|
|
|
0.52
|
|
|
|
150,000
|
|
|
|
0.30
|
|
|
Exercised
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
Forfeited
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
Outstanding
end of year
|
|
|
3,775,000
|
|
|
$
|
0.51
|
|
|
|
150,000
|
|
|
$
|
0.30
|
|
|
Exercisable
end of year
|
|
|
2,025,000
|
|
|
$
|
0.44
|
|
|
|
150,000
|
|
|
$
|
0.30
|
|
|
Weighted
average fair value of options granted
|
|
|
|
|
|
$
|
2.26
|
|
|
|
|
|
|
$
|
3.56
|
|
At June
30, 2008, the range of exercise prices and weighted average remaining
contractual life of outstanding options was $0.30 to $0.62 and 4.75 years,
respectively.
A summary
of warrant transactions for the years ended June 30, 2008 and 2007 is as
follows:
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Warrants
|
|
|
Wtd.
Avg.
Exercise
Price
|
|
|
Warrants
|
|
|
Wtd.
Avg.
Exercise
Price
|
|
|
Outstanding
beginning of year
|
|
|
3,500,000
|
|
|
$
|
0.32
|
|
|
|
1,100,000
|
|
|
$
|
0.43
|
|
|
Granted
|
|
|
8,625,000
|
|
|
|
0.42
|
|
|
|
2,400,000
|
|
|
|
0.27
|
|
|
Exercised
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
Forfeited
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
Outstanding
end of year
|
|
|
12,125,000
|
|
|
$
|
0.39
|
|
|
|
3,500,000
|
|
|
$
|
0.32
|
|
|
Exercisable
end of year
|
|
|
12,125,000
|
|
|
$
|
0.39
|
|
|
|
3,500,000
|
|
|
$
|
0.32
|
|
|
Weighted
average fair value of warrants granted
|
|
|
|
|
|
$
|
2.36
|
|
|
|
|
|
|
$
|
4.39
|
|
At June
30, 2008, the range of exercise prices and weighted average remaining
contractual life of outstanding warrants was $0.05 to $0.60 and 3.8 years,
respectively.
NOTE
7. INCOME
TAXES
We use
the liability method, where deferred tax assets and liabilities are determined
based on the expected future tax consequences of temporary differences between
the carrying amounts of assets and liabilities for financial and income tax
reporting purposes. During fiscal years ended June 30, 2008,and 2007, the
Company incurred net losses and, therefore, has no tax liability. The net
deferred tax asset generated by the loss carry-forward has been fully
reserved. The cumulative net operating loss carry-forward is approximately
$2,684,552 at June 30, 2008.
At June
30, 2008 and 2007, deferred tax assets consisted of the following:
|
|
2008
|
|
2007
|
|
|
Deferred
tax assets:
|
|
|
|
|
|
Net
operating loss
|
$ 939,593
|
|
$
|
465,622
|
|
|
Less:
valuation allowance
|
(939,593
|
)
|
|
(465,622
|
)
|
|
Net
deferred tax assets
|
$
--
|
|
$
|
--
|
|
The net
operating loss will expire beginning in 2027. The valuation allowance
increased by $473,971 during the year ended June 30, 2008.
NOTE
8. SUBSEQUENT
EVENTS
Acquisition
of Voyager Gas Corporation
On May
22, 2008, we entered into a Stock Purchase and Sale Agreement (the “Voyager
Agreement”) with Voyager Gas Holdings, L.P. (“Seller”) and Voyager Gas
Corporation (“Voyager”). On September 2, 2008, we completed our purchase of
all of the outstanding capital stock of Voyager Gas Corporation, the owner of
interests in oil and gas lease blocks located in Duval County, Texas, including
working and other interests in oil and gas leases, wells, and properties,
together with rights under related operating, marketing, and service contracts
and agreements, seismic exploration licenses and rights, and personal property,
equipment and facilities (the "Voyager Acquisition"). Upon the completion
of the Voyager Acquisition, Voyager Gas Corporation became a wholly-owned
subsidiary of our company. Our newly acquired subsidiary’s properties
consist of approximately 14,300 net acres located in Duval County, Texas, or the
Duval County Properties, as defined and more particularly described elsewhere in
this annual report under “
Item
2. Description of Propertie
s
.” The purchase price
also included a proprietary 3-D seismic data base covering a majority of the
property.
The
purchase price paid in the Voyager Acquisition consisted of cash consideration
of $35.0 million, plus 10,000 newly issued shares of our preferred stock
designated as Series D preferred stock (the “Series D Preferred”), having an
agreed upon value of $7.0 million. Upon the effectiveness of an amendment
to our Articles of Incorporation increasing the number of shares of common stock
that we may issue (the “Charter Amendment”), the Series D Preferred will
automatically convert into 17.5 million shares of our common stock, as provided
by the Certificate of Designation with respect to the Series D Preferred filed
with the State of Nevada on August 27, 2008.
CIT
Credit Facility
On
September 2, 2008, we entered into (i) a First Lien Credit Agreement (the
“Revolving Loan”) among the Company, CIT Capital USA Inc. (“CIT Capital”), as
Administrative Agent and the lenders named therein and party thereto (the
“Lenders”) and (ii) a Second Lien Term Loan Agreement (the “Term Loan”) among
the Company, CIT Capital and the Lenders. The Revolving Loan and Term Loan
are collectively referred to herein as the “CIT Credit Facility.”
The
Revolving Loan provides for a $50.0 million senior secured revolving credit
facility which is subject to an initial borrowing base of $14.0 million, or an
amount determined based on semi-annual review of our proved oil and gas
reserves. As of September 4, 2008, we had borrowed $11.5 million under the
Revolving Loan to finance the Voyager Acquisition, to repay the related bridge
loan and transaction expenses, and to fund capital expenditures
generally. Monies advanced under the Revolving Loan mature in three years
and bear interest at a rate equal to LIBOR plus 1.75% to 2.50% based upon a
percentage of funds advanced against the Revolving Loan as it relates to the
borrowing base.
The Term
Loan provides for a one-time advance to us of $22.0 million. We drew down
the full amount on September 2, 2008 to finance the Voyager Acquisition and to
repay the related bridge loan and transaction expenses. Monies borrowed
under the Term Loan mature in three and one-half years and bear interest at a
rate equal to LIBOR plus 5% during the first twelve months after closing and
LIBOR plus 7.50%, thereafter.
All of
the oil and natural gas properties acquired in the Voyager Acquisition are
pledged as collateral for the CIT Credit Facility. We have also agreed not
to pay dividends on our Common Stock.
As
further consideration for entering into the CIT Credit Facility, we issued to
CIT Capital a warrant exercisable at an exercise price of $0.35 per share for up
to 24,199,996 shares of our common stock, or approximately 27.5% of our common
stock on a fully-diluted basis at September 2, 2008. The warrant is
exercisable for a period of seven years, contains certain anti-dilution
provisions and is not exercisable until the effectiveness of the Charter
Amendment.
Related
Party Transaction
On August
20, 2008, we issued 500 shares of our newly designated Series C Preferred
(defined below) to Alan D. Gaines, our largest stockholder and a director of our
Company, in exchange for the cancellation of a promissory note made by us in
favor of Mr. Gaines, in the principal amount of $50,000. In addition to
these shares of Series C Preferred, on August 20, 2008 we also issued an
additional 500 shares of Series C Preferred to Mr. Gaines for cash consideration
of $50,000. The Series C Preferred are automatically redeemable by our
Company at the rate of $100 for every one (1) share of Series C Preferred being
redeemed upon the closing of a debt or equity financing whereby we realize gross
proceeds in excess of $5,000,000.
Shares of
preferred stock, $.001 par value, designated out of our authorized “blank check
preferred stock” by our Board as “Series C Preferred Stock” (the “Series C
Preferred”), have the rights, preferences, powers, restrictions and obligations
set forth in the Certificate of Designation filed with the Secretary of State of
the State of Nevada on August 20, 2008, including the automatic redemption
rights referenced above. However, holders of the Series C Preferred are not
entitled to any dividends, preemption, voting, conversion or other rights as a
stockholder of our Company.
(b)
Financial Statements of Voyager Gas Corporation
(Predecessor)
VOYAGER
GAS CORPORATION
|
|
Financial
Statements Together With
|
|
|
Report
of Independent Auditors
|
|
|
December
31, 2007 and 2006
|
MONTGOMERY
COSCIA GREILICH LLP
Certified
Public Accountants
MONTGOMERY
COSCIA GREILICH LLP
Certified
Public Accountants
2701
Dallas Parkway, Suite 300
Plano,
Texas 75093
972.378.0400
p
972.378.0416
f
Thomas A.
Montgomery, CPA
Matthew
R. Coscia, CPA
Paul E.
Greilich, CPA
Jeanette
A. Musacchio
James M.
Lyngholm
Chris C.
Johnson, CPA
INDEPENDENT
AUDITOR’S REPORT
To the
Stockholders of
Voyager
Gas Corporation
We have
audited the accompanying balance sheets of Voyager Gas Corporation as of
December 31, 2007 and 2006 and the related statements of operations, changes in
stockholders’ equity and cash flows for the years then ended. 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 audit in accordance with standards of the Public Company
Acounting 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 consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the circumstances,
but not for the purpose of expressing an opinion on the effectiveness of the
Company’s internal control over financial reporting. Accordingly, we
express no such opinion. An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our
opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Voyager Gas Corporation as of
December 31, 2007 and 2006, and the results of its operations and its cash flows
for the years then ended in conformity with accounting principles generally
accepted in the United States of America.
/s/ MONTGOMERY
COSCIA GREILICH LLP
MONTGOMERY
COSCIA GREILICH LLP
Plano,
Texas
May 8,
2008
VOYAGER
GAS CORPORATION
BALANCE
SHEETS
DECEMBER
31, 2007 AND 2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
--
|
|
|
$
|
631,755
|
|
|
Trade
accounts receivable, net of allowance of $0
|
|
|
1,791,519
|
|
|
|
1,811,319
|
|
|
Option
contracts
|
|
|
205,639
|
|
|
|
1,445,403
|
|
|
Other
current assets
|
|
|
7,933
|
|
|
|
6,333
|
|
|
Total
current assets
|
|
|
2,005,091
|
|
|
|
3,894,810
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
38,798,447
|
|
|
|
52,763,865
|
|
|
Other
long-term assets
|
|
|
16,728
|
|
|
|
17,714
|
|
|
Total
assets
|
|
$
|
40,820,266
|
|
|
$
|
56,676,389
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
|
Bank
overdraft
|
|
$
|
316,239
|
|
|
$
|
--
|
|
|
Accounts
payable and accrued expenses
|
|
|
1,517,811
|
|
|
|
1,190,080
|
|
|
Credit
facility, current
|
|
|
--
|
|
|
|
15,000,000
|
|
|
Deferred
taxes
|
|
|
--
|
|
|
|
511,506
|
|
|
Income
taxes currently payable
|
|
|
771,352
|
|
|
|
--
|
|
|
Total
current liabilities
|
|
|
2,605,402
|
|
|
|
16,701,586
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit
facility, long-term
|
|
|
15,116,287
|
|
|
|
29,965,589
|
|
|
Deferred
income taxes
|
|
|
4,876,267
|
|
|
|
369,447
|
|
|
Total liabilities
|
|
|
22,597,956
|
|
|
|
47,036,622
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
|
|
Common
stock, $.01 par value, 10 shares authorized, issued and
outstanding
|
|
|
--
|
|
|
|
--
|
|
|
Additional
paid-in capital
|
|
|
7,140,000
|
|
|
|
7,140,000
|
|
|
Retained
earnings
|
|
|
11,082,310
|
|
|
|
2,499,767
|
|
|
Total
stockholders’ equity
|
|
|
18,222,310
|
|
|
|
9,639,767
|
|
|
Total
liabilities and stockholders' equity
|
|
$
|
40,820,266
|
|
|
$
|
56,676,389
|
|
The
accompanying notes are an integral part of these financial
statements.
VOYAGER
GAS CORPORATION
STATEMENTS
OF OPERATIONS
FOR
THE YEARS ENDED DECEMBER 31, 2007 AND 2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
Oil
and gas revenue
|
|
$
|
10,739,352
|
|
|
$
|
15,370,438
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
|
Lease
operating expenses
|
|
|
2,464,653
|
|
|
|
2,936,265
|
|
|
Production
tax
|
|
|
836,349
|
|
|
|
721,510
|
|
|
Exploration
expenses
|
|
|
9,399
|
|
|
|
391,482
|
|
|
Depletion,
depreciation and amortization
|
|
|
4,834,352
|
|
|
|
5,440,973
|
|
|
Interest
expense
|
|
|
979,832
|
|
|
|
1,928,909
|
|
|
General
and administrative
|
|
|
970,701
|
|
|
|
785,059
|
|
|
Total
costs and expenses
|
|
|
10,095,286
|
|
|
|
12,204,198
|
|
|
Income
from operations
|
|
|
644,066
|
|
|
|
3,166,240
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income:
|
|
|
|
|
|
|
|
|
|
Gain
on sale of lease
|
|
|
12,702,811
|
|
|
|
--
|
|
|
Income
before provision for income taxes
|
|
|
13,346,877
|
|
|
|
3,166,240
|
|
|
Income
tax expense
|
|
|
(4,764,334
|
)
|
|
|
(805,503
|
)
|
|
Net
income
|
|
$
|
8,582,543
|
|
|
$
|
2,360,737
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these financial
statements.
VOYAGER
GAS CORPORATION
STATEMENTS
OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR
THE YEARS ENDED DECEMBER 31, 2007 AND 2006
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Total
|
|
|
|
|
Common
Stock
|
|
|
Paid-In
|
|
|
Retained
|
|
|
Stockholders’
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Earnings
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2005
|
|
|
10
|
|
|
$
|
--
|
|
|
$
|
7,140,000
|
|
|
$
|
139,030
|
|
|
$
|
7,279,030
|
|
|
Net
income
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
2,360,737
|
|
|
|
2,360,737
|
|
|
Balance,
December 31, 2006
|
|
|
10
|
|
|
|
--
|
|
|
|
7,140,000
|
|
|
|
2,499,767
|
|
|
|
9,639,767
|
|
|
Net
income
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
8,582,543
|
|
|
|
8,582,543
|
|
|
Balance,
December 31, 2007
|
|
|
10
|
|
|
$
|
--
|
|
|
$
|
7,140,000
|
|
|
$
|
11,082,310
|
|
|
$
|
18,222,310
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these financial
statements.
VOYAGER
GAS CORPORATION
STATEMENTS
OF CASH FLOWS
FOR
THE YEARS ENDED DECEMBER 31, 2007 AND 2006
|
|
|
2007
|
|
|
2006
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
8,582,543
|
|
|
$
|
2,360,737
|
|
|
Adjustments
to reconcile net income to cash provided by operating
activities:
|
|
|
|
|
|
|
Depletion,
depreciation and amortization
|
|
|
4,834,351
|
|
|
|
5,440,973
|
|
|
Deferred
income taxes
|
|
|
3,995,314
|
|
|
|
805,503
|
|
|
Gain
on sale of leased property
|
|
|
(12,702,811
|
)
|
|
|
370,188
|
|
|
Unrealized
derivative (gain) loss
|
|
|
1,239,764
|
|
|
|
(1,868,442
|
)
|
|
(Increase)
decrease in operating assets:
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
19,800
|
|
|
|
(1,194,427
|
)
|
|
Other
current assets
|
|
|
(1,600
|
)
|
|
|
853
|
|
|
Other
long-term assets
|
|
|
986
|
|
|
|
(7866
|
)
|
|
Increase (decrease) in operating liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
327,731
|
|
|
|
400,440
|
|
|
Income
taxes payable
|
|
|
771,352
|
|
|
|
(11,572
|
)
|
|
Net
cash provided by operating activities
|
|
|
7,067,430
|
|
|
|
6,296,387
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
Purchase
of oil and gas properties
|
|
|
(7,195,160
|
)
|
|
|
(44,656,768
|
)
|
|
Proceeds
from sale of oil and gas properties
|
|
|
29,029,038
|
|
|
|
--
|
|
|
Net
cash provided by (used in) investing activities
|
|
|
21,833,878
|
|
|
|
(44,656,768
|
)
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
Net
(repayments) proceeds from long-term debt
|
|
|
(29,849,302
|
)
|
|
|
39,172,563
|
|
|
Bank
overdraft
|
|
|
316,239
|
|
|
|
(180,427
|
)
|
|
Net
cash provided by (used in) financing activities
|
|
|
(29,533,063
|
)
|
|
|
38,992,136
|
|
|
Net
increase (decrease) in cash
|
|
|
(631,755
|
)
|
|
|
631,755
|
|
|
Cash
at beginning of year
|
|
|
631,755
|
|
|
|
--
|
|
|
Cash
at end of year
|
|
$
|
--
|
|
|
$
|
631,755
|
|
|
Supplemental
information:
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
1,255,923
|
|
|
$
|
1,635,908
|
|
|
Cash
paid for income taxes
|
|
$
|
--
|
|
|
$
|
--
|
|
The
accompanying notes are an integral part of these financial
statements.
VOYAGER
GAS CORPORATION
Notes to
Financial Statements
December
31, 2007 and 2006
Note
1. Organization
Voyager
Gas Corporation (the “Company”) was formed in May 2004 as a Delaware
corporation. The Company is engaged in the acquisition, development,
production, and sale of oil and gas. The Company sells its oil and gas
products primarily to domestic pipelines and refineries.
Note
2. Summary of Significant Accounting Policies
A summary
of the Company’s significant accounting policies consistently applied in the
preparation of the accompanying financial statements as follows:
Basis
of Accounting and Revenue Recognition
The
financial statements are prepared on the accrual basis of accounting in
accordance with generally accepted accounting principles. Revenues and
their related costs are recognized when petroleum products are delivered to the
customer in accordance with the underlying sales contract.
Cash
and Cash Equivalents
For
purposes of the statement of cash flows, the Company considers all short-term
securities with an original maturity of three months or less to be cash
equivalents. There were no cash equivalents at December 31, 2007 or
2006.
Accounts
Receivable
At
December 31, 2007 and 2006, accounts receivable consisted primarily of accrued
oil and gas revenue. The Company extends unsecured credit to its customers
in the ordinary course of business but mitigates the associated credit risk by
performing credit checks and actively pursuing past due accounts. The
company does not have a history of uncollectible accounts, and did not record an
allowance for bad debt at December 31, 2007 or 2006.
Property
and Equipment
The
Company capitalizes all exploratory well costs until a determination is made
that the well has found proved reserves or is deemed noncommercial, in which
case the well costs are charged to exploration expense.
The
Company uses the successful efforts method of accounting for oil and gas
producing activities. Costs to acquire mineral interests in oil and gas
properties, to drill and equip exploratory wells that find proved reserves, to
drill and equip development wells and related asset retirement costs are
capitalized. Costs to drill exploratory wells that do not find proved
reserves, geological and geophysical costs, and costs of carrying and retaining
unproved properties are expensed. Exploratory expenses and unsuccessful
exploratory well costs were $9,399 and $391,482 for the years ended December 31,
2007 and 2006, respectively.
VOYAGER
GAS CORPORATION
Notes to
Financial Statements, Continued
Note
2. Summary of Significant Accounting Policies, continued
Property
and Equipment, continued
Unproved
oil and gas properties that are individually significant are periodically
assessed for impairment of value and a loss is recognized at the time of
impairment by providing an impairment allowance. There were no unproved oil
and gas properties at December 31, 2007 and 2006.
Other
property and equipment consists of lease and well equipment, automobiles and
office furniture and equipment. Major renewals and improvements are
capitalized while the costs of repairs and maintenance are charged to expense as
incurred. The costs of assets retired or disposed and the related
accumulated depreciation are removed from the accounts, and the resulting gain
or loss is reflected in operations.
The
Company provides depreciation, depletion and amortization of their investment in
producing oil and natural gas properties on the units-of-production method,
based upon qualified internal reserve engineer estimates of recoverable oil and
natural gas reserves from the property. Depreciation expense for other
property and equipment is depreciated on a straight-line basis over the
estimated useful lives of three to seven years.
Impairment
of Assets
The
Company evaluates producing property costs for impairment and reduces such costs
to fair value if the sum of expected undiscounted future cash flows is less than
net book value pursuant to SFAS 144,
Accounting for the Impairment or
Disposal of Long-Lived Assets
. The Company assesses impairment of
non-producing leasehold costs and undeveloped mineral and royalty interests
periodically on a property-by-property basis. The Company charges any
impairment in value to expense in the period incurred. There was no
impairment loss recognized for the years ended December 31, 2007 and
2006.
Capitalized
Interest
The
Company capitalizes interest on significant investments in unproved properties
that were not being currently depreciated, depleted or amortized and on which
exploration activities were in progress. Interest is capitalized using the
weighted average interest rate on its outstanding borrowings. There was no
capitalized interest for the years ended December 31, 2007 and
2006.
Income
taxes
Provisions
for income taxes are based on taxes payable or refundable for the current year
and deferred taxes on temporary differences between the amount of taxable income
and pretax financial income and between the tax bases of assets and liabilities
and their reported amounts in the financial statements. Deferred tax
assets and liabilities are included in the financial statements at currently
enacted income tax rates applicable to the period in which the deferred tax
assets and liabilities are expected to be realized or settled as prescribed in
SFAS 109,
Accounting for
I
ncome
Taxes.
As changes in tax laws or rates are enacted, deferred
tax assets and liabilities are adjusted through the provision for income
taxes.
VOYAGER
GAS CORPORATION
Notes to
Financial Statements, Continued
Note
2. Summary of Significant Accounting Policies, continued
Use
of estimates
The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Significant
estimates include the evaluation of proved reserves and related depletion
expense as well as changes in the value of unrealized option
contracts.
Environmental
Matters
Environmental
expenditures are expensed or capitalized, as appropriate, depending on their
future economic benefit. Expenditures that relate to an existing condition
caused by past operations, and that do not have future economic benefit are
expensed. Liabilities related to future costs are recorded on an
undiscounted basis when environmental assessments and/or remediation activities
are probable and the costs can be reasonably estimated. Any insurance
recoveries are recorded as assets when received. There are no estimated
environmental liabilities at December 31, 2007 and 2006.
Abandonment
Costs
SFAS 143
requires that the fair value of a liability for a retirement obligation be
recognized in the period in which the liability is incurred. For oil and
gas properties, this is the period in which an oil and gas well is acquired or
drilled. The asset retirement obligation is capitalized as part of the
carrying amount of the Company’s oil and gas properties at its discounted fair
value. The liability is then accreted each period until the liability is
settled or the well is sold, at which time the liability is reversed. The
Company has not recorded an abandonment cost liability at December 31, 2007 or
2006 because it believes that any costs, net of related salvage value, are
insignificant.
Option
Contracts
The
Company enters into option contracts to reduce the effect of the volatility of
price changes on the oil and gas products sold. Realized gains and losses
on option contracts are included as component of oil and gas
sales. Unrealized gains and losses due to changes in fair value of option
contracts not qualifying for designation as either cash flow or fair value
hedges that occur prior to maturity are also included as a component of oil and
gas sales.
The
Company has established the fair value of all derivative instruments using
estimates determined by financial risk management professionals engaged to
execute hedging activities on behalf of the Company. These values are based
upon, among other things, futures prices, volatility, time to maturity and
credit risk. The values the Company reports in their financial statements
change as these estimates are revised to reflect actual results, changes in
market conditions or other factors.
VOYAGER
GAS CORPORATION
Notes to
Financial Statements, Continued
Note
2. Summary of Significant Accounting Policies, continued
Option
Contracts, continued
SFAS
133,
Accounting for Derivative
Instruments and Hedging Activities
, establishes accounting and reporting
standards requiring that derivative instruments (including certain derivative
instruments embedded in other contracts) be recorded at fair value and included
in the balance sheet as assets or liabilities. The accounting for changes
in the fair value of a derivative instrument depends on the intended use of the
derivative and the resulting designation, which is established at the inception
of a derivative. For derivative instruments designated as cash flow
hedges, changes in fair value, to the extent the hedge is effective, are
recognized in other comprehensive income until the derivative instrument is sold
or recognized in earnings. Any change in the fair value resulting from
ineffectiveness, as defined by SFAS 133, is recognized in oil and gas
sales.
No option
contracts expense or benefit was recognized in other comprehensive income in
2007 or 2006. For the years ended December 31, 2007 and 2006, realized
gains (losses) of $630,539 and ($267,852) and unrealized gains (losses) of
($1,239,764) and $1,868,442 were recorded, net, in oil and gas sales,
respectively.
Concentrations
and Credit Risk
Financial
instruments that potentially subject the Company to a concentration of credit
risk consist principally of cash, accounts receivable and its option contract
instruments. The Company places its cash with high credit quality
financial institutions and has not experienced any such losses. The
Company sells its oil and natural gas to two customers. The Company places
their option contract instruments with financial institutions and other firms
that they believe have high credit ratings.
Note
3. Acquisitions and Sales of Lease Properties
Voyager
South Texas Holdings, L.L.C. (“VST”) was formed in May 2006, in order to
facilitate a Section 1031 exchange of certain oil gas lease properties. The
Company borrowed and guaranteed funds under its credit facility to fund the
acquisition of the Duval Lease property through VST.
The
acquisition of the Duval Lease was recorded by allocating the total purchase
consideration to the fair values of the net assets acquired as
follows:
|
Net
assets acquired:
|
|
|
|
|
Proven,
developed properties
|
|
$
|
22,065,415
|
|
|
Proven,
undeveloped properties
|
|
|
13,298,590
|
|
|
Tangible
drilling costs
|
|
|
5,508,670
|
|
|
Total
purchase price
|
|
$
|
40,872,675
|
|
VOYAGER
GAS CORPORATION
Notes to
Financial Statements, Continued
Note
3. Acquisitions and Sales of Lease Properties, continued
To
complete the IRS Section 1031 exchange, the Company executed an asset sale
agreement in January 2007 to sell the Garza Lease property for approximately
$29,000,000 in cash, resulting in a gain of approximately
$13,000,000. Included in property and equipment is approximately
$16,000,000 of assets held for sale at December 31, 2006. In February 2007,
VST was merged with the Company. As a result of the economic dependencies
and debt guarantees between the Company and VST at December 31, 2006, the
financial statements of VST have been combined for financial statement
presentation purposes. All inter-company profits, transactions and balances
have been eliminated in the combined financial statements.
The IRS
Section 1031 exchange did not qualify for like-kind exchange accounting for book
purposes because the counter parties were not the same and the earnings process
was completed with each leg of the exchange.
Note
4. Property and Equipment
Property
and equipment consisted of the following at December 31, 2007 and
2006:
|
|
|
2007
|
|
|
2006
|
|
|
Non-producing
leaseholds
|
|
$
|
13,298,591
|
|
|
$
|
14,025,344
|
|
|
Producing
leaseholds and related costs
|
|
|
33,287,330
|
|
|
|
43,691,392
|
|
|
Lease
and well equipment
|
|
|
1,125,349
|
|
|
|
1,522,491
|
|
|
Furniture,
fixtures, and office equipment
|
|
|
25,400
|
|
|
|
24,650
|
|
|
Automobiles
|
|
|
28,688
|
|
|
|
28,688
|
|
|
|
|
|
47,765,358
|
|
|
|
59,292,565
|
|
|
Accumulated
depreciation, depletion and amortization
|
|
|
(8,966,911
|
)
|
|
|
(6,528,700
|
)
|
|
|
|
$
|
38,798,447
|
|
|
$
|
52,763,865
|
|
Depreciation,
depletion and amortization expense for the years ended December 31, 2007 and
2006 was $4,834,351 and $5,440,973, respectively. Depletion expense per
equivalent Mcf for the years ended December 31, 2007 and 2006, was $3.60
per Mcfe and $3.02 per Mcfe, respectively.
Note
5. Credit Facility
On March
22, 2005, the Company entered into a three-year asset-based borrowing facility
with Bank of Texas (the “Credit Facility”). The total commitment under the
Credit Facility is $75,000,000. The borrowing base is set by the bank every
March 1st and September 1st of each year and is based on
the present value of the future net income accruing to the property. The
borrowing base was $17,000,000 at December 31, 2007.
VOYAGER
GAS CORPORATION
Notes to
Financial Statements, Continued
Note
5. Credit Facility, continued
Interest
on the Credit Facility is payable quarterly and is based upon the prime rate or
LIBOR rate, in each case plus an applicable margin, at the option of the Company
(6.72% and 7.94% weighted average interest rates at December 31, 2007 and 2006,
respectively). On December 31, 2007, the Company had $15,116,287 in
outstanding borrowings and $1,833,713 available for borrowings. The Company
is subject to a floating unused borrowing base commitment fee of 0.25% to 0.50%
(0.375% and 0.500% at December 31, 2007 and 2006). The Credit Facility
matures on March 22, 2009 at which time all unpaid principal and interest are
due. The Credit Facility is collateralized by all the Company’s
assets. The entire principal balance outstanding at December 31, 2007 is
due at maturity.
The
Credit Facility contains various affirmative and negative covenants. These
covenants, among other things, limit additional indebtedness, the sale of
assets, and require the Company to meet certain financial
ratios. Specifically, the Company must maintain a current ratio greater
than or equal to 1.0, an interest coverage ratio greater than or equal to 3.0
and a funded debt to EBITDA less than 3.5. As of December 31, 2007, the
Company was in compliance with regard to the covenants.
The
Credit Facility requires the Company to enter into option contracts to hedge
crude oil prices. The Credit Facility allows for additional lines of credit
not to exceed $500,000 securing obligations of the Company under its option
contracts with other parties.
Note
6. Income Taxes
The
components of the provision for income taxes at December 31, 2007 and
2006:
|
|
|
2007
|
|
|
2006
|
|
|
Current
income tax expense
|
|
$
|
(769,019
|
)
|
|
$
|
-
|
|
|
Deferred
income tax expense
|
|
|
(3,995,315
|
)
|
|
|
(805,503
|
)
|
|
Total
income tax expense
|
|
$
|
(4,764,334
|
)
|
|
$
|
(805,503
|
)
|
The
Company’s effective income tax rate differed from the federal statutory rate as
follows at December 31, 2007 and 2006.
|
|
|
2007
|
|
|
2006
|
|
|
U.S.
Federal statutory rate
|
|
|
34.00
|
%
|
|
|
34.00
|
%
|
|
State
income tax
|
|
|
0.80
|
%
|
|
|
0.50
|
%
|
|
Permanent
differences
|
|
|
(0.00
|
)%
|
|
|
(10.30
|
)%
|
|
Valuation
allowance
|
|
|
(0.00
|
)%
|
|
|
(0.00
|
)%
|
|
Other
|
|
|
1.00
|
%
|
|
|
1.23
|
%
|
|
|
|
|
35.8
|
%
|
|
|
25.43
|
%
|
VOYAGER
GAS CORPORATION
Notes to
Financial Statements, Continued
Note
6. Income Taxes, continued
Temporary
differences in the amount of assets and liabilities recognized for financial
reporting and tax purposes create deferred tax assets and liabilities, which are
summarized as follows at December 31, 2007 and 2006.
|
|
|
2007
|
|
|
2006
|
|
|
Current
deferred tax assets (liabilities):
|
|
|
|
|
|
|
|
Unrealized
loss on option contracts
|
|
$
|
-
|
|
|
$
|
(500,977
|
)
|
|
Other
|
|
|
-
|
|
|
|
(10,529
|
)
|
|
|
|
$
|
-
|
|
|
$
|
(511,506
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Non-current
deferred tax assets (liabilities):
|
|
|
|
|
|
|
|
|
|
Unrealized
loss on option contracts
|
|
$
|
(71,274
|
)
|
|
$
|
-
|
|
|
Depletion,
depreciation, and amortization
|
|
|
(249,428
|
)
|
|
|
(279,066
|
)
|
|
Net
operating losses
|
|
|
-
|
|
|
|
829,332
|
|
|
Intangible
drilling costs
|
|
|
(109,509
|
)
|
|
|
(919,713
|
)
|
|
Gain
on sale of oil and gas properties
|
|
|
(4,402,795
|
)
|
|
|
-
|
|
|
Other
|
|
|
(43,261
|
)
|
|
|
-
|
|
|
|
|
$
|
(4,876,267
|
)
|
|
$
|
(369,447
|
)
|
Note
7. Lease Commitments
The
Company presently leases office space under a non-cancelable operating
lease. Rent expense for the years ended December 31, 2007 and 2006 was
$20,404 was $28,912, respectively. Future minimum lease payments under this
lease as of December 31, 2007 are as follows:
|
Years
ending December 31,
|
|
|
|
|
2008
|
|
|
15,754
|
|
|
|
|
$
|
15,754
|
|
Note
8. Related Party Transactions
During
2004, the Company entered into an Advisory Services, Reimbursement, and
Indemnification Agreement (“The Agreement”) with Natural Gas Partners (“NGP”), a
related party. NGP is a majority partner in Voyager Gas Holdings LLP which
owns one hundred percent of the Company’s common stock. This Agreement
states that the Company will pay NGP $75,000 per year in advisory fees beginning
in May 2005 until the earlier of (i) the date of dissolution of the Company or
(ii) the second anniversary of an initial public offering by the
Company. During 2007 and 2006 the total amounts paid to NGP for advisory
fees was $75,000 and $75,000, respectively.
NGP also
serves as a director of the Company and was paid $30,000 and $30,000 in
director’s fees during 2007 and 2006, respectively.
VOYAGER
GAS CORPORATION
Notes to
Financial Statements, Continued
Note
9. Common Stock
Authorized
and outstanding shares of common stock are as follows:
|
|
|
Authorized
|
|
|
Outstanding
|
|
|
Par
Value
|
|
|
Common
stock
|
|
|
10
|
|
|
|
10
|
|
|
$
|
0.01
|
|
Holders
of the common stock have exclusive voting rights and powers at shareholders’
meetings, including the exclusive right to notice of such shareholders’
meetings.
Note
10. Oil and Natural Gas Producing Activities (Unaudited)
The
estimates of proved reserves are made using available geological and reservoir
data as well as production performance data. These estimates are reviewed
annually and revised, either upward or downward, as warranted by additional
data. Revisions are necessary due to changes in, among other things,
reservoir performance, prices, economic conditions and governmental restrictions
as well as changes in the expected recovery rates associated with infill
drilling. Decreases in prices, for example, may cause a reduction in some
proved reserves due to reaching economic limits sooner.
The
supplementary oil and gas data that follows is presented in accordance with SFAS
No. 69, “
Disclosures about Oil
and Gas Producing Activities”
and includes (1) capitalized costs, costs
incurred and results of operations related to oil and gas producing activities,
(2) net proved oil and gas reserves, and (3) a standardized measure of
discounted future net cash flows relating to proved oil and gas
reserves. During July 2006 the Company acquired the Duval Lease located in
Duval County, Texas and in January 2007 sold its Garza Lease located in Garza
County, Texas.
Proved
oil and gas reserves estimates, all of which are located in the United States,
were prepared solely by Company engineers and are the responsibility of
management. The reserve reports were prepared in accordance with guidelines
established by the Securities and Exchange Commission and, accordingly, were
based on existing economic and operating conditions. Crude oil and natural
gas prices in effect as of the date of the reserve reports were used without any
escalation. Operating costs, production and ad valorem taxes and future
development costs were based on current costs with no escalation.
There are
numerous uncertainties inherent in estimating quantities of proved reserves and
in projecting the future rates of production and timing of development
expenditures. The following reserve data represents estimates only and
should not be construed as being exact. Moreover, the present values should
not be construed as the current market value of the Company’s crude oil and
natural gas reserves or the costs that would be incurred to obtain equivalent
reserves.
VOYAGER
GAS CORPORATION
Notes to
Financial Statements, Continued
Note
10. Oil and Natural Gas Producing Activities (Unaudited),
continued
The
changes in proved reserves for the years ended December 31, 2007 and 2006 were
as follows:
|
|
|
Years
Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
Oil
|
|
|
Natural
Gas
|
|
|
Oil
|
|
|
Natural
Gas
|
|
|
|
|
(Mbbls)
|
|
|
(MMcf)
|
|
|
(Mbbls)
|
|
|
(MMcf)
|
|
|
Beginning
balance
|
|
|
2,881
|
|
|
|
10,453
|
|
|
|
2,800
|
|
|
|
382
|
|
|
Revisions
|
|
|
659
|
|
|
|
7,461
|
|
|
|
(446
|
)
|
|
|
(537
|
)
|
|
Extensions/discoveries
|
|
|
242
|
|
|
|
2,718
|
|
|
|
320
|
|
|
|
38
|
|
|
Purchases
in place
|
|
|
--
|
|
|
|
--
|
|
|
|
342
|
|
|
|
11,562
|
|
|
Sales
in place
|
|
|
(2,564
|
)
|
|
|
(351
|
)
|
|
|
--
|
|
|
|
--
|
|
|
Production
|
|
|
(46
|
)
|
|
|
(1,068
|
)
|
|
|
(135
|
)
|
|
|
(992
|
)
|
|
Ending
balance
|
|
|
1,172
|
|
|
|
19,213
|
|
|
|
2,881
|
|
|
|
10,453
|
|
Proved developed reserves for the
years ended December 31, 2007 and 2006 were as follows:
|
|
|
Years
Ended December 31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Oil
|
|
|
Natural
Gas
|
|
|
Oil
|
|
|
Natural
Gas
|
|
|
|
|
(Mbbls)
|
|
|
(MMcf)
|
|
|
(Mbbls)
|
|
|
(MMcf)
|
|
|
Proved
developed reserves:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
of year
|
|
|
2,260
|
|
|
|
5,689
|
|
|
|
2,114
|
|
|
|
282
|
|
|
End
of year
|
|
|
768
|
|
|
|
9,132
|
|
|
|
2,260
|
|
|
|
5,689
|
|
The
capitalized costs relating to oil and gas producing activities and the related
accumulated depletion, depreciation and amortization as of December 31, 2007 and
2006 were as follows:
|
|
|
Years
Ended December 31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Non-producing
leaseholds
|
|
$
|
13,298,591
|
|
|
$
|
14,025,344
|
|
|
Proved
properties
|
|
|
34,412,679
|
|
|
|
45,213,883
|
|
|
Accumulated
depletion and depreciation
|
|
|
(8,936,029
|
)
|
|
|
(6,510,338
|
)
|
|
Net
capitalized costs
|
|
$
|
38,775,241
|
|
|
$
|
52,728,889
|
|
The
following table reflects total costs incurred, both capitalized and expensed,
for oil and gas property acquisitions and exploration and development activities
during the years ended December 31, 2007 and 2006.
|
|
|
Years
Ended December 31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Property
acquisition costs:
|
|
|
|
|
|
|
|
Proved
|
|
$
|
--
|
|
|
$
|
27,574,085
|
|
|
Unproved
|
|
|
--
|
|
|
|
13,298,590
|
|
|
Total
acquisition costs
|
|
|
--
|
|
|
|
40,872,675
|
|
|
Unproved
acreage
|
|
|
--
|
|
|
|
--
|
|
|
Development
costs
|
|
|
7,195,160
|
|
|
|
3,784,093
|
|
|
Exploration
costs
|
|
|
9,399
|
|
|
|
391,482
|
|
|
Total
|
|
$
|
7,204,559
|
|
|
$
|
45,048,250
|
|
VOYAGER
GAS CORPORATION
Notes to
Financial Statements, Continued
Note
10. Oil and Natural Gas Producing Activities (Unaudited),
continued
Net
revenues from production in the following schedule include only the revenues
from the production and sale of oil and natural gas. The income tax expense
is calculated by applying the current statutory tax rates to the revenues after
deducting costs, which include DD&A allowances. The results of
operations exclude general office overhead and interest expense attributable to
oil and gas activities. Results of operations from producing operations for
the years ended December 31, 2007 and 2006, are set forth below:
|
|
|
Years
Ended December 31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Oil
and gas sales
|
|
$
|
10,739,352
|
|
|
$
|
15,370,438
|
|
|
Oil
and gas production costs
(1)
|
|
|
(3,301,002
|
)
|
|
|
(3,657,775
|
)
|
|
Exploration
expense
|
|
|
(9,399
|
)
|
|
|
(391,482
|
)
|
|
Depletion
expense
|
|
|
(4,824,336
|
)
|
|
|
(5,430,957
|
)
|
|
Gross
profit
|
|
|
2,604,615
|
|
|
|
5,890,224
|
|
|
Income
tax expense
|
|
|
(911,615
|
)
|
|
|
(2,061,578
|
)
|
|
Results
from producing activities
|
|
$
|
1,693,000
|
|
|
$
|
3,828,646
|
|
|
(1)
|
Production
costs consist of oil and natural gas operations expense and production and
ad valorem taxes.
|
The
Standardized Measure of Discounted Future Net Cash Flows and Changes Therein
Relating to Proved Oil and Natural Gas Reserves (“Standardized Measure”) do not
purport to present the fair market value of the Company’s crude oil and natural
gas properties. An estimate of such value should consider, among other
factors, anticipated future prices of crude oil and natural gas, the probability
of recoveries in excess of existing proved reserves, the value of probable
reserves and acreage prospects, and perhaps different discount rates. It
should be noted that estimates of reserve quantities, especially from new
discoveries, are inherently imprecise and subject to substantial
revision.
Under the
Standardized Measure, future cash inflows were estimated by applying year-end
prices to the estimated future production of the year-end reserves. These
prices have varied widely and have a significant impact on both the quantities
and value of the proved reserves as reduced prices cause wells to reach the end
of their economic life much sooner and also make certain proved undeveloped
locations uneconomical, both of which reduce reserves.
At
December 31, 2007, the present value (discounted at 10%) of future net cash
flows from the Company’s proved reserves was $87.8 million, (stated in
accordance with the regulations of the SEC and the FASB). The increase of
$14.6 million or 20% in 2007 compared to 2006 is primarily due to higher oil and
natural gas prices at year-end 2007 and successful exploration and development,
partially offset by the sale of the Company’s West Texas
properties.
VOYAGER
GAS CORPORATION
Notes to
Financial Statements, Continued
Note
10. Oil and Natural Gas Producing Activities (Unaudited),
continued
The
present value of future net cash flows does not purport to be an estimate of the
fair market value of the Company’s proved reserves. An estimate of fair
value would also take into account, among other things, anticipated changes in
future prices and costs, the expected recovery of reserves in excess of proved
reserves and a discount factor more representative of the time value of money
and the risks inherent in producing oil and gas. Significant changes in
estimated reserve volumes or commodity prices could have a material effect on
the Company’s financial statements.
The
standardized measure of discounted cash flows related to proved oil and gas
reserves at December 31, 2007 and 2006 were as follows:
|
|
|
Years
Ended December 31,
|
|
|
(Dollars
in thousands)
|
|
2007
|
|
|
2006
|
|
|
Future
revenues
|
|
$
|
211,713
|
|
|
$
|
215,413
|
|
|
Future
production costs
|
|
|
(51,454
|
)
|
|
|
(70,592
|
)
|
|
Future
development costs
|
|
|
(12,350
|
)
|
|
|
(11,395
|
)
|
|
Future
net cash flows
|
|
|
147,909
|
|
|
|
133,426
|
|
|
10%
discount factor
|
|
|
(60,147
|
)
|
|
|
(60,143
|
)
|
|
Standardized
measure of discounted future net cash relating to proved
reserves
|
|
$
|
87,762
|
|
|
$
|
73,284
|
|
|
|
|
|
|
|
|
|
|
|
Future
cash flows are computed by applying year-end prices, adjusted for location and
quality differentials on a property-by-property basis, to year-end quantities of
proved reserves, except in those instances where fixed and determinable price
changes are provided by contractual arrangements at year-end. The
discounted future cash flow estimates do not include the effects of the
Company’s derivative instruments.
The
following table reflects the year-end prices for crude oil and natural
gas.
|
|
|
December
31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Average
crude oil price per Bbl
|
|
$
|
71.40
|
|
|
$
|
52.41
|
|
|
Average
natural gas price per Mcf
|
|
$
|
6.66
|
|
|
$
|
6.16
|
|
VOYAGER
GAS CORPORATION
Notes to
Financial Statements, Continued
Note
10. Oil and Natural Gas Producing Activities (Unaudited),
continued
The
primary changes in the standardized measure of discounted future net cash flows
for the years ended December 31, 2007 and 2006, were as follows:
|
|
|
Years
Ended December 31,
|
|
|
(Dollars
in thousands)
|
|
2007
|
|
|
2006
|
|
|
Standardized
measure, beginning balance
|
|
$
|
73,284
|
|
|
$
|
42,196
|
|
|
Oil
and gas sales, net of costs
|
|
|
(7,228
|
)
|
|
|
(11,713
|
)
|
|
Discoveries,
extensions and transfers
|
|
|
9,964
|
|
|
|
3,788
|
|
|
Purchase
of minerals in place
|
|
|
--
|
|
|
|
47,313
|
|
|
Sales
of minerals in place
|
|
|
(32,402
|
)
|
|
|
--
|
|
|
Changes
in estimates of future development costs
|
|
|
4,520
|
|
|
|
(4,045
|
)
|
|
Net
changes in prices
|
|
|
11,035
|
|
|
|
13,453
|
|
|
Development
costs incurred during the period
|
|
|
7,195
|
|
|
|
3,784
|
|
|
Revisions
of estimates and other
|
|
|
21,395
|
|
|
|
(21,492
|
)
|
|
Standardized
measure, ending balance
|
|
$
|
87,763
|
|
|
$
|
73,284
|
|
VOYAGER
GAS CORPORATION
VOYAGER
GAS CORPORATION
BALANCE
SHEETS
(Unaudited)
|
|
|
June
30,
|
|
|
December
31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
708,367
|
|
|
$
|
--
|
|
|
Restricted
cash
|
|
|
801,525
|
|
|
|
--
|
|
|
Trade
accounts receivable, net of allowance of $0
|
|
|
576,214
|
|
|
|
1,791,519
|
|
|
Option
contracts
|
|
|
--
|
|
|
|
205,639
|
|
|
Other
current assets
|
|
|
9,124
|
|
|
|
7,933
|
|
|
Total
current assets
|
|
|
2,095,230
|
|
|
|
2,005,091
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
37,347,690
|
|
|
|
38,798,447
|
|
|
Other
long-term assets
|
|
|
48,365
|
|
|
|
16,728
|
|
|
Total
assets
|
|
$
|
39,491,285
|
|
|
$
|
40,820,266
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
|
Bank
overdraft
|
|
$
|
--
|
|
|
$
|
316,239
|
|
|
Accounts
payable and accrued expenses
|
|
|
71,823
|
|
|
|
1,517,811
|
|
|
Credit
facility – short-term
|
|
|
12,239,193
|
|
|
|
--
|
|
|
Option
contracts
|
|
|
1,037,295
|
|
|
|
--
|
|
|
Earnest
money deposit
|
|
|
800,000
|
|
|
|
--
|
|
|
Income
taxes currently payable
|
|
|
689,115
|
|
|
|
771,352
|
|
|
Total
current liabilities
|
|
|
14,837,426
|
|
|
|
2,605,402
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit
facility, long-term
|
|
|
--
|
|
|
|
15,116,287
|
|
|
Deferred
income taxes
|
|
|
4,876,267
|
|
|
|
4,876,267
|
|
|
Total
liabilities
|
|
|
19,713,693
|
|
|
|
22,597,956
|
|
|
Shareholders'
equity:
|
|
|
|
|
|
|
|
|
|
Common
stock, $.01 par value, 10 shares authorized, 10 shares issued and
outstanding at June 30, 2008 and December 31, 2007
|
|
|
--
|
|
|
|
--
|
|
|
Additional
paid-in capital
|
|
|
7,140,000
|
|
|
|
7,140,000
|
|
|
Retained
earnings
|
|
|
12,637,592
|
|
|
|
11,082,310
|
|
|
Total
shareholders’ equity
|
|
|
19,777,592
|
|
|
|
18,222,310
|
|
|
Total
liabilities and shareholders' equity
|
|
$
|
39,491,285
|
|
|
$
|
40,820,266
|
|
See
accompanying notes to unaudited financial statements.
VOYAGER
GAS CORPORATION
STATEMENTS
OF OPERATIONS
FOR
THE THREE AND SIX MONTHS ENDED JUNE 30, 2008 AND 2007
(Unaudited)
|
|
|
Three
Months Ended
June
30,
|
|
|
Six
Months Ended
June
30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil
and gas revenue
|
|
$
|
3,430,047
|
|
|
$
|
2,983,026
|
|
|
$
|
6,828,541
|
|
|
$
|
4,596,748
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease
operating expenses
|
|
|
141,410
|
|
|
|
706,128
|
|
|
|
2,326,418
|
|
|
|
1,299,093
|
|
|
Production
taxes
|
|
|
267,445
|
|
|
|
182,847
|
|
|
|
370,338
|
|
|
|
366,739
|
|
|
Depletion,
depreciation and amortization
|
|
|
768,289
|
|
|
|
1,709,034
|
|
|
|
1,699,409
|
|
|
|
4,824,815
|
|
|
Interest
expense
|
|
|
152,207
|
|
|
|
259,364
|
|
|
|
401,707
|
|
|
|
308,224
|
|
|
General
and administrative
|
|
|
274,333
|
|
|
|
254,952
|
|
|
|
475,387
|
|
|
|
498,204
|
|
|
Total
costs and expenses
|
|
|
1,603,684
|
|
|
|
3,112,325
|
|
|
|
5,273,259
|
|
|
|
7,297,075
|
|
|
Income
(loss) from operations
|
|
|
1,826,363
|
|
|
|
(129,299
|
)
|
|
|
1,555,282
|
|
|
|
(2,700,327
|
)
|
|
Gain
on sale of oil and gas properties
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
12,702,811
|
|
|
Income
(loss) before provision for income taxes
|
|
|
1,826,363
|
|
|
|
(129,299
|
)
|
|
|
1,555,282
|
|
|
|
10,002,484
|
|
|
Income
tax expense
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
(4,402,795
|
)
|
|
Net
income (loss)
|
|
$
|
1,826,363
|
|
|
$
|
(129,299
|
)
|
|
$
|
1,555,282
|
|
|
$
|
5,599,689
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to unaudited financial statements.
VOYAGER
GAS CORPORATION
STATEMENTS
OF CASH FLOWS
FOR
THE SIX MONTHS ENDED JUNE 30, 2008 AND 2007
(Unaudited)
|
|
|
Six
Months Ended June 30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
1,555,282
|
|
|
$
|
5,599,689
|
|
|
Adjustments
to reconcile net income to cash provided by operating
activities:
|
|
|
|
|
|
|
Depletion,
depreciation and amortization
|
|
|
1,699,409
|
|
|
|
4,824,815
|
|
|
Deferred
income taxes
|
|
|
--
|
|
|
|
4,402,794
|
|
|
Gain
on sale of oil and gas properties
|
|
|
--
|
|
|
|
(12,702,811
|
)
|
|
Unrealized
derivative loss
|
|
|
1,242,934
|
|
|
|
942,460
|
|
|
Non-cash
investment interest
|
|
|
(1,525
|
)
|
|
|
--
|
|
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
1,215,305
|
|
|
|
626,278
|
|
|
Other
current assets
|
|
|
(1,191
|
)
|
|
|
--
|
|
|
Other
long-term assets
|
|
|
(31,637
|
)
|
|
|
(1,364
|
)
|
|
Accounts
payable and accrued liabilities
|
|
|
(1,445,988
|
)
|
|
|
370,698
|
|
|
Income
taxes payable
|
|
|
(82,237
|
)
|
|
|
--
|
|
|
Net
cash provided by operating activities
|
|
|
4,150,352
|
|
|
|
4,062,559
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
Investment
in oil and gas properties
|
|
|
(248,652
|
)
|
|
|
(2,966,495
|
)
|
|
Net
proceeds from sale of oil and gas properties
|
|
|
--
|
|
|
|
29,029,038
|
|
|
Net
cash provided by (used in) investing activities
|
|
|
(248,652
|
)
|
|
|
26,062,543
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
Net
(repayments) proceeds from long-term debt
|
|
|
(2,877,094
|
)
|
|
|
(30,756,857
|
)
|
|
Repayment
of bank overdraft
|
|
|
(316,239
|
)
|
|
|
--
|
|
|
Net
cash used in financing activities
|
|
|
(3,193,333
|
)
|
|
|
(30,756,857
|
)
|
|
Net
increase (decrease) in cash
|
|
|
708,367
|
|
|
|
(631,755
|
)
|
|
Cash
and cash equivalents, beginning of period
|
|
|
--
|
|
|
|
631,755
|
|
|
Cash
and cash equivalents, end of period
|
|
$
|
708,367
|
|
|
$
|
--
|
|
|
Supplemental
cash flow disclosures:
|
|
|
|
|
|
|
|
Interest
paid
|
|
$
|
400,724
|
|
|
$
|
624,672
|
|
|
Taxes
paid
|
|
$
|
82,237
|
|
|
$
|
--
|
|
See
accompanying notes to unaudited financial statements.
VOYAGER
GAS CORPORATION
Notes to
Unaudited Financial Statements
June 30,
2008 and 2007
Note
1. Organization
The
accompanying unaudited financial statements of Voyager Gas Corporation (the
"Company" or "Voyager") have been prepared in accordance with accounting
principles generally accepted in the United States of America for interim
financial information. They do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States of America for a complete financial presentation. In the opinion of
management, all adjustments, consisting only of normal recurring adjustments
considered necessary for a fair presentation, have been included in the
accompanying unaudited financial statements. Operating results for the
periods presented are not necessarily indicative of the results that may be
expected for the full year.
These
unaudited financial statements should be read in conjunction with the Company’s
annual audited financial statements and footnotes for the years ended December
31, 2007 and 2006, which are included as part of this Form 8-K.
Voyager
was formed in May 2004 as a Delaware corporation. The Company is engaged in
the acquisition, development, production, and sale of oil and natural gas and
its operations are conducted primarily in Duval County, Texas. The
Company sells its oil and natural gas products primarily to domestic pipelines
and refineries.
Note
2. Acquisitions
and Sales of Lease Properties
Voyager
South Texas Holdings, L.L.C. (“VST”) was formed in May 2006, in order to
facilitate a Section 1031 exchange of certain oil and gas lease
properties. The Company borrowed and guaranteed funds under its credit
facility to fund the acquisition of the Duval County, Texas lease property
through VST. The acquisition of the Duval lease was recorded by allocating
the total purchase consideration to the fair values of the net assets acquired
as follows:
|
Net
assets acquired:
|
|
|
|
|
Proven,
developed properties
|
|
$
|
22,065,415
|
|
|
Proven,
undeveloped properties
|
|
|
13,298,590
|
|
|
Tangible
drilling costs
|
|
|
5,508,670
|
|
|
Total
purchase price
|
|
$
|
40,872,675
|
|
To
complete the IRS Section 1031 exchange, the Company executed an asset sale
agreement in January 2007 to sell the Garza lease property located in Garza
County, Texas for approximately $29,000,000 in cash, resulting in a gain of
approximately $13,000,000. In February 2007, VST was merged with the
Company. As a result of the economic dependencies and debt guarantees
between the Company and VST at December 31, 2006, the financial statements of
VST have been combined for financial statement presentation purposes. All
inter-company profits, transactions and balances have been eliminated in the
combined financial statements. The IRS Section 1031 exchange did not
qualify for like-kind exchange accounting for book purposes because the counter
parties were not the same and the earnings process was completed with each leg
of the exchange.
On May
22, 2008, the Company and Voyager Gas Holdings, L.P. (“Seller”) entered into a
Stock Purchase and Sale Agreement (the “ABC Agreement”) with ABC Funding, Inc.,
a Nevada corporation, (“Buyer”). Pursuant to the ABC Agreement, as amended
on August 15, 2008 and September 2, 2008, on September 2, 2008, Seller sold to
Buyer all of the issued and outstanding shares of common stock of Voyager Gas
Corporation. Included in the sale were the Company’s interests in its oil
and gas field located in Duval County, Texas, including working and other
interests in oil and gas leases, wells, and properties, together with rights
under related operating, marketing, and service contracts and agreements,
seismic exploration licenses and rights, and personal property, equipment, and
facilities. The purchase price also included a proprietary 3-D seismic data
base covering a majority of the property.
The sales
price received in the sale consisted of cash consideration of $35.0 million,
plus 10,000 newly issued shares of ABC’s preferred stock designated as Series D
preferred stock, having an agreed upon value of $7.0 million. Upon the
effectiveness of an amendment to ABC’s Articles of Incorporation increasing the
number of shares of common stock that it may issue, the Series D preferred stock
will automatically convert into 17.5 million shares of ABC’s common stock, as
provided by the Certificate of Designation with respect to the Series D
preferred filed by ABC Funding, Inc. with the State of Nevada on August 27,
2008.
Note
3. Property
and Equipment
Property
and equipment consisted of the following at June 30, 2008 and December 31,
2007:
|
|
|
June
30, 2008
|
|
|
December
31, 2007
|
|
|
Non-producing
leaseholds
|
|
$
|
13,299,340
|
|
|
$
|
13,298,591
|
|
|
Producing
leaseholds and related costs
|
|
|
34,661,332
|
|
|
|
34,412,679
|
|
|
Furniture,
fixtures and office equipment
|
|
|
24,650
|
|
|
|
25,400
|
|
|
Automobiles
|
|
|
28,688
|
|
|
|
28,688
|
|
|
|
|
|
48,014,010
|
|
|
|
47,765,358
|
|
|
Accumulated
depreciation, depletion and amortization
|
|
|
(10,666,320
|
)
|
|
|
(8,966,911
|
)
|
|
Net
property and equipment
|
|
$
|
37,347,690
|
|
|
$
|
38,798,447
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation,
depletion and amortization expense for the six months ended June 30, 2008 and
2007, was $1,699,409 and $4,824,815, respectively. Depletion
expense per equivalent Mcf for the six months ended June 30, 2008 and 2007 was
$2.54 per Mcfe and $5.31 per Mcfe, respectively.
Note
4. Credit
Facility
On March
22, 2005, the Company entered into a three-year asset-based borrowing facility
with Bank of Texas (the “Credit Facility”). The total commitment under the
Credit Facility is $75,000,000. The borrowing base is set by the bank March
1st and September 1st of each year and is based on the present value of the
future net income accruing to the property. The borrowing base was
$17,000,000 at June 30, 2008 and December 31, 2007.
Interest
on the Credit Facility is payable quarterly and is based upon the prime rate or
LIBOR rate, in each case plus an applicable margin, at the option of the
Company. On June 30, 2008, the Company had $12,239,193 in outstanding
borrowings and $4,760,807 available for borrowings. The Company is subject
to a floating unused borrowing base commitment fee of 0.25% to 0.50% (0.375% at
June 30, 2008). The Credit Facility matures on March 22, 2009, at which
time all unpaid principal and interest are due. The Credit Facility is
collateralized by all the Company’s assets. The entire principal balance
outstanding at June 30, 2008, is due at maturity. The Credit Facility
contains various affirmative and negative covenants. These covenants, among
other things, limit additional indebtedness, the sale of assets, and require the
Company to meet certain financial ratios. Specifically, the Company must
maintain a current ratio greater than or equal to 1.0, an interest coverage
ratio greater than or equal to 3.0 and a funded debt to EBITDA less than
3.5. As of June 30, 2008, the Company was in compliance with regard to the
covenants. The Credit Facility requires the Company to enter into option
contracts to hedge crude oil and natural gas prices. The Credit Facility
allows for additional lines of credit not to exceed $500,000 securing
obligations of the Company under its option contracts with other
parties.
Note
5. Lease Commitments
The
Company previously leased office space under a non-cancelable operating lease,
which lease expired on June 30, 2008. Rent expense for the six months ended
June, 2008 and 2007, was $14,120 and $14,785, respectively. Future minimum
lease payments under this lease as of December 31, 2007 were as
follows:
|
Years
ending December 31,
|
|
|
|
|
2008
|
|
$
|
15,754
|
|
|
Total
|
|
$
|
15,754
|
|
The
Company entered into a new lease agreement effective as of August 1, 2008, for a
period of thirty-nine months. The Company’s lease is for approximately
2,173 square feet at an initial base monthly rental rate of $3,622 and increases
to $3,712 for months 16 through 27 and $3,803 for the balance of the
lease. The Company will receive free rent for months seven through
nine.
Note
6. Related
Party Transactions
During
2004, the Company entered into an Advisory Services, Reimbursement, and
Indemnification Agreement (“The Agreement”) with Natural Gas Partners (“NGP”), a
related party. NGP is a majority partner in Voyager Gas Holdings LLP which
owns one hundred percent (100%) of the Company’s common stock. This
Agreement states that the Company will pay NGP $75,000 per year in advisory fees
beginning in May 2005 until the earlier of (i) the date of dissolution of the
Company or (ii) the second anniversary of an initial public offering by the
Company. During the six months ended June 30, 2008 and 2007, the total
amounts paid to NGP for advisory fees was $37,500 in each period. NGP also
serves as a director of the Company and was paid $15,000 in director’s fees in
each of the six month periods ended June 30, 2008 and 2007.
(c)
Pro Forma Financial Information of
ABC Funding, Inc.
ABC
FUNDING, INC.
UNAUDITED
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The
following unaudited pro forma condensed consolidated financial statements and
related notes are presented to show the pro forma effects of the Voyager
Acquisition. The unaudited pro forma condensed consolidated statement
of operations for the fiscal year ended June 30, 2008, and three month periods
ended September 30, 2008 and 2007, are presented to show income from continuing
operations as if the Voyager Acquisition occurred as of the beginning of each
period. The unaudited pro forma condensed balance sheet is based on
the assumption that the Voyager Acquisition occurred effective as of June 30,
2008.
The acquisition has been accounted for
in accordance with the provisions of Statement of Financial Standards (“SFAS”)
No. 141, “Business Combinations.” The total purchase price was
allocated to the net tangible assets based on the estimated fair
values. No goodwill was recorded as there was no excess of the
purchase price over the net tangible assets. The preliminary
allocation of the purchase price was based upon valuation data as of September
2, 2008, and the estimates and assumptions are subject to change. The
initial purchase price allocation may be adjusted within one year of the
effective date of the acquisition for changes in estimates of fair value of
assets acquired and liabilities assumed based on the results of the purchase
price allocation process.
Pro forma
data are based on assumptions and include adjustments as explained in the notes
to the unaudited pro forma condensed consolidated financial statements. The
pro forma data are not necessarily indicative of the financial results that
would have been attained had the Voyager Acquisition occurred on the dates
referenced above and should not be viewed as indicative of operations in future
periods. The unaudited pro forma condensed consolidated financial
statements should be read in conjunction with the notes thereto of our Annual
Report on Form 10-KSB for the year ended June 30, 2008, our Quarterly Report on
Form 10-Q for the three months ended September 30, 2008, Voyager’s audited
financial statements as of and for the years ended December 31, 2007 and 2006,
and Voyager’s unaudited financial statements as of and for the six months
ended June 30, 2008 and 2007, included elsewhere in this document.
ABC
FUNDING, INC.
UNAUDITED
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
|
|
|
As
of June 30, 2008
|
|
|
|
ABC
Funding
|
|
|
Voyager
|
|
Adjustments
|
|
|
Pro
Forma
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
12,158
|
|
|
$
|
708,367
|
|
$
|
33,500,000
|
(a)
|
|
$
|
764,767
|
|
|
|
|
|
|
|
|
|
|
|
|
(510,000)
|
(b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(290,000)
|
(c)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(450,000)
|
(e)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(601,935)
|
(j)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,239,193)
|
(k)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(21,960,807)
|
(l)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,525
|
(n)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,594,652
|
(t)
|
|
|
|
|
|
Restricted
cash
|
|
|
--
|
|
|
|
801,525
|
|
|
(801,525)
|
(n)
|
|
|
--
|
|
|
Trade
accounts receivable
|
|
|
--
|
|
|
|
576,214
|
|
|
--
|
|
|
|
576,214
|
|
|
Prepaid
expenses and other current assets
|
|
|
31,215
|
|
|
|
9,124
|
|
|
--
|
|
|
|
40,339
|
|
|
Deferred
financing costs, net
|
|
|
143,472
|
|
|
|
--
|
|
|
(143,472
|
(h)
|
|
|
--
|
|
|
Total
current assets
|
|
|
186,845
|
|
|
|
2,095,230
|
|
|
(900,755)
|
|
|
|
1,381,320
|
|
|
Oil
and natural gas properties, net
|
|
|
--
|
|
|
|
37,347,690
|
|
|
(206,000)
|
(d)
|
|
|
41,930,270
|
|
|
|
|
|
|
|
|
|
|
|
|
12,239,193
|
(k)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,960,807
|
(l)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
976,284
|
(m)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,100,000
|
(o)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,239,193)
|
(p)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,876,267)
|
(q)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,140,000)
|
(r)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,637,592)
|
(s)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,594,652)
|
(t)
|
|
|
|
|
|
Fixed
assets, net
|
|
|
7,881
|
|
|
|
--
|
|
|
--
|
|
|
|
7,881
|
|
|
Acquisition
costs
|
|
|
976,284
|
|
|
|
--
|
|
|
(976,284)
|
(m)
|
|
|
--
|
|
|
Deferred
financing costs, net
|
|
|
--
|
|
|
|
--
|
|
|
510,000
|
(b)
|
|
|
1,927,435
|
|
|
|
|
|
|
|
|
|
|
|
|
290,000
|
(c)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,127,435
|
(j)
|
|
|
|
|
|
Other
assets
|
|
|
--
|
|
|
|
48,365
|
|
|
--
|
|
|
|
48,365
|
|
|
Total
assets
|
|
$
|
1,171,010
|
|
|
$
|
39,491,285
|
|
$
|
4,632,976
|
|
|
$
|
45,295,271
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
notes to unaudited pro forma condensed consolidated financial
statements.
ABC
FUNDING, INC.
UNAUDITED
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(CONTINUED)
|
|
|
As
of June 30, 2008
|
|
|
|
ABC
Funding
|
|
|
Voyager
|
|
Adjustments
|
|
|
Pro
Forma
|
|
|
LIABILITIES
AND SHAREHOLDERS’
EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued liabilities
|
|
$
|
426,249
|
|
|
$
|
71,823
|
|
$
|
(32,000)
|
(j)
|
|
$
|
466,072
|
|
|
Convertible
debt
|
|
|
25,000
|
|
|
|
--
|
|
|
--
|
|
|
|
25,000
|
|
|
Notes
payable
|
|
|
--
|
|
|
|
--
|
|
|
557,500
|
(j)
|
|
|
557,500
|
|
|
Senior secured
convertible debentures, net
|
|
|
121,638
|
|
|
|
--
|
|
|
(450,000)
|
(e)
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
(450,000)
|
(f)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
778,362
|
(h)
|
|
|
|
|
|
Credit
facility – short-term
|
|
|
--
|
|
|
|
12,239,193
|
|
|
(12,239,193)
|
(p)
|
|
|
--
|
|
|
Option
contracts
|
|
|
--
|
|
|
|
1,037,295
|
|
|
--
|
|
|
|
1,037,295
|
|
|
Earnest
money deposit
|
|
|
--
|
|
|
|
800,000
|
|
|
(800,000)
|
(n)
|
|
|
--
|
|
|
Derivative
liabilities
|
|
|
11,893,573
|
|
|
|
--
|
|
|
(1,099,287)
|
(g)
|
|
|
34,060,982
|
|
|
|
|
|
|
|
|
|
|
|
|
38,921
|
(i)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,710,878
|
(u)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(483,103)
|
(v)
|
|
|
|
|
|
Current
income taxes payable
|
|
|
--
|
|
|
|
689,115
|
|
|
|
|
|
|
689,115
|
|
|
Total
current liabilities
|
|
|
12,466,460
|
|
|
|
14,837,426
|
|
|
9,532,078
|
|
|
|
36,835,964
|
|
|
Credit
facility:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving
loan
|
|
|
--
|
|
|
|
--
|
|
|
11,500,000
|
(a)
|
|
|
11,500,000
|
|
|
Term
loan
|
|
|
--
|
|
|
|
--
|
|
|
22,000,000
|
(a)
|
|
|
11,841,664
|
|
|
|
|
|
|
|
|
|
|
|
|
(206,000)
|
(d)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,952,336)
|
(ff)
|
|
|
|
|
|
Deferred
income taxes
|
|
|
--
|
|
|
|
4,876,267
|
|
|
(4,876,267)
|
(q)
|
|
|
--
|
|
|
Total
liabilities
|
|
|
12,466,460
|
|
|
|
19,713,693
|
|
|
27,997,475
|
|
|
|
60,177,628
|
|
|
Shareholders'
equity (deficit):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock
|
|
|
136
|
|
|
|
--
|
|
|
10
|
(f)
|
|
|
156
|
|
|
|
|
|
|
|
|
|
|
|
|
10
|
(o)
|
|
|
|
|
|
Common
stock
|
|
|
24,378
|
|
|
|
--
|
|
|
--
|
|
|
|
24,378
|
|
|
Additional
paid-in capital
|
|
|
769,318
|
|
|
|
7,140,000
|
|
|
449,990
|
(f)
|
|
|
11,418,585
|
|
|
|
|
|
|
|
|
|
|
|
|
1,099,287
|
(g)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,099,990
|
(o)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,140,000)
|
(r)
|
|
|
|
|
|
Retained
earnings (deficit)
|
|
|
(12,089,282
|
)
|
|
|
12,637,592
|
|
|
(921,834)
|
(h)
|
|
|
(26,325,476
|
)
|
|
|
|
|
|
|
|
|
|
|
|
(38,921)
|
(i)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,637,592)
|
(s)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,758,542)
|
(u)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
483,103
|
(v)
|
|
|
|
|
|
Total
shareholders’ equity (deficit)
|
|
|
(11,295,450
|
)
|
|
|
19,777,592
|
|
|
(23,364,449)
|
|
|
|
(14,882,357
|
)
|
|
Total
liabilities and shareholders' equity (deficit)
|
|
$
|
1,171,010
|
|
|
$
|
39,491,285
|
|
$
|
4,632,976
|
|
|
$
|
45,295,271
|
|
See
notes to unaudited pro forma condensed consolidated financial
statements.
ABC
FUNDING, INC.
UNAUDITED
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
|
|
|
Twelve
Months Ended June 30, 2008
|
|
|
|
|
ABC
Funding
|
|
|
Voyager
(1)
|
|
Adjustments
|
|
|
Pro
Forma
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil
and gas revenue
|
|
$
|
--
|
|
|
$
|
12,971,145
|
|
$
|
-
|
|
|
$
|
12,971,145
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease
operating expenses
|
|
|
--
|
|
|
|
3,491,978
|
|
|
--
|
|
|
|
3,491,978
|
|
|
Production
taxes
|
|
|
--
|
|
|
|
839,948
|
|
|
--
|
|
|
|
839,948
|
|
|
Exploration
expenses
|
|
|
--
|
|
|
|
9,399
|
|
|
--
|
|
|
|
9,399
|
|
|
Depletion,
depreciation and amortization
|
|
|
183
|
|
|
|
1,708,946
|
|
|
(1,708,946)
|
(y)
|
|
|
2,994,340
|
|
|
|
|
|
|
|
|
|
|
|
|
2,994,157
|
(y)
|
|
|
|
|
|
General
and administrative
|
|
|
4,052,178
|
|
|
|
947,884
|
|
|
--
|
|
|
|
5,000,062
|
|
|
Total
costs and expenses
|
|
|
4,052,361
|
|
|
|
6,998,155
|
|
|
1,285,211
|
|
|
|
12,335,727
|
|
|
Income
(loss) from operations
|
|
|
(4,052,361
|
)
|
|
|
5,972,990
|
|
|
(1,285,211)
|
|
|
|
635,418
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
5,174
|
|
|
|
--
|
|
|
--
|
|
|
|
5,174
|
|
|
Interest
expense
|
|
|
(2,039,213
|
)
|
|
|
(1,073,315
|
)
|
|
(921,834)
|
(h)
|
|
|
(8,342,390
|
)
|
|
|
|
|
|
|
|
|
|
|
|
(550,696)
|
(w)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(58,860)
|
(w)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,891,895)
|
(w)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,073,315
|
(x)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,879,892)
|
(x)
|
|
|
|
|
|
Change
in fair value of derivatives
|
|
|
(3,657,671
|
)
|
|
|
--
|
|
|
(38,921)
|
(i)
|
|
|
(16,972,031
|
)
|
|
|
|
|
|
|
|
|
|
|
|
(13,758,542)
|
(u)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
483,103
|
(v)
|
|
|
|
|
|
Total
other
|
|
|
(5,691,710
|
)
|
|
|
(1,073,315
|
)
|
|
(18,544,222)
|
|
|
|
(25,309,247
|
)
|
|
Income
(loss) before provision for income taxes
|
|
|
(9,744,071
|
)
|
|
|
4,899,675
|
|
|
(19,829,433)
|
|
|
|
(24,673,829
|
)
|
|
Income
tax expense
|
|
|
--
|
|
|
|
(1,588,348
|
)
|
|
1,588,348
|
(gg)
|
|
|
--
|
|
|
Net
income (loss)
|
|
$
|
(9,744,071
|
)
|
|
$
|
3,311,327
|
|
$
|
(18,241,085
|
)
|
|
$
|
(24,673,829
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
$
|
(0.42
|
)
|
|
|
|
|
|
|
|
|
$
|
(1.07
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
|
23,067,241
|
|
|
|
|
|
|
|
|
|
|
23,067,241
|
|
|
(1)
|
The
historical financials of Voyager Gas Corporation for the twelve months
ended June 30, 2008 are comprised of the twelve months beginning July 1,
2007 and ending June 30, 2008.
|
See
notes to unaudited pro forma condensed consolidated financial
statements.
ABC
FUNDING, INC.
UNAUDITED
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
|
|
|
Three
Months
Ended
September
30, 2008
|
|
|
Period
July 1
Through
September
2, 2008
|
|
|
|
|
|
|
|
|
|
|
|
ABC
Funding
|
|
|
Voyager
|
|
|
Adjustments
|
|
|
|
Pro
Forma
|
|
|
|
|
(Restated)
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil
and gas revenue
|
|
$
|
794,184
|
|
|
$
|
3,851,191
|
|
|
$
|
--
|
|
|
|
$
|
4,645,375
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease
operating expenses
|
|
|
154,373
|
|
|
|
242,516
|
|
|
|
|
|
|
|
|
396,889
|
|
|
Production
taxes
|
|
|
55,361
|
|
|
|
290,295
|
|
|
|
|
|
|
|
|
345,656
|
|
|
Depletion,
depreciation and amortization
|
|
|
206,451
|
|
|
|
758,151
|
|
|
|
(758,151
|
)
|
(z)
|
|
|
581,601
|
|
|
|
|
|
|
|
|
|
|
|
|
|
375,150
|
|
(z)
|
|
|
|
|
|
General
and administrative
|
|
|
707,345
|
|
|
|
158,306
|
|
|
|
|
|
|
|
|
865,651
|
|
|
Total
costs and expenses
|
|
|
1,123,530
|
|
|
|
1,449,268
|
|
|
|
(383,001
|
)
|
|
|
|
2,189,797
|
|
|
Income
(loss) from operations
|
|
|
(329,346
|
)
|
|
|
2,401,923
|
|
|
|
383,001
|
|
|
|
|
2,455,578
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
1,397
|
|
|
|
--
|
|
|
|
|
|
|
|
|
1,397
|
|
|
Interest
expense
|
|
|
(1,297,426
|
)
|
|
|
(237,412
|
)
|
|
|
237,412
|
|
(aa)
|
|
|
(2,087,413
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(401,260
|
)
|
(aa)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(91,782
|
)
|
(bb)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,810
|
)
|
(bb)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(287,135
|
)
|
(bb)
|
|
|
|
|
|
Risk
management
|
|
|
683,391
|
|
|
|
--
|
|
|
|
|
|
|
|
|
683,391
|
|
|
Loss
on extinguishment of debt
|
|
|
(804,545
|
)
|
|
|
--
|
|
|
|
|
|
|
|
|
(804,545
|
)
|
|
Change
in fair value of derivatives
|
|
|
(7,970,436
|
)
|
|
|
--
|
|
|
|
|
|
|
|
|
(7,970,436
|
)
|
|
Total
other
|
|
|
(9,387,619
|
)
|
|
|
(237,412
|
)
|
|
|
(552,575
|
)
|
|
|
|
(10,177,606
|
)
|
|
Net
income (loss)
|
|
$
|
(9,716,965
|
)
|
|
$
|
2,164,511
|
|
|
$
|
(169,574
|
)
|
|
|
$
|
(7,722,028
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
$
|
(0.40
|
)
|
|
|
|
|
|
|
|
|
|
|
$
|
(0.32
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
|
24,487,451
|
|
|
|
|
|
|
|
|
|
|
|
|
24,487,451
|
|
See
notes to unaudited pro forma condensed consolidated financial
statements.
ABC
FUNDING, INC.
UNAUDITED
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
|
|
|
Three
Months Ended September 30, 2007
|
|
|
|
|
ABC
Funding
|
|
|
Voyager
|
|
|
Adjustments
|
|
|
|
Pro
Forma
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil
and gas revenue
|
|
$
|
--
|
|
|
$
|
2,556,515
|
|
|
$
|
--
|
|
|
|
$
|
2,556,515
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease
operating expenses
|
|
|
--
|
|
|
|
598,338
|
|
|
|
--
|
|
|
|
|
598,338
|
|
|
Production
taxes
|
|
|
--
|
|
|
|
156,970
|
|
|
|
--
|
|
|
|
|
156,970
|
|
|
Depletion,
depreciation and amortization
|
|
|
--
|
|
|
|
1,774,952
|
|
|
|
(1,774,952
|
)
|
(cc)
|
|
|
709,846
|
|
|
|
|
|
|
|
|
|
|
|
|
|
709,846
|
|
(cc)
|
|
|
|
|
|
General
and administrative
|
|
|
208,711
|
|
|
|
192,669
|
|
|
|
|
|
|
|
|
401,380
|
|
|
Total
costs and expenses
|
|
|
208,711
|
|
|
|
2,722,929
|
|
|
|
(1,065,106
|
)
|
|
|
|
1,866,534
|
|
|
Loss
from operations
|
|
|
(208,711
|
)
|
|
|
(166,414
|
)
|
|
|
1,065,106
|
|
|
|
|
689,981
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
4,833
|
|
|
|
--
|
|
|
|
--
|
|
|
|
|
4,833
|
|
|
Interest
expense
|
|
|
(171,303
|
)
|
|
|
(194,782
|
)
|
|
|
194,782
|
|
(dd)
|
|
|
(1,348,103
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(595,419
|
)
|
(dd)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(137,673
|
)
|
(ee)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(428,993
|
)
|
(ee)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14,715
|
)
|
(ee)
|
|
|
|
|
|
Total
other
|
|
|
(166,470
|
)
|
|
|
(194,782
|
)
|
|
|
(982,018
|
)
|
|
|
|
(1,343,270
|
)
|
|
Net
loss
|
|
$
|
(375,181
|
)
|
|
$
|
(361,196
|
)
|
|
$
|
83,088
|
|
|
|
$
|
(653,289
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
$
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
|
|
$
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
|
22,227,374
|
|
|
|
|
|
|
|
|
|
|
|
|
22,227,374
|
|
See
notes to unaudited pro forma condensed consolidated financial
statements.
ABC
FUNDING, INC.
NOTES
TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
On
September 2, 2008, we consummated the Voyager Acquisition, whereby we purchased
all of the outstanding capital stock of Voyager Gas Corporation, the owner of
interests in oil and gas lease blocks located in Duval County, Texas, including
working and other interests in oil and gas leases, producing wells, and
properties, together with rights under related operating, marketing, and service
contracts and agreements, seismic exploration licenses and rights, and personal
property, equipment and facilities. The Voyager Acquisition was made
pursuant to the Purchase Agreement, as amended by the First Amendment to the
Stock Purchase and Sale Agreement dated August 15, 2008 and the Second Amendment
to the Stock Purchase and Sale Agreement dated September 2, 2008 among the
parties thereto.
The
purchase price paid in the Voyager Acquisition consisted of cash consideration
of $35.0 million and, as amended by the Second Amendment, 10,000 newly issued
shares of our preferred stock designated as Series D preferred stock (the
“Series D Preferred”), having an agreed upon value of $7.0 million. Upon
the effectiveness of an amendment to our Articles of Incorporation increasing
the number of shares of Common Stock that we may issue (the “Charter
Amendment”), the Series D Preferred will automatically convert into 17.5 million
shares of our Common Stock.
The
acquisition will be accounted for in accordance with the provisions of Statement
of Financial Standards (“SFAS”) No. 141, “Business Combinations.” The total
purchase price of $42,000,000 will be allocated to the net tangible assets based
on the estimated fair values. No goodwill will be recorded as there will be
no excess of the purchase price over the net tangible assets to be
acquired.
On
September 2, 2008, we entered into (i) a credit agreement (the “Revolving Loan”)
among the Company, CIT Capital USA Inc. (“CIT Capital”), as Administrative Agent
and the lender named therein and (ii) a second lien term loan agreement (the
“Term Loan”) among the Company, CIT Capital and the lender. The Revolving
Loan and Term Loan are collectively referred to herein as the “CIT Credit
Facility.”
The
Revolving Loan provides for a $50.0 million senior secured revolving credit
facility which is subject to an initial borrowing base of $14.0 million, or an
amount determined based on semi-annual review of our proved oil and gas
reserves. As of September 4, 2008, we had $11.5 million borrowed to finance
the Voyager Acquisition, to repay the related bridge loan and transaction
expenses, and to fund capital expenditures generally. Monies advanced under
the Revolving Loan mature in three years and bear interest at a rate equal to
LIBOR plus 1.75% to 2.50%, as the case may be.
The
Term Loan provides for a one-time advance to us of $22.0 million. We drew
down the full amount on September 2, 2008 to finance the Voyager Acquisition and
to repay the related bridge loan and transaction expenses. Monies borrowed
under the Term Loan mature in three and one-half years and bear interest at a
rate equal to LIBOR plus 5% during the first twelve months after closing and
LIBOR plus 7.50%, thereafter.
The
unaudited pro forma condensed consolidated statement of operations for the three
months ended September 30, 2008 and 2007 and the twelve months ended June 30,
2008, and the unaudited pro forma condensed consolidated balance sheet as of
June 30, 2008, are based on the consolidated financial statements of ABC
Funding, Inc. and Voyager Gas Corporation for the three months ended
September 30, 2008 and 2007 and the twelve months ended June 30, 2008, and the
adjustments and assumptions are described below.
|
2.
|
ABC/Voyager
Pro Forma Adjustments:
|
The
unaudited pro forma financial statements reflect the following
adjustments:
|
(a)
|
Record
the initial borrowings on the Revolving Loan of $11.5 million and the Term
Loan of $22.0 million under the CIT Credit
Facility.
|
|
(b)
|
Record
the cash payment of fees in the amount of $510,000 to CIT on the Revolving
Loan and Term Loan as deferred financing costs.
|
|
(c)
|
Record
the cash payment of $290,000 in legal fees incurred for the financing
of the CIT Credit Facility as deferred financing
costs.
|
|
(d)
|
Record
the fair value of $206,000 of the CIT one percent (1%) overriding royalty
interest as a reduction in oil and gas property properties and a discount
on the Term Loan to be amortized over the life of the
loan.
|
|
(e)
|
Record
the cash payment of $450,000 principal amount of the senior
convertible debentures.
|
|
(f)
|
Record
the conversion of $450,000 principal amount of the senior convertible
debentures into our Series E Preferred.
|
|
(g)
|
Record
the elimination of the derivative liability associated with the senior
convertible debentures against additional paid-in
capital.
|
|
(h)
|
Record
the elimination of the discount on the senior convertible debentures and
the unamortized deferred financing costs associated with the convertible
debentures and charge interest expense.
|
|
(i)
|
Record
the elimination of the change in fair value of the senior convertible
debentures and charge change in fair value of
derivatives.
|
|
(j)
|
Record
the commission in the amount of $1,127,435as deferred financing costs to
Global Hunter Securities pursuant to the CIT Credit Facility, the cash
payment of $601,935 and the issuance of a non-interest bearing promissory
note due March 15, 2009 in the principal amount of
$557,500.
|
|
(k)
|
Record
the cash payment in the amount of $12,239,193 to payoff Voyager’s credit
facility and charge to oil and gas properties.
|
|
(l)
|
Record
the cash payment of the $35.0 million purchase price to the Sellers
after deducting the payoff of Voyager’s credit facility of $12,239,193 and
the earnest money deposit of $800,000..
|
|
(m)
|
Transfer
acquisition costs of $976,284 to oil and gas
properties.
|
|
(n)
|
Record
the elimination on Voyager of the earnest money deposit and accrued
interest of $801,525.
|
|
(o)
|
Record
the issuance of our Series D Preferred, convertible into 17.5 million
shares of our common stock valued at $9.1 million to oil and gas
properties.
|
|
(p)
|
Record
elimination of Voyager’s credit facility paid at closing to oil and gas
properties.
|
|
(q)
|
Record
transfer of Voyager’s deferred tax liability to oil and gas
properties.
|
|
(r)
|
Record
elimination of Voyager’s additional paid-in capital and charge oil and gas
properties.
|
|
(s)
|
Record
elimination of Voyager’s retained earnings and charge oil and gas
properties.
|
|
(t)
|
Record
working capital of Voyager acquired in the acquisition and charge oil and
gas properties.
|
|
(u)
|
Record
fair value of outstanding tainted warrants and the derivative
liability associated with such warrants..
|
|
(v)
|
Record
mark-to-market of warrants issued to CIT Capital
|
|
(w)
|
Record
amortization as interest expense of deferred financing costs of $550,696
and debt discounts of $58,860 and $1,891,895 over the three and one-half
year term of the Term Loan portion of the CIT Credit Facility for the
twelve months ended June 30, 2008
|
|
(x)
|
Adjust
interest expense to reverse interest expense from the redeemed existing
debt of Voyager and record interest expense associated with the CIT Credit
Facility for the twelve months ended June 30, 2008.
|
|
(y)
|
Reverse
Voyager’s depletion expense and record depletion expense utilizing the
post-acquisition rate of $2.35 per equivalent Mcf for the twelve months
ended June 30, 2008. The initial depletion rate per equivalent
Mcf will be $2.35 in the initial period following the
acquisition.
|
|
(z)
|
Reverse
Voyager’s depletion and record depletion expense utilizing the
post-acquisition rate of $2.35 per equivalent Mcf for the three months
ended September 30, 2008.
|
|
(aa)
|
Adjust
interest expense to reverse interest expense from the redeemed existing
debt of Voyager and record interest expense associated with the CIT Credit
Facility for the months of July and August 2008.
|
|
(bb)
|
Record
amortization as interest expense of deferred financing costs of $91,782
and debt discounts of $9,180 and $287,135 over the three and one-half year
term of the Term Loan portion of the CIT Credit Facility for the months of
July and August 2008.
|
|
(cc)
|
Reverse
Voyager’s depletion and record depletion expense utilizing the
post-acquisition rate of $2.35 per equivalent Mcf for the three months
ended September 30, 2007.
|
|
(dd)
|
Adjust
interest expense to reverse interest expense from the redeemed existing
debt of Voyager and record interest expense associated with the CIT Credit
Facility for the three months ended September,
2007.
|
|
(ee)
|
Record
amortization as interest expense of deferred financing costs of $137,673
and debt discounts of $14,715 and $428,993 over the three and
one-half year term of the Term Loan portion of the CIT Credit Facility for
the three months ended September 30, 2007.
|
|
(ff)
|
Record
discount on the CIT Term Loan related to warrants issued with
debt.
|
|
(gg)
|
Eliminate
Voyager's federal income tax expense as a result of utilizing ABC
Funding's loss carry forwards.
|
The
allocation of the purchase price is preliminary, the estimates and assumptions
are subject to change and the initial purchase price allocation may be adjusted
within one year of the effective date of the acquisition for changes in
estimates of fair value of assets acquired and liabilities
assumed.
The preliminary allocation of the purchase price and the estimated fair market
values of the assets acquired and liabilities assumed are subject to
modification and are shown below.
|
Cash
|
|
$
|
1,864,446
|
|
|
Accounts
receivables
|
|
|
39,410
|
|
|
Security
deposit
|
|
|
3,622
|
|
|
Oil
and gas property
|
|
|
40,738,549
|
|
|
Total assets acquired
|
|
|
42,646,027
|
|
|
Severance
tax payable
|
|
|
65,418
|
|
|
Royalties
payable
|
|
|
405,714
|
|
|
Ad
valorem taxes payable
|
|
|
60,000
|
|
|
Asset
retirement obligations
|
|
|
765,658
|
|
|
Total liabilities assumed
|
|
|
1,296,790
|
|
|
Net assets acquired
|
|
$
|
41,349,237
|
|
The
following table represents the calculation of the purchase price for the
Voyager Acquisition:
|
Proved
oil and gas properties
|
|
$
|
37,347,690
|
|
|
Cash
portion of purchase price
|
|
|
35,000,000
|
|
|
Series
D Preferred
|
|
|
9,100,000
|
|
|
Acquisition
costs for legal, engineering and title
|
|
|
176,284
|
|
|
Less:
|
|
|
|
|
|
Payment
of Voyager’s bank debt
|
|
|
(12,239,193
|
)
|
|
Deferred
tax liability
|
|
|
(4,876,267
|
)
|
|
Elimination
of Voyager’s additional paid-in capital
|
|
|
(7,140,000
|
)
|
|
Elimination
of Voyager’s retained earnings
|
|
|
(12,637,592
|
)
|
|
Working
capital
|
|
|
(2,594,652
|
)
|
|
Value
of CIT’s overriding royalty interest
|
|
|
(206,000
|
)
|
|
Preliminary
purchase price allocation
|
|
$
|
41,930,270
|
|
ABC
FUNDING, INC.
PRO
FORMA SUPPLEMENTAL OIL AND NATURAL GAS DISCLOSURES
The
following table sets forth certain unaudited combined supplemental oil and gas
disclosures concerning our proved oil and gas reserves at April 1, 2008, giving
effect to the Voyager Acquisition as if it had occurred on April 1,
2008. The following estimates of proved oil and gas reserves, both
developed and undeveloped, represent interests acquired by us in the Voyager
Acquisition described above, and are located solely within the United
States. Proved reserves represent estimated quantities of crude oil
and natural gas which geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known reservoirs
under existing economic and operating conditions. Proved developed
oil and gas reserves are the quantities expected to be recovered through
existing wells with existing equipment and operating methods. Proved
undeveloped oil and gas reserves are reserves that are expected to be recovered
from new wells on undrilled acreage, or from existing wells for which relatively
major expenditures are required for completion.
Disclosures
of oil and gas reserves which follow are based on estimates as of April 1, 2008,
prepared by Ralph E. Davis Associates, Inc., our independent third party
engineering firm, and from information provided by the Sellers, in accordance
with guidelines established by the SEC. Such estimates are subject to
numerous uncertainties inherent in the estimation of quantities of proved
reserves and in the projection of future rates of production and the timing of
development expenditures. These estimates do not include probable or
possible reserves. The information provided does not necessarily
represent our estimate of expected future cash flows or value of proved oil and
gas reserves.
Proved
and Undeveloped Reserves
|
|
|
Oil
Reserves (Mbbls)
|
|
|
|
|
ABC
Funding
|
|
|
Voyager
|
|
|
Pro
Forma
|
|
|
Balance,
December 31, 2007
|
|
|
--
|
|
|
|
1,172
|
|
|
|
1,172
|
|
|
Revisions
|
|
|
--
|
|
|
|
(322
|
)
|
|
|
(322
|
)
|
|
Extensions/discoveries
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
Purchases
in place
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
Sales
in place
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
Production
|
|
|
--
|
|
|
|
(22
|
)
|
|
|
(22
|
)
|
|
Balance,
April 1, 2008
|
|
|
--
|
|
|
|
828
|
|
|
|
828
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proved
developed reserves at April 1, 2008
|
|
|
--
|
|
|
|
578
|
|
|
|
578
|
|
|
|
|
Natural
Gas Reserves (MMcf)
|
|
|
|
|
ABC
Funding
|
|
|
Voyager
|
|
|
Pro
Forma
|
|
|
Balance,
December 31, 2007
|
|
|
--
|
|
|
|
19,213
|
|
|
|
19,213
|
|
|
Revisions
|
|
|
--
|
|
|
|
(7,754
|
)
|
|
|
(7,754
|
)
|
|
Extensions/discoveries
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
Purchases
in place
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
Sales
in place
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
Production
|
|
|
--
|
|
|
|
(231
|
)
|
|
|
(231
|
)
|
|
Balance,
April 1, 2008
|
|
|
--
|
|
|
|
11,228
|
|
|
|
11,228
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proved
developed reserves at April 1, 2008
|
|
|
--
|
|
|
|
7,302
|
|
|
|
7,302
|
|
Standardized
Measure of Discounted Future Net Cash Flows
The standardized measure of
discounted future net cash flows from the estimated proved oil and natural gas
reserves is provided for the financial statement user as a common base for
comparing oil and natural gas reserves of enterprises in the industry and may
not represent the fair market value of the oil and natural gas reserves or the
present value of future cash flows of equivalent reserves due to various
uncertainties inherent in making these estimates. Those factors
include changes in oil and natural gas prices from year end prices used as
estimates, unanticipated changes in future production and development costs and
other uncertainties in estimating quantities and present values of oil and
natural gas reserves.
The following table presents the
standardized measure of discounted future net cash flows from the ownership
interest in proved oil and natural gas reserves as of April 1,
2008. The standardized measure of future net cash flows as of April
1, 2008 is calculated using the price received by Voyager as of the end of this
period. The average prices used for Voyager were $105.56 per barrel
of oil and $9.59 per Mcf of natural gas.
The resulting estimated cash flows
are reduced by estimated future costs to produce and estimated proved reserves
based upon actual end of period operating cost levels. The future
cash flows are reduced to present value by applying a 10% discount
rate.
The standardized measure of
estimated discounted future cash flow is not intended to represent the
replacement cost or fair market value of the oil and natural gas
properties.
|
|
|
April
1, 2008
|
|
|
(Dollars
in thousands)
|
|
ABC
Funding
|
|
|
Voyager
|
|
|
Pro
Forma
|
|
|
Future
revenues
|
|
$
|
--
|
|
|
$
|
203,445
|
|
|
$
|
203,445
|
|
|
Future
production costs
|
|
|
--
|
|
|
|
(49,270
|
)
|
|
|
(49,270
|
)
|
|
Future
development costs
|
|
|
--
|
|
|
|
(7,924
|
)
|
|
|
(7,924
|
)
|
|
Future net cash flows
|
|
|
--
|
|
|
|
146,251
|
|
|
|
146,251
|
|
|
10%
discount factor
|
|
|
--
|
|
|
|
(70,617
|
)
|
|
|
(70,617
|
)
|
|
Standardized
measure of discounted
future
net cash relating to proved
reserves
|
|
$
|
--
|
|
|
$
|
75,634
|
|
|
$
|
75,634
|
|
The primary
changes in the standardized measure of discounted future net cash flows for the
Period beginning April 1, 2008 when compared to the year ended December 31, 2007
were as follows:
|
(Dollars
in thousands)
|
|
|
|
|
Standardized
measure, December 31, 2007
|
|
$
|
87,762
|
|
|
Oil
and gas sales, net of costs
|
|
|
(1,111
|
)
|
|
Discoveries,
extensions and transfers
|
|
|
--
|
|
|
Purchase
of minerals in place
|
|
|
--
|
|
|
Sales
of minerals in place
|
|
|
--
|
|
|
Changes
in estimates of future development costs
|
|
|
(4,426
|
)
|
|
Net
changes in prices
|
|
|
117,840
|
|
|
Development
costs incurred during the period
|
|
|
--
|
|
|
Revisions
of estimates and other
|
|
|
(124,431
|
)
|
|
Standardized
measure, April 1, 2008
|
|
$
|
75,634
|
|
INTERESTS
OF NAMED EXPERTS AND COUNSEL
Legal
Matters
Certain
matters related to the validity of the issuance of the Registered Securities
that are being registered for resale in the registration statement to which this
prospectus forms a part will be passed upon for us by Thompson & Knight LLP,
New York, New York.
Independent
Registered Public Accounting Firm
Included
in this prospectus are the reports of Malone & Bailey, PC, independent
registered public accountants, located in Houston, Texas, with respect to its
audits of our consolidated balance sheets as of June 30, 2008 and 2007, and the
related consolidated statements of operations, cash flows and changes in
stockholders' deficit for the two year period then ended and for the period from
February 21, 2006 (Inception) through June 30, 2008. We have relied
upon such reports, given upon the authority of such firm as an expert in
accounting and auditing.
Included
in this prospectus are the reports of Montgomery Coscia Greilich LLP,
independent registered public accountants, located in Plano, Texas, with respect
to its audits of the balance sheets of Voyager Gas Corporation, our
newly-acquired subsidiary following the Voyager Acquisition, for the years ended
December 31, 2007 and 2006, and the related statements of operations, changes in
stockholders' equity and cash flow for the two year period then
ended. We have relied upon such reports, given upon the authority of
such firm as an expert in accounting and auditing.
Independent
Petroleum Engineer
The
information included in this prospectus regarding estimated quantities of proved
reserves, [the future net revenues from those reserves and their present value]
is based, in part, on estimates of the proved reserves and present values of
proved reserves of the properties of Voyager Gas Corporation, now a wholly-owned
subsidiary of ours, as of April 1, 2008 from the summary report, dated May 13,
2008, of the Estimated Reserves and Non Escalated Future Net Revenue Remaining
as of April 1, 2008, of Voyager Gas Corporation (the “Reserve Report”) prepared
by Ralph E. Davis Associates, Inc, .an independent petroleum engineer (the
“Reserve Report”). [A summary of the Reserve Report is included as an
exhibit to the registration statement of which this prospectus is a
part]. These estimates are included in this prospectus in reliance
upon the authority of the firm as experts in these matters.
DISCLOSURE OF COMMISSION POSITION
ON
INDEMNIFICATION FOR SECURITIES ACT
Our
Articles of Incorporation and By-Laws provide that we will indemnify to the
fullest extent permitted by the Nevada Revised Statutes any person made or
threatened to be made a party to any action, suit or proceeding, whether civil,
criminal, administrative or investigative, by reason of the fact that such
person or such person's testator or intestate is or was a director, officer,
employee or agent of the Company or serves or served at our request as a
director, officer or employee of another corporation or entity.
We may
enter into agreements to indemnify our directors and officers, in addition to
the indemnification provided for in our Articles of Incorporation and
By-Laws. These agreements, among other things, would indemnify our
directors and officers for certain expenses (including advancing expenses for
attorneys' fees), judgments, fines and settlement amounts incurred by any such
person in any action or proceeding, including any action by us or in our right,
arising out of such person's services as a director or officer of the Company,
any subsidiary of ours or any other company or enterprise to which the person
provides services at our request.
We
maintain a Directors, Officers and Company Liability Policy.
Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted to our directors, officers and controlling persons pursuant to the
foregoing provisions, or otherwise, we have been advised that, in the opinion of
the SEC, such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable.
PART
II
INFORMATION
NOT REQUIRED IN PROSPECTUS
Item
13. Other
Expenses of Issuance and Distribution
Our
expenses in connection with the issuance and distribution of the securities
being registered, other than the underwriting discount, are estimated as
follows:
|
SEC
registration fee
|
|
$
|
218
|
|
|
Legal
fees and expenses
|
|
|
50,000
|
|
|
Accountants’
fees and expenses
|
|
|
15,000
|
|
|
Miscellaneous
expenses
|
|
|
5,000
|
|
|
Total
|
|
$
|
70,218
|
|
Item
14. Indemnification
of Directors and Officers
Our
Articles of Incorporation and By-Laws provide that we will indemnify to the
fullest extent permitted by the Nevada General Corporation Law any person made
or threatened to be made a party to any action, suit or proceeding, whether
civil, criminal, administrative or investigative, by reason of the fact that
such person or such person's testator or intestate is or was a director,
officer, employee or agent of the Company or serves or served at our request as
a director, officer or employee of another corporation or entity.
We may
enter into agreements to indemnify our directors and officers, in addition to
the indemnification provided for in our Articles of Incorporation and
By-Laws. These agreements, among other things, would indemnify our
directors and officers for certain expenses (including advancing expenses for
attorneys' fees), judgments, fines and settlement amounts incurred by any such
person in any action or proceeding, including any action by us or in our right,
arising out of such person's services as a director or officer of the Company,
any subsidiary of ours or any other company or enterprise to which the person
provides services at our request.
We
maintain a Directors, Officers and Company Liability Policy.
Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted to our directors, officers and controlling persons pursuant to the
foregoing provisions, or otherwise, we have been advised that, in the opinion of
the Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Securities Act and is, therefore,
unenforceable.
Item
15. Recent
Sales of Unregistered Securities
As of
February 12, 2009, we have 23,363,136 shares of common stock issued and
outstanding, plus options, warrants, convertible preferred stock, convertible
promissory notes and restricted stock agreements that are, or upon effectiveness
of Charter Amendment will be, convertible into or exercisable for up to an
approximately 66,436,850 additional shares of common stock
Unless
stated otherwise below, all issuances of securities described under this “
Item 15 – Recent Sales of
Unregistered Securities
” were issued pursuant to exemptions from
registration provided by Section 4(2) of the Securities Act and Regulation D
promulgated thereunder.
Preferred
Stock
During
May 2008, certain of our outstanding (i) convertible promissory notes, in the
aggregate principal amount of $965,000 and bearing interest at 12% per annum
from September 1, 2007 and (ii) convertible promissory notes, in the aggregate
principal amount of $350,000 and bearing interest at 10% per annum, due October
31, 2008, were exchanged for shares of our Series A Preferred Stock and Series B
Preferred Stock pursuant to Section 3(c)(9) of the Securities Act, in full
satisfaction of our obligations under the notes including, without limitation,
the repayment of principal and accrued unpaid interest
thereon. Pursuant to the exchange transaction, we issued 99,395
shares of Series A Preferred Stock in exchange for the redemption of $965,000 of
principal and $28,950 of accrued interest on the 12% notes, with each share of
such preferred stock being automatically convertible into 20 shares of our
common stock, for an aggregate of 1,987,900 shares of our common
stock. Additionally, we issued 37,100 shares of Series B Preferred
Stock in exchange for the redemption of $350,000 of principal and $21,000 of
accrued interest on the 10% notes, with each share of such preferred stock being
automatically convertible into 28.58 shares of our common stock, for an
aggregate of 1,060,318 shares of our common stock. The Series A and
Series B Preferred Stock are convertible into shares of our common stock any
time after the effectiveness of the Charter Amendment.
On May
20, 2008 we issued 1,000 shares of our Series C Preferred Stock to Mr. Alan D.
Gaines, a current director and principal stockholder of the Company, in
consideration for monies in the aggregate sum of $100,000 advanced by Mr. Gaines
to us for general corporate purposes. These shares of preferred stock
are redeemable by us at $100 per share.
On
September 2, 2008 we issued 10,000 shares of our Series D Preferred Stock to
Voyager Gas Holdings L.P. in partial consideration under the Voyager
Acquisition. These shares of preferred stock automatically convert
into 17,500,000 shares of our common stock on the effectiveness of the Charter
Amendment.
On
September 2, 2008 we issued 10,000 shares of our Series E Preferred Stock to
Whalehaven Capital Fund Limited in full satisfaction of its Debenture in the
redemption amount of $450,000. These shares of preferred stock
automatically convert into 1,363,636 shares of our common stock on the
effectiveness of the Charter Amendment.
Common
Stock
On May
26, 2006, we issued an aggregate of 20,265,000 shares of our common stock to the
stockholders of Energy Venture as partial consideration in the May 2006 Merger
transaction.
On August
21, 2007, we issued 100,000 shares of common stock with a value of $45,000 to a
non-employee as compensation for services rendered.
On
September 4, 2007, we issued 89,248 shares of common stock in lieu of cash in
payment of $44,624 of accrued and current period interest to noteholders who
chose to redeem their 2006 Notes.
On
September 4, 2007, we issued 218,000 shares of common stock with a value of
$98,100 as consideration to those noteholders who chose to extend the maturity
date of their 2006 Notes to February 28, 2008.
On
September 17, 2007, we issued 100,000 shares of common stock with a value of
$45,000 to a non-employee as compensation for services rendered.
On
September 19, 2007, our Board approved the issuance of 150,000 shares of common
stock with a value of $55,500 to a former member of our Board as compensation
for assuming the role of Chief Executive Officer.
On
November 1, 2007, we issued 200,004 shares of common stock with a relative fair
market value of $116,666 to purchasers of $350,000 principal amount of our newly
issued convertible notes.
On
November 7, 2007, we issued 310,435 shares of common stock in lieu of cash in
payment of $155,215 of accrued interest to holders of our 2006 Notes who chose
to extend the maturity date of their notes through February 28,
2008.
On March
6, 2008, we issued 130,449 shares of common stock in lieu of cash in payment of
$65,221 of accrued and current period interest to holders of our 2006
Notes.
On May
22, 2008, we entered into a restricted stock agreement with Robert P. Munn, our
Chief Executive Officer, pursuant to which we agreed to grant 1,500,000 shares
of restricted stock to Mr. Munn, vesting equally as to one-third of the shares
over a two year period, commencing upon the effectiveness of the Charter
Amendment and each of the first and second year anniversary of the grant
dates.
On May
22, 2008, we entered into a restricted stock agreement with Carl A. Chase, our
Chief Financial Officer, pursuant to which we agreed to grant 1,125,000 shares
of restricted stock to Mr. Chase, vesting equally as to one-third of the shares
over a two year period, commencing upon the effectiveness of the Charter
Amendment and each of the first and second year anniversary of the grant
dates.
On
October 1, 2008, we entered into a restricted stock agreement with Jim B. Davis,
our Senior Vice President of Operations, pursuant to which we agreed to grant
750,000 shares of restricted stock to Mr. Davis, vesting equally as to one-third
of the shares over a two year period, commencing upon the effectiveness of the
Charter Amendment and each of the first and second year anniversary of the grant
dates.
Warrants
and Options
On March
1, 2006, Energy Venture granted to a non-employee (and assumed by us under the
May 2006 Merger) in consideration of services performed a warrant, which warrant
expires five years from grant date and is currently exercisable to purchase up
to 350,000 shares of our common stock at an exercise price of $0.05 per
share;
On March
1, 2006, Energy Venture granted to two non-employees (and assumed by us under
the May 2006 Merger) in consideration of services performed warrants, which
warrants expire five years from grant date and are currently exercisable to
purchase up to 750,000 shares of our common stock at an exercise price of $0.60
per share;
On
December 28, 2006, we granted four non-employees warrants in consideration of
services performed, which warrants expire five years from grant date and are
currently exercisable to purchase up to 1,500,000 shares of our common stock at
an exercise price of $0.25 per share;
On May
22, 2007, we granted to two non-employees warrants in consideration of services
performed, which warrants expire five years from grant date and are currently
exercisable to purchase up to 900,000 shares of our common stock at an exercise
price of $0.30 per share;
On May
22, 2007, we granted to our former Chief Financial Officer options in
consideration of services performed, which option expires five years from grant
date and are currently exercisable to purchase up to 150,000 shares of our
common stock at an exercise price of $0.30 per share.
On
October 26, 2007, we granted to our former Chief Financial Officer options in
consideration of services performed, which option expires five years from grant
date and are currently exercisable to purchase up to 250,000 shares of our
common stock at an exercise price of $0.35 per share. The warrants
vested immediately and terminate on October 26, 2012.
On
October 26, 2007, we granted two non-employees warrants to purchase up to an
aggregate of 1,000,000 shares of our common stock at an exercise price of $0.35
per share for services rendered. The warrants vested immediately and
terminate on October 26, 2012.
On
December 19, 2007, we granted our former CEO, options to purchase up to 500,000
shares of our common stock at an exercise price of $0.35 per share for services
rendered. The options vested immediately and terminate on December
19, 2012.
On
December 19, 2007, we granted two non-employees warrants to purchase up to an
aggregate of 1,100,000 shares of our common stock at an exercise price of $0.35
per share for services rendered. The warrants vested immediately and
terminate on December 19, 2012.
On
February 28, 2008, we granted our former CEO, additional options to purchase up
to 250,000 shares of our common stock at an exercise price of $0.54 per share
for services rendered. The options vested immediately and terminate
on February 27, 2013.
On
February 28, 2008, we granted a non-employee warrant to purchase up to an
aggregate of 3,300,000 shares of our common stock at an exercise price of $0.54
per share for services rendered. The warrants vested immediately and
terminate on February 27, 2013.
As part
of our employment agreement with Mr. Munn, our Chief Executive Officer, on May
22, 2008 we granted seven year stock options, exercisable for up to 500,000
shares of our common stock, at an exercise price of $0.52 per share, which
option will vest with respect to these shares on the Effectiveness of the
Charter Amendment, 500,000 shares, at an exercise price of $0.57 per share,
which option vests on May 22, 2009, and 500,000 shares, at an exercise price of
$0.62 per share, which option vests on May 22, 2010.
As part
of our employment agreement with Mr. Chase, our Chief Financial Officer, on May
22, 2008 we granted seven year stock options, exercisable for up to 375,000
shares of our common stock, at an exercise price of $0.52 per share, which
option will vest with respect to these shares on the Effectiveness of the
Charter Amendment, 375,000 shares, at an exercise price of $0.57 per share,
which option vests on May 22, 2009, and 375,000 shares, at an exercise price of
$0.62 per share, which option vests on May 22, 2010.
As part
of the consideration for entry into the Bridge Loan, on May 21, 2008, we granted
to the investors in our Debentures warrants, exercisable for up to an aggregate
of 3,000,000 shares of our common stock, at an exercise price of $0.33 per
share. These warrants vested immediately and expire on May 21,
2013.
As part
of the consideration for entry into the Credit Facility, on September 2, 2008 we
granted the CIT Warrant, exercisable for up to 24,199,996 shares of our common
stock, at an exercise price of $0.35 per share. The CIT Warrant
expires on September 2, 2013, and is exercisable upon the effectiveness of the
Charter Amendment.
As part
of a commission due to the investment banking firm that identified the holders
of the Debentures, on September 2, 2008, we granted the GHS Warrant, exercisable
for up to 225,000 shares of our common stock, at an exercise price of $0.33 per
share. The GHS Warrant expires on September 2, 2013, and is
exercisable upon the effectiveness of the Charter Amendment.
As part
of our employment agreement with Mr. Davis, our Senior Vice President of
Operations, on October 1, 2008 we granted seven year stock options, exercisable
for up to 333,334 shares of our common stock, at an exercise price of $0.54 per
share, which option will vest with respect to these shares on the Effectiveness
of the Charter Amendment, 333,333 shares, at an exercise price of $0.59 per
share, which option vests on October 1, 2009, and 333,333 shares, at an exercise
price of $0.65 per share, which option vests on October 1, 2010.
Item
16. Exhibits
|
Exhibit
Nos.
|
Descriptions
|
|
4.1
|
Certificate
of Designation, dated August 27, 2008, with respect to Series D Preferred
Stock *
|
|
4.2
|
Certificate
of Designation, dated August 29, 2008, with respect to Series E Preferred
Stock *
|
|
5.1
|
Opinion
of Thompson & Knight LLP
|
|
10.1
|
Stock
Purchase and Sale Agreement, dated May 22, 2008, among the Company,
Voyager Partnership Holdings, L.P. and Voyager Gas
Corporation *
|
|
10.1.1
|
First
Amendment to Purchase and Sale Agreement, dated as of August 15, 2008,
among the Company, Gas Holdings, L.P. and Voyager Gas
Corporation *
|
|
10.1.2
|
Second
Amendment to Purchase and Sale Agreement, dated as of September 2,
2008, among the Company, Gas Holdings, L.P. and Voyager
Partnership Corporation *
|
|
10.2
|
Warrant,
dated September 2, 2008, from the Company to CIT Capital USA,
Inc. *
|
|
10.3
|
Warrant,
dated September 2, 2008, from the Company to Global Hunter Securities,
LLC. *
|
|
10.4
|
Registration
Rights Agreement, dated September 2, 2008, among the Company, Voyager
Partnership Holdings, L.P. and CIT Capital USA,
Inc. *
|
|
10.5
|
Registration
Rights Agreement, dated May 21, 2008, among the Company and the purchasers
named therein *
|
|
|
23.1
|
Consent
of Thompson & Knight LLP (included in Exhibit 5.1)
|
|
|
23.2
|
Consent
of Ralph E. Davis Associates, Inc., independent petroleum
engineer *
|
|
|
23.3
|
Consent
of Malone & Bailey, PC, independent registered
accountants *
|
|
|
23.4
|
Consent
of Montgomery Coscia Greilich LLP, independent registered accountants
*
|
Numbers
with (*) are filed herewith.
Item
17. Undertakings
The
undersigned Registrant hereby undertakes:
|
(1)
|
To
file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement
to:
|
|
(i)
|
Include
any registration statement required by Section 10(a)(3) of the Securities
Act;
|
(ii)
Reflect
in the registration statement any facts or events which, individually or
together, represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase
or decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any deviation
from the low or high end of the estimated maximum offering range may be
reflected in the form of registration statement filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price
represent no more than 20% change in the maximum aggregate offering price set
forth in the "Calculation of Registration Fee" table in the effective
Registration Statement; and
(iii)
Include
any material information with respect to the plan of distribution not previously
disclosed in the registration statement or any material change to such
information in the registration statement.
|
(2)
|
For
the purpose of determining any liability under the Securities Act, each
such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial
bona fide
offering
thereof.
|
|
(3)
|
To
remove from registration by means of a post-effective amendment any of the
securities being registered which remain unsold at the end of the
offering.
|
|
(4)
|
For
purposes of determining liability under the Securities Act of 1933 to any
purchaser, if the registrant is subject to Rule 430, each prospectus filed
pursuant to Rule 424(b) as part of a registration statement relating to an
offering, other than registration statements relying on Rule 430B or other
than prospectuses filed in reliance on Rule 430A, shall be deemed to be
part of and included in the registration statement as of the date it is
first used after effectiveness. Provided, however, that no
statement made in a registration statement or prospectus that is part of
the registration statement or made in a document incorporated or deemed
incorporated by reference into the registration statement or prospectus
that is part of a registration statement will, as to a purchaser with a
time of contract of sale prior to such first use, supersede or modify any
statement that was made in the registration statement or prospectus that
was part of the registration statement or made in any such document
immediately prior to such date of first
use.
|
|
(5)
|
For
the purpose of determining liability under the Securities Act of 1933 to
any purchaser in the initial distribution of the securities, the
undersigned registrant undertakes that in a primary offering of securities
of the undersigned registrant pursuant to this registration statement,
regardless of the underwriting method used to sell the securities to the
purchaser, if the securities are offered or sold to such purchaser by
means of any of the following communications, the undersigned small
business issuer will be a seller to the purchaser and will be considered
to offer or sell such securities to such
purchaser:
|
(i)
Any
preliminary registration statement or registration statement of the undersigned
registrant relating to the offering required to be filed pursuant to Rule
424;
(ii)
Any free
writing registration statement relating to the offering prepared by or on behalf
of the undersigned registrant or used or referred to by the undersigned
registrant;
(iii)
The
proportion of any other free writing registration statement relating to the
offering containing material information about the undersigned registrant or its
securities provided by or on behalf of the undersigned registrant;
and
(iv)
Any other
communication that is an offer in the offering made by the undersigned
registrant to the purchase.
Insofar
as indemnification for liabilities arising under the Securities Act of 1933 may
be permitted to directors, officers and controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
SIGNATURES
Pursuant
to the requirements of the Securities Act of 1933, the registrant has duly
caused this registration statement on Form S-1 to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of Houston, State of Texas on
February 13, 2009.
|
|
ABC
FUNDING, INC.
|
|
|
|
|
|
|
|
|
By:
|
/s/ Robert
P. Munn *
|
|
|
|
|
Name:
Robert P. Munn
|
|
|
|
|
Title:
Chief Executive Officer
(Principal Executive Officer)
|
|
|
|
|
|
|
In
accordance with the Securities Act of 1933, as amended, this registration
statement has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
|
Signature
|
|
Capacities
|
|
Date
|
|
|
|
|
|
|
|
/s/
Robert P. Munn *
|
|
Chairman,
President and Chief Executive Officer
|
|
February
13, 2009
|
|
Robert
P. Munn *
|
|
(Principal Executive Officer)
|
|
|
|
|
|
|
|
|
|
/s/
Carl A. Chase
|
|
Chief
Financial Officer
|
|
February
13, 2009
|
|
Carl
A. Chase
|
|
(Principal Financial and Accounting Officer)
|
|
|
|
|
|
|
|
|
|
/s/
Alan D. Gaines *
|
|
Director
|
|
February
13, 2009
|
|
Alan
D. Gaines
|
|
|
|
|
(*) By:
/s/ Carl A.
Chase
Carl A.
Chase
Attorney-in-fact
ABC
FUNDING, INC.
INDEX
OF EXHIBITS FILED WITH REGISTRATION STATEMENT
|
Exhibit
Nos.
|
Descriptions
|
|
4.1
|
Certificate
of Designation, dated August 27, 2008, with respect to Series D Preferred
Stock *
|
|
4.2
|
Certificate
of Designation, dated August 29, 2008, with respect to Series E Preferred
Stock *
|
|
5.1
|
Opinion
of Thompson & Knight LLP
|
|
10.1
|
Stock
Purchase and Sale Agreement, dated May 22, 2008, among the Company,
Voyager Partnership Holdings, L.P. and Voyager Gas
Corporation *
|
|
10.1.1
|
First
Amendment to Purchase and Sale Agreement, dated as of August 15, 2008,
among the Company, Gas Holdings, L.P. and Voyager Gas
Corporation *
|
|
10.1.2
|
Second
Amendment to Purchase and Sale Agreement, dated as of September 2,
2008, among the Company, Gas Holdings, L.P. and Voyager
Partnership Corporation *
|
|
10.2
|
Warrant,
dated September 2, 2008, from the Company to CIT Capital USA,
Inc. *
|
|
10.3
|
Warrant,
dated September 2, 2008, from the Company to Global Hunter Securities,
LLC. *
|
|
10.4
|
Registration
Rights Agreement, dated September 2, 2008, among the Company, Voyager
Partnership Holdings, L.P. and CIT Capital USA,
Inc. *
|
|
10.5
|
Registration
Rights Agreement, dated May 21, 2008, among the Company and the purchasers
named therein *
|
|
|
23.1
|
Consent
of Thompson & Knight LLP (included in Exhibit 5.1)
|
|
|
23.2
|
Consent
of Ralph E. Davis Associates, Inc., independent petroleum
engineer *
|
|
|
23.3
|
Consent
of Malone & Bailey, PC, independent registered
accountants *
|
|
|
23.4
|
Consent
of Montgomery Coscia Greilich LLP, independent registered accountants
*
|
Numbers
with (*) are filed
herewith.