Attached files
| file | filename |
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| EXCEL - IDEA: XBRL DOCUMENT - Rock Energy Resources, Inc. | Financial_Report.xls |
| EX-32 - CERTIFICATION OF CEO - Rock Energy Resources, Inc. | ex_32-1.htm |
| EX-32 - CERTIFICATION OF CFO - Rock Energy Resources, Inc. | ex_32-2.htm |
| EX-31 - CERTIFICATION OF CEO - Rock Energy Resources, Inc. | ex_31-1.htm |
| EX-31 - CERTIFICATION OF CFO - Rock Energy Resources, Inc. | ex_31-2.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2012
or
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file # 0-23022
ROCK ENERGY RESOURCES, INC.
(Exact name of registrant as specified in its charter)
Delaware |
| 11-2740461 |
(State or other jurisdiction of incorporation or organization) |
| (I.R.S. Employer Identification No.) |
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10350 Richmond Avenue, Suite 800 |
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Houston, Texas |
| 77042 |
(Address of principal executive offices) |
| (Zip Code) |
Registrant’s telephone number, including area code: (832) 301-5968
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $0.0001 per share
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
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 the 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 ¨ | Smaller reporting company x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x
As of April 30, 2012, the registrant had 194,792,543 shares of its Common Stock outstanding.
Forward-Looking Information
We make forward-looking statements throughout this report and the documents included or incorporated by reference in this prospectus. Whenever you read a statement that is not simply a statement of historical fact (such as statements including words like “believe,” “expect,” “anticipate,” “intend,” “plan,” “seek,” “estimate,” “could,” “potentially” or similar expressions), you must remember that these are forward-looking statements, and that our expectations may not be correct, even though we believe they are reasonable. The forward-looking information contained in this prospectus or in the documents included or incorporated by reference in this prospectus is generally located in the material set forth under the headings “Risk Factors,” “Business,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” but may be found in other locations as well. These forward-looking statements generally relate to our plans and objectives for future operations and are based upon our management’s reasonable estimates of future results or trends. These statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, some of which are beyond our control and difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements. In evaluating forward-looking statements, you should carefully consider the risks and uncertainties described in “Risk Factors” and elsewhere in this document and such risk factors include, among others, the following:
| · | our success in development, exploitation and exploration activities; |
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| · | our ability to make planned capital expenditures; |
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| · | declines in our production of oil and gas; |
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| · | prices for oil and gas; |
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| · | our ability to raise capital; |
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| · | political and economic conditions in oil producing countries, especially those in the Middle East; |
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| · | price and availability of alternative fuels; |
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| · | our acquisition and divestiture activities; |
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| · | weather conditions and events; |
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| · | the proximity, capacity, cost and availability of pipelines and other transportation facilities; and |
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| · | other factors discussed elsewhere in this prospectus and the documents incorporated by reference in this prospectus. |
All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements and risk factors contained in this document. Forward-looking statements contained in this document reflect our view only as of the date of this document. We undertake no obligation, other than as required by law, to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
References to "Rock” "we," "us," "our" and similar references or like terms refer to Rock Energy Resources, Inc. and references to “Rock Energy” or “REP” refer to Rock Energy Partners, L.P. and its subsidiaries.
- 2 -
Part I. Financial Information
ROCK ENERGY RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
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| March 31, 2012 |
| December 31, 2011 |
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ASSETS |
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Current Assets |
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Cash |
| $ | 743,821 |
| $ | 905,011 |
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Prepaid expenses |
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| 42,500 |
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| — |
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Total Current Assets |
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| 786,321 |
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| 905,011 |
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Mineral properties |
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| 2,868,434 |
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| 2,802,541 |
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Mining and milling equipment |
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| 524,975 |
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| — |
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Deferred financing cost |
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| 136,268 |
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| 75,000 |
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Prepaid mining cost |
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| 301,150 |
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| 270,589 |
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Investment in Santa Maria Pacific Holdings, at cost |
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| 1,263,792 |
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| 1,263,792 |
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TOTAL ASSETS |
| $ | 5,880,940 |
| $ | 5,316,933 |
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LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) |
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Current Liabilities |
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Accounts payable and accrued liabilities |
| $ | 977,945 |
| $ | 1,044,297 |
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Accounts payable and accrued liabilities to related parties |
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| 252,500 |
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| 698,000 |
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Accrued interest |
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| 252,137 |
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| 15,256 |
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Put option liability |
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| 1,670,718 |
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| 1,598,773 |
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Notes payable |
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| 1,457,500 |
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| 2,077,500 |
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Notes payable, related parties |
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| 1,062,000 |
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| 1,062,000 |
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Total Current Liabilities |
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| 5,672,800 |
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| 6,495,826 |
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Notes payable, net of discount of $2,135,417 and $2,447,917, respectively |
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| 1,625,583 |
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| 52,083 |
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Put option liability, noncurrent |
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| 1,670,718 |
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| 1,598,773 |
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Total liabilities |
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| 8,969,101 |
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| 8,146,682 |
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Stockholders' Equity (Deficit) |
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Series A Convertible Non-Redeemable Preferred Stock, $0.0001 par value, 10,000,000 shares authorized, no shares outstanding, $1,000 per share liquidation preference |
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| — |
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| — |
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Common Stock: 500,000,000 shares of $0.0001 par value authorized; 194,762,543 and 180,782,543 shares issued and outstanding as of March 31, 2012 and December 31, 2011, respectively |
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| 19,476 |
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| 18,078 |
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Additional paid in capital |
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| 50,639,088 |
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| 47,603,689 |
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Accumulated deficit |
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| (53,746,725 | ) |
| (50,451,516 | ) |
Total stockholders' equity (deficit) |
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| (3,088,161 | ) |
| (2,829,749 | ) |
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) |
| $ | 5,880,940 |
| $ | 5,316,933 |
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The accompanying notes are an integral part of these unaudited consolidated financial statements.
- 3 -
ROCK ENERGY RESOURCES, INC.
CONOLSIDATED STATEMENTS OF OPERATIONS
(Unaudited)
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| Three months ended March 31, |
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| 2012 |
| 2011 |
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OPERATING EXPENSES: |
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Direct operating costs |
| $ | 95,582 |
| $ | — |
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Indirect operating costs |
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| 162,990 |
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| — |
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Exploration and development |
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| 19,998 |
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| — |
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General and administrative |
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| 1,038,205 |
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| 181,977 |
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Total operating expenses |
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| 1,316,755 |
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| 181,977 |
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LOSS FROM OPERATIONS |
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| (1,316,755 | ) |
| (181,977 | ) |
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OTHER INCOME (EXPENSES): |
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Interest expense |
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| (236,881 | ) |
| — |
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Interest expense related to amortization of discounts and deferred financing costs and interest paid in stock |
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| (483,453 | ) |
| — |
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Loss on conversion of debt to equity |
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| (1,258,100 | ) |
| — |
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Net other income (expense) |
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| (1,978,434 | ) |
| — |
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Net Loss |
| $ | (3,295,209 | ) | $ | (181,977 | ) |
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Basic and diluted net loss per common share |
| $ | (0.02 | ) | $ | (0.00 | ) |
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Basic and diluted weighted average shares outstanding |
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| 192,999,027 |
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| 125,433,691 |
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The accompanying notes are an integral part of these unaudited consolidated financial statements
- 4 -
ROCK ENERGY RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
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| Three months ended March 31, |
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| 2012 |
| 2011 |
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CASH FLOWS FROM OPERATING ACTIVITIES |
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Net loss |
| $ | (3,295,209 | ) | $ | (181,977 | ) |
Adjustments to reconcile net loss to net cash used in operating activities |
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Loss on conversion of debt to equity |
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| 1,258,100 |
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| — |
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Common stock issued for services and interest expense |
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| 14,800 |
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| — |
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Stock based compensation |
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| 706,397 |
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| 45,016 |
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Accretion of put option liability |
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| 143,890 |
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| — |
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Amortization of debt discount and deferred financing costs |
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| 326,562 |
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| — |
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Changes in operating assets and liabilities: |
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Prepaid expenses |
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| (42,500 | ) |
| — |
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Accounts payable and accrued liabilities |
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| (104,182 | ) |
| — |
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Accrued liabilities - related party |
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| (45,500 | ) |
| 127,500 |
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Accrued interest payable |
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| 236,881 |
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| — |
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Net cash used in operating activities |
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| (800,761 | ) |
| (9,461 | ) |
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CASH FLOWS FROM INVESTING ACTIVITIES |
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Cash paid for prepaid mining costs |
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| (30,560 | ) |
| — |
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Investment in mining and milling equipment |
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| (524,975 | ) |
| — |
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Investment in mineral properties |
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| (65,894 | ) |
| — |
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Net cash used by investing activities |
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| (621,429 | ) |
| — |
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CASH FLOWS FROM FINANCING ACTIVITIES |
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Borrowings of third party debt |
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| 1,261,000 |
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| — |
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Net cash provided by financing activities |
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| 1,261,000 |
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| — |
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Net change in cash |
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| (161,190 | ) |
| (9,461 | ) |
Cash and cash equivalents at beginning of period |
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| 905,011 |
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| 9,461 |
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Cash and cash equivalents at end of period |
| $ | 743,821 |
| $ | — |
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION |
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Cash paid for interest: |
| $ | — |
| $ | — |
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Cash paid for income taxes: |
| $ | — |
| $ | — |
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NON-CASH INVESTING AND FINANCING ACTIVITIES |
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Stock option exercise paid with accrued salary |
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| 400,000 |
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| — |
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Stock warrants issued for deferred financing costs |
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| 37,500 |
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| — |
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Deferred financing costs included in accrued liabilities |
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| 37,830 |
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| — |
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The accompanying notes are an integral part of these unaudited consolidated financial statements
- 5 -
ROCK ENERGY RESOURCES, INC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2012
NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Rock Energy Resources, Inc. (the “Company”, “we”, “our”, “Rock”) was formed on April 16, 2004 as a Delaware limited partnership and was engaged in the acquisition, exploration, and development of onshore properties in the United States for the production of crude oil, condensates and natural gas. The Company’s properties were located in Texas and California.
We became severely constrained in our cash and in 2009 were forced to discontinue our working interest oil and gas operations. We traded our California properties in exchange for a small stock interest in a private oil and gas company which has operated these interests since that time. Until December 2011, we had no operations.
During the second half of 2011, we shifted our focus from oil and natural gas operations to the evaluation of possible minerals acquisitions. Towards that end, we began due diligence on a joint venture opportunity with Colorado-based Red Arrow Gold Corporation (“RAGC”). RAGC had spent the past eight years refurbishing the Red Arrow Mine located in Mancos, Colorado.
Consequent to these efforts on December 14, 2011, a $25 million financing (the“Facility”) was closed into the then privately held American Patriot Gold, Inc. (“APG”). On December 20, 2011, APG was merged into our Company as a wholly owned subsidiary. Under the agreement previously reached between APG and RAGC, APG earned a 49% interest in the Red Arrow Mine and all related equipment, facilities, leases, surface rights, and mining claim.
Principles of consolidation – The consolidated financial statements include the results of Rock Energy Resources, Inc. and its wholly owned subsidiaries. All significant intercompany accounts have been eliminated in consolidation.
Use of estimates – The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosures of contingent assets and liabilities. Actual results could differ from the estimates.
Interim Financial Statements – The accompanying unaudited interim financial statements include all adjustments, which in the opinion of management are necessary in order to make the accompanying financial statements not misleading, and are of a normal recurring nature. However, the accompanying unaudited financial statements do not include all of the information and footnotes necessary for a complete presentation of financial position, results of operations, cash flows and stockholders’ equity in conformity with generally accepted accounting principles. Except as disclosed herein, there has been no material change in the information disclosed in the notes to the financial statements included in our annual financial statements for the period ended December 31, 2011 included in Form 10-K. Operating results for the period ended March 31, 2012 are not necessarily indicative of the results that can be expected for the fiscal year ending December 31, 2012.
Cash and cash equivalents – Highly liquid investments with original maturities of less than three months are considered cash equivalents and are stated at cost which approximates market value.
Red Arrow Mine – The Red Arrow Mine is operated by RAGC. We advance funds to RAGC which are used to acquire fixed assets or for operating costs of the mine. In accordance with our agreement with RAGC, we are currently paying 100% of the expenses and fixed asset costs of the Red Arrow Mine. As a result, we will receive 100% of future revenue until payout, when we will have been repaid for the additional (51%) costs incurred above our 49% share. We account for our share of these expenditures and fixed assets in our consolidated financial statements in accordance with ASC 910-10-45-14 Proportionate Consolidation. Advances to RAGC which remain unused at the end of the period are included in prepaid mining costs and included in noncurrent assets since we do not expect to realize these assets in the short term.
Recently issued accounting pronouncements – We do not expect the adoption of recently issued accounting pronouncements to have a significant impact on our results of operations, financial position or cash flow.
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NOTE 2 – RELATED PARTY TRANSACTIONS
During the three months ended March 31, 2012, Rocky Emery, our Chairman and CEO, exercised options to purchase 2,500,000 shares of common stock with an exercise price of $0.16 per share. In accordance with the terms of the options Mr. Emery elected to offset accrued liabilities for unpaid salary in the amount of $400,000 rather than paying the exercise price of $400,000.
During the three months ended March 31, 2012, we issued 3,000,000 shares of common stock to Mr. Craig Liukko, a member of our board of directors and our COO, in accordance with the terms of his employment agreement. The shares were valued at $1,800 based on the market value on the date of grant.
NOTE 3 – CONTINGENCIES AND COMMITMENTS
From time to time, we are party to litigation matters arising out of the normal course of business. In the case of all known contingencies, we accrue a liability when the loss is probable and the amount is reasonably estimable. We do not reduce these liabilities for potential insurance or third-party recoveries. If applicable, we accrue receivables for probable insurance or other third-party recoveries. Based on currently available information, we believe that it is remote that future costs related to known contingent liability exposures will exceed current accruals by an amount that would have a material adverse impact on our financial statements. As we learn new facts concerning contingencies, we reassess our position both with respect to accrued liabilities and other potential exposures.
NOTE 4 – NOTES PAYABLE
In February 2012, we borrowed an additional $1,300,000 under our $25 million lending facility with Maximilian Investors LLC of New York. We received net cash proceeds of $1,261,000 after payment of a 3% broker fee in accordance with the terms of the lending facility.
During the three months ended March 31, 2012, we granted warrants to purchase 750,000 shares of common stock to a broker associated with our $25 million lending facility. The warrants have an exercise price of $0.50 per share and a term of five years. The warrants were valued at $37,500 using the Black-Scholes option pricing model with the following assumptions: stock price on the measurement date of $0.05; option term of five years; expected volatility of 497%; and a discount rate of 1.13%. The value of the options is included in deferred financing costs and will be amortized over the life of the loan.
During the three months ended March 31, 2012, holders of current notes payable in the amount of $620,000 agreed to take 6,480,000 shares of common stock to pay off the loans. The common stock was valued at $1,878,100 based on the market value on the date of issuance. As a result of this transaction, we recognized a loss on conversion of debt to equity in the amount of $1,258,100.
NOTE 5 – COMMON STOCK AND STOCK OPTIONS
During the three months ended March 31, 2012, the Company issued 2,000,000 shares of common stock with a fair value of $13,000 for interest expense on a note previously issued during 2011.
On March 16, 2012, pursuant to the 2009 Stock Grant and Option Plan, the Company granted options to purchase 3,425,000 shares of common stock to three employees and officers of the Company and three contractors of the Company. The options are exercisable at $0.16 per share for a term of five years from the date of grant. One third of the options vest on the grant date and on each of the next two anniversary dates of the grant date. The options were valued at $1,883,747 using the Black-Scholes option pricing model with the following assumptions: stock price on the measurement date of $0.55; option term of 3.5 years; expected volatility of 497%; and a discount rate of 0.57%. During the three months ended March 31, 2012, the Company recognized $706,397 of expense related to these option grants, leaving $1,177,350 of expense to be recognized over two years.
NOTE 6 – PUT OPTION LIABILITY
In connection with the lending facility we entered into during 2011, we issued 18,865,520 shares of common stock to the lender and gave them a put option which would allow them to sell back their shares to the Company for $0.20 per share. The option is exercisable for 9,432,760 shares during each of the years ending December 31, 2012 and 2013. The put option was recorded as a liability at its present value of $3,197,546 as of December 31, 2011. It will be accreted up to its full value of $3,773,104 by the expiration of each put option. This amount represents the maximum potential cash outlay by the Company if it had to repurchase all of the shares. During the three months ended March 31, 2012, the Company recorded accretion of $143,890.
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Item 2. Management's Discussion and Analysis or Plan of Operations
The following discussion and analysis of our plan of operation should be read in conjunction with the financial statements and the related notes. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Our actual results and the timing of certain events could differ materially from those anticipated in these forward-looking statements.
Rock Energy Resources, Inc. (“the Company”) was formed on April 16, 2004 as a Delaware limited partnership and was engaged in the acquisition, exploration, and development of onshore properties in the United States for the production of crude oil, condensates and natural gas. The Company’s properties were located in Texas and California. The produced condensate and natural gas was sold to petroleum marketers.
On January 2, 2008, we entered into a share exchange agreement (“REP Asset Purchase”) with Hanover Gold, Inc. and exchanged all of our outstanding limited and general partnership units for 54,374,849 of the outstanding common stock of Hanover Gold, Inc. Rock Energy Resources, Inc. was the accounting acquirer in this transaction. We also issued 3,746,517 shares to two consultants who assisted us in the transaction and paid a cash consulting fee of $625,000. Prior to the transaction, Hanover Gold, Inc. had 4,378,634 common shares outstanding, all of which were kept by the original shareholders. All common stock information contained herein reflects a one share for eight shares reverse stock split effective February 19, 2008. On the same date, we changed our name from Hanover Gold Company, Inc., to Rock Energy Resources, Inc.
During the second half of 2011, we shifted our focus from oil and natural gas operations to the evaluation of possible minerals acquisitions. Towards that end, we began due diligence on a joint venture opportunity with Colorado-based Red Arrow Gold Corporation (“RAGC”). RAGC had spent the past eight years refurbishing the Red Arrow Mine located in Mancos, Colorado. The Red Arrow mine had distinguished itself on several fronts. First, it is the discovery that is often credited with kicking off the Colorado gold rush in the late 1930s. Second, its yields of gold were consistently in excess of 1 ounce per ton, and often contained substantial gold nuggets, in one case a single nugget weighing 5.5 pounds. After investing approximately $8 million in mine refurbishment over six years, RAGC was seeking outside funding for up to $25 million to finance the full development of its mining interests, in particular the highly prospective Red Arrow mine.
Consequent to these efforts on December 14, 2011, a $25 million financing (“the Facility”) was closed into the then privately held American Patriot Gold, LLC (“APG”). On December 20, 2011, APG was merged into our Company as a wholly owned subsidiary. The Facility and its terms are discussed more fully in Item 8 of this Form 10-K. Under the agreement previously reached between APG and RAGC, APG earned a 49% interest in the Red Arrow Mine and all related equipment, facilities, leases, surface rights, and mining claim. The Red Arrow Mine, its history and current operations profile is discussed in Mining Properties – Red Arrow Mine below. All the related assets we acquired within our 49% interest are discussed in Mining Properties – Red Arrow Mine below.
In furtherance of our strategy to focus on mining operations, and the development of the Red Arrow mine and related claims in particular, on February 2, 2012 we entered into a Letter of Intent to acquire the remaining 51% interest in the assets of RAGC. Under the terms of the LOI, a closing was anticipated to occur prior to the end of May, 2012. That letter expired and a new LOI has been sent to RAGC for their consideration. Both parties remain fully committed to a combination of the two companies within the next several months. Following a closing, all the current employees of RAGC will become employees of our Company or its APG subsidiary.
We are also tightly focused on the exploration and development of the significant reserve potential located on the existing RAGC claims and leases. Towards that end, during the first quarter, we increased our leases and patented claims from 390 acres at the end of 2011, to in excess of 790 acres currently. We expect to add to our holdings during the second quarter as well.
In February, 2012 we began initial milling operations at the mine. During the same month, a survey of our holdings was completed and evaluation of those results is underway. Initial interpretations show our land holdings to have considerable promise. Once we have completed our survey evaluation, we intend to initiate core drilling on our properties to more fully delineate our resource base and determine quantities of proven and probable reserves. Core drilling is anticipated to begin in May 2012. We believe our potential reserves on the properties acquired to date are in the range of 1.5 – 4.0 million ounces of gold, plus as yet to be determined quantities of platinum and silver.
- 8 -
As we work to ascertain our reserves of gold and other minerals, we are rapidly moving to build our cash flows for our shareholders and financial partners. Our first sales of bullion products will occur during the second quarter. . Recently, our milling capacity was expanded significantly from the current 3-5 tons per day at the initial mill to up to 200 tons per day capacity from a much larger mill. That larger facility commenced operations in May, and is anticipated to ramp up from an initial 6 tons per milling day in May to 35 tons per milling day by the end of this year. Further increases are anticipated through 2013. Anticipated cash flows from our mining operations together with drawdowns under our Facility should fully finance our expansion plans. Based on our assumptions of recovery rates at 1 ounce of gold per ton milled, operating cash flow is anticipated to be slightly positive during the third quarter. Further gains are anticipated in the fourth quarter with results for that quarter possibly exceeding $1 million of operating cash flow and positive net income. Further increases in milling rates are anticipated to yield quarter over quarter gains through 2013.
While we fully develop our valuable Red Arrow mining assets, we are continuing to seek avenues for the monetization of our remaining oil and gas holding, a 3.5% membership interest in Santa Maria pacific Holdings, LLC (“SMPH”). As described more fully in Footnote 3 to our financial statements, in June, 2009 we elected to exchange our working interests in our California oil properties into privately held SMPH. We consider that asset to be a potential source of cash to further supplement our financial resources in pursuit of our core business in the mining sector.
Mining Properties – Red Arrow Mine
Historical Background
The Red Arrow Mine has historically produced commercial grade gold and silver ore. According to "Geological Survey Professional Paper No. 219" (1949), Page 161, entitled, "Production of Red Arrow Mine", a total of 621 tons were produced from 1933-1937, which yielded 4,114.5 oz. Au (gold) and 6,928 oz. Ag (silver). The average grade of ore based on these figures yielded 6.62 oz. gold per ton and 11.15 oz. silver per ton. Limited production continued after the reporting period to 1942, with an overall average ore grade from 10,146 tons reported as 1.09 oz. gold per ton and 1.6 oz. silver per ton. (US Geological "Professional Paper 219" provides more detailed information).
Location and Access
We are a Production Stage mining company with executive offices based in Houston, Texas. Our mining operations are carried out at the Red Arrow Mine, located in Montezuma County, Colorado, approximately 9 miles northeast of the town of Mancos, Colorado. The current Red Arrow Mine property consists of in excess of 800 acres of mining claims. The Company has also purchased 120 acres of private mineral rights bordering its patented properties. Approximately $8 million was invested to purchase the properties and equipment and upgrade the entire infrastructure of the mine prior to the December 2011 acquisition by American Patriot Gold, Inc. We currently hold a 49% ownership position in the mineral assets including all mining and milling equipment.
Snow removal equipment enables easy year round access to the Mine via public roadways. Offsite pilot scale milling operations commenced in February 2012. Our 200 ton per day capacity milling facility became fully operational in the mid-second quarter, with power to be supplied by a Tier 4 diesel generator. Sales of bullion products from concentrate are taking place during the second quarter. .
Current Geological and Assay Data
After purchase of the Red Arrow and Outwest properties in 1988, historical maps and assay data completed by former owners was evaluated and cross checked by sampling. Extensive sampling of the Gold Run and Old Mill Levels has given direction for primary ore production. In the current area of ore production, approximately 200 ft. in length along the strike of the vein, the ore has averaged over 1 oz. gold per ton. In the last area of production, a raise from the Gold Run Level to the Old Mill Level ranged from 6 inches to 5 ft. in width (30 in. width average).
Favorable results have also been obtained in the footwall and hanging wall of the vein structure. Assays have ranged from less than 1⁄4 oz. to 16 oz. gold per ton. The values in these structures increase with the presence of silicified and brecciated sandstone. As was proven in the past, it is anticipated along with continued development, high grade pockets of ore will be encountered substantially increasing overall values.
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Possible Overall Reserves
Assuming an overall average ore grade of one ounce of gold per ton, the Red Arrow vein portion of the property could yield over 408,500 ounces of gold yielding gross revenues of $637,260,000. The Company expects, at a maximum, to achieve a production cost per ounce of $450.00. Total production costs would be $183,825,000. The overall pre-tax net operating income would be $453,435,000.
Other Potential
Permits and bonding are in place for a core drilling program that began during the second quarter. The first portion of this program will focus on delineation of the current Red Arrow vein and other potential veins accessiblefrom the existing runs. At least five core holes totaling in excess of 3,500 feet are being drilled in this fan-drilling stage. Dependent on the results of this initial work, additional fan drilling may continue. The second phase of our program is focused on delineating an intrusive sulphide deposit that may have depth potential of over 5,000 ft. below the surface according to the late PhD Geologist John Awald. In addition to his research at the Red Arrow Mine, he conducted an intense investigation of the La Plata Mining District which led to his purchase of a major mining property in close proximity. Core drilling of that property was very positive. Newly discovered surface outcrops and a recently drilled core containing gold, silver, copper and platinum group metals (PGMs) on the Red Arrow Dome support the need for core drilling. Our recently completed aero-magnetic survey offered additional confirmation of potentially significant reserves at depth. This intrusive sulphide deposit could have potential of over 4,000,000 ounces of gold in a high grade ore including high concentrations of PGMs.
In addition to lode (underground) potential, the Company owns approximately two miles of placer mining rights in the East Mancos drainage. According to a 2007 GIS Report, the East Mancos River contained the highest gold and arsenic concentrations from 41 stream sediment samples taken in the La Plata Mining District. The East Mancos River is on Colorado's endangered river list due to high concentrations of copper. Copper, gold, silver and arsenic are closely associated in the District.
Further testing and development of other areas at the Red Arrow Mine are anticipated and may add substantially to the Company's reserves. Significant concentrations of platinum group metals (PGMs) in the Red Arrow Vein, recent core samples, and from surface samples on the Dome could also add significant value. Existence of other veins on Red Arrow property has been revealed. The Company has not gathered sufficient data to form an opinion although assaying of samples has commenced and further testing is warranted.
Other Assets at the Red Arrow Mine
In January 2011, RAGC commissioned Richard Eaman, a Professional Extractive Metallurgist, to perform a third party review of the assets associated with the Red Arrow Mine, as well as the ore bodies themselves. As regards to the property, equipment and other assets at the Red Arrow Mine, Mr. Eaman reported the following valuations:
Red Arrow Development (Underground, Roads & Structures) |
| $ | 2,500,000 |
|
Permits and Permit Amendments |
| $ | 136,550 |
|
Equipment |
| $ | 714,944 |
|
See Independent Report and Analysis of the Red Arrow Mine, dated January, 2012, by Richard A. Eaman and Hazen Research, filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the U.S. Securities and Exchange Commission on January 9, 2012.
Since the date of that appraisal, and as of March 12, 2012, RAGC has invested an additional $900,000 in its initial 3-5 ton per day mill and other related equipment. This is inclusive of capital expenditures in the first quarter of $641,000.
Our Growth Strategies:
Our business model focuses on building shareholder value contemporaneously on two fronts: growth in operating cash flows and validation and growth in resources and reserves.
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Growth in Operating Cash Flows- As a Production Stage Company, and with our larger scale mill now on-line, our shareholders should see quarter over quarter growth in revenues through at least 2013. Revenue growth is forecast to come from higher milling rates for each quarter increasing from 6 tons per milling day in the second quarter of 2012to 50 tons per day by the second quarter of 2013. Based on a continuing yield of one ounce of gold per ton, our Gross Revenue if forecast to rise from slightly in excess of $1.5 million in the third quarter of 2012 to in excess of $5 million in the second quarter of 2013. Our operating cash flow is forecast to rise from a breakeven level in the third quarter of 2012 to in excess of $2.5 million in the second quarter of 2013.
Validation and Growth in Resources and Reserves- Our rising cash flows and access to our existing credit facility should allow us to maintain an ongoing program of coring prospective horizons, both at the shallow existing mining horizons, as well as deeper potential to as deep as 10,000 feet. Our current budget calls for a total of $1.6 million for coring activities during the balance of 2012. Dependent on results of that program we may meaningfully increase our coring budget for 2013, again with the support of our rising cash flows from operations.
Intellectual Capital- To support our efforts during the first quarter of 2012, we announced that we had assembled a highly competent team of advisors to work with us at each step of our process. The common threads running through this group are:
| · | focused on specifics fields—geophysics, geology, engineering and metallurgy; |
| · | well credentialed in their area of expertise; |
| · | substantial years of experience; |
| · | strong knowledge base of the La Plata mining area where the Red Arrow mine is located. |
Our team will work under the guidance and leadership of Craig Liukko, our Chief Operating Officer. Mr. Liukko has considerable experience in the mining field in general and is a second generation from the Mancos area.
We are also continuing to add to our strength at the Board of Directors level. In addition to our C-level executives--Messrs Emery, Harrington and Liukko, we were pleased to announce on May 8 that Mr. Joel Gold had joined our Board. With over 35 years of experience and senior positions in investment banking at firms including Drexel Burnham, Bear Stearns and several others, Mr. Gold’s deep understanding of the challenges of rapidly growing companies is an important asset for us. We will continue to add complimentary strengths to our Board of Directors as the year 2012 progresses.
Plan of Operations
In furtherance of our strategy to focus on mining operations, and the development of the Red Arrow mine and related claims in particular, on February 2, 2012 we entered into a Letter of Intent (“LOI”) to acquire the remaining 51% interest in the assets of RAGC. Under the terms of the LOI, a closing was anticipated to occur prior to the end of May, 2012. The existing LOI has expired. A new proposal is under active discussion with the Board of RAGC. All parties remain committed to consummating a merger of the two companies within the next ninety days. Cash consideration to be paid within one year of closing of such a transaction would approximate $5.0 million.
In addition, we expect to require approximately $2.0 million for investment in mining facilities and exploration cost at the Red Arrow Mine in the coming 18 months.
While we fully develop our valuable Red Arrow mining assets, we are continuing to seek avenues for the monetization of our remaining oil and gas holding, a 3.5% membership interest in Santa Maria Pacific Holdings, LLC (“SMPH”). As described more fully in Footnote 3 to our financial statements, in June, 2009 we elected to exchange our working interests in our California oil properties into privately held SMPH. We consider that asset to be a potential source of cash to further supplement our financial resources in pursuit of our core business in the mining sector.
Results of Operations
For the Three months Ended March 31, 2012 Compared to the Three months Ended March 31, 2011
Direct Operating Costs
Direct Operating Costs were $95,582 for the three months ended March 31, 2012. Direct Operating Costs includes mining and milling salaries and the costs of mining and milling gold.
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Indirect Operating Costs
Indirect Operating Costs were $162,990 for the three months ended March 31, 2012. Indirect Operating Costs include our share of the cost of operating the Red Arrow Gold Mine.
Exploration and Development
We incurred exploration and development costs of $19,998 during the three months ended March 31, 2012.
General and Administrative Expense
General and administrative expense increased to $1,038,205 in 2012 versus $181,977 in 2011. Cash general and administrative expense for the period was $317,008 versus $181,977 in the prior year. General and administrative expense for the three months ended March 31, 2011 was principally the accrual of salaries payable to officers. The increase in cash G&A reflected increased activity post the December 20, 2011 acquisition of interests in the Red Arrow mine. The Company was essentially dormant during the early part of 2011. General and administrative expenses for the three months ended March 31, 2012 include common stock issued for services in the amount of $14,800 and stock based compensation related to the vesting of stock options in the amount of $706,397. Cash general and administrative expense for the three months ended March 31, 2012 excludes the impact of expenses paid in stock including common stock issued for services and stock based compensation discussed above.
Interest Expense
Interest expense for stated interest in accordance with note agreements was $236,881 during the three months ended March 31, 2012. In addition, we recognized interest expense related to interest expense paid by the issuance of common stock, amortization of deferred financing costs and discounts on notes payable in the amount of $483,453 for the three months ended March 31, 2012. There was no interest expense during the same period of 2011. Interest expense increased as a result of the borrowing under the $25 million lending facility.
Loss on Conversion of Debt to Equity
During the three months ended March 31, 2012, we recognized a loss of $1,258,100 as a result of issuing 6,480,000 shares of common stock valued at $1,878,100 on the date of issuance in order to extinguish notes payable in the amount of $620,000.
Net Loss
We generated a net loss of $3,295,209 during the three months ended March 31, 2012 as compared to a loss of $181,977 in the same period of 2011. The increase in the net loss is primarily the result of the loss on conversion of debt to equity, the increase in interest expense and the increase in general and administrative expenses.
Liquidity and Capital Resources
Since the beginning of 2008, we have funded our operations primarily with funds received in the form of short term loans, through the sale of equity securities and with a decreasing amount of revenue received from our discontinued oil and gas operations.
Rock’s sources of capital going forward will primarily be cash from the $25 million lending facility from Maximilian Investors LLC (“Maximilian”) as well as internally generated cash flow from operations. Through December 31, 2011, we have borrowed $3.8 million of the $25 million available. In the coming 18 months, we expect to require approximately $2.0 million for investment in mining facilities and exploration cost at the Red Arrow Mine. In addition, we expect to require additional cash to acquire the remaining 51% interest in the Red Arrow Mine. We expect to begin generating revenue from the Red Arrow Mine during the second quarter of 2012 and to realize positive cash flows from operating activities by the end of 2012.
We expect that cash flows from operating activities will become positive by the end of 2012. Our cash flow from operations will depend heavily on the prevailing price of gold and our production volumes. Future gold price declines would have a material adverse effect on our overall results, and therefore, our liquidity. Falling gold prices could also negatively affect our ability to raise capital on terms favorable to us or at all.
As of March 31, 2012, we had cash on hand in the amount of $743,821. We expect to partially fund our operations for the coming year using cash generated from sales of gold. We expect that this will leave a shortfall of approximately $8 million which we plan to fund through additional borrowings under the Maximilian lending facility and potentially sales of common stock.
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Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
In connection with the preparation of this quarterly report on Form 10-Q, an evaluation was carried out by Rock’s management, with the participation of the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (“Exchange Act”)) as of March 31, 2012. Disclosure controls and procedures are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC rules and forms and that such information is accumulated and communicated to management, including the Chief Executive Officer and the Chief Financial Officer, to allow timely decisions regarding required disclosures.
Based on that evaluation, the Company’s management concluded, as of the end of the period covered by this report, that the Company’s disclosure controls and procedures were not effective.
Notwithstanding the above identified deficiencies that constitute our material weaknesses, based on a number of factors, including the performance of additional procedures performed by management designed to ensure the reliability of our financial reporting, our Chief Executive Officer and Chief Financial Officer believe that the consolidated financial statements included with this periodic report fairly present, in all material respects, our financial position, results of operations, and cash flows as of the dates, and for the periods, presented in conformity with United States Generally Accepted Accounting Principles.
Changes in Disclosure Controls and Procedures
As of the end of the period covered by this report, there have been no changes in internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) during the quarter ended March 31, 2012, that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Part II. Other Information
Item 1. Legal Proceedings
No director, person nominated to become a director, executive officer, promoter or control person of our company has, during the last ten years: (i) been convicted in or is currently subject to a pending a criminal proceeding (excluding traffic violations and other minor offenses); (ii) been a party to a civil proceeding of a judicial or administrative body of competent jurisdiction and as a result of such proceeding was or is subject to a judgment, decree or final order enjoining future violations of, or prohibiting or mandating activities subject to any federal or state securities or banking or commodities laws including, without limitation, in any way limiting involvement in any business activity, or finding any violation with respect to such law, nor (iii) any bankruptcy petition been filed by or against the business of which such person was an executive officer or a general partner, whether at the time of the bankruptcy or for the two years prior thereto.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
During January 2012, we issued 6,480,000 shares of common stock to three individuals for the extinguishment of notes payable in the amount of $620,000.
During January 2012, we issued 2,000,000 shares of common stock to an individual for services.
During March 2012, we issued 2,500,000 shares of common stock to Mr. Rocky Emery as a result of Mr. Emery’s exercise of stock options with an exercise price of $0.16 per share. The exercise price of $400,000 was paid by offsetting amounts owed to Mr. Emery for unpaid salary.
We issued these shares to these individuals pursuant to the exemption from the registration requirements of the Securities Act provided by Section 4(2) thereof, in that all of these individuals had pre-existing relationships with the Company, no general solicitation or advertising methods were employed and these share transactions qualified for this traditional private placement exemption.
Item 3. Default Upon Senior Notes
Not applicable.
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Item 5. Other Information
None.
Item 6. Exhibits
Exhibit No. |
| Description |
3.1 |
| Articles of Incorporation of the registrant (1) |
3.2 |
| Bylaws of registrant (1) |
4.1 |
| 2009 Stock Grant and Option Plan (3) |
4.2 |
| Independent Report and Analysis of the Red Arrow Mine , dated January, 2012, by Richard A. Eamon and Hazen Research, filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the U.S. Securities and Exchange Commission on January 9, 2012, and incorporated by reference herein. |
10.1 |
| Asset Purchase Agreement between Hanover Gold Company, Inc. and Rock Energy Partners L.P (2) |
10.2 |
| Administrative Services Agreement with 4R Oil and Gas, LLC (2) |
10.3 |
| Base Working Interest Purchase Agreement with SMP (2) |
10.4 |
| Option to Purchase Additional Working Interests with SMP (2) |
10.5 |
| Form of Hanover Stockholder Lock-Up Agreement (2) |
10.6 |
| Consulting Agreement with Weston Capital Quest Corporation (2) |
10.7 |
| Consulting Agreement with Source Capital Group (2) |
10.8 |
| Stock Purchase Agreement (Perm Energy Advisers, Inc) |
10.9 |
| Registration Rights Agreement (Perm Energy Advisers, Inc) |
10.10 |
| Voting Agreement (Perm Energy Advisers, Inc) |
10.11 |
| Warrant Certificate (Perm Energy Advisers, Inc) |
10.12 |
| Letter of Intent, dated January 31, 2012, by and between Red Arrow Gold Corporation and Registrant, filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the Commission on February 2, 2012, and incorporated by reference herein |
10.13 |
| Employment Agreement, dated August 15, 2011, by and between Rocky V. Emery and Registrant |
10.14 |
| Employment Agreement, dated August 15, 2011, by and between Mark G. Harrington and Registrant |
10.15 |
| Employment Agreement, dated November 15, 2011, by and between Craig Liukko and Registrant |
10.16 |
| Loan and Security Agreement, dated as of December 14, 2011, by and between HE-MAN LLC, as Borrower, and Maximilian Investors LLC, as Lender, filed as an exhibit to Registrant’s Current Report on Form 8-K filed with the U.S. Securities and Exchange Commission on December 20, 2011, and incorporated by reference herein. |
14.1 |
| 2008 Code of Ethics for Senior Management |
| Certification of CEO as Required by Rule 13a-14(a)/15d-14 | |
| Certification of CFO as Required by Rule 13a-14(a)/15d-14 | |
| Certification of CEO as Required by Rule 13a-14(a) and Rule 15d-14(b) (17 CFR 240.15d-14(b)) and Section 1350 of Chapter 63 of Title 18 of the United States Code | |
| Certification of CFO as Required by Rule 13a-14(a) and Rule 15d-14(b) (17 CFR 240.15d-14(b)) and Section 1350 of Chapter 63 of Title 18 of the United States Code | |
99.1 |
| Audit Committee Charter |
99.2 |
| Compensation Committee Charter |
101 |
| XBRL Interactive Data Files * |
__________
(1) | Filed as an exhibit to the Registrant’s registration statement on Form S-1 (Commission File No. 33-38745) and incorporated by reference herein. |
(2) | Incorporated by reference to the Registrant’s Current Report on Form 8-K filed January 3, 2008 |
(3) | Filed as an exhibit to the Registrant’s Form S-8 registration statement filed with the U.S. Securities and Exchange Commission on June 9, 2009, and incorporated by reference herein. |
* | In accordance with Regulation S-T, the Interactive Data Files in Exhibit 101 on Form 10-Q shall be deemed “furnished” and not “filed”. |
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SIGNATURES
In accordance with Section 13 or 15(d) of Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, on May 14, 2012
| ROCK ENERGY RESOURCES, INC. | |
|
| |
| By | /s/ Rocky V. Emery |
|
| Rocky V. Emery |
|
| Chief Executive Officer and Director and |
|
| |
| By | /s/ Mark G. Harrington |
|
| Mark G. Harrington |
|
| Principal Accounting Officer and Vice Chairman of the Board of Directors |
|
|
|
| By | /s/ Craig Liukko |
|
| Craig Liukko |
|
| Chief Operating Officer and Director |
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