UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2012

 

£

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _______________________________ to _______________________________

 

Commission File Number: 00-28171

 

VADDA ENERGY CORPORATION

(Exact name of registrant as specified in its charter)

 

Florida	27-0471741
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

600 Parker Square, Suite 250 Flower Mound, Texas	75028
(Address of principal executive offices)	(Zip Code)

 

Registrant’s telephone number, including area code:  (214) 222-6500

 

1660 S. Stemmons Freeway, Suite 440, Lewisville, Texas 75067

(Former address)

 

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 Q 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 Q 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,” “non-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 Q

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).        Yes £ No Q

 

The number of shares of registrant’s common stock outstanding as of October 31, 2012 was 104,235,236.

 

 

TABLE OF CONTENTS

 

		Page
PART I – FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Balance Sheets – September 30, 2012 (Unaudited) and December 31, 2011	1
	Consolidated Statements of Operations (Unaudited) – Three and Nine Months Ended September 30, 2012 and 2011	2
	Consolidated Statements of Cash Flows (Unaudited) – Nine Months Ended September 30, 2012 and 2011	3
	Notes to Consolidated Financial Statements (Unaudited)	4
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	9
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	14
Item 4.	Controls and Procedures	14
PART II – OTHER INFORMATION
Item 1.	Legal Proceedings	15
Item 1A.	Risk Factors	15
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	15
Item 3.	Defaults Upon Senior Securities	15
Item 4.	Mine Safety Disclosures	15
Item 5.	Other Information	15
Item 6.	Exhibits	16
Signatures		17

 

 

 

PART I – FINANCIAL INFORMATION

 

Item 1.

Financial Statements

 

VADDA ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

		September 30, 2012				December 31, 2011
		(Unaudited)				(Audited)
Assets:
Cash		$	865,457			$	1,382,166
Accounts receivable - net			180,429				75,777
Deferred federal income taxes - current			774,719				835,275
Prepaid drilling costs			187,905				699,836
Total current assets			2,008,510				2,993,054
Property and equipment:
Oil and gas properties, using successful efforts method of accounting:
Proved properties			2,130,500				2,130,500
Other property and equipment			293,439				287,561
Less: Accumulated depletion and depreciation			(601,797	)			(498,484	)
Property and equipment, net			1,822,142				1,919,577
Goodwill			2,740,171				2,740,171
Prepayment to operator, net of valuation allowance of $1,832,500			–				–
Other assets			821,283				802,436
Total Assets		$	7,392,106			$	8,455,238
Liabilities and Equity:
Accounts payable and accrued liabilities		$	208,130			$	248,106
Current portion of notes payable			11,683				13,797
Payable to affiliate			89,641				75,659
Payable to shareholders			81,394				88,564
Deferred revenue			5,122,806				6,528,474
Total current liabilities			5,513,654				6,954,600
Notes payable			–				7,838
Asset retirement obligation			252,040				212,664
Deferred federal income taxes - long-term			346,526				346,526
Total long-term liabilities			598,566				567,028
Preferred stock, $.001 par value; 10,000,000 shares authorized; none issued or outstanding as of September 30, 2012 and December 31, 2011			–				–
Common stock, $.001 par value; 150,000,000 shares authorized; 104,235,236 issued and outstanding as of September 30, 2012 and December 31, 2011			104,235				104,235
Additional paid-in capital			6,948,359				6,948,359
Accumulated deficit			(5,385,806	)			(5,162,188	)
Total Vadda stockholders’ equity			1,666,788				1,890,406
Deficit attributable to noncontrolling interests			(386,902	)			(956,796	)
Total Equity			1,279,886				933,610
Total Liabilities and Equity		$	7,392,106			$	8,455,238

 

 

See accompanying notes to unaudited consolidated financial statements

 

 

VADDA ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

 

		For the Three Months Ended September 30,								For the Nine Months Ended September 30,
		2012				2011				2012				2011
Revenues:
Turnkey drilling revenues		$	1,068,695			$	–			$	3,733,169			$	–
Natural gas and oil sales			53,194				108,339				180,279				325,136
			1,121,889				108,339				3,913,448				325,136
Costs and Expenses:
Turnkey drilling costs			622,079				–				1,891,055				–
Lease operating expense			17,781				43,124				69,550				137,805
General and administrative			515,443				594,734				1,399,961				1,577,036
Accretion expense			13,125				–				39,376				–
Depletion and depreciation			35,396				43,409				106,674				111,006
			1,203,824				681,267				3,506,616				1,825,847
Operating income (loss)			(81,935	)			(572,928	)			406,832				(1,500,711	)
Other income (expense):
Other			–				3				–				25
Income (loss) before income taxes			(81,935	)			(572,925	)			406,832				(1,500,686	)
Income tax expense (benefit)			(80,444	)			(193,653	)			60,556				(510,233	)
Net income (loss)			(1,491	)			(379,272	)			346,276				(990,453	)
Net income (loss) attributable to noncontrolling    interests			191,993				(67,729	)			569,894				(124,605	)
Net loss attributable to Vadda common stockholders		$	(193,484	)		$	(311,543	)		$	(223,618	)		$	(865,848	)
Basic and diluted loss per common share			(0.00	)			(0.00	)			(0.00	)			(0.01	)
Weighted average number of common shares outstanding - basic and fully diluted			104,235,236				104,235,236				104,235,236				104,235,236

 

 

See accompanying notes to unaudited consolidated financial statements

 

 

VADDA ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

		Nine Months Ended September 30,
		2012				2011
Cash flows from operating activities:
Net income (loss)		$	346,276			$	(990,453	)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation, depletion and amortization			106,674				111,006
Accretion expense			39,376				—
Deferred tax expense (benefit)			60,556				(510,233	)
Changes in operating assets and liabilities:
Accounts receivable			(104,652	)			29,322
Prepaid drilling costs			511,931				(650,745	)
Other assets			(22,208	)			(38,890	)
Accounts payable and accrued liabilities			(39,976	)			(33,286	)
Payable to affiliates and shareholders			6,812				44,986
Deferred revenues			(1,405,668	)			1,068,100
Net cash used in operating activities			(500,878	)			(970,193	)
Cash flows from investing activities:
Additions to property and equipment			(5,878	)			(64,097	)
Net cash used in investing activities			(5,878	)			(64,097	)
Cash flows from financing activities:
Note payable proceeds			–				30,000
Repayment of note payable			(9,952	)			(4,751	)
Net cash used in financing activities			(9,952	)			25,249
Net change in cash			(516,708	)			(1,009,041	)
Cash balance, beginning of period			1,382,166				1,836,957
Cash balance, end of period		$	865,457			$	827,916

 

 

See accompanying notes to unaudited consolidated financial statements

 

  

VADDA ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

NOTE 1 – BASIS OF PRESENTATION

 

Vadda Energy Corporation (“Vadda”) was originally incorporated in Florida in 1997. The foregoing consolidated financial statements include the accounts of Vadda, its wholly owned subsidiary, Mieka Corporation (“Mieka”) and Mieka LLC, a variable interest entity (“VIE”), which collectively are referred to as the “Company”.  All significant intercompany balances and transactions have been eliminated and all normal recurring adjustments have been recorded that are necessary for a fair presentation of the information contained herein.

 

The accompanying interim consolidated financial statements and related notes are presented in accordance with U.S. generally accepted accounting principles (“GAAP”) and are expressed in U.S dollars, and have been prepared by the Company without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnotes have been condensed or omitted, although the Company believes that the disclosures are adequate to make the information presented not misleading. These consolidated interim financial statements should be read in conjunction with the audited consolidated financial statements of the Company for the years ended December 31, 2011 and 2010, and notes thereto contained in the Company’s audited financial statements filed as part of its Form 10-K for the year ended December 31, 2011. The results of operations for such periods are not necessarily indicative of the results expected for a full year or any future period.

 

The Company is an independent developer and producer of natural gas and oil, with operations in Pennsylvania, Kentucky, Ohio and New York.

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Oil and Gas Producing Activities

 

The Company’s oil and gas producing activities were accounted for using the successful efforts method of accounting. Costs to acquire leasehold rights in oil and gas properties, to drill and equip exploratory wells that find proved reserves, to drill and equip development wells and costs of support equipment and facilities are capitalized.  Costs to drill exploratory wells that do not find proved reserves, delay rentals and geological and geophysical costs are expensed.

 

The Company earns carried working interests in wells drilled by joint ventures that it manages. Upon the successful completion of a well, the joint ventures are assigned leasehold rights on acreage that comprises the legal spacing for the well. When a joint venture sells ownership interests in excess of the total offering amount, such additional interests reduce the Company’s carried working interest. The joint ventures typically pay 100% of the drilling and completion costs. The Company also intends to have ownership in wells drilled in the Marcellus Shale on leases in which the joint ventures do not participate.

 

Turnkey Drilling Revenue Recognition

 

In its role as the managing venturer of various oil and gas drilling joint ventures, the Company enters into turnkey drilling agreements with operators whereby a profit is earned by arranging the drilling and completion of prospect wells funded by the individual joint ventures. In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 605, “Revenue Recognition,” revenue is deferred until wells are completed as producing wells or determined to be nonproductive. The associated drilling costs of wells are deferred until revenue is recognized. During the nine months ended September 30, 2012, the Company recognized $3,733,169 of turnkey drilling revenue and $1,891,055 of turnkey drilling costs on three completed gas wells. As of September 30, 2012 and December 31, 2011, the Company had $5,122,806 and $6,528,474, respectively, in deferred turnkey drilling revenue.  The Company had deferred drilling costs related to turnkey agreements in the amount of $187,905 and $699,836, respectively, as of September 30, 2012 and December 31, 2011.

 

No drilling costs are incurred by the Company for its carried working interests retained in wells drilled by managed joint ventures.

 

 

VADDA ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

Prepayment to Operator

 

The Company acquired 18 oil and gas joint ventures in December 2009 and included in the assets were claims by certain of the joint ventures against an operator relating to its business dealings with the joint ventures in the aggregate amount of $1,832,500, which was recorded as a prepayment to operator. Effective December 30, 2011, the Company entered into a written settlement agreement pursuant to which the operator executed a promissory note in the principal amount of $3,000,000 to satisfy its obligations to the Company. The promissory note was recorded at the carrying value of the outstanding claims against operator in the amount of $1,832,500 as of the effective date of the note, December 30, 2011. However, based on the historical settlement issues involved, the Company recorded a reserve of $1,832,500 against the note as of December 31, 2011.

 

Depletion and Depreciation

 

Estimates of natural gas and oil reserves utilized in the calculation of depletion are prepared using certain assumptions. Reserve estimates are based upon existing economic and operating conditions with no provision for price and cost escalations except by contractual arrangements.  Natural gas and oil reserve estimates are inherently imprecise and are subject to change as more current information becomes available. Capitalized costs are depleted and amortized using the units of production method, based upon reserve estimates. 

 

Impairments

 

The carrying value of oil and gas properties is assessed for possible impairment on at least an annual basis, or as circumstances warrant, based on geological analysis or changes in proved reserve estimates. When impairment occurs, an adjustment is recorded as a reduction of the asset carrying value.

 

Asset Retirement Obligations

 

A provision has been recorded for the estimated liability for the plugging and abandonment of natural gas and oil wells at the end of their productive lives. The liability and the associated increase in the related asset are recorded in the period in which the asset retirement obligation, or ARO, is incurred. The liability is accreted to its present value each period and the capitalized cost is depreciated over the useful life of the related asset.

 

The estimated liability is calculated annually using the estimated remaining lives of the wells based on reserve estimates and federal and state regulatory requirements. The liability is discounted using an assumed credit-adjusted risk-free rate. At the time of abandonment, the Company recognizes a gain or loss on abandonment to the extent that actual costs do not equal the estimated costs.

 

The Company recognized $13,125 and $39,376 of accretion expense, respectively, during the three months and nine months ended September 30, 2012, and $0 during each of the three months and nine months ended September 30, 2011.

 

Goodwill

 

At September 30, 2012 and December 31, 2011, the Company had $2,740,171 of goodwill related to the acquisition of certain oil and gas joint ventures on December 1, 2009.

 

Goodwill represents the excess of the purchase price over the fair value of the net assets acquired.  The Company follows ASC Topic 350, “Goodwill and Intangible Asset Impairment Testing.” The Company’s analysis consists of two steps. Step 1 tests the company for impairment by comparing the fair value of equity to the book value of equity. If the fair value is less than the book value, then a Step 2 analysis must be performed. If the fair value of goodwill is less than its carrying amount, impairment is recorded based on the difference. The Company annually assesses the carrying value of goodwill for impairment. No impairment loss was recorded for the nine months ended September 30, 2012.

 

Recently Issued Accounting Standards

 

The SEC and FASB continually adopt new reporting requirements and makes revisions to existing disclosures required for oil and gas companies, which are intended to provide investors with a more meaningful and comprehensive understanding of such information. The following recently adopted changes will have the greatest impact on the Company’s financial statements.

 

 

VADDA ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

Offsetting Assets and Liabilities

 

In December 2011, the FASB issued Accounting Standards Update (“ASU”) No. 2011-11, “Disclosures about Offsetting Assets and Liabilities.” The guidance requires additional disclosures about the impact of offsetting, or netting, on a company’s financial position, and is effective for annual periods beginning on or after January 1, 2013 and interim periods within those annual periods and retrospectively for all comparative periods presented. Under GAAP, derivative assets and liabilities can be offset under certain conditions. The guidance requires disclosures showing both gross information and net information about instruments eligible for offset in the balance sheet. The Company is currently evaluating the provisions of ASU 2011-11 and assessing the impact, if any, it may have on its financial position or results of operations.

 

Common Fair Value Measurement and Disclosure

 

In May 2011, the FASB issued ASU No. 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in US GAAP and IFRSs.” The guidance amends previously issued authoritative guidance and requires new disclosures, clarifies existing disclosures and is effective for interim and annual periods beginning after December 15, 2011. The amendments change requirements for measuring fair value and disclosing information about those measurements. Additionally, the guidance clarifies the FASB’s intent regarding the application of existing fair value measurement requirements and changes certain principles or requirements for measuring fair value or disclosing information about its measurements. For many of the requirements, the FASB does not intend the amendments to change the application of the existing fair value measurements guidance. The Company has evaluated the provisions of ASU 2011-04 and has determined that there is no impact on its financial position or results of operations as of September 30, 2012.

 

Comprehensive Income

 

In June 2011, authoritative guidance was issued on the presentation of comprehensive income. Specifically, the guidance allows an entity to present components of net income and other comprehensive income in one continuous statement, referred to as the statement of comprehensive income, or in two separate but consecutive statements. The new guidance eliminates the current option to report other comprehensive income and its components in the statement of changes in equity. The Company reviewed the changes in presentation of comprehensive income during the third quarter of 2012 and determined that the changes have no effect on the calculation of the Company’s net income, comprehensive income or earnings per share.

 

Impairment

 

In September 2011, the FASB issued an update to existing guidance on testing goodwill for impairment. This update simplifies the assessment of goodwill for impairment by allowing an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If impairment is indicated, it is necessary to perform the two-step impairment review process. It also amends the examples of events or circumstances that would be considered in a goodwill impairment evaluation. The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The Company adopted the new guidance in 2012.

 

NOTE 3 – INCOME TAXES

 

The Company computes quarterly income taxes under the effective tax rate method based on applying an anticipated annual effective rate to its quarterly net income (loss), except for discrete items. Income taxes for discrete items are computed and recorded in the period that the specific transaction occurs. For the three and nine months ended September 30, 2012, the Company’s overall effective tax rate on pre-tax income from operations used was 98.2% and 14.9%, respectively.  Based on net income and losses for the three months and nine months ended September 30, 2012 and 2011, the Company had an estimated income tax benefit of $80,444 for the three months ended September 30, 2012, an estimated income tax expense of $60,556 for the nine months ended September 30, 2012 and an estimated income tax benefit of $193,653 and $510,233, respectively, for the three and nine months ended September 30, 2011.

 

 

VADDA ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

NOTE 4 – RELATED PARTY TRANSACTIONS

 

Pursuant to an arrangement between the Company and Mieka LLC, an entity wholly owned by the Company’s principal stockholders, Mieka LLC provides drilling and completion services on wells owned by the Company. Prices charged to the Company by Mieka LLC under turnkey drilling arrangements do not reflect prevailing rates that would be charged by outside third parties in arms-length transactions. During the three months ended September 30, 2012 and 2011, the Company incurred drilling costs associated with turnkey drilling contracts with Mieka LLC of $1,000,035 and $277,200 respectively. During the nine months ended September 30, 2012 and 2011, the Company incurred drilling costs associated with turnkey drilling contracts with Mieka LLC of $1,763,617 and $1,766,640, respectively. As of September 30, 2012 and December 31, 2011, the Company was obligated to pay $1,176,456 and $662,292, respectively, to Mieka LLC.

 

During the nine months ended September 30, 2012, Daro and Anita Blankenship, principal shareholders of the Company, received aggregate compensation from the Company of $76,000 and $97,500, respectively. During the nine months ended September 30, 2011, they received aggregate compensation of $72,924 and $72,784, respectively. As of September 30, 2012, the Company was obligated to pay Daro and Anita Blankenship $10,083 and $71,311 respectively. As of December 31, 2011, the Company was obligated to pay Daro and Anita Blankenship $10,083 and $78,481 respectively.

 

NOTE 5 – LEASES

 

During the third quarter 2012, the Company leased office space on a month-to-month basis under the terms of an office lease that expired in June 2011 and paid $13,073 per month for rent expense. At the end of September 2012, the Company relocated its principal offices to Flower Mound, Texas under a new lease agreement entered into in May 2012. The lease provides approximately 7,800 square feet of office space for a term of 6 ½ years. After an initial six-month rent abatement period, basic rent for the following 12 months will be $9,775 monthly.

 

NOTE 6 – NOTES PAYABLE

 

In June 2011 the Company obtained an installment loan in the principal amount of $30,000 to purchase oil and gas accounting software. Under the terms of the loan agreement, the loan bears interest at the rate of 6.5% per year and the Company has a monthly payment obligation of $1,338 until the loan’s maturity in June 2013. As of September 30, 2012, the remaining unpaid principal balance was $11,683.

 

NOTE 7 – VARIABLE INTERESTS ENTITIES (VIE)

 

Management performs an analysis of the Company’s variable interests to determine if those type interests are held in other entities. The analysis primarily is based on a qualitative review, but also includes quantitative considerations in evaluating the variable interests in accordance with FASB ASC Topic 810-10, “Accounting for Variable Interest Entities.” Qualitative analyses are performed based on an evaluation of the design by the entity, its organizational structure, to include decision-making ability, and financial arrangements. When used to supplement qualitative analyses, quantitative analyses are based on forecasted cash flows of the entity.

 

GAAP requires reporting entities to consolidate variable interest entities when they have variable interests that provide a controlling financial interest in variable interest entities. Entities that consolidate variable interest entities are referred to as primary beneficiaries.

 

Mieka, LLC (“VIE”), an entity under common control of the Company, was evaluated as a variable interest entity of the Company. The VIE’s only source of revenue is from the drilling of oil and gas wells contracted with the Company through certain turnkey contracts entered into by the Company. The relationship was evaluated to determine if the arrangement gave the Company a variable interest in a variable interest entity and to determine whether the Company was the primary beneficiary that would result in consolidating the VIE.

 

The Company was considered to be the primary beneficiary as a result of the obligation to absorb losses that could be significant to the VIE. Additionally, since future revenue for the VIE is dependent upon the Company entering into future turnkey contracts or drilling programs, the Company directs activities that most significantly impact economic performance of the VIE. The Company was determined to be the primary beneficiary of the VIE for 2012 and 2011 and the VIE has been included in the consolidated financial statements as of and for the years ended December 31, 2011 and as of and for the nine months ended September 30, 2012 and 2011.

 

 

VADDA ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

The table below reflects the amount of assets and liabilities from the VIE included in the consolidated balance sheets as of September 30, 2012 and December 31, 2011.

 

		September 30, 2012				December 31, 2011
Assets:
Cash		$	727,770			$	1,232,252
Accounts receivable from affiliates			1,678,379				662,292
Prepaid drilling cost			187,905				699,836
Investment in joint ventures			614,500				614,500
Other assets			145,030				64,971
Total Assets		$	3,353,584			$	3,273,851
Liabilities and Members’ Deficit:
Accounts payable and accrued liabilities		$	91,231			$	38,233
Deferred revenue			3,649,255				4,192,414
Total liabilities		$	3,740,486			$	4,230,647
Accumulated deficit			(386,902	)		$	(956,796	)
Total members’ deficit			(386,902	)			(956,796	)
Total Liabilities and Members’ Deficit		$	3,353,584			$	3,273,851

 

 

 

 

 

 

 

 

  

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Unless the context requires otherwise, as used in this report, the “Company,” “Vadda,” “we,” “us” or “our,” refer, collectively, to Vadda Energy Corporation (“Vadda”), Mieka Corporation, a Delaware corporation and a wholly owned subsidiary of Vadda (“Mieka”), and Mieka LLC, a Delaware limited liability company and a variable interest entity under common control with Vadda and Mieka.

 

Cautionary Statement Concerning Forward-Looking Statements

 

This report includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are statements other than historical fact and give our current expectations or forecasts of future events. They may include estimates of natural gas and oil reserves, expected natural gas and oil production and future expenses, assumptions regarding future natural gas and oil prices, planned capital expenditures and anticipated asset acquisitions and sales, as well as statements concerning anticipated cash flow and liquidity, business strategy and other plans and objectives for future operations.

 

Although we believe the expectations and forecasts reflected in these and other forward-looking statements are reasonable, we can give no assurance they will prove to have been correct. They can be affected by inaccurate assumptions or by known or unknown risks and uncertainties. Factors that could cause actual results to differ materially from expected results include:

 

·

the volatility of natural gas and oil prices;

·

the limitations our level of cash flow or ability to raise capital may have on our operational and financial flexibility;

·

declines in the values of our natural gas and oil properties resulting in impairments;

·

the availability of capital on an economic basis to fund reserve replacement costs;

·

our ability to replace reserves and sustain production;

·

uncertainties inherent in estimating quantities of natural gas and oil reserves and projecting future rates of production and the timing of development expenditures;

·

inability to generate profits or achieve targeted results in our drilling and well operations;

·

leasehold terms expiring before production can be established;

·

drilling and operating risks, including potential environmental liabilities associated with hydraulic fracturing;

·

changes in legislation and regulation adversely affecting our industry and our business;

·

general economic conditions negatively impacting us and our business counterparties; and

·

transportation capacity constraints and interruptions that could adversely affect our cash flow.

We caution you not to place undue reliance on these forward-looking statements, which speak only as of the date of this report, and we undertake no obligation to update this information. Forward-looking statements are not guarantees of future performance and actual results may differ significantly from the results discussed in the forward-looking statements. We urge you to carefully review and consider the disclosures made in this report and our other filings with the SEC that attempt to advise interested parties of the risks and factors that may affect our business.

 

 

Overview

 

Vadda is a publicly held, independent energy company engaged primarily in the exploration for, and development of, natural gas and crude oil reserves. We generate our revenues and cash flows from two primary sources: profits from the difference between the amounts we received in turnkey fees from joint ventures we manage and our actual costs to conduct the joint ventures’ operations, and proceeds from the sale of oil and gas production on properties we hold.

 

Strategy

 

Our long-term growth strategy is primarily focused on building cash flow from developing crude oil reserves through drilling horizontal wells in southern New York and north central Pennsylvania and natural gas reserves on lease acreage in the Marcellus Shale and Utica Shale formations in southwestern Pennsylvania and eastern Ohio. We believe this strategy will create greater value for investors.

 

We hope to accomplish our objectives in the following manner:

 

·

Generating turnkey drilling profits from wells funded and drilled by joint ventures we manage.

·

Earning carried working interests in wells drilled by joint ventures we sponsor. In all wells drilled by sponsored joint ventures, our carried interest bears no drilling and completion costs. We bear only the cost of the leasehold rights and our share of operating expenses after the wells are drilled, completed and commence production.

·

We also purchase an interest in each joint venture equal to 1% of the working interest owned by the joint venture. Such interest is not carried and pays its proportionate share of joint venture costs and expenses.

·

Direct participation as a working interest owner in wells through a combination of strategies, including retention of carried working interests, overriding royalty interests and reversionary interests (which we expect will provide us ownership in wells after outside investors have recovered their drilling and completion costs from net revenues from the wells).

·

Overhead fees and income earned as the managing venturer of joint ventures.

·

Raising additional capital through debt or equity offerings.

·

Exploiting our oil and gas wells through use of hydraulic fracturing, a method we have employed on past wells we have drilled and/or operated, and a technique we intend to utilize in our Marcellus Shale operations.

 

As part of this strategy, we formed the following joint ventures which are managed by Mieka:

 

2009 Mieka PA Westmoreland/Marcellus Shale Project I—Marcellus I JV

 

In June 2010, we formed our first drilling joint venture that consisted of wells targeting the Marcellus Shale formation. The 2009 Mieka PA Westmoreland/Marcellus Shale Project I (“Marcellus I JV”) received $2,304,000 in capital contributions from outside investors. As the managing venturer we contributed $23,273 of capital for a 1% interest in the joint venture, which equals a 0.44% working interest and a 0.36% net revenue interest in the joint venture wells. In addition, we own a 3.94% carried working interest (2.79% net revenue interest), which is carried to the tanks, outside the joint venture. We also purchased $82,500 of the Marcellus I JV in January 2010 on the same terms and conditions as outside investors.

 

The Marcellus I JV drilled a total of two natural gas wells, one of which was completed in December 2010 and is producing. The second well was completed during the first quarter of 2012. In December 2011, the Commonwealth of Pennsylvania enacted new legislation, which now requires us to obtain a permit to build a pipeline to move the natural gas produced from the second well. The permit was approved in October 2012, which will enable us to construct the pipeline and begin production during the fourth quarter of 2012.

 

 

2010 Mieka PA/WestM/Marcellus Shale Project II—Marcellus II JV

 

The 2010 Mieka PA/WestM/Marcellus Project II (“Marcellus II JV”) was formed in January 2011. In October 2011, the Marcellus II JV was closed with total capital contributions of $4,435,200 from outside investors. As the managing venturer we contributed $44,800 of capital for a 1% interest in the joint venture, which equals a 0.44% working interest and a 0.36% net revenue interest in the joint venture wells. In addition we own a 0.77% carried working interest (0.55% net revenue interest), which is carried to the tanks in two natural gas wells, one of which is a horizontal well.

 

The vertical well had been drilled and was successfully completed during the first quarter of 2012. In December 2011, the Commonwealth of Pennsylvania enacted new legislation, which now requires us to obtain a permit to build a pipeline to move the natural gas produced from the well. The permit was approved in October 2012, which will enable us to construct the pipeline and begin production during the fourth quarter of 2012.

 

2011 Mieka/Jefferson-Cattaraugus Oil & Gas Project A—Mieka Jefferson A JV

 

The 2011 Mieka/Jefferson-Cattaraugus Oil & Gas Project A (“Mieka Jefferson A JV”) began accepting investor subscriptions in December 2011 and had received capital contributions of $3,309,500 as of September 30, 2012. We are in the process of seeking the consent of a majority of the venturers to extend the offering period through December 31, 2012. When closed, we will own a 6% carried working interest (4.25% net revenue interest) in two gas wells, one vertical and one horizontal, targeting the Marcellus shale formation and two horizontal oil wells, which will be drilled to the 1st, 2nd or 3rd Bradford sands formation in western New York.

 

One of the horizontal oil wells had been drilled and was successfully completed during the third quarter of 2012.

 

Results of Operations

 

Comparison of Three Months Ended September 30, 2012 to Three Months Ended September 30, 2011

 

Total Revenues. Total revenues increased $1,013,550 to $1,121,889 for the three months ended September 30, 2012 from $108,339 for the 2011 quarter, due to the recognition of turnkey drilling revenue, offset slightly by decreased natural gas and oil sales.

 

Turnkey Drilling Revenues. Turnkey drilling revenues recognized during the three months ended September 30, 2012 were $1,068,695. This represents revenue recognized on the completion of the horizontal oil well under the Mieka Jefferson A JV project. Turnkey drilling revenues received during the three months ended September 30, 2011 were not recognized, but were deferred because of certain GAAP requirements.

 

Natural Gas and Oil Sales. Natural gas and oil sales decreased $55,145, or 50.9%, to $53,194 for the three months ended September 30, 2012 from $108,339 for the 2011 period, due to normal production decline coupled with a decrease in the price of natural gas.

 

Total Costs and Expenses. Total costs and expenses increased $522,557, or 76.7%, to $1,203,824 for the three months ended September 30, 2012 from $681,267 for the prior year quarter, due primarily to the recognition of turnkey drilling costs in 2012.

 

Turnkey Drilling Costs. Turnkey drilling costs were $622,079 for the three months ended September 30, 2012 and included costs to drill the horizontal oil well under the Mieka Jefferson A JV. There were no turnkey drilling costs for the three months ended September 30, 2011.

 

General and Administrative Expenses. General and administrative expenses decreased $79,291, or 13.3%, to $515,443 during the three months ended September 30, 2012 from $594,734 for the same period in 2011 due primarily to the higher costs incurred in 2011 related to becoming a public company.

 

Net Income (Loss). Consolidated net loss was $1,491, or $0.00 per basic and diluted common share, for the three months ended September 30, 2012 as compared to consolidated net loss of $379,272, or $0.00 per basic and diluted common share, for the 2011 quarter. The consolidated results for the 2012 and 2011 quarters include net income of $191,993 for the three months ended September 30, 2012 and net loss of $67,729 for the three months ended September 30, 2011 attributable to Mieka LLC. Mieka LLC is a variable interest entity that is not owned by the Company, but which shares common control. Due to Mieka LLC’s ownership and dependence upon the Company and its subsidiaries for its cash flows, its financial information is required to be consolidated with Vadda’s and Mieka’s financial statements under variable interest entity accounting. See Note 7 to the unaudited consolidated financial statements included elsewhere in this report.

 

  

Comparison of Nine Months Ended September 30, 2012 to Nine Months Ended September 30, 2011

 

Total Revenues. Total revenues increased $3,588,312 to $3,913,448 for the nine months ended September 30, 2012 from $325,136 for the first nine months of 2011, due to the recognition of turnkey drilling revenue during the first and third quarters of 2012, offset slightly by decreased natural gas and oil sales during the first nine months of 2012.

 

Turnkey Drilling Revenues. Turnkey drilling revenues represented two wells completed and recognized during the first quarter of 2012 and one well completed and recognized during the third quarter of 2012. The amount of $3,733,169 is comprised of revenues earned from the 50% working interest owned by the Marcellus I JV and the Marcellus II JV and revenues earned from the Mieka Jefferson A JV. Turnkey drilling revenues received during the nine months ended September 30, 2011 were not recognized, but were deferred because of certain GAAP requirements.

 

Natural Gas and Oil Sales. Natural gas and oil sales decreased $144,857, or 44.6%, to $180,279 for the nine months ended September 30, 2012 from $325,136 for the first nine months of 2011, due to normal production decline coupled with a decrease in the price of natural gas.

 

Total Costs and Expenses. Total costs and expenses increased $1,680,769, or 92.1%, to $3,506,616 for the nine months ended September 30, 2012 from $1,825,847 for the prior year period, due primarily to the recognition of turnkey drilling costs in the first and third quarters of 2012.

 

Turnkey Drilling Costs. Turnkey drilling costs were $1,891,055 in the first nine months of 2012 and included costs in the first quarter of 2012 to drill 100% of two wells owned 50% by the Marcellus I JV and the Marcellus II JV and in the third quarter to drill a horizontal oil well under the Mieka Jefferson A JV. There were no turnkey drilling costs for the nine months ended September 30, 2011.

 

General and Administrative Expenses. General and administrative expenses decreased $177,075, or 11.2%, to $1,399,961 during the nine months ended September 30, 2012 from $1,577,036 for the same period in 2011 due primarily to the higher costs incurred in 2011 related to becoming a public company, along with a decrease in payroll related expenses in 2012.

 

Net Income (Loss). Consolidated net income was $346,276 for the nine months ended September 30, 2012 as compared to a consolidated net loss of $990,453 for the first nine months of 2011. Consolidated net income for the first nine months of 2012 was attributable to net turnkey drilling income recognized on three wells drilled by three joint ventures and a third party. Consolidated net income for the nine months of 2012 also includes net income of $569,894 attributable to Mieka LLC. The consolidated net loss for the nine months ended September 30, 2011 includes a net loss of $124,605 attributable to Mieka LLC. Mieka LLC is a variable interest entity that is not owned by the Company, but which shares common control. Due to Mieka LLC’s ownership and dependence upon the Company and its subsidiaries for its cash flows, its financial information is required to be consolidated with Vadda’s and Mieka’s financial statements under variable interest entity accounting. See Note 7 to the unaudited consolidated financial statements included elsewhere in this report.

 

Liquidity and Capital Resources

 

Cash flow from operations is our most significant source of liquidity. We generate our operating cash flow from two primary sources:

 

·

Turnkey oil and gas drilling joint ventures, from which we generally receive turnkey income (which generates profits to the extent the turnkey price we charge to the joint ventures exceeds the actual costs necessary to acquire leases and drill, test and complete wells for such joint ventures) and carried working interests in such wells (which generate monthly revenue and cash flow to the extent such wells produce natural gas and oil), as well as interests in such joint ventures purchased by the Company (which also generate monthly revenue and cash flow to the extent such wells produce natural gas and oil); and

·

Natural gas and oil sales, which are attributable to working interests owned and held directly by us in wells on producing oil and gas properties (which generate monthly revenue and cash flow to the extent such wells produce natural gas and oil) and carried working interests in such wells (which also generate monthly revenue and cash flow to the extent such wells produce natural gas and oil), as well as overriding royalty interests and reversionary interests (which may generate additional monthly revenue and cash flow to the extent such wells produce natural gas and oil).

 

 

Cash and cash equivalents totaled $865,547 as of September 30, 2012, as compared to $1,382,166 as of December 31, 2011. As of September 30, 2012, we had a working capital deficit of $3,505,144 which consisted of $2,008,510 of current assets offset by $5,513,654 of current liabilities. Current assets as of September 30, 2012 included cash of $865,457, deferred income tax of $774,719, prepaid drilling costs of $187,905 and accounts receivable (net) of $180,429. Current liabilities as of September 30, 2012 included deferred revenue of $5,122,806, accounts payable and accrued liabilities of $208,130, payable to affiliate of $89,641, payable to shareholders of $81,394 and current portion of note payable of $11,683.

 

As of December 31, 2011, we had a working capital deficit of $3,961,546, which consisted of $2,993,054 of current assets offset by $6,954,600 of current liabilities. Current assets as of December 31, 2011 included cash of $1,382,166, deferred income tax of $835,275, prepaid drilling costs of $699,836 and accounts receivable (net) of $75,777. Current liabilities as of December 31, 2011 included deferred revenue of $6,528,474, accounts payable and accrued liabilities of $248,106, payable to shareholders of $88,564, payable to affiliate of $75,659 and current portion of note payable of $13,797.

 

Cash used in operating activities was $500,878 for the nine months ended September 30, 2012, compared to $970,193 for the nine months ended September 30, 2011.

 

Changes in cash flows from operations are largely due to the same factors that affect our net income, excluding various non-cash items such as depreciation, depletion and amortization and deferred income taxes. For example, changes in turnkey drilling revenues, production volumes and market prices for natural gas and oil directly impact the level of our cash flow from operations.

 

Although our long-term growth strategy calls for an increased focus on our own natural gas and oil operations and we intend to rely less on turnkey drilling revenues in the future, we expect to continue our reliance on these sources of liquidity in the future. We use cash flows from operations to fund expenditures related to our exploration, development and acquisition of natural gas and oil properties. We have historically obtained most of the capital to fund expenditures related to our turnkey drilling ventures from the sale of interests in the joint ventures to outside participants. Since 2001, we have raised approximately $43.0 million from outside investors in 32 joint ventures that drilled 167 oil and gas wells.

 

However, our ability to raise capital from outside investors through joint ventures is dependent upon the ability of the investors to deduct intangible drilling costs on their federal income tax returns. If there are changes to the U.S. tax laws to eliminate or significantly limit this deduction, it could materially adversely affect our ability to fund our turnkey drilling operations and generate our turnkey drilling revenues.

 

The selling price for natural gas we produce has decreased over the past couple of years and, if his trend continues, will lower the amount of cash flow available to the Company. In response to this trend in natural gas prices, we have added two oil wells to our current drilling joint venture. The two new horizontal oil wells, one of which was completed in the quarter ended September 30, 2012, are on leases located in western New York and target the Speechley oil sand. We believe that packaging two Marcellus gas wells with two Speechley oil wells has enhanced our ability to market drilling joint ventures now and in the future.

 

Our revenues and cash flow will be adversely impacted by lower natural gas and crude oil prices and we are presently not participating in any hedging activities. However we believe that within the next twelve months natural gas prices will begin to increase and have steady growth on a long term basis.

 

 

We cannot give any assurance that we will be able to raise additional capital or generate sufficient turnkey drilling profits and net revenues from producing wells to fund such growth. If we are unable to achieve a sufficient level of cash inflows and/or cannot secure equity financing, if needed, on satisfactory terms, we may be unable to support our current operations or expand our operations.  Additional equity financings are likely to be dilutive to holders of our common stock and debt financings, if available, may involve significant payment obligations and covenants that restrict how we operate our business.

 

We did not generate any cash flow from financing activities in the nine months ended September 30, 2012. Cash flow generated from financing activities for the nine months ended September 30, 2011 was $30,000.

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk.

 

We are a “smaller reporting company” as defined by Rule 12b-2 under the Securities Exchange Act, and as such, are not required to provide the information required under this Item.

 

Item 4.

Controls and Procedures.

 

Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures as defined in Rule 13a-15(e) or 15d-15(e) under the Securities Exchange Act, which (1) are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and (2) include controls and procedures designed to ensure that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, or the person or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

 

Our management evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of such disclosure controls and procedures as of September 30, 2012, the end of the period covered by this report, as required by paragraph (b) of Rule 13a-15 or Rule 15d 15 under the Securities Exchange Act. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective at a reasonable assurance level as of September 30, 2012. Management took significant steps to improve its disclosure controls and procedures during the quarter ended June 30, 2012, which continued in the third quarter. Management intends to continue these efforts during the remainder of 2012.

 

Changes in Internal Control over Financial Reporting

 

During the quarter ended June 30, 2012, management initiated a program to appropriately address the effectiveness of our internal control over financial reporting, as defined in Rule 13a-15(f) of the Securities Exchange Act, with the objective of implementing and maintaining an effective system of internal control over financial reporting, preventing any significant deficiencies or material weaknesses, and appropriately addressing any that have been identified or may be identified in the future. The accounting and financial reporting team has been strengthened by the addition of a new chief financial officer and a new vice president of accounting, both of which have significant accounting experience.

 

New accounting controls have been implemented and financial reporting has been improved. Standard monthly accounting and review procedures are being performed. In addition, financial reports are generated and reviewed on a regular basis. We are continuing to implement controls and procedures that will improve internal control over financial reporting as well as improving the timeliness in meeting financial reporting requirements.

 

 

Part II – Other Information

 

Item 1.

Legal Proceedings.

 

In April 2011, in the Matter of Mieka Corporation, Daro Blankenship and Stephen Romo, Case No. XY-11-CD-11, Fred J. Joseph, the Colorado Securities Commissioner, and the Colorado Division of Securities, entered a Final Cease and Desist Order against Mieka, Daro Blankenship and Stephen Romo (the “Respondents”) directing them to refrain from committing or causing any violations of Sections 301, 401 or 501 of the Colorado Securities Act, or otherwise engaging in conduct in violation of the Colorado Securities Act. The Colorado Securities Commissioner found that (1) joint venture interests in a joint venture sponsored by Mieka were “investment contracts” and therefore “securities” within the meaning of the Colorado Securities Act, (2) the offer of such interests in Colorado required registration under Colorado Revised Statute Section 11-51-301 or an exemption to that registration requirement and (3) the Respondents violated provisions of the Colorado Securities Act relating to the employment of securities broker/dealers or sales representatives. The Respondents appealed the Order to the Colorado Court of Appeals in May 2011. The appellate court affirmed the Order on May 10, 2012.

 

Item 1A.

Risk Factors.

 

We are a “smaller reporting company” as defined by Rule 12b-2 under the Securities Exchange Act, and as such, are not required to provide the information required under this Item.

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

 

Not applicable.

 

Item 3.

Defaults Upon Senior Securities.

 

Not applicable.

 

Item 4.

Mine Safety Disclosures.

 

Not applicable.

 

Item 5.

Other Information.

 

Not applicable.

 

 

Item 6.

Exhibits.

 

The following exhibits are furnished as exhibits to this report:

 

EXHIBIT INDEX

 

Exhibit		Description
31.1		Certification of Principal Executive Officer of Periodic Report pursuant to Rule 13a-14a/Rule 14d-14(a)
31.2		Certification of Principal Financial Officer of Periodic Report pursuant to Rule 13a-14a/Rule 14d-14(a)
32.1		Certification of Principal Executive Officer of Periodic Report pursuant to 18 U.S.C. Section 1350
32.2		Certification of Principal Financial Officer of Periodic Report pursuant to 18 U.S.C. Section 1350
101.INS		XBRL Instances Document
101.SCH		XBRL Taxonomy Extension Schema Document
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		XBRL Taxonomy Extension Label Linkbase Document
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

 

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

	VADDA ENERGY CORPORATION
Date: November 14, 2012	By:	/s/ Daro Blankenship
		Daro Blankenship President and Chief Executive Officer (principal executive officer)
Date: November 14, 2012	By:	/s/ Martin N. Mayrath
		Martin N. Mayrath Chief Financial Officer (principal financial officer)

 

 

 

 

 

17