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 June 30, 2013

 

£

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

 

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 £ No Q

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 September 30, 2013 was 104,235,236.

 

 

TABLE OF CONTENTS

 

		Page
PART I – FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Balance Sheets – June 30, 2013 (Unaudited) and December 31, 2012 (Audited)	3
	Consolidated Statements of Operations (Unaudited) – Three and Six Months Ended June 30, 2013 and 2012	5
	Consolidated Statements of Cash Flows (Unaudited) – Six Months Ended June 30, 2013 and 2012	5
	Notes to Consolidated Financial Statements (Unaudited)	6
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	11
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	17
Item 4.	Controls and Procedures	17
PART II – OTHER INFORMATION
Item 1.	Legal Proceedings	18
Item 1A.	Risk Factors	18
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	18
Item 3.	Defaults Upon Senior Securities	18
Item 4.	Mine Safety Disclosures	18
Item 5.	Other Information	18
Item 6.	Exhibits	19
Signatures		20

 

 

PART I – FINANCIAL INFORMATION

 

Item 1.     Financial Statements

 

VADDA ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

		June 30, 2013				December 31, 2012
		(Unaudited)				(Audited)
Assets:
Cash		$	521,778			$	358,519
Accounts receivable - net			48,936				59,146
Receivable from affiliate			–				280,046
Deferred federal income taxes - current			29,930				29,930
Prepaid drilling costs			1,252,737				455,009
Total current assets			1,853,381				1,182,650
Property and equipment:
Oil and gas properties, using successful efforts method of accounting:
Proved properties			2,506,004				2,130,500
Other property and equipment			362,160				304,369
Less: Accumulated depletion and depreciation			(719,505	)			(636,645	)
Property and equipment, net			2,148,659				1,798,224
Investment in joint ventures – cost method			849,689				849,689
Deferred federal income tax – non-current			526,947				332,332
Other assets			56,210				56,210
Total Assets		$	5,434,886			$	4,219,105
Liabilities and Equity:
Accounts payable and accrued liabilities		$	315,067			$	298,095
Current portion of notes payable			11,202				7,852
Payable to affiliate			67,454				–
Payable to shareholders			12,319				45,319
Deferred revenue			7,838,223				5,796,556
Total current liabilities			8,244,265				6,147,822
Notes payable			22,887				–
Asset retirement obligation			228,420				223,296
Total long-term liabilities			251,307				223,296
Preferred stock, $.001 par value; 10,000,000 shares authorized; none issued or outstanding as of June 30, 2013 and December 31, 2012			–				–
Common stock, $.001 par value; 150,000,000 shares authorized; 104,235,236 and 104,235,236 issued and outstanding as of June 30, 2013 and December 31, 2012			104,235				104,235
Additional paid-in capital			7,136,111				6,948,359
Accumulated deficit			(8,794,988	)			(8,212,688	)
Total Vadda stockholders’ deficit			(1,554,642	)			(1,160,094	)
Deficit attributable to noncontrolling interests			(1,506,044	)			(991,919	)
Total Deficit			(3,060,686	)			(2,152,013	)
Total Liabilities and Equity		$	5,434,886			$	4,219,105

 

See accompanying notes to unaudited consolidated financial statements

 

  

VADDA ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

 

		For the Three Months Ended June 30,								For the Six Months Ended June 30,
		2013				2012				2013				2012
Revenues:
Turnkey drilling revenues		$	–			$	–			$	–			$	2,664,474
Natural gas and oil  sales			90,681				47,465				155,974				127,085
			90,681				47,465				155,974				2,791,559
Costs and Expenses:
Turnkey drilling costs			–				10,000				–				1,268,976
Lease operating expense			64,504				14,577				107,965				51,769
General and administrative			541,123				366,401				1,063,314				884,518
Accretion expense			2,562				13,126				5,124				26,251
Depletion and depreciation			41,911				34,782				82,859				71,278
			650,100				438,886				1,259,262				2,302,792
Income (loss) before income taxes			(559,419	)			(391,421	)			(1,103,288	)			448,767
Income tax expense (benefit)			(94,680	)			(90,000	)			(194,615	)			141,000
Net income (loss)			(464,739	)			(301,421	)			(908,673	)			347,767
Net income (loss) attributable to noncontrolling interests			(173,445	)			633				(326,373	)			377,901
Net loss attributable to Vadda common stockholders		$	(291,294	)		$	(302,054	)		$	(582,300	)		$	(30,134	)
Basic and diluted loss per Vadda common share			(0.00	)			(0.00	)			(0.01	)			(0.00	)
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)

 

		Six Months Ended June 30,
		2013				2012
Cash flows from operating activities:
Net income (loss)		$	(908,673	)		$	347,767
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation, depletion and amortization			82,859				71,278
Accretion expense			5,124				26,251
Deferred tax expense (benefit)			(194,615	)			141,000
Changes in operating assets and liabilities:
Accounts receivable			10,210				(96,234	)
Prepaid drilling costs			(797,728	)			(22,413	)
Other assets			–				(22,208	)
Accounts payable and accrued liabilities			16,973				69,084
Payable to affiliates			347,500				8,651
Deferred revenues			2,041,667				(1,582,391	)
Net cash provided by (used in) operating activities			603,317				(1,059,215	)
Cash flows from investing activities:
Additions to oil and gas properties			(375,504	)			–
Additions to property and equipment			(57,791	)			(5,347	)
Net cash used in investing activities			(433,295	)			(5,347	)
Cash flows from financing activities:
Proceeds from note payable			35,000				–
Repayment of note payable			(8,763	)			(6,154	)
Repayment of shareholder payable			(33,000	)			–
Net cash used in financing activities			(6,763	)			(6,154	)
Net change in cash			163,259				(1,070,716	)
Cash balance, beginning of period			358,519				1,382,166
Cash balance, end of period		$	521,778			$	311,450
Non cash financing activities:
Non cash contribution to Vadda Energy Corporation		$	187,752			$	–
Non cash distribution to Mieka LLC owners		$	187,752			$	–

 

See accompanying notes to unaudited consolidated financial statements

VADDA ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (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, 2012 and 2011, 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, 2012. 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, 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 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. The Company did not recognize any turnkey drilling revenue or turnkey drilling costs on completed wells during the six months ended June 30, 2013. During the six months ended June 30, 2012, the Company recognized $2,664,474 of turnkey drilling revenue and $1,268,976 of turnkey drilling costs on two completed gas wells. As of June 30, 2013 and December 31, 2012, the Company had $7,838,223 and $5,796,556, respectively, in deferred turnkey drilling revenue.  The Company had deferred drilling costs related to turnkey agreements in the amount of $1,252,737 and $455,009, respectively, as of June 30, 2013 and December 31, 2012.

 

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

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 $2,562 and $5,124 of accretion expense during the three and six months ended June 30, 2013, and $13,126 and $26,251 during the three and six months ended June 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. No new pronouncements were issued that would impact the Company’s financial position or operations as of June 30, 2013.

 

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 six months ended June 30, 2013, the Company’s overall effective tax rate on pre-tax income from operations used was 16.9% and 17.6% respectively. This is less than the 34% statutory tax rate because there is a full valuation reserve against the tax impact of Vadda’s net loss since it is determined to be unrecognizable in future periods.

 

Based on net income and losses for the three months and six months ended June 30, 2013 and 2012, the Company had an estimated income tax benefit of $94,680 and $194,615 for the three and six months ended June 30, 2013, an estimated income tax benefit of $90,000 for the three months ended June 30, 2012 and an income tax expense of $141,000 for the six months ended June 30, 2012.

VADDA ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (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. During the three months ended June 30, 2013 and 2012, the Company incurred drilling costs associated with turnkey drilling contracts with Mieka LLC of $1,003,417 and $306,249, respectively. During the six months ended June 30, 2013 and 2012, the Company incurred drilling costs associated with turnkey drilling contracts with Mieka LLC of $1,689,417 and $763,582, respectively. As of June 30, 2013 and December 31, 2012, the Company was obligated to pay $1,566,508 and $1,562,206, respectively, to Mieka LLC.

 

During the six months ended June 30, 2013, Mieka LLC was charged an administrative fee of $48,000 from Vadda Energy Corporation and $204,000 from Mieka. This activity is eliminated in the consolidated financial statements.

 

During the six months ended June 30, 2013, Daro and Anita Blankenship, principal shareholders of the Company, received aggregate compensation from the Company of $52,000 and $65,000, respectively. During the six months ended June 30, 2012, they received aggregate compensation of $50,000 and $62,500, respectively. As of June 30, 2013 and December 31, 2012, the Company was obligated to pay Daro and Anita Blankenship $12,319 and $45,319 in repayment of a previous loan. As of June 30, 2013 the Company had payables to affiliates of $67,454. As of December 31, 2012 the Company had receivables from affiliates of $280,046.

 

Martin N. Mayrath is a principal of Mayrath & Co., PC, which has been engaged to perform the function of Chief Financial Officer, in addition to providing tax services. The Company paid to Mayrath & Co. a total of $30,784 and $37,226 for its services in the quarters ended June 30, 2013 and June 30, 2012 respectively.

 

NOTE 5 – EQUITY TRANSACTIONS

During the quarter ended June 30, 2013, Mieka LLC paid $375,503 in drilling costs for the Potter Lumber #2 well in return for a 43.7% working interest (37.1% net revenue interest) in such well. Fifty percent of such working interest was contributed by Mieka LLC to Vadda as an equity contribution. Vadda then contributed such working interest to Mieka as a capital contribution to Mieka, which contribution is appropriately eliminated in consolidation. After the consummation of these transactions, Mieka LLC and Mieka each hold a 21.8% working interest (18.6% net revenue interest) in the Potter Lumber #2 well, with a capitalized value of $187,752 each in oil and gas properties.

NOTE 6 – LEASES

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 7 – NOTES PAYABLE

 

In May 2013 the Company obtained an installment loan in the principal amount of $35,000 to purchase a Ford F350 truck. Under the terms of the loan agreement, the loan bears interest at the rate of 4.5% per year and the Company has a monthly payment obligation of $1,042 until the loan’s maturity in May 2016. As of June 30, 2013, the remaining unpaid principal balance was $34,089.

 

NOTE 8 – LIQUIDITY AND GOING CONCERN

 

The Company evaluated the ability to continue as a going concern through the year ended December 31, 2013 due to the following factors:

 

·

recurring operating losses;

·

working capital deficiencies;

·

negative cash flows from operating activities; and

·

accumulated deficits.

VADDA ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

 

Cash flow from operations is the Company’s most significant source of liquidity. The Company generates operating cash flow from two primary sources:

 

·

Turnkey oil and gas drilling joint ventures, from which the Company generally receives turnkey fees (which generate profits to the extent the turnkey price the Company charges 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 in commercial quantities); and

·

Natural gas and oil sales, which are generally attributable to working interests owned and held directly by the Company 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 in commercial quantities) 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 in commercial quantities).

 

The Company’s plan to generate cash flows to meet ongoing drilling obligations and fund general and administrative expenses through the remainder of 2013 is to execute the following:

 

·

continue to generate turnkey drilling revenues and profits;

·

obtain carried interests in wells drilled by new joint ventures; and

·

directly participate in wells drilled in the Marcellus Shale, Utica Shale and oil sands in New York and Pennsylvania.

 

The Company may not be able to raise additional capital or generate turnkey drilling revenues or profits in amounts sufficient to fund ongoing drilling obligations and general and administrative expenses. If the Company cannot continue to raise additional capital or start generating sufficient cash flow from operations the Company may have to significantly delay the timing of expenditures for drilling and/or administrative expenses to meet its current obligations or consider curtailing operations. Although the Company typically retains a significant degree of control over the timing of its capital expenditures, the Company may not always be able to defer or accelerate certain capital expenditures to address any potential liquidity issues, although largely discretionary. The Company has been able to generate significant funds from the sale of interests in its joint ventures in 2013 to allow the Company to continue as a going concern, including a total of $735,000 from July 1, 2013 through September 30, 2013. The Company expects to continue to generate additional investment to fund operations through the year ended December 31, 2013; however, the Company cannot give any assurance of its ability to do so.

 

 

NOTE 9 - 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. 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 VIE also is an investor in certain joint ventures of 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.

 

VADDA ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

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 2013 and 2012 and the VIE has been included in the consolidated financial statements as of and for the years ended December 31, 2012 and 2011 and as of and for the six months ended June 30, 2013.

 

The table below reflects the amount of assets and liabilities from the VIE included in the consolidated balance sheets as of June 30, 2013 and December 31, 2012.

 

		June 30, 2013				December 31, 2012
Assets:
Cash		$	390,936			$	278,032
Accounts receivable from affiliates			1,566,508				1,562,206
Prepaid drilling cost			1,252,737				455,009
Oil and gas properties			187,752				–
Investment in joint ventures			612,500				612,500
Other assets			150,290				60,602
Total assets		$	4,160,723			$	2,968,349
Liabilities and Equity:
Accounts payable, accrued liabilities, and notes payable		$	156,595			$	139,513
Deferred revenue			5,510,172				3,820,755
Total liabilities		$	5,666,767			$	3,960,268
Retained earnings (accumulated deficit)			(1,506,044	)		$	(991,919	)
Total stockholders’ equity (deficit)			(1,506,044	)			(991,919	)
Total Liabilities and Equity		$	4,160,723			$	2,968,349

 

 

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. 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. We also purchased $82,500 of the Marcellus I JV in January 2010 on the same terms and conditions as outside investors, which equals 1.63% working interest and 1.35% net revenue interest in the wells. In addition, we hold a 4.91% carried working interest (3.35% net revenue interest), in each of the wells, which is carried to the tanks, outside the joint venture. We also hold an additional 36.04% working interest (29.28% net revenue interest) in the wells outside the joint venture.

 

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 2013.

 

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. The Marcellus II JV was originally formed to drill one vertical oil and gas well and one horizontal oil and gas well targeting the Marcellus Shale formation in Pennsylvania. In March 2013, the venture voted to acquire interest in two horizontal wells in New York in substitution for the horizontal well. As of August 31, 2013, the vertical well has been drilled, tested and completed and is awaiting a pipeline, and the horizontal wells have not commenced operations. Mieka holds a .77% carried working interest (0.00% net revenue interest) in the vertical well. 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 vertical well and a 0.36% working interest and a 0.30% net revenue interest in the horizontal wells.

 

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 $6,757,917 as of September 30, 2013. The Mieka Jefferson A JV was originally formed to drill two gas wells, one vertical and one horizontal, targeting the Marcellus Shale formation and two horizontal oil wells, which were to be drilled to the 1st, 2nd or 3rd Bradford Sands formation in western New York. In March 2013, the venture voted to acquire interests in two horizontal wells in New York in substitution for the horizontal gas well. As of September 30, 2013, the vertical natural gas well had been drilled, tested, and fracked. One of the horizontal oil wells was completed in the quarter ended September 30, 2012 and the other horizontal well has been completed in the quarter ended September 30, 2013. The other two horizontal wells have not yet commenced operations. Mieka holds a 6% carried working interest (4.25% net revenue interest) in the wells that have commenced operations, and will hold a 4% carried working interest (3.4% net revenue interest) in the wells that have not commenced operations. As the managing venturer we have contributed $86,616 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 wells that have commenced operations and will equal a 0.36% working interest and a 0.30% net revenue interest in the wells that have not commenced operation. Additionally, Mieka LLC holds a 10% working interest (8.12% net revenue interest) in one well, which has commenced operations. Mieka LLC and Mieka also each hold a 21.82% working interest (18.55% net revenue interest) in the Potter Lumber #2 well, which was completed in the quarter ended September 30, 2013.

 

Results of Operations

 

Comparison of Three Months Ended June 30, 2013 to Three Months Ended June 30, 2012

 

Total Revenues. Total revenues increased $43,036 to $90,681 for the three months ended June 30, 2013 from $47,645 for the 2012 second quarter, due to increased natural gas and oil sales.

 

Turnkey Drilling Revenues. Turnkey drilling cash received of $1,429,167 and $347,083 during the three months ended June 30, 2013 and 2012 respectively, was not recognized, but was deferred because of certain GAAP requirements.

 

Natural Gas and Oil Sales. Natural gas and oil sales increased $43,036, or 90.7%, to $90,681 for the three months ended June 30, 2013 from $47,645 for 2012, due to increased production from two new oil wells coupled with an increase in the price of both oil and natural gas.

 

Total Costs and Expenses. Total costs and expenses increased $211,214, or 48.1%, to $650,100 for the three months ended June 30, 2013 from $438,886 for the prior year quarter, due to increased lease operating costs, general and administrative costs, and depletion and depreciation in 2013.

 

Turnkey Drilling Costs. There were no turnkey drilling costs for the three months ended June 30, 2013. Turnkey drilling costs were $10,000 in the three months ended June 30, 2012.

 

General and Administrative Expenses. General and administrative expenses increased $174,722, or 47.7%, to $541,123 during the three months ended June 30, 2013 from $366,401 for the same period in 2012 due primarily to increased commissions and payroll related expenses.

 

Net Income (Loss). Net loss attributable to Vadda common stockholders was $291,294, or $0.00 per basic and diluted common share, for the three months ended June 30, 2013 as compared to a net loss attributable to Vadda common stockholders of $302,054, or $0.00 per basic and diluted common share, for the 2012 quarter. The total net loss of $464,739 for the second quarter of 2013 represents a consolidated net loss, which includes a net loss of $173,445 attributable to Mieka LLC. The 2012 total net loss of $301,421 represents a consolidated net loss that includes net income of $633 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 9 to the unaudited consolidated financial statements included elsewhere in this report.

 

Comparison of Six Months Ended June 30, 2013 to Six Months Ended June 30, 2012

 

Total Revenues. Total revenues decreased $2,635,585 to $155,974 for the six months ended June 30, 2013 from $2,791,559 for the first six months of 2012, due primarily to the recognition of turnkey drilling revenue during the first quarter of 2012, offset slightly by increased natural gas and oil sales in 2013.

 

Turnkey Drilling Revenues. Turnkey drilling cash received during the six months ended June 30, 2013 was not recognized, but was deferred because of certain GAAP requirements. Turnkey revenues for the six months ended June 30, 2012 represent two wells completed during the first quarter of 2012 and are comprised of $2,664,474 of revenues earned from the 50% working interest owned by the Marcellus I JV and the Marcellus II JV.

 

Natural Gas and Oil Sales. Natural gas and oil sales increased $28,889, or 22.7%, to $155,974 for the six months ended June 30, 2013 from $127,085 for the 2012 period, due to increased production from two new oil wells coupled with an increase in the price of both oil and natural gas.

 

Total Costs and Expenses. Total costs and expenses decreased $1,043,530, or 45.3%, to $1,259,262 for the six months ended June 30, 2013 from $2,302,792 for the prior year, due primarily to the recognition of turnkey drilling costs on completed projects in 2012.

 

Turnkey Drilling Costs. Turnkey drilling costs were $0 for the six months ended June 30, 2013. Turnkey drilling costs were $1,268,976 in the first six months of 2012 and included costs to drill 100% of two wells owned 50% by the Marcellus I JV and the Marcellus II JV.

 

General and Administrative Expenses. General and administrative expenses increased $178,796, or 20.2%, to $1,063,314 during the six months ended June 30, 2013 from $884,518 for the same period in 2012 due primarily to increased commission costs and payroll related expenses.

 

Net Income (Loss). Net loss attributable to Vadda common stockholders was $582,300 or $0.01 loss per basic and diluted common share, for the six months ended June 30, 2013 as compared to a net loss attributable to common stockholders of $30,134, or $0.00 per basic and diluted common share, for the 2012 period. The total net loss of $908,673 for the six months ended June 30, 2013 represents a consolidated net loss, which includes a net loss of $326,373 attributable to Mieka LLC. The 2012 total net income of $347,767 represents a consolidated net income that includes a net income of $377,901 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

 

The Company evaluated the ability to continue as a going concern through the year ended December 31, 2013 due to the following factors:

 

·

recurring operating losses;

·

working capital deficiencies;

·

negative cash flows from operating activities; and

·

accumulated deficits.

 

Cash and cash equivalents totaled $521,778 as of June 30, 2013, as compared to $358,519 as of December 31, 2012. As of June 30, 2013, we had a working capital deficit of $6,390,884, which consisted of $1,853,381 of current assets offset by $8,244,265 of current liabilities. Current assets as of June 30, 2013 included cash of $521,778, prepaid drilling costs of $1,252,737, accounts receivable (net) of $48,936, and deferred income tax of $29,930. Current liabilities as of June 30, 2013 included deferred revenue of $7,838,223, accounts payable and accrued liabilities of $315,067, payable to affiliate of $67,454, payable to shareholders of $12,319 and current portion of note payable of $11,202.

 

As of December 31, 2012, we had a working capital deficit of $4,965,172, which consisted of $1,182,650 of current assets offset by $6,147,822 of current liabilities. Current assets as of December 31, 2012 included cash of $358,519, prepaid drilling costs of $455,009, receivable from affiliate of $280,046, accounts receivable of $59,146 and deferred income tax of $835,275. Current liabilities as of December 31, 2012 included deferred revenue of $5,796,556, accounts payable and accrued liabilities of $298,095, payable to stockholders of $45,319, and current portion of note payable of $7,852.

 

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 in commercial quantities); 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 in commercial quantities) 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 in commercial quantities).

 

 

Cash provided by operating activities was $603,317 for the six months ended June 30, 2013, compared to $1,059,215 used in operating activities for the six months ended June 30, 2012.

 

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 impairments of assets, 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 $46.4 million from outside investors in 32 joint ventures that drilled 168 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.

 

Our plan to generate cash flows to meet ongoing drilling obligations and fund general and administrative expenses through the remainder of 2013 is to execute the following:

 

·

continue to generate turnkey drilling revenues and profits;

·

obtain carried interests in wells drilled by new joint ventures; and

·

directly participate in wells drilled in the Marcellus Shale, Utica Shale and oil sands in New York and Pennsylvania.

 

The selling price for natural gas we produce has decreased over the past couple of years. However, the prices have increased approximately 50% thus far in 2013, and natural gas futures indicate continuing improved performance over the next several years. The Company’s current drilling joint venture, the 2011 Mieka/Jefferson-Cattaraugus Oil & Gas Project A, includes four oil wells in addition to one gas well. The Zlomek #2 H-1 horizontal oil well, located in Cattaraugus County, New York, was completed in the quarter ended September 30, 2012. The Kruger Thomas vertical gas well, located in Jefferson County, New York, is expected to be completed by the end of the year. The Potter Lumber 2 #1 horizontal oil well, located in Cattaraugus County, New York, has been completed in the third quarter of 2013. Two additional horizontal oil wells, to be located in Cattaraugus County, New York, have been permitted, and preparations to begin drilling are in process.

 

Our revenues and cash flow could be adversely impacted by lower natural gas and crude oil prices and we are presently not participating in any hedging activities. Although gas prices have been depressed over the past couple of years, they have been increasing in 2013 and based on natural gas futures we expect continuing improved performance. Oil prices have been steady and we expect this trend to continue.

 

We may not be able to raise additional capital or generate turnkey drilling revenues or profits in amounts sufficient to fund ongoing drilling obligations and general and administrative expenses. If we cannot continue to raise additional capital or start generating sufficient cash flow from operations, we may have to significantly delay the timing of expenditures for drilling and/or administrative expenses to meet our current obligations or consider curtailing operations. Although we typically retain a significant degree of control over the timing of our capital expenditures, we may not always be able to defer or accelerate certain capital expenditures to address any potential liquidity issues, although largely discretionary. The Company has been able to generate significant funds from the sale of interests in its joint ventures in 2013 to allow us to continue as a going concern, including a total of $735,000 from July 1, 2013 through September 30, 2013. We expect to continue to generate additional investment to fund operations through the year ended December 31, 2013; however, we cannot give any assurance of our ability to do so.

 

Cash flows used in investing activities was $433,295 and 5,347 for the six months ended June 30, 2013 and 2012, respectively. This represents primarily cash used for additions to oil and gas properties, as well as additions to property and equipment.

 

Cash flow generated from financing was $35,000 and $0 in the six months ended June 30, 2013 and 2012 respectively.

 

We cannot give any assurance that we will be able to raise additional equity capital or generate sufficient cash flow from operations to fund operations or 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 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.

 

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 June 30, 2013, 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 June 30, 2013. However, management has taken significant steps to improve its disclosure controls and procedures over the last year. The Company has engaged a new Chief Financial Officer, Vice President of Finance, and Accounting Manager to review control deficiencies, implement accounting controls, and provide multiple levels of review of financial information. A new oil & gas accounting software system has been implemented to provide more accurate and detailed financial information. A formal monthly accounting close process has been implemented. Management continues to take steps to improve its disclosure controls and procedures in 2013.

 

Changes in Internal Control over Financial Reporting

 

There were no changes in our internal control over financial reporting during the quarter ended June 30, 2013 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Part II - Other Information

 

Item 1.     Legal Proceedings.

 

Not applicable.

 

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

 

*

Pursuant to Rule 406T of Regulation S-T, these interactive data files are not deemed filed or part of a registration statement or prospectus for purposes of Section 11 or 12 of the Securities Act or Section 18 of the Securities Exchange Act and otherwise not subject to liability

 

 

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:  October 17, 2013	By: /s/ Daro Blankenship
	Daro Blankenship
	President and Chief Executive Officer
	(principal executive officer)
Date:  October 17, 2013	By: /s/ Martin N. Mayrath
	Martin N. Mayrath
	Chief Financial Officer
	(principal financial officer)