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EX-32.1 - EXHIBIT 32.1 - Rock Energy Resources, Inc.v307904_ex32-1.htm
EX-31.2 - EXHIBIT 31.2 - Rock Energy Resources, Inc.v307904_ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - Rock Energy Resources, Inc.v307904_ex31-1.htm
EX-32.2 - EXHIBIT 32.2 - Rock Energy Resources, Inc.v307904_ex32-2.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

For the quarterly period ended June 30, 2011

or

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

 

Commission file # 0-23022

 

ROCK ENERGY RESOURCES, INC.

(Exact name of registrant as specified in its charter)

 

Delaware   11-2740461
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)
     
2607 Sara Ridge    
Katy, TX   77450
(Address of principal executive offices)   (Zip Code)

 

Registrant’s telephone number, including area code: (832) 301-5968

 

Securities registered pursuant to Section 12(b) of the Act: None.

 

Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $0.0001 per share

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ¨  No  x

 

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 ¨  No  x

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ¨ Accelerated filer ¨
Non-accelerated filer ¨ Smaller reporting company x

 

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

 

As of February 29, 2012, the registrant had 196,024,149 shares of its Common Stock outstanding.

 

 
 

 

Forward-Looking Information

 

We make forward-looking statements throughout this report and the documents included or incorporated by reference in this prospectus.  Whenever you read a statement that is not simply a statement of historical fact (such as statements including words like “believe,” “expect,” “anticipate,” “intend,” “plan,” “seek,” “estimate,” “could,” “potentially” or similar expressions), you must remember that these are forward-looking statements, and that our expectations may not be correct, even though we believe they are reasonable.  The forward-looking information contained in this prospectus or in the documents included or incorporated by reference in this prospectus is generally located in the material set forth under the headings “Risk Factors,” “Business,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” but may be found in other locations as well.  These forward-looking statements generally relate to our plans and objectives for future operations and are based upon our management’s reasonable estimates of future results or trends.  These statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, some of which are beyond our control and difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements. In evaluating forward-looking statements, you should carefully consider the risks and uncertainties described in “Risk Factors” and elsewhere in this document and such risk factors include, among others, the following:

 

·our success in development, exploitation and exploration activities;

 

·our ability to make planned capital expenditures;

 

·declines in our production of oil and gas;

 

·prices for oil and gas;

 

·our ability to raise capital;

 

·political and economic conditions in oil producing countries, especially those in the Middle East;

 

·price and availability of alternative fuels;

 

·our acquisition and divestiture activities;

 

·weather conditions and events;

 

·the proximity, capacity, cost and availability of pipelines and other transportation facilities; and

 

·other factors discussed elsewhere in this prospectus and the documents incorporated by reference in this prospectus.

 

All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements and risk factors contained in this document. Forward-looking statements contained in this document reflect our view only as of the date of this document.  We undertake no obligation, other than as required by law, to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

References to "Rock” "we," "us," "our" and similar references or like terms refer to Rock Energy Resources, Inc. and references to “Rock Energy” or “REP” refer to Rock Energy Partners, L.P. and its subsidiaries.

 

 
 

 

Part I — Financial Information

 

ROCK ENERGY RESOURCES, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

   June 30, 2011   December 31,
2010
 
ASSETS          
Current Assets          
Cash  $-   $9,461 
Total Current Assets   -    9,461 
           
Investment in Santa Maria Properties   1,263,792    1,263,792 
TOTAL ASSETS  $1,263,792   $1,273,253 
           
LIABILITIES AND STOCKHOLDERS' DEFICIT          
Current Liabilities          
Accounts payable and accrued liabilities  $780,251   $780,251 
Accounts payable and accrued liabilities to related parties   440,000    185,000 
Accrued interest   8,834    8,834 
Notes payable   2,077,500    2,077,500 
Notes payable, related parties   1,062,000    1,062,000 
Total Current Liabilities   4,368,585    4,113,585 
           
Stockholders' Deficit          
Series A Convertible Non-Redeemable Preferred Stock, $0.0001 par value, 10,000,000 shares authorized, no shares outstanding, $1,000 per share liquidation preference   -    - 
Common Stock: 500,000,000 shares of $0.0001 par value authorized; 125,433,691 and 125,433,691 shares issued and outstanding as of June 30, 2011 and December 31, 2010, respectively   12,543    12,543 
Additional paid in capital   45,823,558    45,733,526 
Accumulated deficit   (48,940,894)   (48,586,401)
Total stockholders' deficit   (3,104,793)   (2,840,332)
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT  $1,263,792   $1,273,253 

 

The accompanying notes are an integral part of these unaudited financial statements.

 

 
 

 

ROCK ENERGY RESOURCES, INC.

CONOLSIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

   Six months ended June 30,   Three months ended June 30, 
   2011   2010   2011   2010 
                 
OPERATING EXPENSES:                    
General and administrative  $354,493   $256,610   $172,516   $130,309 
Total operating expenses   354,493    256,610    172,516    130,309 
LOSS FROM OPERATIONS   (354,493)   (256,610)   (172,516)   (130,309)
                     
OTHER EXPENSES:                    
Interest expense   -    (506,258)   -    (253,118)
                     
Loss from continuing operations   (354,493)   (762,768)   (172,516)   (383,427)
                     
Loss from discontinued operations, net of tax   -    (18,789)   -    (7,254)
                     
Net Loss  $(354,493)  $(781,557)  $(172,516)  $(390,681)
                     
Basic and diluted net loss per common share:                    
From continuing operations  $(0.00)  $(0.01)  $(0.00)  $(0.01)
From discontinued operations  $(0.00)  $(0.00)  $(0.00)  $(0.00)
Basic and diluted net loss per common share  $(0.00)  $(0.01)  $(0.00)  $(0.01)
                     
Basic and diluted weighted average shares outstanding   125,433,691    76,905,331    125,433,691    77,298,750 

 

The accompanying notes are an integral part of these unaudited financial statements

 

 
 

 

ROCK ENERGY RESOURCES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOW

(Unaudited)

 

   Six months ended June 30, 
   2011   2010 
CASH FLOWS FROM OPERATING ACTIVITIES          
           
Net loss  $(354,493)  $(781,557)
Adjustments to reconcile net loss to net cash used in operating activities          
Stock based compensation   90,032    184,600 
Changes in assets and liabilities:          
Accounts payable and accrued liabilities   -    21,745 
Accrued liabilities - related party   255,000    - 
Accrued interest payable   -    506,288 
Net cash provided by (used in) operating activities   (9,461)   (68,924)
           
CASH FLOWS FROM FINANCING ACTIVITIES          
Proceeds from sale of stock, net of offering costs   -    45,000 
Borrowings of third party debt   -    20,000 
Payments of third party debt   -    (3,000)
Net cash provided by financing activities   -    62,000 
           
Net change in cash   (9,461)   (6,924)
Cash and cash equivalents at beginning of period   9,461    18,163 
Cash and cash equivalents at end of period  $-   $11,239 
           
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION          
           
Cash paid for interest:  $-   $- 
Cash paid for income taxes:  $-   $- 

 

The accompanying notes are an integral part of these unaudited financial statements

 

 
 

 

ROCK ENERGY RESOURCES, INC.

STATEMENT OF SHAREHOLDERS’ EQUITY

(Unaudited)

 

       Additional         
   Common Stock   Paid-In   Accumulated     
   Shares   Par   Capital   Deficit   Total 
BALANCE, December 31, 2010   125,433,691   $12,543   $45,733,526   $(48,586,401)  $(2,840,332)
                          
Stock based compensation   -    -    90,032    -    90,032 
                          
Net loss   -    -    -    (354,493)   (354,493)
                          
BALANCE, June 30, 2011   125,433,691   $12,543   $45,823,558   $(48,940,894)  $(3,104,793)

 

The accompanying notes are an integral part of these unaudited financial statements.

 

 
 

 

ROCK ENERGY RESOURCES, INC

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2011

 

 

NOTE 1 — ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Rock Energy Resources, Inc. (the “Company”, “we”, “our”, “Rock”) was formed on April 16, 2004 as a Delaware limited partnership and was engaged in the acquisition, exploration, and development of onshore properties in the United States for the production of crude oil, condensates and natural gas. The Company’s properties were located in Texas and California.

 

We became severely constrained in our cash and in 2009 were forced to discontinue our working interest oil and gas operations. We traded our California properties in exchange for a small stock interest in a private oil and gas company which has operated these interests since that time. Until December 2011, we had no operations.

 

During the second half of 2011, we shifted our focus from oil and natural gas operations to the evaluation of possible minerals acquisitions. Towards that end, we began due diligence on a joint venture opportunity with Colorado-based Red Arrow Gold Corporation (“RAGC”). RAGC had spent the past eight years refurbishing the Red Arrow Mine located in Mancos, Colorado.

 

Consequent to these efforts on December 14, 2011, a $25 million financing (the“Facility”) was closed into the then privately held American Patriot Gold, Inc. (“APG”). On December 20, 2011, APG was merged into our Company as a wholly owned subsidiary. Under the agreement previously reached between APG and RAGC, APG earned a 49% interest in the Red Arrow Mine and all related equipment, facilities, leases, surface rights, and mining claim.

 

Principles of consolidation — The consolidated financial statements include the results of Rock Energy Resources, Inc. and its wholly owned subsidiaries. All significant intercompany accounts have been eliminated in consolidation.

 

Use of estimates — The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosures of contingent assets and liabilities. Actual results could differ from the estimates.

 

Interim Financial Statements – The accompanying unaudited interim financial statements include all adjustments, which in the opinion of management are necessary in order to make the accompanying financial statements not misleading, and are of a normal recurring nature.  However, the accompanying unaudited financial statements do not include all of the information and footnotes necessary for a complete presentation of financial position, results of operations, cash flows and stockholders’ equity in conformity with generally accepted accounting principles.  Except as disclosed herein, there has been no material change in the information disclosed in the notes to the financial statements included in our annual financial statements for the period ended December 31, 2010 included in Form 10-K.  Operating results for the period ended June 30, 2011 are not necessarily indicative of the results that can be expected for the fiscal year ending December 31, 2011.

 

Cash and cash equivalents — Highly liquid investments with original maturities of less than three months are considered cash equivalents and are stated at cost which approximates market value.

 

Recently issued accounting pronouncements — We do not expect the adoption of recently issued accounting pronouncements to have a significant impact on our results of operations, financial position or cash flow.

 

NOTE 2 — RELATED PARTY TRANSACTIONS

 

During 2011, various officers and directors of the Company paid expenses on behalf of the Company and accrued unpaid salaries. These amounts are included in accrued liabilities to related parties in the consolidated balance sheet as of June 30, 2011 and December 31, 2010.

 

NOTE 3 – STOCKHOLDERS’ EQUITY

 

During six months ended June 30, 2011 and 2010, we recognized stock option expense of $90,032 and $184,600, respectively.

 

NOTE 4. – SUBSEQUENT EVENTS

 

Acquisition of American Patriot Gold, Inc.

 

On December 20, 2011, the Company closed its acquisition of 100% of the equity interests of privately held He-Man, LLC. He-Man’s principal asset is a 49% interest in the Red Arrow gold mine located in Mancos, Colorado. Subsequent to the acquisition, the Company changed the name of He-Man, LLC to American Patriot Gold.

  

 
 

 

The Company issued 13,983,332 shares of common stock for the acquisition of He-Man, LLC. The shares were valued at $0.11 per share based on the closing price of the stock on the date of acquisition. The purchase price of $4,305,166 includes the assumption of accrued liabilities to the former He-Man, LLC shareholders of $267,000 and a note payable of $2,500,000. The fair value of the stock on the grant date was $1,538,166. The purchase included the assumption of debt and assets including cash and mineral properties. The acquisition price was allocated to the assets acquired and liabilities assumed based upon their estimated fair values. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition: 

 

   Amount 
Cash  $1,502,626 
Undeveloped mineral properties   2,802,540 
Total assets acquired   4,305,166 
      
Accrued liabilities   267,000 
Note payable   2,500,000 
Net assets acquired  $1,538,166 
      
Common stock issued to He-Man, LLC shareholders   1,538,166 
      
Total purchase price  $1,538,166 

 

On December 14, 2011, our subsidiary American Patriot Gold closed a $25 million lending facility with Maximilian Investors LLC of New York (“Maximilian”). The loan matures December 14, 2013 and bears interest at 18% per year. Interest will be payable monthly beginning 120 days after the closing date of the loan. In addition we will pay a monthly commitment fee of 0.60% of outstanding advances. The commitment fee accrues beginning on December 14, 2011 and is payable monthly on the first of each month beginning 120 days after the closing date of the lending facility. As of December 31, 2011, we have borrowed $2,500,000 under the facility. In connection with the lending facility, we issued 18,865,520 shares of common stock to Maximilian and gave Maximilian a put option which would allow Maximilian to sell back its shares to the Company for $0.20 per share. The option is exercisable for 9,432,760 shares during each of the years ending December 31, 2012 and 2013.

 

The loan is secured by our entire investment in Santa Maria Properties.

 

During January and February 2012, we issued 8,480,000 shares of common stock for the conversion of current notes payable in the amount of $645,000.

 

In February 2012, we borrowed an additional $1,261,000 under our lending facility with Maximilian.

 

Stockholders’ Equity

 

Additional subsequent events related to stockholders’ equity are as follows:

 

·On August 15, 2011, we signed employment agreements with Rocky Emery and Mark Harrington under which we agreed to issue 10,000,000 and 3,000,000 shares of common stock respectively. In addition, we agreed to issue 9,500,000 shares of common stock to Mr. Emery for services to the Company. The shares were valued at $247,500 based on the closing market price of the stock on the date of the agreements.
·On November 21, 2011, we signed an employment agreement with Craig Liukko to serve as our Chief Operating Officer and a Director, and agreed to issue to him 3,000,000 restricted common shares which have not yet been issued.

 

 
 

 

Item 2. Management's Discussion and Analysis or Plan of Operations

 

The following discussion and analysis of our plan of operation should be read in conjunction with the financial statements and the related notes. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Our actual results and the timing of certain events could differ materially from those anticipated in these forward-looking statements.

 

Rock Energy Resources, Inc. (“the Company”) was formed on April 16, 2004 as a Delaware limited partnership and is engaged in the acquisition, exploration, and development of onshore properties in the United States for the production of crude oil, condensates and natural gas. The Company’s properties were located in Texas and California. The produced condensate and natural gas was sold to petroleum marketers.

 

During the second half of 2011, we shifted our focus from oil and natural gas operations to the evaluation of possible minerals acquisitions. Towards that end, we began due diligence on a joint venture opportunity with Colorado-based Red Arrow Gold Corporation (“RAGC”). RAGC had spent the past eight years refurbishing the Red Arrow Mine located in Mancos, Colorado. The Red Arrow mine had distinguished itself on several fronts. First, it is the discovery that is often credited with kicking off the Colorado gold rush in the late 1930s. Second, its yields of gold were consistently in excess of 1 ounce per ton, and often contained substantial gold nuggets, in one case a single nugget weighing 5.5 pounds. After investing approximately $8 million in mine refurbishment over six years, RAGC was seeking outside funding for up to $25 million to finance the full development of its mining interests, in particular the highly prospective Red Arrow mine.

 

Consequent to these efforts on December 14, 2011, a $25 million financing (“the Facility”) was closed into the then privately held American Patriot Gold, Inc. (“APG”). On December 20, 2011, APG was merged into our Company as a wholly owned subsidiary. The Facility and its terms are discussed more fully in Item 8 of this Form 10-K. Under the agreement previously reached between APG and RAGC, APG earned a 49% interest in the Red Arrow Mine and all related equipment, facilities, leases, surface rights, and mining claim. The Red Arrow Mine, its history and current operations profile is discussed in Mining Properties – Red Arrow Mine below. All the related assets we acquired a 49% interest in are discussed in Mining Properties – Red Arrow Mine below.

 

In furtherance of our strategy to focus on mining operations, and the development of the Red Arrow mine and related claims in particular, on February 2, 2012 we entered into a Letter of Intent to acquire the remaining 51% interest in the assets of RAGC. Under the terms of the LOI, a closing is anticipated to occur prior to the end of May, 2012. Following such closing, all the current employees of RAGC will become employees of our Company or its APG subsidiary.

 

We are tightly focused on the exploration and development of the significant reserve potential located on the existing RAGC claims and leases. Towards that end, we have increased our leases and patented claims from 390 acres at the end of 2011, to 790 acres currently.

 

In February, 2012 we began initial milling operations at the mine. During the same month, a survey of our holdings was completed and evaluation of those results is underway. Initial interpretations show our land holdings to have considerable promise. Once we have completed our survey evaluation, we intend to initiate core drilling on our properties to more fully delineate our resource base and determine quantities of proven and probable reserves. Core drilling is anticipated to begin in April 2012. We believe our potential reserves on the properties acquired to date are in the range of 1.5 – 4.0 million ounces of gold, plus as yet to be determined quantities of platinum and silver.

 

As we work to ascertain our reserves of gold and other minerals, we are rapidly moving to build our cash flows for our shareholders and financial partners. Our first sales of bullion products are anticipated to occur before the end of April, 2012. Our milling operations will be significantly expanded from the current 3-5 tons per day from the initial mill to up to 200 tons per day from a much larger mill we expect to complete construction of in late March, 2012. Two additional mills have been budgeted for over the course of the next eighteen months. Anticipated cash flows from our mining operations together with drawdowns under our Facility should fully finance our expansion plans.

 

While we fully develop our valuable Red Arrow mining assets, we are continuing to seek avenues for the monetization of our remaining oil and gas holding, a 3.5% membership interest in Santa Maria pacific Holdings, LLC (“SMPH”). As described more fully in Footnote 3 to our financial statements, in June, 2009 we elected to exchange our working interests in our California oil properties into privately held SMPH. We consider that asset to be a potential source of cash to further supplement our financial resources in pursuit of our core business in the mining sector.

 

Mining Properties – Red Arrow Mine

 

Historical Background

 

The Red Arrow Mine has historically produced commercial grade gold and silver ore. According to "Geological Survey Professional Paper No. 219" (1949), Page 161, entitled, "Production of Red Arrow Mine", a total of 621 tons were produced from 1933-1937, which yielded 4,114.5 oz. Au (gold) and 6,928 oz. Ag (silver). The average grade of ore based on these figures yielded 6.62 oz. gold per ton and 11.15 oz. silver per ton. Limited production continued after the reporting period to 1942, with an overall average ore grade from 10,146 tons reported as 1.09 oz. gold per ton and 1.6 oz. silver per ton. (US Geological "Professional Paper 219" provides more detailed information).

 

 
 

 

Location and Access

 

We are a Production Stage mining company with executive offices based in Houston, Texas. Our mining operations are carried out at the Red Arrow Mine, located in Montezuma County, Colorado, approximately 9 miles northeast of the town of Mancos, Colorado. The current Red Arrow Mine property consists of 370 acres of patented mining claims (deeded land with mineral rights) and an additional 15 unpatented mining claims. The Company has also purchased 120 acres of private mineral rights bordering its patented properties. Approximately $8 million has been invested to purchase the properties and equipment and upgrade the entire infrastructure of the mine. American Patriot Gold, Inc. currently holds a 49% ownership position in the mineral assets including all mining and milling equipment.

 

Snow removal equipment enables easy year round access to the Mine via public roadways. Offsite pilot scale milling operations commenced in February 2012. Our planned 200 ton per day milling facility will be located at the mine site with power to be supplied by a Tier 4 diesel generator. Bullion products from concentrate are anticipated to occur prior to April 15, 2012.

 

Current Geological and Assay Data

 

After purchase of the Red Arrow and Outwest properties in 1988, historical maps and assay data completed by former owners was evaluated and cross checked by sampling. Extensive sampling of the Gold Run and Old Mill Levels has given direction for primary ore production. In the current area of ore production, approximately 200 ft. in length along the strike of the vein, the ore has averaged over 1 oz. gold per ton. In the last area of production, a raise from the Gold Run Level to the Old Mill Level ranged from 6 inches to 5 ft. in width (30 in. width average).

 

Favorable results have also been obtained in the footwall and hanging wall of the vein structure. Assays have ranged from less than 1⁄4 oz. to 16 oz. gold per ton. The values in these structures increase with the presence of silicified and brecciated sandstone. As was proven in the past, it is anticipated along with continued development, high grade pockets of ore will be encountered substantially increasing overall values.

 

Possible Overall Reserves

 

Assuming an overall average ore grade of $1,560.00 per ton, the Red Arrow vein portion of the property could yield over 408,500 tons of ore yielding gross revenues of $637,260,000. The Company expects, at a minimum, to achieve a production cost per ton of $450.00. Total production costs would be $183,825,000. The overall pre-tax net operating income would be $453,435,000.

 

Other Potential

 

Permits and bonding are in place for a core drilling program. The primary target is not the Red Arrow Vein, but an intrusive sulphide deposit that may have depth potential of over 5,000 ft. below the surface according to the late PhD Geologist John Awald. In addition to his research at the Red Arrow Mine, he conducted an intense investigation of the La Plata Mining District which led to his purchase of a major mining property in close proximity. Core drilling of that property was very positive. Newly discovered surface outcrops and recently drilled core containing gold, silver, copper and platinum group metals (PGMs) on the Red Arrow Dome support the need for core drilling. This intrusive sulphide deposit could have potential of over 1,000,000 tons of high grade ore including high concentrations of PGMs.

 

In addition to lode (underground) potential, the Company owns approximately two miles of placer mining rights in the East Mancos drainage. According to a 2007 GIS Report, the East Mancos River contained the highest gold and arsenic concentrations from 41 stream sediment samples taken in the La Plata Mining District. The East Mancos River is on Colorado's endangered river list due to high concentrations of copper. Copper, gold, silver and arsenic are closely associated in the District.

 

Further testing and development of other areas at the Red Arrow Mine are anticipated and may add substantially to the Company's reserves. Significant concentrations of platinum group metals (PGMs) in the Red Arrow Vein, recent core samples, and from surface samples on the Dome could also add significant value. Existence of other veins on Red Arrow property has been revealed. The Company has not gathered sufficient data to form an opinion although assaying of samples has commenced and further testing is warranted.

 

Other Assets at the Red Arrow Mine

 

In January 2011, RAGC commissioned Richard A Eaman, a Professional Extractive Metallurgist, to perform a third party review of the assets associated with the Red Arrow Mine, as well as the ore bodies themselves. As regards to the property, equipment and other assets at the Red Arrow Mine, Mr. Eaman reported the following valuations:

 

 

Red Arrow Development (Underground, Roads & Structures)  $2,500,000 
Permits and Permit Amendments  $136,550 
Equipment  $714,944 

 

See Independent Report and Analysis of the Red Arrow Mine , dated January, 2012, by Richard A. Eamon and Hazen Research, filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the U.S. Securities and Exchange Commission on January 9, 2012.

 

 
 

 

Since the date of that appraisal, and as of March 12, 2012, RAGC has invested an additional $900,000 in its initial 3-5 ton per day mill and other related equipment.

 

Plan of Operations

 

In furtherance of our strategy to focus on mining operations, and the development of the Red Arrow mine and related claims in particular, on February 2, 2012 we entered into a Letter of Intent to acquire the remaining 51% interest in the assets of RAGC. Under the terms of the LOI, a closing is anticipated to occur prior to the end of May, 2012. Under the existing LOI, we expect to require cash in order to pay RAGC $10,000,000 cash, $3,500,00 of which amount is due at closing, with the balance accruing interest at the rate of 5% per annum and payable monthly in the amount of $200,000 as well as to pay additional operating costs of the mine. We will need to draw additional funds on our Maximilian Credit Agreement or obtain other sources of financing for this transaction.

 

In addition, we expect to require approximately $6.5 million for investment in mining facilities and exploration cost at the Red Arrow Mine in the coming 18 months.

 

While we fully develop our valuable Red Arrow mining assets, we are continuing to seek avenues for the monetization of our remaining oil and gas holding, a 3.5% membership interest in Santa Maria pacific Holdings, LLC (“SMPH”). As described more fully in Footnote 3 to our financial statements, in June, 2009 we elected to exchange our working interests in our California oil properties into privately held SMPH. We consider that asset to be a potential source of cash to further supplement our financial resources in pursuit of our core business in the mining sector.

 

Results of Operations

 

For the Six months Ended June 30, 2011 Compared to the Six months Ended June 30, 2010

 

General and Administrative Expense

 

General and administrative expense increased to $354,493 in 2011 versus $256,510 in 2010.  General and administrative expense increased in 2011 relative to 2010 because of overall decreased expenses as a result of the accrued officer salaries in 2011. General and administrative expenses for the six months ended June 30, 2011 were primarily made up of accrued and unpaid officer salaries and amortization of stock option expense. During 2010, these expenses were paid through the issuance of common stock.

 

Interest Expense

 

Interest expense was $506,258 during the six months ended June 30, 2010. There was no interest expense during the same period of 2011. Interest expense decreased due to the forgiveness of the Company’s then outstanding Senior Secured Debt in 2010.

 

Net Loss from Continuing Operations

 

We generated a net loss from continuing operations of $354,493 during the six months ended June 30, 2011 as compared to a loss of $762,768 in the same period of 2010. The decrease in the net loss from continuing operations is directly related to the decrease in general and administrative expense and interest expense discussed above.

 

Loss from Discontinued Operations

 

We generated a loss from discontinued operations of $18,789 in 2010. There was no income or loss from discontinued operations during the six months ended June 30, 2011.

 

For the Three Months Ended June 30, 2011 Compared to the Three Months Ended June 30, 2010

 

General and Administrative Expense

 

General and administrative expense increased to $172,516 in 2011 versus $130,309 in 2010.  General and administrative expense increased in 2011 relative to 2010 as a result of accrued officer salaries. General and administrative expenses for the three months ended June 30, 2011 were primarily made up of accrued and unpaid officer salaries and amortization of stock option expense. During 2010, these expenses were paid through the issuance of common stock.

 

Interest Expense

 

Interest expense was $253,118 during the three months ended June 30, 2010. There was no interest expense during the same period of 2011. Interest expense decreased due to the forgiveness of the Company’s then outstanding Senior Secured Debt in 2010.

 

 
 

 

Net Loss from Continuing Operations

 

We generated a net loss from continuing operations of $172,516 for the three months ended June 30, 2011 as compared to a loss of $383,427 in the same period of 2010. The decrease in the net loss from continuing operations is directly related to the decrease in general and administrative expense and interest expense discussed above.

 

Loss from Discontinued Operations

 

We generated a loss from discontinued operations of $7,254 during the three months ended June 30, 2010. There was no income or loss from discontinued operations during the three months ended June 30, 2011.

 

Liquidity and Capital Resources

 

Since the beginning of 2008, we have funded our operations primarily with funds received in the form of short term loans, through the sale of equity securities and with a decreasing amount of revenue received from our discontinued oil and gas operations.

 

Rock’s sources of capital going forward will primarily be cash from the $25 million lending facility from Maximilian Investors LLC (“Maximilian”) as well as internally generated cash flow from operations. Through December 31, 2011, we have borrowed $2.5 million of the $25 million available. In the coming 18 months, we expect to require approximately $6.5 million for investment in mining facilities and exploration cost at the Red Arrow Mine. In addition, we expect to require additional cash to acquire the remaining 51% interest in the Red Arrow Mine. We expect to begin generating revenue from the Red Arrow Mine during the first half of 2012 and to realize positive cash flows from operating activities by the end of 2012.

 

We expect that cash flows from operating activities will become positive by the second half of 2012. Our cash flow from operations will depend heavily on the prevailing price of gold and our production volumes. Future gold price declines would have a material adverse effect on our overall results, and therefore, our liquidity. Falling gold prices could also negatively affect our ability to raise capital on terms favorable to us or at all. 

 

As of June 30, 2011, we had no cash on hand. We expect to partially fund our operations for the coming year using cash generated from sales of gold. We expect that this will leave a shortfall of approximately $8 million which we plan to fund through additional borrowings under the Maximilian lending facility and potentially sales of common stock.

  

Item 4. Controls and Procedures.

 

(a)      Evaluation of Disclosure Controls and Procedures.

 

The Company’s Chief Executive Officer and Chief Financial Officer has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the fiscal period ended June 30, 2011 covered by this Quarterly Report on Form 10-Q. Based upon such evaluation, the Chief Executive Officer and Chief Financial Officer has concluded that, as of the end of such period, the Company’s disclosure controls and procedures were not effective as required under Rules 13a-15(e) and 15d-15(e) under the Exchange Act.

 

As of June 30, 2011, management assessed, with the participation of the Chief Executive Officer and Chief Financial Officer, the effectiveness of our internal control over financial reporting based on the criteria set forth in Internal Control – Integrated Framework for effective internal control over financial reporting established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") and SEC guidance on conducting such assessments.  Based on that evaluation, they concluded that, during the period covered by this report, such internal controls and procedures were not effective as more fully described below.  Based on management’s assessment over financial reporting, management believes as of June 30, 2011, the Company’s internal control over financial reporting was not effective due to the following deficiencies:

 

Weakness in Our Control Environment.  We did not maintain an effective control environment necessary to promote effective internal control over financial reporting throughout the organization. Because of insufficient resources, we were not able to retain qualified financial and accounting personnel to timely prepare our Company’s accurate and reliable financial statements in accordance with generally accepted accounting principles. Due to this control environment weakness, the Company:

 

-Was unable to effectively maintain its accounting and financial reporting for the years 2011, 2010 and 2009 on a timely and efficient manner, lacking the qualified personnel to prepare and then review financial statements and significantly accounting transactions during these subject periods, and;

 

-Was not able to maintain an accounting policy and protocol that permitted timely review and updating of our Company accounting policies and procedures, as well as able to evaluate significant Company transactions during these subject periods.

 

Pending remediation of these material weaknesses, there is a reasonable possibility that a material misstatement in our financial statements may not be detected or prevented on a timely basis. We have retained qualified financial and accounting consultants to assist in the preparation of the financial statements contained in this Form 10-Q and other delinquent reports. We anticipate retaining experienced and qualified financial and accounting personnel to supervise our accounting function in the immediate future.

 

 
 

 

Notwithstanding the above identified deficiencies that constitute our material weakness, based on a number of factors, including the performance of additional procedures performed by management designed to ensure the reliability of our financial reporting, our Chief Executive Officer and Chief Financial Officer believe that the consolidated financial statements included with this periodic report fairly present, in all material respects, our financial position, results of operations, and cash flows as of the dates, and for the periods, presented, in conformity with United States Generally Accepted Accounting Principles.

 

Changes in Internal Controls over Financial Reporting

 

Other than as stated above, during the quarter ended June 30, 2011, there have been no changes in the Company’s internal control over financial reporting that have materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

Part II. Other Information

 

Item 1. Legal Proceedings

 

No director, person nominated to become a director, executive officer, promoter or control person of our company has, during the last ten years: (i) been convicted in or is currently subject to a pending a criminal proceeding (excluding traffic violations and other minor offenses); (ii) been a party to a civil proceeding of a judicial or administrative body of competent jurisdiction and as a result of such proceeding was or is subject to a judgment, decree or final order enjoining future violations of, or prohibiting or mandating activities subject to any federal or state securities or banking or commodities laws including, without limitation, in any way limiting involvement in any business activity, or finding any violation with respect to such law, nor (iii) any bankruptcy petition been filed by or against the business of which such person was an executive officer or a general partner, whether at the time of the bankruptcy or for the two years prior thereto.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

See Item 5 in our Form 10-K for the years ended December 31, 2011, 2010 and 2009, filed with the Commission on March 19, 2012, and incorporated by reference herein..

 

Item 3. Default Upon Senior Notes

 

Not applicable.

 

Item 5. Other Information

 

None.

 

Item 6. Exhibits

 

Exhibit Description

 

ITEM 15. EXHIBITS

 

  (a) Exhibits

 

 
 

 

Exhibit No.   Description
3.1   Articles of Incorporation of the registrant(1)
3.2   Bylaws of registrant(1)
4.1   2009 Stock Grant and Option Plan (3)
4.2   Independent Report and Analysis of the Red Arrow Mine , dated January, 2012, by Richard A. Eamon and Hazen Research, filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the U.S. Securities and Exchange Commission on January 9, 2012, and incorporated by reference herein.
10.1   Asset Purchase Agreement between Hanover Gold Company, Inc. and Rock Energy Partners L.P(2)
10.2   Administrative Services Agreement with 4R Oil and Gas, LLC(2)
10.3   Base Working Interest Purchase Agreement with SMP(2)
10.4   Option to Purchase Additional Working Interests with SMP(2)
10.5   Form of Hanover Stockholder Lock-Up Agreement(2)
10.6   Consulting Agreement with Weston Capital Quest Corporation(2)
10.7   Consulting Agreement with Source Capital Group(2)
10.8   Stock Purchase Agreement (Perm Energy Advisers, Inc)
10.9   Registration Rights Agreement (Perm Energy Advisers, Inc)
10.10   Voting Agreement (Perm Energy Advisers, Inc)
10.11   Warrant Certificate (Perm Energy Advisers, Inc)
10.12   Letter of Intent, dated January 31, 2012, by and between Red Arrow Gold Corporation and Registrant, filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the Commission on February 2, 2012, and incorporated by reference herein
10.13   Employment Agreement, dated August 15, 2011, by and between Rocky V. Emery and Registrant
10.14   Employment Agreement, dated August 15, 2011, by and between Mark G. Harrington and Registrant
10.15   Employment Agreement, dated November 15, 2011, by and between Craig Liukko and Registrant
10.16   Loan and Security Agreement, dated as of December 14, 2011, by and between HE-MAN LLC, as Borrower, and Maximilian Investors LLC, as Lender, filed as an exhibit to Registrant’s Current Report on Form 8-K filed with the U.S. Securities and Exchange Commission on December 20, 2011, and incorporated by reference herein.
14.1   2008 Code of Ethics for Senior Management
31.1   Certification of CEO as Required by Rule 13a-14(a)/15d-14
31.2   Certification of CFO as Required by Rule 13a-14(a)/15d-14
32.1   Certification of CEO as Required by Rule 13a-14(a) and Rule 15d-14(b) (17 CFR 240.15d-14(b)) and Section 1350 of Chapter 63 of Title 18 of the United States Code
32.2   Certification of CFO as Required by Rule 13a-14(a) and Rule 15d-14(b) (17 CFR 240.15d-14(b)) and Section 1350 of Chapter 63 of Title 18 of the United States Code
99.1   Audit Committee Charter
99.2   Compensation Committee Charter

  

  (1) Filed as an exhibit to the Registrant’s registration statement on Form S-1 (Commission File No. 33-38745) and incorporated by reference herein.
  (2) Incorporated by reference to the Registrant’s Current Report on Form 8-K filed January 3, 2008
  (3) Filed as an exhibit to the Registrant’s Form S-8 registration statement filed with the U.S. Securities and Exchange Commission on June 9, 2009, and incorporated by reference herein.

 

SIGNATURES

 

In accordance with Section 13 or 15(d) of Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, on March 30, 2012

 

  ROCK ENERGY RESOURCES, INC.  
   
  By /s/ Rocky V. Emery
    Rocky V. Emery
    Chief Executive Officer and Director and
Chairman of the Board of Directors
   
  By /s/ Mark G. Harrington
    Mark G. Harrington
   

Principal Accounting Officer and

Vice Chairman of the Board of Directors

     
  By /s/ Craig Liukko
    Craig Liukko
    Chief Operating Officer and Director