History
A Newport Beach shell became a small oil and gas explorer in 2004, then collapsed into Chapter 11 in 2007 after defaulting on $22 million of convertible notes.
2004: From shell to explorer
The company began as The Coffee Exchange, a tiny Newport Beach shell. On February 28, 2004, its two directors, George Sines and Scott Yancey, agreed to hand control to Stephen Harrington. The company would redeem 1,700,000 of Sines' shares and 2,971,000 of Yancey's, and Harrington would buy 300,000 and 354,000 of theirs, leaving him with 654,000 shares (32.7%) and the board seats. Closing was set for March 15, 2004, and no shareholder vote was needed.
The shell, renamed Touchstone Resources USA, then bought an exploration business of the same name from Touchstone Resources Ltd. of Canada for 7 million shares. The business focused on the Permian Basin, East Texas Basin and Gulf Coast, and Harrington became CEO. Small working interests in three other ventures came with the deal. In May the company added more small stakes: Knox Gas/Knox Miss in Mississippi, interests in New Zealand and Texas, and a Louisiana exploration interest. These were paid for mostly with notes owed to the seller, Endeavour International, on a tight repayment schedule. On April 1, 2004 it also agreed to put $1,350,000 into PHT Vela Partners for a 35.64% limited partnership interest.
The accounts of the acquired Touchstone USA unit were not encouraging. It lost $12,706,979 in the year to September 30, 2003, including a $10,651,113 write-down of its oil and gas properties, and its liabilities were well above its assets.
2005-2006: Raising money
The company paid its way through private share sales. On April 19, 2005 it closed two sales of units, each a Series A convertible preferred share plus warrants, at $11.00 a unit. The US offering sold 402,331 units for $4,425,641 and the non-US offering sold 307,727 units for $3,384,997. Each preferred share converts into 10 common shares at $1.10, pays an 8% dividend (12% if paid in stock) and ranks ahead of common shareholders for $11.00 in a liquidation. Each warrant buys 5 shares at $1.50 for three years. Fees of $575,333 and $338,500 were paid.
In April 2006 the company, then still called Touchstone, closed a $22 million offering of 7.5% senior convertible notes due April 2009. It netted about $20.3 million, partly used to pay off older notes.
2007: Default and collapse
Cygnus missed a $412,500 interest payment due December 31, 2006. The default raised the interest rate to 12%. In February 2007 noteholders began demanding redemption at 125% of principal: Kings Road Holdings sought $13.75 million, Capital Ventures $5 million and RHP $3.75 million. By April all four holders were demanding a combined $27.5 million plus about $1.1 million of accrued interest.
On April 3, 2007, Cygnus and eight subsidiaries filed for Chapter 11 bankruptcy in Houston. CEO R. Gerald Bennett resigned but stayed as Chairman, and H. Malcolm Lovett became President and Chief Restructuring Officer. On April 16 Kings Road, the same fund whose demand helped trigger the filing, provided a $3 million loan to fund what the company called a liquidation of its assets. The company warned that shareholders would likely receive nothing and that it risked delisting from the OTC Bulletin Board if it did not file its overdue 10-K by May 4, 2007.
On May 11, 2007, Cygnus deregistered its securities, ending its obligation to report to the SEC.
Written from the 12 story beats below (2004 to 11 May 2007), which come from the company's own announcements and filings.