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** **

 

** **

**UNITEDSTATES SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-Q**

 

**(Mark One)**

 

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

 

**For the quarterly period ended April 30, 2009**

 

**OR**

 

**o****   TRANSITION REPORT PURSUANT TO SECTION 13 OR15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the transition periodfrom                        to**

 

**CommissionFile Number 001-32239**

 

**CommerceEnergy Group, Inc.**

(Exact name of registrant as specified in its charter)

 

| **Delaware**                              | ** ** | **20-0501090**      |
|-------------------------------------------|------------|---------------------|
| (State or other jurisdiction              |       | (I.R.S. Employer    |
| of incorporation or organization)         |       | Identification No.) |
|                                      |       |                |
| **600  Anton Boulevard, Suite 2000** |       |                |
| **Costa  Mesa, California**               | ** ** | **92626**           |
| (Address of principal executive offices)  |       | (Zip code)          |

 

**(714)259-2500**

(Registrant’s telephone number, including area code)

 

**NotApplicable**

(Former name, former address and former fiscal year, if changed sincelast report)

 

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

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of thischapter) during the preceding 12 months (or for such shorter period that theregistrant was required to submit and post such files).   Yes x No o

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company. See the definitions of “largeaccelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2of the Exchange Act. :

 

| Large  accelerated filer o                                             |   | Accelerated  filer o         |
|-----------------------------------------------------------------------------|--------|-----------------------------------|
|                                                                        |   |                              |
| Non-accelerated  filer o(Do not check if a  smaller reporting company) |   | Smaller  reporting company x |

 

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

 

As of May 29, 2009, 30,762,118shares of theregistrant’s common stock, par value $0.001 per share, were outstanding.

 

 

 

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**COMMERCEENERGY GROUP, INC.**

 

**Form 10-Q**

 

**Forthe Period Ended April 30, 2009**

 

**Index**

 
| ** **                                                                                                         | **Page  No.** |
|--------------------------------------------------------------------------------------------------------------------|---------------|
| Explanatory Note                                                                                                   | i             |
| Forward-Looking Statements                                                                                         | ii            |
| PART I  — FINANCIAL INFORMATION                                                                          | 1             |
| Item 1.  Financial Statements (Unaudited)                                                                          | 1             |
| Condensed Statement of Net  Assets in Liquidation as of April 30, 2009                                        | 1             |
| Condensed  Consolidated Balance Sheet as of July 31, 2008                                                     | 2             |
| Condensed  Consolidated Statements of Operations for the three and nine months ended  April 30, 2009 and 2008 | 3             |
| Condensed  Consolidated Statements of Cash Flows for the nine months ended  April 30, 2009 and 2008           | 4             |
| Notes to  Condensed Consolidated Financial Statements                                                              | 5             |
| Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of  Operations               | 8             |
| Item 3.  Quantitative and Qualitative Disclosures About Market Risk                                                | 9             |
| Item 4. Controls  and Procedures                                                                                   | 9             |
| PART II — OTHER  INFORMATION                                                                             | 10            |
| Item 1. Legal  Proceedings                                                                                         | 10            |
| Item 1A. Risk Factors                                                                                              | 10            |
| Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds                                               | 10            |
| Item 3.  Defaults Upon Senior Securities                                                                           | 10            |
| Item 4.  Submission of Matters to a Vote of Security Holders                                                  | 10            |
| Item 5. Other  Information                                                                                         | 10            |
| Item  6. Exhibits                                                                                                  | 11            |
| SIGNATURES                                                                                                         | 12            |

 

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**COMMERCEENERGY GROUP, INC.**

 

**Explanatory Note**

 

On December 15,2008, Commerce Energy Group, Inc, or the Company, filed a current report on Form 8-K/A(Amendment No. 1) dated December 12, 2008, or the December 2008 Form 8-K,with the U.S. Securities and Exchange Commission, or the SEC, reporting, amongother things, that it had consented to a foreclosure proceeding under Section 9-620under the New York Uniform Commercial Code, or the Consensual Foreclosure. Inconnection with the Consensual Foreclosure, all of the common stock of CommerceEnergy, Inc., the wholly-owned operating company of the Company, orCommerce, was ultimately accepted by the lenders in satisfaction of all of theCompany’s secured debt.  To induce theCompany to consent rather than exercising its statutory rights to delay theforeclosure, and pursuant to the terms of the acceptance agreement, the lenders(i) consented to the payment of a dividend from Commerce to the Company inthe amount of $3.1 million; and (ii) consented to Commerce’s assumption ofcertain liabilities and obligations of the Company.  Immediately after the Consensual Foreclosure,the Board decided to make a distribution to its stockholders of $2,614,780,after providing for all known and reasonably foreseeable obligations to theCompany.  This distribution was comprisedof a cash dividend on shares of the Company’s common stock in the amount of$0.084 per share to be paid to the Company’s stockholders of record as of December 11,2008.  In addition to the dividendpayment, such stockholders received a payment of $0.001 per right in connectionwith the redemption of all the outstanding rights under the Company’sShareholders Rights Plan dated July 1, 2004.  The distribution date was December 17,2008.

 

After the dividend andthe redemption payment, the Company has continued as a shell company, asdefined in Section 12b-2 of the Securities Exchange Act of 1934, asamended, with no operating business and no material assets.  It is the recommendation of the Board ofDirectors of the Company to wind up and dissolve the Company.  To that end, the Company plans to schedule aspecial meeting of stockholders to consider and vote upon a proposal to adopt aplan of liquidation and dissolve the Company. The Company expects to file a definitive proxy statement with the SECand mail proxy materials to shareholders related to the special meeting.  This Quarterly Report on Form 10-Q shallnot constitute a solicitation of a proxy to vote shares of common stock of theCompany with respect to any matter related to the special meeting.

 

For a further discussionof the Consensual Foreclosure, including the related pro forma financialinformation, reference is made to the December 2008 Form 8-K. Youshould read this quarterly report on Form 10-Q in conjunction with the December 2008Form 8-K.

 

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**FORWARD-LOOKING STATEMENTS**

 

Someof the statements in this quarterly report on Form 10-Q which relate toperiods prior to the Consensual Foreclosure, during which the Company had anoperating business, are forward-looking statements regarding our assumptions,projections, expectations, targets, intentions or beliefs about future eventswhich involve risks and uncertainties.  All statements other than statements of historical facts included inthis quarterly report on Form 10-Q relating to expectation of futurefinancial performance, continued growth, changes in economic conditions orcapital markets and changes in customer usage patterns and preferences, areforward-looking statements.    In somecases, you can identify forward-looking statements by terms such as “may,” “will,”“should,” “expect,” “plan,” “intend,” “forecast,” “anticipate,” “believe,” “estimate,”“predict,” “potential,” “continue” or the negative of these terms or othercomparable terms.

 

Theforward-looking statements contained in this quarterly report on Form 10-Qinvolve known and unknown risks and uncertainties and situations that may causeour or our industry’s actual results, level of activity, performance orachievements to be materially different from any future results, levels ofactivity, performance or achievements expressed or implied by thesestatements.   Factors that might causeactual events or results to differ materially from those indicated by theseforward-looking statements may include the matters listed under “Risk Factors”in Item 1A in the Form 10-K and elsewhere in this quarterly report on Form 10-Q,including, without limitation, our ability to obtain and retain creditnecessary to profitably support our operations; changes in general economicconditions in the markets in which we may compete; fluctuations in the marketprice of energy which may negatively impact the competitiveness of our productofferings to current and future customers; decisions by our energy suppliersrequiring us to post additional collateral for our energy purchases;uncertainties relating to federal and state proceedings regarding issuesemanating from the 2000-2001 California energy crisis, including any resultingfederal, state, or administrative legal proceedings which could affect us;increased competition; our ability to address changes in laws and regulations;adverse state or federal legislation or regulation or adverse determinations byregulators; and other factors identified from time to time in our filings withthe U.S. Securities and Exchange Commission, or the SEC.  We caution that, while we make suchstatements in good faith and we believe such statements are based on reasonableassumptions, including, without limitation, management’s examination ofhistorical operating trends, data contained in records and other data availablefrom third parties, we cannot assure you that our expectations will berealized.

 

Anyforward-looking statement speaks only as of the date on which such statement ismade, and, except as required by law, we undertake no obligation to update anyforward-looking statement to reflect events or circumstances after the date onwhich such statement is made or to reflect the occurrence of unanticipatedevents. New factors emerge from time to time, and it is not possible formanagement to predict all such factors.

 

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** **

**PART I — FINANCIAL INFORMATION**

 

***Item 1. Financial Statements.***

 

**COMMERCEENERGY GROUP, INC.**

 

**CONDENSED STATEMENT OF NET ASSETS IN LIQUIDATION**

**(InThousands)**

**(Unaudited)**

 
| ** **                           | ** ** | **April  30,2009** | ** ** |
|--------------------------------------|------------|--------------------|------------|
| Total assets; cash                   |       | $                  | 225        |   |
| Other liabilities                    |       | (127               | )          |
| Net assets available in  liquidation |       | $                  | 98         |   |

 

The accompanyingnotes are an integral part of these Condensed Consolidated FinancialStatements.

 

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**COMMERCE ENERGY GROUP, INC.**

 

**CONDENSED CONSOLIDATED BALANCE SHEET**

**(GoingConcern Basis)**

**(Inthousands, except per share amounts)**

 
| ** **                                                                                                                                                                 | ** ** | **July 31,  2008** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|
| **ASSETS**                                                                                                                                                                 |       |                    |       |
| Current assets:                                                                                                                                                            |       |                    |       |
| Cash and equivalents                                                                                                                                                       |       | $                       | 5,042      |   |
| Accounts receivable, net                                                                                                                                                   |       | 82,416                  |       |
| Natural gas inventory                                                                                                                                                      |       | 7,717                   |       |
| Prepaid expenses and other current assets                                                                                                                                  |       | 13,269                  |       |
| Total current assets                                                                                                                                                       |       | 108,444                 |       |
|                                                                                                                                                                       |       |                    |       |
| Deposits and other assets                                                                                                                                                  |       | 1,600                   |       |
| Property and equipment, net                                                                                                                                                |       | 8,009                   |       |
| Other intangible assets, net                                                                                                                                               |       | 3,976                   |       |
|                                                                                                                                                                       |       |                    |       |
| Total assets                                                                                                                                                               |       | $                       | 122,029    |   |
|                                                                                                                                                                       |       |                    |       |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                                                             |       |                    |       |
| Current liabilities:                                                                                                                                                       |       |                    |       |
| Energy and accounts payable                                                                                                                                                |       | $                       | 58,500     |   |
| Short-term borrowings                                                                                                                                                      |       | 11,756                  |       |
| Accrued liabilities                                                                                                                                                        |       | 11,901                  |       |
| Total current liabilities                                                                                                                                                  |       | 82,157                  |       |
|                                                                                                                                                                       |       |                    |       |
| Commitments and contingencies                                                                                                                                              |       |                    |       |
|                                                                                                                                                                       |       |                    |       |
| Stockholders’ equity:                                                                                                                                                 |       |                    |       |
| Common stock — 150,000 shares authorized with $0.001 par value;  30,762 (unaudited) issued and outstanding at January 31, 2009 and 31,141  at July 31, 2008 |       | 61,919                  |       |
| Other comprehensive loss                                                                                                                                                   |       | (996                    | )          |
| Accumulated deficit                                                                                                                                                        |       | (21,051                 | )          |
| Total stockholders’ equity                                                                                                                                            |       | 39,872                  |       |
|                                                                                                                                                                       |       |                    |       |
| Total liabilities and stockholders’ equity                                                                                                                            |       | $                       | 122,029    |   |

 

The accompanyingnotes are an integral part of these Condensed Consolidated FinancialStatements.

 

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**COMMERCEENERGY GROUP, INC.**

 

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

**(Inthousands, except per share amounts)**

**(Unaudited)**

 
| ** **                                          | ** ** | **Three Months Ended  April 30,** | ** ** | **Nine Months Ended  April 30,** | ** ** |
|-----------------------------------------------------|------------|--------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                          | ** ** | **2009**                                         | ** ** | **2008**                                        | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                          | ** ** | ** **                                       | ** ** | ** **                                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net revenue                                         |       | $                                                |       |                                            | $          | 105,495 |   | $ | 121,627 |   | $ | 319,485 |   |
| Direct energy costs                                 |       |                                             |       | 91,362                                          |       | 114,409 |   | 269,698 |   |
| Gross profit                                        |       |                                             |       | 14,133                                          |       | 7,218 |   | 49,787 |   |
| Selling and marketing expenses                      |       |                                             |       | 3,254                                           |       | 3,137 |   | 11,446 |   |
| General and administrative expenses                 |       | 60                                               |       | 18,744                                          |       | 17,695 |   | 48,177 |   |
| Impairment of intangibles                           |       |                                             |       | 1,426                                           |       |   |   | 1,426 |   |
| Adjustment to adopt liquidation basis of accounting |       |                                             |       |                                            |       | 24,969 |   | — |   |
|                                                |       |                                             |       |                                            |       |   |   |   |   |
| Income (loss) from operations                       |       | (60                                              | )          | (9,291                                          | )          | (38,583 | ) | (11,262 | ) |
| Other income (expense):                             |       |                                             |       |                                            |       |   |   |   |   |
| Interest income                                     |       |                                             |       | 28                                              |       | 63 |   | 345 |   |
| Interest expense                                    |       |                                             |       | (230                                            | )          | (8,361 | ) | (912 | ) |
| Gain on sale of Texas electric service contracts    |       |                                             |       | —                                          |       | 7,642 |   | — |   |
| Total other income and expenses                     |       |                                             |       | (202                                            | )          | (656 | ) | (567 | ) |
| Net loss                                            |       | $                                                | (60        | )                                               | $          | (9,493 | ) | $ | (39,239 | ) | $ | (11,829 | ) |
|                                                |       |                                             |       |                                            |       |   |   |   |   |
| Loss per common share:                              |       | —                                           |       |                                            |       | — |   |   |   |
| Basic                                               |       | $                                                | (.00       | )                                               | $          | (0.31 | ) | $ | (1.27 | ) | $ | (0.39 | ) |
| Diluted                                             |       | $                                                | (.00       | )                                               | $          | (0.31 | ) | $ | (1.27 | ) | $ | (0.39 | ) |

 

The accompanyingnotes are an integral part of these Condensed Consolidated FinancialStatements.

 

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**COMMERCEENERGY GROUP, INC.**

 

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(InThousands)**

**(Unaudited)**

 
| ** **                                                                                 | ** ** | **Nine Months Ended  April 30,** | ** ** |
|--------------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                                                 | ** ** | **2009**                                        | ** ** | **2008** | ** ** |
| **Cash Flows From Operating Activities**                                                   |       |                                            |       |   |   |
| Net loss                                                                                   |       | $                                               | (39,239    | ) | $ | (11,829 | ) |
| Adjustments to reconcile net loss to net cash provided by (used in)  operating activities: |       |                                            |       |   |   |
| Adjustment to adopt liquidation basis of accounting                                   |       | 24,969                                          |       | — |   |
| Depreciation                                                                               |       | 1,038                                           |       | 1,947 |   |
| Amortization                                                                               |       | 478                                             |       | 1,244 |   |
| Amortization of deferred loan costs                                                        |       | 4,720                                           |       | 122 |   |
| Gain on sale of assets                                                                     |       | (7,642                                          | )          | — |   |
| Impairment of intangible assets                                                            |       |                                            |       | 1,426 |   |
| Provision for doubtful accounts                                                            |       | 3,596                                           |       | 17,709 |   |
| Stock-based compensation                                                                   |       | 13                                              |       | 986 |   |
| Changes in operating assets and liabilities:                                               |       |                                            |       |   |   |
| Accounts receivable, net                                                                   |       | 86,012                                          |       | (8,828 | ) |
| Inventory                                                                                  |       | 7,717                                           |       | 3,344 |   |
| Prepaid expenses and other assets                                                          |       | 17,989                                          |       | (2,259 | ) |
| Energy and accounts payable                                                                |       | (58,500                                         | )          | (5,047 | ) |
| Accrued liabilities and other                                                              |       | (11,774                                         | )          | (1,212 | ) |
| Net cash provided by (used in) operating activities                                        |       | 29,377                                          |       | (2,397 | ) |
|                                                                                       |       |                                            |       |   |   |
| **Cash Flows From Investing Activities**                                                   |       |                                            |       |   |   |
| Purchase of property and equipment                                                         |       | —                                          |       | (4,040 | ) |
| Proceeds from sale of Texas electric service contracts                                     |       | 9,600                                           |       | — |   |
| Payment received in consensual foreclosure                                                 |       | 3,100                                           |       |   |   |
| Net assets transferred in connection with consensual foreclosure                           |       | (30,088                                         | )          |   |   |
| Net cash used in investing activities                                                      |       | (17,388                                         | )          | (4,040 | ) |
|                                                                                       |       |                                            |       |   |   |
| **Cash Flows From Financing Activities**                                                   |       |                                            |       |   |   |
| Dividend paid to shareholders                                                              |       | (2,615                                          | )          |   |   |
| Short-term borrowings                                                                      |       | (11,756                                         | )          |   |   |
| Credit line commitment fee                                                                 |       | (2,435                                          | )          | — |   |
| Repurchase of common stock                                                                 |       |                                            |       | (209 | ) |
| Increase in restricted cash                                                                |       | —                                          |       | 10,457 |   |
| Net cash provided by (used in) financing activities                                        |       | (16,806                                         | )          | 10,248 |   |
|                                                                                       |       |                                            |       |   |   |
| Increase (decrease) in cash and equivalents                                                |       | (4,817                                          | )          | 3,811 |   |
| Cash and equivalents at beginning of period                                                |       | 5,042                                           |       | 6,559 |   |
|                                                                                       |       |                                            |       |   |   |
| Cash and equivalents at end of period                                                      |       | $                                               | 225        |   | $ | 10,370 |   |
|                                                                                       |       |                                            |       |   |   |
| **Supplemental Disclosure of Cash Flow Information**                                       |       |                                            |       |   |   |
| Cash paid for:                                                                             |       |                                            |       |   |   |
| Interest                                                                                   |       | $                                               | 5,806      |   | $ | 790 |   |
| Income taxes                                                                               |       | $                                               | —     |   | $ | 130 |   |

 

The accompanyingnotes are an integral part of these Condensed Consolidated FinancialStatements.

 

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**COMMERCEENERGY GROUP, INC.**

 

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(Dollarsin Thousands, Except for Share and Per Share Amounts)**

**(Unaudited)**

 

**Note 1. Basis of Presentation**

 

The information set forthin this Form 10-Q for the Quarterly Period Ended April 30, 2009, orthe April 2009 Form 10-Q, relates primarily to periods during whichthe Company had an operating business, which periods were prior to theconsensual foreclosure on December 11, 2008, or the ConsensualForeclosure, summarized below and previously disclosed in the Company’s CurrentReport on Form 8-K/A (Amendment No. 1) dated December 12, 2008and filed with the Securities and Exchange Commission on December 15,2008, or the December 2008 Form 8-K. As a result of the ConsensualForeclosure, the Company no longer has an operating business and the Board ofDirectors of the Company has recommended that the Company be dissolved. The April 2009Form 10-Q is being filed to comply with a requirement under the SecuritiesExchange Act of 1934, as amended.  Asused herein and unless the context requires otherwise, references to the “Company,”“we,” “us” and “our” refer specifically to Commerce Energy Group, Inc. andits subsidiaries.  “Commerce” refers toCommerce Energy, Inc., our former principal operating subsidiary.

 

On December 11,2008, AP Finance, LLC and Commerce Gas and Electric Corp., collectively, theLenders, notified the Company in writing that an event of default existed underthe Discretionary Line of Credit Demand Note executed by the Company andCommerce in favor of AP Finance, LLC, or the Secured Debt. On December 11,2008, the Lenders proposed under Section 9-620 of the Uniform CommercialCode, or the UCC, as in effect in the State of New York and subject toobtaining the Company’s consent, to accept all shares of stock in Commerce insatisfaction of the Company’s liabilities and obligations with respect to theSecured Debt pursuant to the terms and conditions of an acceptance agreement orthe Acceptance Agreement, between the Company and the Lenders.

 

In connection with theConsensual Foreclosure, to induce the Company to consent rather than exercisingits statutory rights to delay the foreclosure, and pursuant to the terms of theAcceptance Agreement, the Lenders: (i) consented to the payment of adivided from Commerce to the Company in the amount of $3.1 million immediatelyprior to the delivery of the Acceptance Agreement; (ii) consented toCommerce’s assumption of certain liabilities and obligations of the Companyidentified in an assumption letter dated December 11, 2008 between theCompany and Commerce, or the Assumption Letter, including, but not limited to,all liabilities and obligations of the Company under the employment agreementsbetween the Company and its executive officers (including any severance obligationsthereunder); (iii) agreed to assume responsibility for the sponsorship andadministration of the Company’s employee benefit plans covering Commerce’semployees (other than the equity incentive and employee stock purchase plans); (iv) agreedto indemnify the Company and its officers, directors, employees, agents andrepresentatives from liabilities arising from any breach by Commerce of itsobligations under the Assumption Letter; (v) released the Company from anyand all liabilities and obligations with respect to the Secured Debt; and (vi) cancelledall warrants to acquire shares of common stock of the Company held by APFinance, LLC.

 

The Company consented tothe Consensual Foreclosure and executed and delivered the Acceptance Agreementand the other documents related thereto on December 11, 2008.

 

As a result of theConsensual Foreclosure, the Company ceased all operations. Additionally,following the Consensual Foreclosure and after providing for all known andreasonably foreseeable liabilities and obligations of the Company, the Companydecided to make a distribution in the amount of $2,614,780. This distributionwas comprised of a cash dividend on shares of the Company’s common stock in theamount of $0.084 per share to be paid to the Company’s stockholders of recordas of December 11, 2008. In addition to the dividend payment, suchstockholders received a payment of $0.001 per right in connection with theredemption of all the outstanding Rights under the Company’s ShareholdersRights Plan dated July 1, 2004. The distribution date was December 17,2008.  After the dividend and theredemption payment, the Company continues as a shell company, as defined in Section 12b-2of the Securities Exchange Act of 1934, as amended, with no operating businessand no material assets.  It is therecommendation of the Board of Directors to wind up and dissolve the Company.

 

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As a result, the Companychanged its basis of accounting effective October 31, 2008 (and for theperiods ending subsequent to that date) from the going concern basis to aliquidation basis in accordance with generally accepted accounting principalsin the United States (“GAAP”).  Thevaluation of assets and liabilities in liquidation is based on management’s estimateof their net realizable value or settlement amounts at April 30, 2009.Such values could differ materially from amounts ultimately realized in thefuture as the Company completes its liquidation. Differences between theestimated revalued amounts of assets and liabilities and actual cashtransactions after April 30, 2009 will be recognized in the period inwhich they are subject to reasonable estimation in accordance with GAAP.

 

The accompanyingcondensed statement of net assets in liquidation at April 30, 2009, thecondensed statements of operations for the three and nine month periods ended April 30,2009 and 2008, and the statements of cash flows for the nine month periodsended April 30, 2009 and 2008 are unaudited. Except for the statement ofnet assets in liquidation, these financial statements have been prepared on thesame basis as the Company’s audited financial statements and, in the opinion ofmanagement, reflect all adjustments which (except as described in these notesto unaudited condensed financial statements) are only of a normal recurringnature and which are necessary for a fair presentation of the net assets inliquidation, cash flows, and results of operations for such periods.Except for the statement of net assets in liquidation, these unauditedcondensed financial statements should be read in conjunction with the auditedfinancial statements included in the Company’s Form 10-K/A (Amendment No. 1)for the Fiscal Year Ended July 31, 2008, filed with the Securitiesand Exchange Commission on November 13, 2008.

 

**Note2.  Basic and Diluted Income (Loss) per Common Share**

 

Basic income (loss) percommon share was computed by dividing net income (loss) available to commonstockholders, by the weighted average number of common shares outstandingduring the period. Diluted income per common share reflects the potentialdilution that would occur if all outstanding options or other contracts toissue common stock were exercised or converted, and was computed by dividingnet income (loss) by the weighted average number of common shares plus dilutivecommon equivalent shares outstanding, unless they were anti-dilutive.

 

The following is a reconciliationof the numerator, income (loss), and the denominator, (common shares inthousands), used in the computation of basic and diluted income (loss) percommon share:

 
| ** **                                                           | ** ** | **Three Months Ended  April 30**** 31,** | ** ** | **Nine Months Ended  April 30****,** | ** ** |
|----------------------------------------------------------------------|------------|--------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                           | ** ** | **2009**                                                     | ** ** | **2008**                                            | ** ** | **2009** | ** ** | **2008** | ** ** |
| **Numerator:**                                                       |       |                                                         |       |                                                |       |   |   |   |   |
| Net income (loss)                                                    |       | $                                                            | (60        | )                                                   | $          | (9,493 | ) | $ | (39,239 | ) | $ | (11,829 | ) |
| Net income (loss) applicable to common stock —basic and diluted |       | $                                                            | (60        | )                                                   | $          | (9,493 | ) | $ | (39,239 | ) | $ | (11,829 | ) |
|                                                                 |       |                                                         |       |                                                |       |   |   |   |   |
| **Denominator:**                                                     |       |                                                         |       |                                                |       |   |   |   |   |
| Weighted-average outstanding common shares — basic              |       | 30,762                                                       |       | 30,758                                              |       | 30,947 |   | 30,537 |   |
| Effect of stock options                                              |       | —                                                       |       | —                                              |       | — |   | — |   |
| Weighted-average outstanding common shares — diluted            |       | 30,762                                                       |       | 30,758                                              |       | 30,947 |   | 30,537 |   |

 

**Note3.  Sale of Texas Electric Service Contracts**

 

On October 24, 2008,Commerce completed the sale of all of its electric service contracts with itscustomers in Texas and certain assets related to these contracts to Ambitpursuant to the terms and conditions of an Asset Purchase Agreement dated October 23,2008 by and between Commerce and Ambit.

 

The initial purchaseprice paid to Commerce in connection with the transaction was$11.2 million with $8.5 million paid in cash on October 24,2008, and $2.7 million, to be reduced by customer deposits and adjusted bypositive or negative monetary adjustments if the number of active customerstransferred deviates by more than 2.5% from 57,588 customers, payable in cashon or before November 24, 2008. The second payment, originally due on November 24,2008, received on December 5, 2008, totaled $1.1 million, and reflectedadjustments primarily due to customer deposits. In addition, Ambit will assumecertain liabilities relating to the assets being sold. Ambit has also agreed tomake residual payments to Commerce during a period beginning on the closingdate and continuing through December 31, 2010. The residual payments,which are calculated and paid monthly, generally consist of $3.50 for eachelectric service contract being transferred that has charges invoiced to Ambitthat are not past due and are estimated to be approximately $3.6 million.

 

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The following details the gain recorded from the saleof Texas electric service contracts:

 
| Proceeds from sale (before residual payments)              |   | $      | 11,200 |   |
|------------------------------------------------------------|--------|--------|--------|--------|
| Less:                                                      |   |   |   |
| Write off of prepaid sales commissions                     |   | (1,969 | )      |
| Settlement of receivables and customer deposits            |   | (596   | )      |
| Write off of Texas customer related property and equipment |   | (638   | )      |
| Broker and legal fees                                      |   | (355   | )      |
| Gain on sale of Texas electric service contracts           |   | $      | 7,642  |   |

 

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***Item 2. Management’s Discussion andAnalysis of Financial Condition and Results of Operations.***

 

*As usedherein and unless the context requires otherwise, references to the “Company,” “we,”“us,” and “our” refer specifically to Commerce Energy Group, Inc. and itssubsidiaries. “Commerce” refers to Commerce Energy, Inc., our formerprincipal operating subsidiary. This discussion and analysis should be read inconjunction with Management’s Discussion and Analysis of Financial Conditionand Results of Operations set forth in our Annual Report on Form 10-K/A(Amendment No. 1) for the Fiscal Year Ended July 31, 2008, or the Form 10-K/A..*

 

**Overview**

 

We were an independent marketerof retail electricity and natural gas to residential, commercial, industrialand institutional end-use customers.  Wewere founded in 1997 as a retail electricity marketer in California. As of October 31,2008, we delivered electricity to approximately 97,000 customers in California,Maryland, Michigan, New Jersey, Pennsylvania and Texas; and natural gas toapproximately 46,000 customers in California, Florida, Georgia, Maryland,Nevada, Ohio and Pennsylvania.

 

*ConsensualForeclosure*.

 

The information set forthin this Quarterly Report on Form 10-Q for the Quarterly Period Ended April 30,2009, or this Quarterly Report, relates primarily to periods during which theCompany had an operating business, which periods were prior to the consensualforeclosure on December 11, 2008, or the Consensual Foreclosure,summarized below and previously disclosed in the Company’s Current Report on Form 8-K/A(Amendment No. 1) dated December 12, 2008 and filed with the U.S.Securities and Exchange Commission, or the SEC, on December 15, 2008, orthe December 2008 Form 8-K. You are encouraged to read the December 2008Form 8-K, including the exhibits thereto, in its entirety.  As a result of the Consensual Foreclosure,the Company no longer has an operating business and it is the recommendation ofthe Board of Directors of the Company to wind up and dissolve the Company.

 

On December 11,2008, AP Finance, LLC and Commerce Gas and Electric Corp., collectively theLenders, notified the Company in writing that an event of default existed underthe Discretionary Line of Credit Demand Note executed by the Company andCommerce in favor of AP Finance, LLC, or the Secured Debt.  On December 11, 2008, the Lendersproposed under Section 9-620 of the Uniform Commercial Code, or the UCC,as in effect in the State of New York, and Section 9620 of the UCC, as ineffect in the State of California and subject to obtaining the Company’sconsent, to accept all shares of stock in Commerce in satisfaction of theCompany’s liabilities and obligations with respect to the Secured Debt pursuantto the terms and conditions of an acceptance agreement, or the AcceptanceAgreement, between the Company and the Lenders.

 

In connection with theConsensual Foreclosure, to induce the Company to consent rather than exercisingits statutory rights to delay the foreclosure, and pursuant to the terms of theAcceptance Agreement, the Lenders: (i) consented to the payment of adivided from Commerce to the Company in the amount of $3.1 million immediatelyprior to the delivery of the Acceptance Agreement; (ii) consented toCommerce’s assumption of certain liabilities and obligations of the Companyidentified in an assumption letter dated December 11, 2008 between theCompany and Commerce, or the Assumption Letter, including, but not limited to,all liabilities and obligations of the Company under the employment agreementsbetween the Company and its executive officers (including any severanceobligations thereunder); (iii) agreed to assume responsibility for the sponsorshipand administration of the Company’s employee benefit plans covering Commerce’semployees (other than the equity incentive and employee stock purchase plans); (iv) agreedto indemnify the Company and its officers, directors, employees, agents and representativesfrom liabilities arising from any breach by Commerce of its obligations underthe Assumption Letter; (v) released the Company from any and allliabilities and obligations with respect to the Secured Debt; and (vi) cancelledall warrants to acquire shares of common stock of the Company held by APFinance, LLC.

 

The Company consented tothe Consensual Foreclosure and executed and delivered the Acceptance Agreementand the other documents related thereto on December 11, 2008.

 

As a result of theConsensual Foreclosure, the Company ceased all operations. Additionally,following the Consensual Foreclosure and after providing for all known andreasonably foreseeable liabilities and obligations of the Company, the Board ofDirectors of the Company, or the Board, decided to make a cash distribution tothe Company’s stockholders of $2,614,780. This distribution was comprised of acash dividend on shares of the Company’s common stock in the amount of $0.084per share to be paid to the Company’s stockholders of record as of December 11,2008.  In addition to the dividendpayment, such stockholders received a payment of $0.001 per right in connectionwith the redemption of all the outstanding rights under the Company’sShareholders Rights Plan dated July 1, 2004.  The distribution date was December 17,2008.  After the dividend and theredemption payment, the Company continues as a shell company, as defined in Section 12b-2of the Securities Exchange Act of 1934, as amended, with no operating businessand no material assets.  It is the recommendationof the Board to wind up and dissolve the Company.

 

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The December 2008 Form 8-Kincludes a more detailed description of the Consensual Foreclosure transactionand includes pro form financial information relating thereto.  We encourage you to review the December Form 8-Kin conjunction with this Quarterly Report.

 

**Results ofOperations**

 

A comparison of theresults of operations between fiscal periods would not be helpful toinvestors due to the announced intention to pursue an orderly cessation of ouroperations. The Company has implemented liquidation basis accounting effectiveOctober 31, 2008.

 

In connection with theadoption of liquidation accounting discussed above, the Company recognizedimpairment charges of $25.0 million for the nine months ended April 30,2009.

 

**Liquidity and Capital Resources**

 

As a result of the ConsensualForeclosure, the Company ceased all operations. Additionally, following theConsensual Foreclosure and after providing for all known and reasonablyforeseeable liabilities and obligations of the Company, the Board took actionto distribute substantially all of its cash to its stockholders, the result ofwhich left the Company with virtually no assets.

 

***Item 3. Quantitative and Qualitative Disclosures AboutMarket Risk***

 

NotApplicable.

 

***Item 4. Controls and Procedures.***

 

**Evaluation of Disclosure Controls and Procedures**

 

Our Chief FinancialOfficer, the sole remaining officer and employee of the Company, has concluded,based on his evaluation required by paragraph (b) of Rules 13a-15or 15d-15(e), as of the end of the period covered by this report, thatour disclosure controls and procedures, as defined in Rules 13a-15(e) or15d-15(e) under the Securities Exchange Act of 1934, as amended (the “ExchangeAct”), were not effective at the reasonable assurance level because of thematerial weakness in internal control over financial reporting referenced belowto ensure that all information required to be disclosed by us in the reportsfiled or submitted by us under the Exchange Act is recorded, processed,summarized and reported within the time periods specified in the rules andforms of the SEC.

 

In the Form 10-K/A,we identified material weaknesses in our internal control over financialreporting under the caption “Management’s Report on Internal Control overFinancial Reporting” in Part II, Item 9A(T). Controls andProcedures.  The material weaknesses included deficiencies in our internalcontrols over the existence, completeness and accuracy of revenues, cost ofrevenues, deferred revenues and associated accountsreceivable.  Specifically, the design of controls over thepreparation and review of the account reconciliations and analysis of revenues,cost of revenues and deferred revenues may not be adequate to detect materialerrors in revenues, cost of revenues, deferred revenues and associated accountsreceivable. A contributing factor was found to be the ineffective operations ofcertain of our information system controls over revenue and billing systems.This control deficiency could result in a misstatement of revenue, deferredrevenue and accounts receivable that would result in a material misstatement tothe Company’s interim or annual consolidated financial statements. As a result,management determined that this control deficiency constituted a materialweakness.

 

In light of theConsensual Foreclosure, no steps have been taken to remediate the deficienciesbecause such deficiencies related to controls regarding the businesstransferred pursuant to the Consensual Foreclosure.

 

**Changesin Internal Control over Financial Reporting**

 

There was no change inthe Company’s internal control over financial reporting during the quarterended April 30, 2009 that has materially affected, or is reasonably likelyto materially affect, our internal control over financial reporting.

 

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**PART II — OTHER INFORMATION**

 

***Item 1. Legal Proceedings.***

 

Reference is made to the Form 10-K/Afor a summary of our previously reported legal proceedings.  Sincethe date of the Form 10-K/A, there have been no material developments inpreviously reported legal proceedings.

 

***Item 1A. Risk Factors.***

 

Not Applicable.

 

***Item 2. Unregistered Sales of Equity Securities and Use ofProceeds.***

 

None.

 

***Item 3. Defaults upon Senior Securities.***

 

On December 15,2008, the Company filed a current report on Form 8-K/A (Amendment No. 1)dated December 12, 2008, with the SEC reporting, among other things, thatit had consented to a foreclosure proceeding under Section 9-620 under theNew York Uniform Commercial Code, or the Consensual Foreclosure. As a result ofthe Consensual Foreclosure, the Company no longer has an operating business andthe Board has recommended that the Company be wound up and dissolved.

 

***Item 4. Submission of Matters to a Vote of Security Holders.***

 

None.

 

***Item 5. Other Information.***

 

None.

 

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***Item 6.*** ***Exhibits.***

 

The Exhibits listed beloware hereby filed with the SEC as part of this Quarterly Report on Form 10-Q.

 

| **Exhibit  Number** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                    |
|---------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                                                                                                                                                                                                                                               |
| 3.1                 |       | Amended and Restated Certificate of Incorporation of  Commerce Energy Group, Inc., previously filed with the SEC on  July 6, 2004 as Exhibit 3.3 to Commerce Energy Group, Inc.’s  Registration Statement on Form 8-A and incorporated herein by reference.                                                          |
| 3.2                 |       | Certificate of Designation of Series A Junior  Participating Preferred Stock of Commerce Energy Group, Inc., dated July 1,  2004, previously filed with the SEC on July 6, 2004 as Exhibit 3.4  to Commerce Energy Group, Inc.’s Registration Statement on Form 8-A  and incorporated herein by reference. |
| 3.3                 |       | Second Amended and Restated Bylaws of Commerce  Energy Group, Inc., as amended, previously filed with the SEC on  March 17, 2009 as Exhibit 3.3 to Commerce Energy Group, Inc.’s  Quarterly Report on Form 10-Q for the Quarterly Period Ended  January 31, 2009 and incorporated herein by reference.          |
| 31.1                |       | Principal Executive Officer and Principal Financial  Officer Certification pursuant to Section 302 of the Sarbanes-Oxley Act  of 2002.                                                                                                                                                                                                        |
| 32.1                |       | Principal Executive Officer and Principal Financial  Officer Certification pursuant to Section 906 of the Sarbanes-Oxley Act  of 2002.                                                                                                                                                                                                        |

 

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**SIGNATURES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 
|                         | COMMERCE ENERGY GROUP, INC. |
|------------------------------|-----------------------------|
|                         |                        |   |
|                         |                        |   |
| Date: June 2, 2009 | By:                         | /s/ C. DOUGLAS MITCHELL |
|                         |                        | C. Douglas Mitchell |
|                         |                        | Chief Financial Officer |
| * *                     | * *                    | *(Principal Executive Officer,* |
| * *                     | * *                    | *Principal Financial Officer* |
| * *                     | * *                    | *and Principal Accounting Officer)* |

 

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**EXHIBITINDEX**

 

| **Exhibit  Number** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                    |
|---------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                                                                                                                                                                                                                                               |
| 3.1                 |       | Amended and Restated Certificate of Incorporation of  Commerce Energy Group, Inc., previously filed with the SEC on  July 6, 2004 as Exhibit 3.3 to Commerce Energy Group, Inc.’s  Registration Statement on Form 8-A and incorporated herein by reference.                                                          |
| 3.2                 |       | Certificate of Designation of Series A Junior  Participating Preferred Stock of Commerce Energy Group, Inc., dated  July 1, 2004, previously filed with the SEC on July 6, 2004 as  Exhibit 3.4 to Commerce Energy Group, Inc.’s Registration Statement  on Form 8-A and incorporated herein by reference. |
| 3.3                 |       | Second Amended and Restated Bylaws of Commerce  Energy Group, Inc., as amended, previously filed with the SEC on  March 17, 2009 as Exhibit 3.3 to Commerce Energy Group, Inc.’s  Quarterly Report on Form 10-Q for the Quarterly Period Ended  January 31, 2009 and incorporated herein by reference.          |
| 31.1                |       | Principal Executive Officer and Principal Financial  Officer Certification pursuant to Section 302 of the Sarbanes-Oxley Act  of 2002.                                                                                                                                                                                                        |
| 32.1                |       | Principal Executive Officer and Principal Financial  Officer Certification pursuant to Section 906 of the Sarbanes-Oxley Act  of 2002.                                                                                                                                                                                                        |

 

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