UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarter ended September 30, 2003
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission file number 333-61714
ASSURE ENERGY, INC.
(Exact name of small business issuer as specified in its charter)
Nevada 13-4125563
-------- ------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2750-140 4th Avenue S.W., Calgary, Alberta, Canada T2P 3N3
-------------------------------------------------- ---------
(Address of principal executive offices) (Zip Code)
(403) 266-2787
(Issuer's telephone number, including area code)
N/A
(Former Name, Former Address and Former Fiscal Year,
if Changed since Last Report)
Check whether the issuer (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, and (2) has been subject to such filing requirements for
the past 90 days. Yes |X| No | |
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date:
17,981,100 shares as at November 13, 2003
Transitional Small Business Disclosure Format (check one). Yes ; No X
-- ---
ASSURE ENERGY, INC.
SEPTEMBER 30, 2003 QUARTERLY REPORT ON FORM 10-QSB
TABLE OF CONTENTS
Page Number
Special Note Regarding Forward Looking Statements ...........3
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements ........................................4
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations............13
Item 3 Controls and Procedures.....................................14
PART II - OTHER INFORMATION
Item 1. Legal Proceedings ..........................................14
Item 2. Changes in Securities and Use of Proceeds...................16
Item 4. Submission of Matters to a Vote of Security Holders.........16
Item 5. Other Information...........................................16
Item 6. Exhibits and Reports on Form 8-K............................17
2
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
To the extent that the information presented in this Quarterly Report
on Form 10-QSB for the quarter ended September 30, 2003, discusses financial
projections, information or expectations about our products or markets, or
otherwise makes statements about future events, such statements are
forward-looking. We are making these forward-looking statements in reliance on
the safe harbor provisions of the Private Securities Litigation Reform Act of
1995. Although we believe that the expectations reflected in these
forward-looking statements are based on reasonable assumptions, there are a
number of risks and uncertainties that could cause actual results to differ
materially from such forward-looking statements.
In addition, we disclaim any obligations to update any forward-looking
statements to reflect events or circumstances after the date of this Quarterly
Report. When considering such forward-looking statements, you should keep in
mind the risks referenced above and the other cautionary statements in this
Quarterly Report.
3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Page
----
Consolidated Balance Sheet as at September 30, 2003 (unaudited)..........................................5
Consolidated Statements of Operations for the three and nine months ended
September 30, 2003 and 2002 (unaudited)...........................................6
Consolidated Statements of Cash Flows for the nine months ended September 30, 2003 and
2002 (unaudited)...................................................................................7
Notes to Consolidated Financial Statements (unaudited)...................................................9
4
ASSURE ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 2003
(Unaudited)
ASSETS
Current Assets:
Cash $ 559,601
Accounts receivable 2,211,632
Prepaid expenses and other current assets 943,488
---------------
Total current assets 3,714,721
Investment 645,024
Restricted cash 64,153
Property and equipment 23,861,614
---------------
$ 28,285,512
===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Bank line of credit $ 5,667,120
Current portion of long term debt 343,800
Accounts payable and accrued expenses 2,905,810
Accrued interest payable 310,000
Commodity hedging payable 255,660
Income tax payable 223,694
---------------
Total current liabilities 9,706,084
Long term debt, net of current portion 5,851,224
Obligation for site restoration 249,061
Deferred income tax payable 2,430,714
---------------
18,237,083
---------------
Minority interest 2,588,419
Stockholders' Equity:
Preferred stock: 4,977,250 shares authorized
Series A; stated value $100, 5% cumulative dividend, 17,500 shares
authorized, issued and outstanding 1,750,000
Series B; stated value $100, 5% cumulative dividend, 5,250 shares
authorized, issued and outstanding 525,000
Common stock; $.001 par value, 100,000,000 shares authorized,
16,433,000 shares issued and outstanding 16,433
Additional paid in capital 6,635,293
Accumulated other comprehensive income 1,478,194
Accumulated deficit (2,944,910)
----------------
Total stockholders' equity 7,460,010
---------------
$ 28,285,512
===============
See Notes to Consolidated Financial Statements.
5
ASSURE ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Nine Months Ended Three Months Ended
September 30, September 30,
----------------------------- ----------------------------
2003 2002 2003 2002
------------- -------------- ------------- -------------
Revenue:
Oil and gas production $ 3,760,973 $ 685,967 $ 1,828,781 $ 388,761
Other 79,502 16,524 53,323 9,132
------------- -------------- ------------- -------------
Total revenue 3,840,475 702,491 1,882,104 397,893
------------- -------------- ------------- -------------
Royalty expense:
Crown royalties 529,488 73,405 261,677 24,180
Freehold royalties 116,652 33,665 43,178 11,089
Gross overriding royalties 81,603 - 21,892 -
------------- -------------- ------------- -------------
Total royalty expense 727,743 107,070 326,747 35,269
------------- -------------- ------------- -------------
Net oil and gas revenue 3,112,732 595,421 1,555,357 362,624
------------- -------------- ------------- -------------
Expenses:
General and administrative 1,249,377 307,761 689,710 159,656
Operating 1,220,316 167,483 843,306 85,156
Interest 549,851 25,060 156,060 2,979
Unrealized gain on commodity hedging (93,859) - (93,859) -
Depletion and site restoration 1,872,727 106,989 785,603 18,340
------------- -------------- ------------- -------------
Total expenses 4,798,412 607,293 2,380,820 266,131
------------- -------------- ------------- -------------
(Loss) income before provision for
income taxes and minority interest (1,685,680) (11,872) (825,463) 96,493
-
Provision for income taxes 262,503 - 208,015 -
Minority interest 135,575 - 135,575 -
------------- -------------- ------------- -------------
Net (loss) income (2,083,758) (11,872) (1,169,053) 96,493
Other comprehensive income (loss), net of taxes:
Foreign translation gain (loss) 1,551,493 (146,910) 117,448 (26,419)
------------- -------------- ------------- --------------
Comprehensive income (loss) $ (532,265) $ (158,782) $ (1,051,605) $ 70,074
============= ============== ============= =============
Basic loss per common share $ (0.13) $ * $ (0.07) $ *
============= ============== ============= =============
Basic weighted average common shares
outstanding 16,210,220 32,156,989 16,433,000 29,021,217
============= ============== ============= =============
* Amount is less than $.01
See Notes to Consolidated Financial Statements.
6
ASSURE ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30,
(Unaudited)
2003 2002
------------- -------------
Cash flows from operating activities:
Net loss $ (2,083,758) $ (11,872)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and depletion 1,814,240 207,942
Allowance for site restoration 58,487 16,744
Unrealized gain on commodity hedging payable (93,859) -
Warrants issued for interest 181,260 -
Options and warrants issued for services 127,500 -
Deferred income taxes 245,891 -
Minority interest 135,575 -
Change in working capital items, net of acquisition:
Accounts receivable 120,684 (240,393)
Prepaid expenses and other current assets (915,948) -
Other assets - 3,000
Accounts payable and accrued expenses 587,374 (62,869)
Accrued interest payable 310,000 -
Income tax payable 6,631 -
------------- -------------
Net cash provided by (used in) operating activities 494,077 (87,448)
------------- -------------
Cash flows from investing activities:
Purchases of property and equipment (2,698,782) (452,833)
Disposition of commodity hedging payable (191,567) -
Acquisition of business, net of acquired assets and liabilities (6,999,973) (1,838,620)
------------- -------------
Net cash used in investing activities (9,890,322) (2,291,453)
------------- -------------
Cash flows from financing activities:
Proceeds from long term debt 4,500,000 1,350,000
Proceeds from bank line of credit 431,772 -
Repayment of long term debt - (100,000)
Proceeds from the sale of units 2,400,750 -
Proceeds from sale of common stock - 1,750,000
Proceeds from sale of Series A Preferred Stock - 500,000
Proceeds from sale of Series B Preferred Stock - 525,000
------------ -------------
Net cash provided by financing activities 7,332,522 4,025,000
------------- -------------
Effect of exchange rate changes on cash 1,406,570 (41,563)
------------- -------------
Increase (decrease) in cash (657,153) 1,604,536
Cash, beginning of period 1,216,754 17,289
------------- -------------
Cash, end of period $ 559,601 $ 1,621,825
============= =============
See Notes to Consolidated Financial Statements.
7
ASSURE ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30,
(Unaudited)
2003 2002
------------- -------------
Supplemental disclosure of cash flow information:
Cash paid for interest $ 58,591 $ 25,046
============= =============
Supplemental disclosure of non-cash financing activities:
Conversion of debt to Series A Preferred Stock $ - $ 1,250,000
============= =============
Common stock issued for acquisition $ - $ 2,108,421
============= =============
Options and warrants issued for services $ 127,500 $ -
============= =============
See Notes to Consolidated Financial Statements.
8
ASSURE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(Unaudited)
Note 1 - Nature of Business
Assure Energy, Inc. (the "Company") was incorporated in the State of
Delaware on August 11, 1999. On September 11, 2003 the Company changed its
state of domicile from Delaware to Nevada (the "Reincorporation"). The
Company, through its wholly owned Canadian subsidiaries Assure Oil & Gas
Corp. and Westerra 2000, Inc., and partially owned subsidiary Quarry Oil &
Gas Ltd. is engaged in the exploration, development and production of oil
and natural gas properties in the Canadian providences of Alberta,
Saskatchewan and British Columbia.
By August 14, 2003 the Company acquired a total of 6,919,900 shares of
Quarry Oil & Gas Ltd. ("Quarry"). The Company acquired 6,750,000 shares of
Quarry pursuant to a Purchase Agreement (the "Agreement") dated March 6,
2003 and acquired an additional 169,900 shares through market transactions.
The aggregate purchase price for the acquisition of the 6,919,900 Quarry
shares, which represents approximately 48.5% of Quarry's outstanding common
stock, was $6,814,268 which was paid in cash (the "Acquisition"). Quarry is
an oil and natural gas exploration and development company located in
Calgary, Canada with properties in Alberta and British Columbia, Canada. As
part of the Acquisition certain non oil and gas industry assets, as defined
in the Agreement, have been excluded from the Acquisition and have been
transferred to a new entity which is a subsidiary of Quarry. The Company
then sold 51% of this subsidiary to certain vendors, as defined in the
Agreement, for approximately $640,000 in cash. The remaining 49% interest
has been recorded by the Company as an investment in the accompanying
consolidated balance sheet.
The acquisition of Quarry was accounted for as a purchase. The purchase
price of $6,814,268 has been allocated to the assets acquired and
liabilities assumed based upon their fair values at the date of
acquisition. Total consideration paid has been allocated as follows:
Current Assets $ 898,664
Investment 645,024
Oil and Natural Gas Properties 16,710,838
Accounts Payable and Accrued Expenses (4,847,138)
Notes payable bank (6,593,120)
-------------
Purchase price $ 6,814,268
=============
The following unaudited pro forma consolidated results of operations for
the nine months ended September 30, 2003 assume that the acquisition had
occurred as of January 1, 2003. The pro forma data is for informational
purposes only and may not necessarily reflect the actual results of
operations had Quarry been operated as a part of the Company since January
1, 2003.
Net revenue $ 8,580,077
=============
Net loss $ (1,760,450)
=============
Basic net loss per common share $ (0.11)
=============
Basic weighted average common share outstanding 16,210,220
=============
9
ASSURE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(Unaudited)
Note 2 - Basis of Presentation
The accompanying unaudited consolidated financial statements and related
footnotes have been prepared in accordance with accounting principles
generally accepted in the United States of America for interim financial
statements and pursuant to the rules and regulations of the Securities and
Exchange Commission for Form 10-QSB. Accordingly, they do not include all
of the information and footnotes required by accounting principles
generally accepted in the United States of America for complete financial
statements. In the opinion of management, all adjustments (consisting of
normal recurring accruals) considered necessary for a fair presentation
have been included. For further information read the financial statements
and footnotes thereto included in the Company's Annual Report on Form
10-KSB for the year ended December 31, 2002. The results of operations for
the nine-months ended September 30, 2003 are not necessarily indicative of
the operating results that may be expected for the year ending December 31,
2003.
The accompanying financial statements include the accounts of the Company,
its wholly owned subsidiaries and Quarry, as the Company controls Quarry's
operations, from the date of Acquisition. All significant intercompany
balances and transactions have been eliminated in consolidation.
Note 3 - Summary of Significant Accounting Policies
Investment
An investment where the Company owns 20% or more but 50% or less of the
voting stock of another entity is recorded using the equity method. Under
this method the initial investment is recorded at cost. Subsequently, the
investment is increased or decreased to reflect the Company's share of
income, losses and dividends actually paid.
Minority Interest
Minority interest represents the minority stockholders' proportionate share
of the equity of the Company's subsidiary at September 30, 2003. The
minority interest is adjusted for the minority's share of the earnings or
loss of Quarry.
Stock based compensation
Effective January 1, 2003, the Company adopted the fair value of accounting
for stock based compensation following the provisions of Statement of
Financial Accounting Standards No. 148 "Accounting for Stock-Based
Compensation - Transition and Disclosure" an amendment of SFAS No. 123.
10
ASSURE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(Unaudited)
Note 3 - Summary of Significant Accounting Policies - continued
Nine-Months Ended
September 30, 2003
--------------------
Net loss (as reported) $ (2,083,758)
Deduct: Additional stock based compensation expense determined
under the fair value based method for all awards granted,
modified or settled during the period, net of related taxes -
---------------------
Pro forma net loss $ (2,083,758)
=====================
Basic, as reported $ (0.13)
=====================
Basic, pro forma $ (0.13)
=====================
Use of estimates
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements and revenues
and expenses during the reporting period. Actual results could differ from
those estimates.
Recent accounting pronouncements
In January 2003, the Financial Accounting Standards Board issued Financial
Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN
46"). The consolidation requirements of FIN 46 apply immediately to
variable interest entities created after January 31, 2003. The
consolidation requirements apply to older entities in the first fiscal year
or interim periods beginning after June 15, 2003. Certain of the disclosure
requirements apply in all financial statements issued after January 31,
2003, regardless of when the variable interest entity was established. The
Company does not have variable interest entities and does not expect the
adoption of FIN 46 to have a material effect on its financial position or
results of operations.
Reclassification
Certain reclassifications have been made to the prior period's financial
statements in order to conform to the current period presentation.
Note 4 - Commitments
On August 28, 2003 the Company entered into a consulting agreement for
approximately $3,500 per month. In addition, the Company granted 50,000
non-cancelable options to purchase an equal number of the Company's common
stock, with an exercise price of $3 per share and are exercisable for five
years from the vesting date. The vesting date for 25,000 options is the
earlier of August 28, 2004 or when the Company achieves production of 2,000
barrels of oil per day or its natural gas equivalent. The remaining 25,000
shares vest on the first anniversary of the vesting date. These options
have been valued at approximately $11,000.
11
ASSURE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(Unaudited)
Note 4 - Commitments - continued
On August 29, 2003 the Company entered into three employment contracts,
each for approximately $70,000 annually. The employment contacts grant a
total of 225,000 stock options for an equal number of the Company's common
stock. The employment agreements are each through September 29, 2005. The
Company will amortize the fair value of these options over the employment
period. The options have an exercise price of $3 per share and are
exercisable for five years from the vesting date. The vesting date for
75,000 options is the earlier of March 31, 2004 or when the Company
achieves production of 2,500 barrels of oil per day or its natural gas
equivalent. The next 75,000 options vest on the earlier of September 30,
2004 or when the Company achieves production of 3,000 barrels of oil per
day or its natural gas equivalent. The remaining 75,000 options vest on the
earlier of March 31, 2005 or when the Company achieves production of 3,000
barrels of oil per day or its natural gas equivalent. These options have
been valued at approximately $123,000.
Note 5 - Options
On September 4, 2003 the Company granted 30,000 options to purchase an
equal number of the Company's common stock to one of its directors. The
options have an exercise price of $3 per share and are exercisable at any
time during the period ending September 3, 2006. These options have been
valued at approximately $12,400.
Note 6 - Subsequent Events
During October 2003 the Company issued 1,538,100 shares of its common stock upon
the exercise of 1,538,100 shares of the A warrants for approximately $512,000.
Additionally, the Company issued 10,000 shares of its common stock upon the
exercise of 10,000 warrants for $30,000.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of our financial condition and results of
operations should be read in conjunction with the financial statements
and the notes to those statements included elsewhere in this report. On
July 28, 2003 we completed the initial phase of our acquisition of
6,750,000 shares of Quarry Oil & Gas Ltd. ("Quarry") common stock
through our acquisition of 6,267,500 Quarry shares. We acquired the
balance of the acquisition shares in August 2003. The 6,750,000 Quarry
shares together with the 169,900 Quarry shares already owned by us
represent approximately 48.5% of Quarry's outstanding common shares.
The Quarry acquisition had a significant impact on our Results of
Operations and Liquidity and Capital Resources, as discussed below, and
in our September 30, 2003 financial statements and notes thereto.
RESULTS OF OPERATIONS
For the three-month periods ended September 30, 2003 and September 30,
2002, we had total revenue of $1,882,104 and $397,893, respectively.
Quarry's revenue for the three and nine month period ended September
30, 2003 was $1,247,927 or 66.3% of total revenue for the three months
ended September 30, 2003 and 32.5% of total revenue for the nine months
ended September 30, 2003. For the nine-month periods ended September
30, 2003 and September 30, 2002, we had total revenue of $3,840,475 and
$702,491 respectively. The increase in total revenue for the nine month
period ended September 30, 2003 as compared to the nine month period
ended September 30, 2002 was due primarily to the acquisition of Quarry
and, to a lesser extent, increased drilling activity within our
subsidiaries during 2003, an increase in the price of oil and natural
gas during 2003, and the relative strength of the Canadian dollar
against the United States dollar since December 2002. Another factor
giving rise to the increase in total revenue is the fact that our
subsidiaries, Assure Oil & Gas Corp. and Westerra 2000 Ltd. were
acquired effective April 1, 2002. Accordingly, only six months of
operations were included in the nine month period ended September 30,
2002.
Our total expenses for the three-month periods ended September 30, 2003
and September 30, 2002 was $2,380,820 and $266,131, respectively.
Quarry's expenses for the three and nine month period ended September
30, 2003 was $1,047,695 or 44.0% of total expenses for the three months
ended September 30, 2003 and 21.8% of total expense for the nine months
ended September 30, 2003. Our total expenses were $4,798,412 for the
nine-month period ended September 30, 2003 and $607,293 for the
nine-month period ended September 30, 2002. The increase in total
expenses for the three and nine month periods ended September 30, 2003
as compared to the three and nine month periods ended September 30,
2002 were due to increased costs associated with our expanded
operations including increases in general and administrative expenses,
operating expenses, interest expenses and depletion and site
restoration.
For the three-months ended September 30, 2003 and September 30, 2002,
we had a net loss of $1,169,053 or $.07 per share and net income of
$96,493, or less than $.01 per share, respectively. Quarry had net
income for the three and nine month periods ended September 30, 2003 of
$53,326. For the nine-months ended September 30, 2003, we had a net
loss of $2,083,758 or $.13 per share as compared to a net loss of
$11,872 or less than $.01 per share, for the nine-months ended
September 30, 2002. The Company attributes the losses for the three and
nine month periods ended September 30, 2003, to increased costs
associated with our expanded operations including increases in general
and administrative expenses, operating expenses, interest expenses and
depletion and site restoration. During the three month period ended
September 30, 2003, the Company incurred non-recurring costs associated
with the acquisition of Quarry of approximately $340,000.
13
LIQUIDITY AND CAPITAL RESOURCES
We have incurred losses since the inception of our business as an oil
and gas exploration company in April 2002. Prior to this date we were a
developmental stage company. Since that time, we have been dependent on
acquisitions and funding from private lenders and investors to conduct
operations. As of September 30, 2003 we had an accumulated deficit of
$2,944,910. As of September 30, 2003, we had total current assets of
$3,714,721 and total current liabilities of $9,706,084 or negative
working capital of $5,991,363. The Quarry acquisition increased our
current assets by approximately $1,100,000 and our current liabilities
by approximately $8,100,000. This negatively impacted our working
capital by approximately $7,000,000.
During the nine month period ended September 30, 2003 we obtained
financing of $4,500,000 and issued equity whereby we obtained an
additional $2,400,500. These sums were used to provide financing for
our operations.
ITEM 3. CONTROLS AND PROCEDURES
Our principal executive and financial officer evaluated the
effectiveness of our disclosure controls and procedures as of a date within 90
days prior to the filing of this report. Based on this evaluation, our principal
executive and financial officer concluded that our controls and procedures are
effective in providing reasonable assurance that the information required to be
disclosed in this report is accurate and complete and has been recorded,
processed, summarized and reported within the time period required for the
filing of this report. Subsequent to the date of this evaluation, there have not
been any significant changes in our internal controls or, to our knowledge, in
other factors that could significantly affect our internal controls.
Consistent with Section 10A(i)(2) of the Securities Exchange Act of
1934, as added by Section 202 of the Sarbanes-Oxley Act of 2002, we are
responsible for listing the non-audit services approved by our Board of
Directors to be performed by Rogoff & Company, P.C., our external auditor.
Non-audit services are defined as services other than those provided in
connection with an audit or a review of our financial statements. Our Board of
Directors currently has not approved the engagement of Rogoff & Company, P.C. to
perform any non-audit services in 2003, except for income tax preparation.
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On February 19, 2003 Gary Freitag, Garth R. Keyte and Evan Stephens filed a
Statement of Claim against Assure Oil & Gas Corp. in the Court of Queen's Bench
of Alberta, Canada Judicial District of Calgary seeking judgment in the sum of
CDN$350,0000 (approximately US $221,000) together with interest thereon at the
rate of 6% per annum from January 15, 2003. The action relates to CDN$350,000
that was placed in trust as part of the May 30,2002 Share Purchase Agreement
between Assure Oil & Gas Corp. and the three shareholders of Westerra 2000 Inc.
Plaintiffs claim the money should have been released to them on or about January
15, 2003, the date of resolution of certain title deficiencies that existed at
the time the Share Purchase Agreement was executed. We filed a Statement of
Defense and Counterclaim based upon our assertion that certain of the Westerra
2000 Inc. wells that had been purchased in consideration of a report that
indicated they were proven or producing wells were and are in fact non-producing
and that the shareholders had represented that the wells could be brought to
production at any time. We further asserted that since the wells are not on
production the holdback has been forfeited and is not payable. On May 27, 2003,
Messrs. Freitag, Keyte, and Stephens filed a Reply and Statement of Defense to
Counterclaim alleging that the payment of the CDN $350,000 to them was
unconditional and that no representations or warranties had been made that any
of Westerra 2000 Inc. wells were proven or producing. While we disagree with
these statements made in the Reply and Statement of
14
Defense to Counterclaim, and we continue to believe our position has merit we
can offer no assurance as to the outcome of this matter.
On July 3, 2003, Assure Oil and Gas Corp. and Westerra 2000 Inc., hereinafter
referred to as the plaintiffs, filed a Statement of Claim in the Court of
Queen's Bench of Alberta, Judicial District of Calgary (Action No.: 0301-10499)
naming Lloyd Venture 1 Inc., 970313 Alberta Ltd. and Roswell Petroleum
Corporation as defendants. The action relates to a May 2002 Farmout and Option
Agreement in which Assure Oil & Gas Corp. and Nevarro Energy Ltd. were given the
ability to earn an interest in certain oil and gas interests of the defendants.
Effective November 8, 2002, Nevarro Energy Ltd. assigned its interests under the
Farmout and Option Agreement to Westerra 2000 Inc. The plaintiffs claim that all
of the requirements to earn an interest in the properties was satisfied and that
they became entitled to drill certain option wells, subject to the terms of the
Farmout and Option Agreement. Consequently, several option wells were drilled
and the plaintiffs earned interests in some of the farmout lands. Subsequently,
plaintiffs provided notices to defendants to drill additional option wells.
Defendants advised plaintiffs that the notices were invalid, that they were not
to occupy any further farmout lands or commence any further drilling on the
farmout lands, and that the Farmout and Option Agreement was terminated. The
action seeks an order declaring that the plaintiffs have properly exercised
their rights to drill the option wells in accordance with the Farmout and Option
Agreement, an order for specific performance, and a declaration that the
plaintiffs are entitled to exercise the remainder of their rights under the
Farmout and Option Agreement to elect to drill further option wells and to earn
a working interest in the specifically identified farmout lands. On August 25,
2003 the defendants filed a Statement of Defense and a Counterclaim. In the
Statement of Defense defendants allege that:
o Westerra has no interest in the Farmout Agreement or, alternatively, it
failed to provide proper notice of such interest to defendants;
o Plaintiffs have no right to drill any additional option wells or to
earn further interests in the farmout lands;
o Plaintiffs had no right to drill multiple option wells and failed to
exercise their right to drill option wells in accordance with the
provisions of the Farmout and Option Agreement; and
o Certain election notices were improperly issued by plaintiffs, were not
valid, and resulted in plaintiff's not having any interest in certain
farmout lands;
The Counterclaim seeks, among other things:
o Orders for accounting of all production from certain wells drilled
pursuant to the Farmout and Option Agreement;
o An order directing the abandonment of certain wells drilled pursuant to
the Farmout and Option Agreement; and
o Monetary charges for trespass and general damages.
We are presently preparing a Statement of Defense to the Counterclaim. While we
believe our claims have merit and the defendants Statement of Defense and
Counterclaim does not, we can offer no assurance as to the outcome of this
matter.
15
No other legal proceedings are pending to which we or any of our
property is subject, nor to our knowledge are any such proceedings threatened.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In October 2003, we issued an aggregate of 1,548,100 shares of our common stock
to 13 persons in connection with their exercise of common stock purchase
warrants. These issuances were made in reliance on the exemption from
registration provided by Section 4(2) of the Securities Act of 1933, as amended.
Effective August 28, 2003 we issued 50,000 non-statutory stock options to one
person each exercisable, upon vesting, to purchase one share of our common stock
at a price of $3.00 per share during the five year period commencing on the date
of vesting. The issuance was made in reliance on the exemption from registration
provided by Section 4(2) of the Securities Act of 1933, as amended.
Effective August 29, 2003 we issued an aggregate of 225,000 non statutory stock
options to three persons each exercisable, upon vesting, to purchase one share
of our common stock at a price of $3.00 per share during the five year period
commencing on the date of vesting. These issuances were made in reliance on the
exemption from registration provided by Section 4(2) of the Securities Act of
1933, as amended.
Effective September 4, 2003 we issued 30,000 non-statutory stock options to one
person, each exercisable, upon vesting to purchase one share of our common stock
at a price of $3.00 per share during the three year period ending September 3,
2006. The issuance was made in reliance on the exemption from registration
provided by Section 4(2) of the Securities Act of 1933, as amended.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Shareholders of record as of the close of business on August 21, 2003 (the
"Record Date") holding an aggregate of 12,534,200 of our 16,433,000 then
outstanding shares (approximately 76%) executed consents approving the Agreement
and Plan of Merger (the "Merger Agreement") between us and Assure Energy, Inc.,
a Nevada corporation and wholly owned subsidiary of ours formed specifically to
effect the merger. The Merger Agreement resulted in a change in our corporate
domicile from Delaware to Nevada. Shareholders on the Record Date that did not
consent to the Merger Agreement were given appraisal rights. No eligible
shareholders exercised these appraisal rights.
Shareholders of record as of the close of business on September 18, 2003 (the
"Record Date") holding an aggregate of 11,834,500 of our 16,433,000 then
outstanding shares (approximately 72%) executed consents approving the terms and
conditions of our Plan of Conversion and related transactions involving a
proposed change in our corporate domicile from Nevada to Alberta, Canada. The
Plan of Conversion is subject, among other things, to the prior effectiveness of
our Form S-4 Registration Statement, which is presently in registration.
Following the effectiveness of the Form S-4 Registration Statement, we intend to
hold a special shareholders' meeting at which the Plan of Conversion will be
made subject to a new vote of shareholders. Shareholders that have previously
consented to the Plan of Conversion will be given the opportunity to rescind
their prior consent and vote again.
ITEM 5. OTHER INFORMATION
Through our wholly owned subsidiary, Assure Oil & Gas Corp., on August 29, 2003
entered into two year employment agreements with each of Tim Chorney, Colin
Emerson and Cameron Bogle whereby Messrs. Chorney, Emerson and Bogle will serve
as Operations Manager, Exploration Manager and Land Manager, respectively. The
Chorney and Bogle employment agreements each provide for an annual base salary
of CDN$100,000. The Emerson employment agreement provides for an annual base
salary of CDN$90,000 in the
16
first year of the agreement and CDN$100,000 in the second year. Each of the
employment agreements provide for the grant of 75,000 stock options, each
exercisable for the purchase of one share of our common stock at a price of
$3.00 per share. The employment agreements also provide that the employees are
eligible to participate in our production bonus pool. The production bonus pool
is a cash pool to be funded by us based upon the sustained production, in terms
of barrels of oil per day or its gas equivalent (boe/d), from all oil and gas
properties in which we have working interests. Funding of the pool will be made
by us upon reaching certain production milestones. We have committed to
contribute up to CDN$1,075,000 to the pool. The maximum contribution level will
be reached at such time, if ever, that we achieve sustained production for 120
consecutive days of 5,000 boe/d.
Through our wholly owned subsidiary, Assure Oil & Gas Corp. ("Assure O&G")
effective September 15, 2003 we entered into a Management and Operational
Service Agreement (the "Management Agreement") with Quarry Oil & Gas Ltd.
("Quarry"), an Alberta corporation in which we own 48.5% of the outstanding
common shares. The Management Agreement is the result of our election regarding
the post closing activities contemplated by the March 6, 2003 Share Purchase
Agreement among us, Quarry and certain Quarry Shareholders. Pursuant to such
election, we presented to Quarry an experienced, previously successful
management team. The team consists of Harvey Lalach, our President, Colin
McNeail, our Exploration Consultant; Tim Chorney, our Operations Manager, Cam
Bogle, our Land Manager, and Colin Emerson, our Exploration Manager. The
Management Agreement provides the basis upon which we are providing the services
of the team to Quarry. The Management Agreement has a six month term, subject to
automatic renewals for additional three month terms unless either party gives
the other thirty days prior written notice of its intention not to renew.
Pursuant to the Management Agreement, Quarry is obligated to pay us a monthly
fee equal to certain costs incurred by us in providing the services of the team
to Quarry.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
31.1 Rule 13(a)-14(a)/15(d)-14(a) Certification of Principal
Executive and Financial Officer
32.1 Section 1350 Certification of Chief Executive and Financial
Officer
(b) Reports on Form 8-K.
On August 11, 2003 we filed a Form 8-K dated July 28, 2003. In Item 2
thereof, we discussed our purchase of certain common shares of Quarry
Oil & Gas Ltd.
On September 25, 2003 we filed a Form 8-K dated September 11, 2003. In
Item 5 thereof, we discussed our change in domicile from Delaware to
Nevada and our further intention to re-domicile in Alberta, Canada.
17
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
ASSURE ENERGY, INC.
Dated: November 14, 2003 By: /s/ Harvey Lalach
-------------------------------------
Harvey Lalach
President and Chief Executive Officer
18