U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
(Mark One)
|_| REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For Fiscal Year Ended: December 31, 2004
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: 0-31040
ASSURE ENERGY, INC.
-------------------
(Exact name of small business issuer as specified in its charter)
N/A Alberta, Canada
--- ---------------
(Translation of Registrant's (Jurisdiction of Incorporation
Name Into English) or Organization)
521 3rd Avenue, S.W., Suite 800
Calgary, Alberta T2P 3T3
Canada
Securities for which there is a reporting
obligation pursuant to Section 15(d) of the Act.
Title of Each Class Name of Each Exchange On Which Registered
------------------- -----------------------------------------
Common Stock N/A
Securities registered or to be registered pursuant to Section
12(b) of the Act:
N/A
(Title of Class)
Securities registered or to be registered pursuant to Section
12(g) of the Act:
N/A
(Title of Class)
Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the annual
report.
As of December 31, 2004 23,868,265 common shares were issued and outstanding.
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark which financial statement item the registrant has elected
to follow. Item 17 |X| Item 18 |_|
The information set forth in this Annual Report on Form 20-F is at December 31,
2004 unless an earlier or later date is indicated.
Financial information is presented in accordance with accounting principles
generally accepted in Canada. Measurement differences between accounting
principles generally accepted in Canada and in the Unites States, as applicable
to us, are set forth in Item 5 of this Annual Report and in Note 22 to our
accompanying Financial Statements.
Statements in this Annual Report regarding expected completion dates of
feasibility studies, anticipated commencement dates of drilling or oil and gas
production operations, projected quantities of future oil and gas production
rates, operating efficiencies, costs and expenditures are forward-looking
statements. Actual results could differ materially depending upon the
availability of materials, equipment, required permits or approvals and
financing, the occurrence of unusual weather or operating conditions, the
accuracy of reserve estimates or the failure of equipment or processes to
operate in accordance with specifications. See "Risk Factors" for other factors
that may affect our future financial performance.
2
SECURITIES AND EXCHANGE COMMISSION
FORM 20-F
TABLE OF CONTENTS
INTRODUCTION.....................................................................................5
FINANCIAL AND OTHER INFORMATION..................................................................5
FORWARD-LOOKING STATEMENTS.......................................................................5
PART I...........................................................................................6
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS........................6
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE......................................6
ITEM 3. KEY INFORMATION..............................................................6
A. Selected Financial Data..................................................................6
B. Capitalization and Indebtedness.........................................................17
C. Reasons for the Offer and Use of Proceeds...............................................17
D. Risk Factors............................................................................17
ITEM 4. INFORMATION ON THE COMPANY..................................................25
A. History and Development of the Company..................................................25
B. Business Overview.......................................................................30
C. Organizational Structure................................................................45
D. Property, Plant and Equipment...........................................................46
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS................................49
A. Operating Results.......................................................................49
B. Liquidity and Capital Resources.........................................................57
C. Research and Development, Patents and Licenses, etc.....................................68
D. Trend Information.......................................................................68
E. Off Balance Sheet Arrangements..........................................................69
F. Disclosure of Contractual Obligations...................................................69
G. Safe Harbor.............................................................................70
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES..................................70
A. Directions and Senior Management........................................................70
B. Compensation............................................................................72
C. Board Practices.........................................................................76
D. Employees...............................................................................77
E. Share Ownership.........................................................................77
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS...........................78
A. Major Shareholders......................................................................78
B. Related Party Transactions..............................................................78
C. Interests of Experts and Counsel........................................................81
ITEM 8. FINANCIAL INFORMATION.......................................................81
ITEM 9. THE OFFER AND LISTING.......................................................82
A. Offer and Listing Details...............................................................82
B. Plan of Distribution....................................................................83
C. Markets.................................................................................83
D. Selling Shareholders....................................................................83
E. Dilution................................................................................83
F. Expenses of the Issue...................................................................83
3
ITEM 10. ADDITIONAL INFORMATION..................................................84
A. Share Capital...........................................................................84
B. Memorandum and Articles of Association..................................................87
C. Material Contracts......................................................................87
D. Exchange Controls.......................................................................88
E. Taxation................................................................................88
F. Dividends and Paying Agents.............................................................95
G. Statements by Experts...................................................................95
H. Documents on Display....................................................................95
I. Subsidiary Information..................................................................95
ITEM 11. QUANTITIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKETRISKS.......................................................95
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN
EQUITY SECURITIES.......................................................97
PART II.........................................................................................97
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES.........................97
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY
HOLDERS AND USE OF PROCEEDS ............................................97
ITEM 15. CONTROLS AND PROCEDURES.................................................97
ITEM 16. [RESERVED]..............................................................98
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT........................................98
ITEM 16B. CODE OF ETHICS..........................................................98
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES..................................98
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT
COMMITTEES .............................................................99
ITEM 16E. PURCHASE OF EQUITY SECURITIES BY THE ISSUER AND
AFFILIATED PURCHASERS ..................................................99
PART III.......................................................................................100
ITEM 17. FINANCIAL STATEMENTS...................................................100
ITEM 18. FINANCIAL STATEMENTS...................................................100
ITEM 19. EXHIBITS...............................................................100
SIGNATURES .......................................................................105
FINANCIAL STATEMENTS .......................................................................F-1
4
INTRODUCTION
References in this annual report to "Assure," "Company," "we," "us" and "our"
refer to Assure Energy, Inc. and, unless the context requires otherwise, to its
subsidiaries. Assure is amalgamated under the laws of Alberta, Canada. We refer
to our wholly owned subsidiary, Assure Oil & Gas Corp. as Assure Oil & Gas, and
we refer to our wholly owned subsidiary, Westerra 2000 Inc. as Westerra.
FINANCIAL AND OTHER INFORMATION
Unless otherwise indicated, all references to "dollars" and "$" in this annual
report are to, and all monetary amounts in this annual report are presented in,
Canadian dollars. Unless otherwise indicated, the financial information
contained in this annual report has been prepared in accordance with accounting
principles generally accepted in Canada, referred to as Canadian GAAP which
differs in certain respects from those principles that we would have followed
had our financial statements been prepared in accordance with accounting
principles generally accepted in the United States (referred to as U.S. GAAP).
The major differences between Canadian GAAP and U.S. GAAP that would affect the
measurement of our financial position, and cash flows are set forth in Note 22
to our accompanying Consolidated Financial Statements.
Certain monetary amounts, percentages and other figures included in this annual
report have been subject to rounding adjustments. Accordingly, figures shown as
totals in certain tables may not be the arithmetic aggregation of the figures
that precede them, and figures expressed as percentages in the text may not
total 100% or, as applicable, when aggregated may not be the arithmetic
aggregation of the percentages that precede them.
In this annual report, we refer to and rely on publicly available information
regarding our industry and our competitors. Although we believe the information
is reliable, we cannot guarantee the accuracy and completeness of the
information and have not independently verified it.
FORWARD-LOOKING STATEMENTS
Except for historical information, this report contains forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. These statements involve
known and unknown risks, uncertainties, and other factors that may cause our or
our industry's actual results, levels of activity, performance or achievements
to be materially different from any future results, levels of activity,
performance or achievements expressed or implied by these forward-looking
statements.
In some cases, you can identify forward-looking statements by terminology such
as "may," "will," "should," "expects," "plans," "anticipates," "believes,"
"estimates," "predicts," "potential," "continue" or the negative of these terms
or other comparable terminology. Although we believe that the assumptions
underlying our forward-looking statements are reasonable, we cannot guarantee
future results, levels of activity, performance or achievements.
In particular, this report may contain forward-looking statements pertaining to
the following:
5
o oil and natural gas production levels;
o capital expenditure programs;
o the quantity of oil and natural gas reserves;
o projections of market prices and costs;
o supply and demand for oil and natural gas;
o expectations regarding the ability to raise capital and to continually add
to reserves through acquisitions, exploration and development; and
o treatment under governmental regulatory regimes.
The actual results could differ materially from those anticipated in these
forward-looking statements as a result of the risk factors set forth below and
elsewhere in this registration statement:
o volatility in market prices for oil and natural gas;
o liabilities inherent in oil and natural gas operations;
o uncertainties associated with estimating oil and natural gas reserves;
o competition for, among other things, capital, acquisitions of reserves,
undeveloped lands and skilled personnel;
o incorrect assessments of the value of acquisitions;
o geological, technical, drilling and processing problems; and
o fluctuations in foreign exchange or interest rates and stock market
volatility.
You are cautioned not to place undue reliance on the forward-looking statements,
which speak only as of the date of this annual report. We undertake no
obligation to publicly release any revisions to the forward-looking statements
or reflect events or circumstances after the date of this prospectus.
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
This Form 20-F is being filed as an annual report under the Exchange Act and, as
such, there is no requirement to provide any information under this item.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
This Form 20-F is being filed as an annual report under the Exchange Act and, as
such, there is no requirement to provide any information under this item.
ITEM 3. KEY INFORMATION
A. Selected Financial Data
Most of our operations are conducted by our Canadian subsidiaries in Canadian
dollars. As only limited operations are conducted in United States dollars we
adopted Canadian dollars as our reporting currency effective January 1, 2002.
Comparative figures for prior periods have been restated using the current rate
method of currency translation as though the Canadian dollar was the reporting
currency in that period. The net effect of adopting Canadian dollars as our
6
reporting currency reduces the foreign currency fluctuations recorded as a
result of translating our Canadian subsidiaries into US dollars. As
substantially all of our operations are now in Canada, management is of the
opinion that the Canadian dollar will more accurately reflect the balance sheet
and the net exposure in US dollars will be appropriately recognized through the
income statement. The net exposure to the US dollar will come from US dollar
denominated accounts such as cash and US dollar Note payable. All numbers
reported below are stated in Canadian dollars unless otherwise denoted.
The United States dollar amounts have been converted into Canadian dollar
amounts, at the closing Bank of Canada rate for the period, for convenience
purposes using either the average or the closing rate for the period end
exchange rates shown below.
Twelve months ended December 31, 2004 $1.2991
Twelve months ended December 31, 2003 $1.3161
As at June 10, 2005(1) $1.2497
As at December 31, 2004 $1.2020
As at December 31, 2003 $1.2965
As at December 31, 2002 $1.5776
(1) Stock options denominated in US dollars were translated using this exchange
rate
The table below summarizes our selected annual financial data (stated in
Canadian dollars) for the years ended December 31, 2004, 2003 and 2002 prepared
in accordance with Canadian generally accepted accounting principals. The
information in the tables was extracted from the more detailed financial
statements and related notes included with this annual report and should be read
in conjunction with these financial statements and with the information
appearing under the heading "Item 5 - Operating and Financial Review and
Prospects". Note 22 of our financial statements included with this annual report
sets forth the measurement differences were such information to be presented in
conformity with United States generally accepted accounting principles. Results
for the indicated periods are not necessarily indicative of results for future
periods. No information is provided for years prior to 2002 because 2002 was the
first year we engaged in our present line of business and information for the
years ended December 31, 2001 and 2000 cannot be provided on a restated basis
without unreasonable effort or expense.
7
SELECTED FINANCIAL INFORMATION ($CDN)-
Canadian Generally Accepted Accounting Principles
--------------------------------------------------------------------------------------------------------------------------
Year Ended Year Ended Year Ended
December 31, 2004 December 31, 2003 December 31, 2002(1)
--------------------------------------------------------------------------------------------------------------------------
OPERATIONS
Production:
Crude oil & NGL's (Bbl/d) 715 696 36
Natural gas (Mcf/d) 2,417 2,361 860
Total (Boe/d) 1,118 1,090 179
Average sales prices:
Crude oil ($/Bbl) $ 38.95 $ 33.04 $ 37.75
Natural gas ($/Mcf) $ 6.53 $ 6.23 $ 4.33
Total ($/boe) $ 39.04 $ 34.95 $ 28.32
Royalty expense ($/ Boe) $ (8.34) $ (5.88) $ (5.27)
Operating expense ($/ Boe) $ (13.91) $ (12.73) $ (7.18)
Netback ($/ Boe) $ 16.78 $ 16.35 $ 15.87
FINANCIAL
Revenues:
Crude oil & NGL's $ 10,195,428 $ 4,390,809 $ 490,689
Natural gas 5,781,337 3,943,571 1,359,327
--------------------------------------------------------------------------------------------------------------------------
15,976,765 8,334,380 1,850,016
Royalty expenses (3,413,404) (1,400,856) (344,362)
Operating expenses (5,694,504) (3,035,185) (468,848)
--------------------------------------------------------------------------------------------------------------------------
Revenue less operating expenses from oil
and gas production 6,868,857 3,898,339 1,036,806
--------------------------------------------------------------------------------------------------------------------------
Net loss $ (3,662,782) $ (12,409,986) $ (1,030,208)
--------------------------------------------------------------------------------------------------------------------------
Net loss per share $ (0.18) $ (0.77) $ (0.04)
--------------------------------------------------------------------------------------------------------------------------
Capital expenditures (disposal) including
acquisition of business $ 10,402,820 $ 16,453,788 $ 5,387,164
--------------------------------------------------------------------------------------------------------------------------
Long term liabilities $ 6,631,999 $ 11,461,096 $ 1,112,121
--------------------------------------------------------------------------------------------------------------------------
Total assets $ 39,082,134 $ 35,092,975 $ 11,403,042
--------------------------------------------------------------------------------------------------------------------------
Common shares $ 25,256,913 $ 15,597,103 $ 6,248,491
--------------------------------------------------------------------------------------------------------------------------
Preferred shares $ 3,489,521 $ 3,489,521 $ 3,489,521
--------------------------------------------------------------------------------------------------------------------------
Warrants $ 2,070,001 $ 1,976,913 $ --
--------------------------------------------------------------------------------------------------------------------------
Weighted average number of common shares 20,489,457 16,210,220 27,924,740
--------------------------------------------------------------------------------------------------------------------------
Dividends (Preferred Shares) $ 227,083 $ 147,478 $ --
--------------------------------------------------------------------------------------------------------------------------
NGLs - natural gas liquids
Bbls/d - barrels of oil per day
Mcf/d - thousand cubic feet per day
Mmcf/d - million cubic feet per day
Boe/d - barrels of oil equivalent per day
(A boe conversion ratio of 6 mcf: 1bbl is based on an energy equivalency
conversion method primarily applicable at the burner tip and does not represent
a value equivalency at the wellhead)
(1)Certain comparative figures have been restated to conform to the current
period presentation
8
SELECTED FINANCIAL INFORMATION ($CDN)-
United State Generally Accepted Accounting Principles
--------------------------------------------------------------------------------------------------------------------------
Year Ended Year Ended Year Ended
December 31, 2004 December 31, 2003 December 31, 2002(1)
--------------------------------------------------------------------------------------------------------------------------
OPERATIONS
Production:
Crude oil & NGL's (Bbl/d) 715 696 36
Natural gas (Mcf/d) 2,417 2,361 860
Total (Boe/d) 1,118 1,090 179
Average sales prices:
Crude oil ($/Bbl) $ 38.95 $ 33.04 $ 37.75
Natural gas ($/Mcf) $ 6.53 $ 6.23 $ 4.33
Total ($/boe) $ 39.04 $ 34.95 $ 28.32
Royalty expense ($/ Boe) $ (8.34) $ (5.88) $ (5.27)
Operating expense ($/ Boe) $ (13.91) $ (12.73) $ (7.18)
Netback ($/ Boe) $ 16.78 $ 16.35 $ 15.87
FINANCIAL
Revenues:
Crude oil & NGL's $ 10,195,428 $ 4,390,809 $ 490,689
Natural gas 5,781,337 3,943,571 1,359,327
--------------------------------------------------------------------------------------------------------------------------
15,976,765 8,334,380 1,850,016
Royalty expenses (3,413,404) (1,400,856) (344,362)
Operating expenses (5,694,504) (3,035,185) (468,848)
--------------------------------------------------------------------------------------------------------------------------
Revenue less operating expenses from oil
and gas production 6,868,857 3,898,339 1,036,806
--------------------------------------------------------------------------------------------------------------------------
Net loss $ (4,647,023) $ (12,647,232) $ (1,105,566)
--------------------------------------------------------------------------------------------------------------------------
Net loss attributed to common share $ (5,529,565) $ (14,206,930) $ (1,862,224)
--------------------------------------------------------------------------------------------------------------------------
Net loss per share $ (0.27) $ (0.88) $ (0.07)
Capital expenditures (disposal) including
acquisition of business $ 10,402,820 $ 16,453,788 $ 5,387,164
--------------------------------------------------------------------------------------------------------------------------
Long term liabilities $ 5,182,845 $ 10,007,096 $ 1,112,121
--------------------------------------------------------------------------------------------------------------------------
Total assets $ 37,940,392 $ 34,200,975 $ 11,403,041
--------------------------------------------------------------------------------------------------------------------------
Common shares $ 25,256,913 $ 15,597,103 $ 6,248,491
--------------------------------------------------------------------------------------------------------------------------
Preferred shares $ 3,489,521 $ 3,489,521 $ 3,489,521
--------------------------------------------------------------------------------------------------------------------------
Warrants $ 2,070,001 $ 1,976,913 $ --
--------------------------------------------------------------------------------------------------------------------------
Weighted average number of common shares 20,489,457 16,210,220 27,924,740
--------------------------------------------------------------------------------------------------------------------------
Dividends (Preferred Shares) $ 227,083 $ 147,478 $ --
--------------------------------------------------------------------------------------------------------------------------
NGLs - natural gas liquids
Bbls/d - barrels of oil per day
Mcf/d - thousand cubic feet per day
Mmcf/d - million cubic feet per day
Boe/d - barrels of oil equivalent per day
(A boe conversion ratio of 6 mcf: 1bbl is based on an energy equivalency
conversion method primarily applicable at the burner tip and does not represent
a value equivalency at the wellhead)
(1)Certain comparative figures have been restated to conform to the current
period presentation
Differences Between Generally Accepted Accounting Principles (GAAP) in Canada
and the United States
The consolidated financial statements have been prepared in accordance with
Canadian generally accepted accounting principles. The following summarizes the
significant adjustments or disclosures which would be required to present these
consolidated financial statements in accordance with U.S. generally accepted
accounting principles.
Reconciliation to Accounting Principles Generally Accepted in the United States
The Corporation's accounting policies do not differ materially from accounting
principles generally accepted in the United States ("US GAAP") except for the
following:
9
a) Reconciliation of Net Loss Under Canadian GAAP to U.S. GAAP
Consolidated Statement of Operations - U.S. GAAP
For the year ended
December 31, December 31,
December 31, 2003 2002
2004 (restated Note 3b) (restated Note 3b)
--------------------------------------------------------------------------------------------------------------------------
Net loss as reported in accordance with Canadian
principles $ (3,662,782) (12,409,986) $ (1,030,208)
---------------- ---------------- --------------------
Impact of US principles:
Amortization of debt discount (debenture)(1) (109,200) (54,600) --
Amortization of debt discount (long term debt)(2) (152,153) (102,480) --
Asset retirement obligation(6) -- (86,700) --
Depletion(7) (1,542,224) (916,300) --
Future tax expense 621,648 1,115,600 --
Stock compensation(3) 197,688 (184,366) (75,358)
Foreign exchange -- (8,400) --
---------------- ---------------- --------------------
Net U.S. GAAP adjustments (984,241) (237,246) (75,358)
---------------- ---------------- --------------------
Net loss for the year in accordance with U.S. principles (4,647,023) (12,647,232) (1,105,566)
Less dividend on preferred shares(10) (227,083) (147,478) --
Less amortization of beneficial conversion on preferred
shares10, (11) (655,459) (1,412,220) (756,658)
---------------- ---------------- --------------------
Net loss attributed to common stock in accordance with U.S.
principles (5,529,565) (14,206,930) (1,862,224)
--------------------------------------------------------------------------------------------------------------------------
Loss per common share in accordance with U.S. principles
Basic and diluted (0.27) (0.88) (0.07)
--------------------------------------------------------------------------------------------------------------------------
10
Year Ended Year Ended Year Ended
December 31, 2004 December 31, 2003 December 31, 2002
-------------------------------------------------------------------------------------------------------------
Note 3(b)
REVENUE
Petroleum and natural gas sales $ 15,976,765 $ 8,334,380 $ 1,850,016
Less: royalties, net of tax credits 3,413,404 1,400,856 344,362
-------------------------------------------------------------------------------------------------------------
Net petroleum and natural gas revenue 12,563,361 6,933,524 1,505,654
EXPENSES
Asset retirement obligation - accretion 78,507 65,515 --
Depletion and depreciation 8,151,956 14,224,353 1,103,092
Foreign exchange gain (112,242) 141,947 (183,658)
General and administrative 4,735,877 2,675,476 1,141,315
Interest1, (2) 1,126,898 1,013,427 37,833
Production and operating costs 5,694,504 3,035,185 468,848
-------------------------------------------------------------------------------------------------------------
19,675,500 21,155,903 2,567,431
-------------------------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSES)
Equity income 28,025 68,531 --
Loss on dilution (350,401) -- --
Interest and other income (656) -- --
-------------------------------------------------------------------------------------------------------------
(323,032) 68,531 --
-------------------------------------------------------------------------------------------------------------
Loss before income taxes (7,435,171) (14,153,848) (1,061,777)
-------------------------------------------------------------------------------------------------------------
Income tax expense (recovery) - current 38,223 (279,041) 360
Income tax expense (recovery) - future (2,098,149) (1,206,124) 43,429
-------------------------------------------------------------------------------------------------------------
Total income tax expense (recovery) (2,059,926) (1,485,165) 43,789
-------------------------------------------------------------------------------------------------------------
Net loss after taxes (5,024,844) (12,668,683) (1,105,566)
Minority interest in consolidated subsidiary 728,222 21,451 --
-------------------------------------------------------------------------------------------------------------
Net loss for the period (4,647,023) (12,647,232) (1,105,566)
-------------------------------------------------------------------------------------------------------------
b) Comparative information
The revenue and net loss as reported in US GAAP for the year ended
December 31, 2003 differs from the amounts previously reported by an
immaterial amount due to a correction in the accounting for realized
hedging gains. The ending net equity amount remains unchanged.
11
c) Condensed Consolidated Balance Sheet
--------------------------------------------------------------------------------------------------------------------------------
Canadian Canadian
Principles at US Principles at Principles at US Principles at
December 31, 2004 December 31, 2004 December 31, 2003 December 31, 2003
--------------------------------------------------------------------------------------------------------------------------------
Assets
Current assets $ 3,819,065 $ 3,819,065 $ 8,482,514 $ 8,482,514
Deposits 53,200 53,200 159,581 159,581
Investment 927,626 927,626 899,601 899,601
Property and equipment8,(12) 34,282,243 33,140,501 25,551,279 24,659,279
----------------- ----------------- ----------------- -----------------
$ 39,082,134 $ 37,940,392 $ 35,092,975 $ 34,200,975
================= ================= ================= =================
Liabilities
Current liabilities(1) $ 17,929,846 $ 17,929,846 $ 15,681,950 $ 15,572,750
Long term debt(2) 3,131,412 2,825,765 4,370,595 3,912,795
Asset retirement obligation(7) 1,279,702 1,315,902 1,088,682 1,124,882
Future taxes 2,220,885 1,041,178 2,716,255 1,683,855
Minority interest -- -- 3,285,564 3,285,564
----------------- ----------------- ----------------- -----------------
24,561,845 23,112,691 27,143,046 25,579,846
Shareholders' Equity(5,6) 14,520,289 14,827,701 7,949,929 8,621,129
----------------- ----------------- ----------------- -----------------
$ 39,082,134 $ 37,940,392 $ 35,092,975 $ 34,200,975
================= ================= ================= =================
--------------------------------------------------------------------------------------------------------------------------------
12
d) Reconciliation of Shareholders' Equity under Canadian GAAP to US GAAP:
---------------------------------------------------------------------------------------------------------
December 31, December 31,
2004 2003
---------------------------------------------------------------------------------------------------------
Shareholders' Equity as reported with Canadian principles 14,520,289 7,949,929
Beneficial conversion feature(1) 163,800 163,800
Proceeds from warrant sale (long term debt) (2) 560,280 560,280
Stock compensation expense (recovery)(3) 62,037 259,724
Valuation of shares issued in amalgamation of Quarry(12) 818,141 --
Amortization of debt discount (debenture)(1) (163,800) (54,600)
Amortization of debt discount (long term debt)(2) (254,633) (102,480)
Asset retirement obligation(7) (86,700) (86,700)
Depletion(8) (2,458,524) (916,300)
Future tax expense 1,737,248 1,115,600
Stock compensation(3) (62,037) (259,724)
Foreign exchange (8,400) (8,400)
---------------------------------------
Shareholders' Equity in accordance with U.S. Principles 14,827,701 8,621,129
---------------------------------------------------------------------------------------------------------
13
(1) On July 28, 2003, the Company issued through a subsidiary a
debenture payable for $1,250,000. The holder has the right to
convert the debenture into common shares of Quarry at any time after
July 22, 2004 and prior to maturity at a price equal to the lesser
of $1.33 per share or the 10 day weighted average trading price of
Quarry's common shares, not to be lower than $0.75 per share. In
accordance with US principles, the face value of the debenture
payable has been reduced for the beneficial conversion option of
$163,800 and had been accounted for in the accompanying consolidated
statement of shareholders' equity as additional paid-in capital and
a discount on the debenture. This amount will be amortized over 15
months. The charge for amortization in the period was $109,200
(December 31, 2003 - $54,600).
(2) On March 15, 2003, the Company entered into a six year
Subordinated Promissory Note Payable (the "Subordinated Note") with
a foreign entity with a principal balance of US $4,500,000. This
Subordinated Note is unsecured and accrues interest at 7.7.5% per
annum. The Company issued 450,000 common stock purchase warrants to
purchase an equal number of the Company's common stock with an
exercise price of US $3.10 per share. These common stock purchase
warrants may be exercised at any time during the five years
commencing July 1, 2003. In accordance with US principles, the
Company allocated the proceeds of the financing based on relative
fair values. The value attributed to the warrants was $560,280
(US$400,000) of which $152,153 (US$108,681) was amortized in the
period (December 31, 2003 - $102,480 (US$73,200)) as interest
expense. The remaining $305,647 (US$218,318) has been netted against
long-term debt as debt discount.
(3) The Company's functional and reporting currency is Canadian
dollars and the Company's stock options and exercise prices are
denominated in US dollars. In addition, there are options issued to
consultants that vest over a period of time. As a result, for U.S.
principles, the options issued prior to January 1, 2003 have been
accounted for using variable accounting under APB 25. Effective
January 1, 2003 the Company adopted the fair value basis of
accounting under FAS 123 for all options issued after January 1,
2003.
(4) In accordance with Canadian principles, the Company records
dividends in the statement of deficit. For US principles, preferred
stock dividends are to be recorded against contributed surplus.
Under U.S principles, preferred stock dividends are also considered
in calculating the net loss per common share.
(5) Foreign currency translation adjustment - Under Canadian GAAP,
foreign exchange gain translations of opening balance sheet
information can be done using a translation of convenience
methodology in the initial period when a Company changes its
reporting currency. Any net gain or loss is reflected as a separate
component of equity. Under U.S. GAAP, such foreign currency
translation gains and losses are income to be reflected in the
earnings based on the rates prevailing during each fiscal period of
operations. As such, the amount included in the separate component
of shareholders' equity would be reclassified to deficit under US
GAAP.
The above two GAAP differences identified above (5 and 6) will
affect accumulated deficit, but will have no net effect on total
shareholders' equity.
(6) In 2003, the Company early adopted the Canadian accounting
standard for asset retirement obligations, as outlined in the CICA
handbook section 3110. This standard is equivalent to U.S. FAS 143
"Accounting for Asset Retirement Obligations", which was effective
for fiscal periods beginning on or after January 1, 2003. Early
adopting the Canadian standard avoided a U.S. GAAP reconciling item
in respect to accounting for the obligation. No retroactive
adjustment was made to 2002 as the net effect was not material.
(7) The full cost method of accounting for crude oil and natural gas
operations under Canadian and U.S. GAAP differ in the following
respects. Under U.S. GAAP, a ceiling test is applied to ensure the
unamortized capitalized costs in each cost centre do not exceed the
sum of the present value, discounted at 10 percent, of the estimated
unescalated future net operating revenue from proved reserves plus
unimpaired unproved property costs less future development costs,
related production costs and applicable taxes. Under Canadian GAAP,
a similar ceiling test calculation is performed with the exception
that cash flows from proved reserves are undiscounted and utilize
forecast pricing to determine whether impairment exists. Any
impairment amount is measured using the fair value of proved and
probable reserves excluding the tax effect of the write down.
14
In computing its consolidated net earnings for U.S. GAAP purposes,
the Company recorded additional depletion in 2003 as a result of the
application of the tax effect on the ceiling test. These charges
were not required under the Canadian GAAP ceiling tests. As a
result, the depletion base of unamortized capitalized costs is less
for U.S. GAAP purposes.
In 2003, the Company adopted the new Canadian guideline AcG-16 which
restricts the capitalized costs less accumulated depletion from
exceeding an amount equal to the estimated undiscounted value of
future net revenues from proved oil and gas reserves, as determined
by independent engineers, based on sales prices achievable under
existing contracts and posted average reference prices in effect
between the end of the year and the finalization of the year end
audit and current costs, and after deducting estimated production
related expenses, abandonment and reclamation costs, and applicable
taxes. When the carrying value of the cost center exceeds the
undiscounted value of future net revenues from proved oil and gas
reserves, the Company is required to determine the fair value of
proved and probable reserves and a writedown, if any is recorded.
Commodity prices used in calculating estimated cash inflows are
based on quoted benchmark prices as at the latest balance sheet
date. Unproved properties are tested separately for impairment. For
U.S. principles, entities are required to use discounted future net
revenues (discounted at 10%) based on unescalated current pricing.
For the ceiling test, under Canadian principles, impairment is
measured using discounted forecast prices of proved and probable
reserves. Under U.S. principles, impairment is measured using
current prices of proved reserves discounted at 10%. In computing
its consolidated net earnings for U.S. GAAP purposes for the Company
there was a $1,693,864 writedown as a result of the application of
the US ceiling test at December 31, 2004 (December 31, 2003 -
$963,900).
(8) U.S. GAAP requires the disclosure, as other comprehensive
income, of changes in equity during the period from transaction and
other events from non-owner sources. Canadian GAAP does not require
similar disclosure. Other comprehensive income arose from gains on
hedging activities.
(9 In calculating earnings attributable to common shares under U.S.
GAAP principles requires deducting dividends on preferred shares and
amortization of the beneficial conversion feature of the preferred
shares. Under Canadian GAAP principles dividends are a reduction of
shareholders equity. Under Canadian GAAP principles does not
recognize the amortization of the beneficial conversion feature of
the preferred shares.
(10) Under US GAAP the face value of the Series A and B preferred
shares has been reduced for the effect of the total beneficial
conversion option value of $2,824,337 (US$1,841,333) and has been
accounted for in the accompanying consolidated statement of
stockholders' equity as additional paid-in capital and a discount on
these preferred shares for the year ended December 31, 2002. This
beneficial conversion amount will be amortized over 2 years. The
charge for amortization affecting the net loss attributed to common
stock in the accompanying statements of operations for the year
ended December 31, 2004 $655,459 (US$427,328) (December 31, 2003 was
$1,412,220 (US$920,700) ,year ended December 31, 2002 $756,658
(US$493,305)). Under Canadian principles there is no recognition of
the beneficial conversion option value attributable to preferred
shares.
(11) Under US GAAP principles the value ascribed to the transaction
between Assure and Quarry as described in Note 2 is to be based on
trading prices of Assure's stock around the announcement date. In
Canadian GAAP, consideration was given to block discounts and other
qualitative factors. As a result, the purchase price of the
properties was determined to be $1,292,482 higher of which $818,141
was attributed to the value of the common shares issued and $474,341
to related future tax liabilities. As a result of this additional
purchase price discrepancy, depletion increased for the year by an
equivalent amount as the excess was written off as additional
depletion upon applying the U.S. GAAP ceiling test.
15
e) Recent Developments in Accounting Standards
In December of 2004, the Financial Accounting Standards Board ("FASB")
issued SFAS "Share Based Payments" which addresses the accounting for
transactions in which an entity exchanges its equity instruments for goods
and services. It also addresses transactions in which an entity incurs
liabilities in exchange for goods or services that are based on the fair
value of the entity's equity instruments or that may be settled by the
issuance of those equity instruments. This statement is a revision of FASB
statement No. 123, "Accounting for Stock-Based Compensation". This
statement supersedes APB Opinion No. 25 "Accounting for Stock Issued to
Employees". Among other things, this statement requires a public entity to
measure the cost of employee services received in exchange for an award of
equity instruments based on the grant-date fair value of the award. That
cost is recognized over the period during which an employee is required to
provide service in exchange for the award - the requisite service period
(usually the vesting period). This statement is to be applied as of the
beginning of the first interim or annual period that begins after June 15,
2005, but earlier adoption is encouraged. We adopted FAS 123 using the
modified prospective approach effective January 1, 2003There is no
expected impact upon adoption of FAS 123R.
In December of 2004, FASB issued SFAS No. 153 "Exchanges of Nonmonetary
Assets - An Amendment of APB Opinion No. 29". The guidance in APB Opinion
No. 29, "Accounting for Nonmonetary Transactions" is based on the
principle that exchanges of nonmonetary assets should be measured based on
the fair value of the assets exchanged. The guidance in that Opinion,
however, included certain exceptions to that principle. This Statement
amends Opinion 29 to eliminate the exception for nonmonetary exchanges of
similar productive assets and replaces it with a general exception for
exchanges of nonmonetary assets that do not have commercial substance. A
nonmonetary exchange has commercial substance if the future cash flows of
the entity are expected to change significantly as a result of the
exchange. The provisions of this Statement are effective for nonmonetary
asset exchanges occurring in fiscal periods beginning after June 15, 2005.
Earlier application is permitted for nonmonetary asset exchanges occurring
in fiscal periods beginning after the date this Statement is issued. The
provisions of this Statement shall be applied prospectively. The adoption
of SFAS No. 153 will not have any impact on our financial statements.
Summary of Exchange Rates for the 3-year Period - 2002 to 2004
The following table sets forth, for each of the years indicated, the exchange
rate of the United States dollar into Canadian currency at the end of such year,
the average exchange rate during each such year and the range of high and low
rates for each such year and the range of high and low rates for each such year
as supplied by the Bank of Canada.
16
Exchange Rate 2004 2003 2002
---- ---- ----
1.2020 1.2965 1.5776
Rate at the End of the Period(1)
1.2991 1.3161 1.5648
Average Rate(2)
1.3957 1.5672 1.6125
High Rate(1)
1.1759 1.2943 1.5122
Low Rate (1)
Notes:
(1) The rate of exchange is the Bank of Canada closing rate for the period.
(2) The average rate means the average of the exchange rates during the year.
The high and low rates of exchange for each of the 6 months from December 2004
to May 2005 are as follows:
Dec. 2004 Jan. 2005 Feb. 2005 March 2005 April 2005 May 2005
--------- --------- --------- ---------- ---------- --------
Closing 1.2020 1.2412 1.2335 1.2096 1.2585 1.2552
Average 1.2991 1.2245 1.2383 1.2157 1.2374 1.2553
Hi 1.2414 1.2412 1.2559 1.2438 1.2585 1.2696
Low 1.1837 1.2003 1.2249 1.2018 1.2151 1.2372
B. Capitalization and Indebtedness
This Form 20-F is being filed as an Annual Report under the Exchange Act and, as
such, there is no requirement to provide any information under this item.
C. Reasons for the Offer and Use of Proceeds
This Form 20-F is being filed as an Annual Report under the Exchange Act and, as
such, there is no requirement to provide any information under this item.
D. Risk Factors
An investment in our securities involves a high degree of risk. Investors need
to carefully consider the following risk factors, in addition to other
information contained in this Annual Report and the Exhibits hereto.
An investment in our common stock involves certain risks. In evaluating us and
our business, investors should carefully consider the following risk factors in
addition to the other information included or incorporated by reference in this
Annual Report.
We Have A History Of Losses And An Accumulated Deficit And Expect To Continue to
Incur Losses Until We Establish Profitable Business Operations. This Could Drive
The Price Of Our Stock Down
We have experienced operating losses since our inception. As at December 31,
2004 we had an accumulated deficit in the amount of $17,612,056. We expect to
incur additional operating losses until we are able to establish profitable
business operations. If we fail to establish profitable business operations and
continue to incur losses, the price of our common stock can be expected to fall.
17
Exploration, Development and Production Costs Are High Which Makes Our Business
Capital Intensive. No Assurance Can Be Given That We Will Make Prudent Decisions
Respecting Our Drilling Programs
Oil and natural gas exploration involves a high degree of risk and there is no
assurance that expenditures made on future exploration by us will result in new
discoveries of oil or natural gas in commercial quantities. It is difficult to
project the costs of implementing an exploratory drilling program due to the
inherent uncertainties of drilling in unknown formations, the costs associated
with encountering various drilling conditions such as over pressured zones and
tools lost in the hole, and changes in drilling plans and locations as a result
of prior exploratory wells or additional seismic data and interpretations
thereof.
Our long-term commercial success depends on our ability to find, acquire,
develop and commercially produce oil and natural gas reserves. No assurance can
be given that we will be able to locate satisfactory properties for acquisition
or participation. Moreover, if such acquisitions or participations are
identified, we may determine that current markets, terms of acquisition and
participation or pricing conditions make such acquisitions or participations
uneconomic. We have limited reserves and producing oil and gas properties and a
limited history of business operations.
Future oil and gas exploration may involve unprofitable efforts, not only from
dry wells, but from wells that are productive but do not produce sufficient net
revenues to return a profit after drilling, operating and other costs.
Completion of a well does not assure a profit on the investment or recovery of
drilling, completion and operating costs. In addition, drilling hazards or
environmental damage could greatly increase the cost of operations, and various
field operating conditions may adversely affect the production from successful
wells. These conditions include delays in obtaining governmental approvals or
consents, shut-ins of connected wells resulting from extreme weather conditions,
insufficient storage or transportation capacity or other geological and
mechanical conditions. While close well supervision and effective maintenance
operations can contribute to maximizing production rates over time, production
delays and declines from normal field operating conditions cannot be eliminated
and can be expected to adversely affect revenue and cash flow levels to varying
degrees.
In addition, oil and gas operations are subject to the risks of exploration,
development and production of oil and natural gas properties, including
encountering unexpected formations or pressures, premature declines of
reservoirs, blow-outs, cratering, sour gas releases, fires and spills. Losses
resulting from the occurrence of any of these risks could have a materially
adverse effect on our future results of operations, liquidity and financial
condition.
Prices, Markets and Marketing of Crude Oil and Natural Gas Are Beyond Our
Control And Will Impact Our Results Of Operations
Oil and natural gas are commodities whose prices are determined based on world
demand, supply and other factors, all of which are beyond our control. World
prices for oil and natural gas have fluctuated widely in recent years. Any
material decline in prices could result in a reduction of net production
revenue. Certain wells or other projects may become uneconomic as a result of a
decline in world oil prices or natural gas prices, leading to a reduction in the
volume of our oil and gas reserves. We might also elect not to produce from
certain wells at lower prices. All of these factors could result in a material
decrease in our future net production revenue, causing a reduction in our oil
and gas acquisition and development activities. In addition, bank borrowings
available to us are in part determined by our borrowing base. A sustained
material decline in prices from historical average prices could limit or reduce
our borrowing base, thereby reducing the bank credit available to us, and could
require that a portion of any existing bank debt of ours be repaid.
18
In addition to establishing markets for our oil and natural gas, we must also
successfully market our oil and natural gas to prospective buyers. The
marketability and price of oil and natural gas which may be acquired or
discovered by us will be affected by numerous factors beyond our control. We
will be affected by the differential between the price paid by refiners for
light quality oil and the grades of oil produced by us. Our ability to market
our natural gas may depend upon our ability to acquire space on pipelines which
deliver natural gas to commercial markets. We will also likely be affected by
deliverability uncertainties related to the proximity of our reserves to
pipelines and processing facilities and related to operational problems with
such pipelines and facilities and extensive government regulation relating to
price, taxes, royalties, land tenure, allowable production, the export of oil
and natural gas and many other aspects of the oil and natural gas business. We
have limited direct experience in the marketing of oil and natural gas.
Our Cash Flows Are Dependent On Our Ability To Maintain Or Increase Our Oil And
Natural Gas Reserves
Our future oil and natural gas reserves, production, and cash flows to be
derived therefrom are highly dependent on us successfully acquiring or
discovering new reserves. Without the continual addition of new reserves, any
existing reserves we may have at any particular time and the production
therefrom will decline over time as such existing reserves are exploited. A
future increase in our reserves will depend not only on our ability to develop
any properties we may have from time to time, but also on our ability to select
and acquire suitable producing properties or prospects. There can be no
assurance that our future exploration and development efforts will result in the
discovery and development of additional commercial accumulations of oil and
natural gas.
Our Business Is Subject To Numerous Operating Risks Not All Of Which Are Covered
By Insurance. The Occurrence Of An Uninsured Event Could Have A Material Adverse
Effect On Our Financial Position And Results Of Operations
Our business involves a variety of operating risks, including but not
limited to:
o Blowouts, cratering and explosions;
o Mechanical problems;
o Uncontrolled flows of oil, natural gas or well fluids;
o Fires;
o Formations with abnormal pressures;
o Pollution and other environmental risks; and
o Natural disasters
19
The operation of our natural gas gathering and pipeline systems also involves
various risks of explosions and environmental hazards caused by pipeline leaks
and ruptures. The location of pipelines near populated areas, including
residential areas, commercial business centers and industrial sites, could
increase these risks. Any of these events could result in loss of human life,
significant damage to property, environmental pollution, impairment of our
operations and substantial losses to us. In accordance with customary industry
practice, we maintain insurance against some, but not all, of these risks and
losses. The occurrence of any of these events not fully covered by insurance
could have a material adverse effect on our financial position and results of
operations.
Failure To Realize The Expected Benefits From Our Amalgamation With Quarry Oil &
Gas Ltd. Will Have A Material Adverse Effect On Our Financial Position And
Results Of Operations
We may not realize the anticipated benefits from our amalgamation with Quarry
Oil & Gas Ltd. ("Quarry"). We entered into an Arrangement Agreement with Quarry
to strengthen our position in the oil and gas industry and to create the
opportunity for potential cost savings, among other things. Achieving any
benefits will depend in part on successfully consolidating functions and
integrating operations and procedures in a timely and efficient manner, as well
as our ability to realize the anticipated growth opportunities and synergies
from combining the businesses of Assure and Quarry.
Many Of Our Competitors Have Greater Financial And Human Resources Than We Do
Which Makes It More Difficult For Us To Compete With Them
The petroleum industry is characterized by intense competition. We compete with
numerous other participants in the search for the acquisition of oil and natural
gas properties and in the marketing of oil and natural gas. Our competitors
include oil and gas companies which have greater financial resources, staff and
facilities than we do. Our ability to increase reserves in the future will
depend not only on our ability to develop our present properties, but also on
our ability to select and acquire suitable producing properties or prospects for
exploratory drilling. Competitive factors in the distribution and marketing of
oil and natural gas include price and methods and reliability of delivery.
Our Reserves Estimates Are Subject To Uncertainties; Many Of Which Are Beyond
Our Control. An Overestimate Of Our Reserves Would Result In Lower Revenues Than
We Are Expecting And Have A Detrimental Effect On Our Revenues And Operating
Results
There are numerous uncertainties inherent in estimating quantities of reserves
and cash flows to be derived therefrom, including many factors that will be
beyond our control. The reserve and cash flow information set forth in this
Annual Report represent estimates only. The reserves and estimated future net
cash flow from each of our properties have been independently evaluated in our
Engineer's Reports. These evaluations include a number of assumptions relating
to factors such as initial production rates, production decline rates, ultimate
recovery of reserves, timing and amount of capital expenditures, marketability
of production, future prices of oil and natural gas, operating costs and
royalties and other government levies that may be imposed over the producing
life of the reserves. These assumptions were based on price forecasts in use at
the date the relevant evaluations were prepared and many of these assumptions
are subject to change and are beyond our control. Actual production and cash
flows derived therefrom will vary from these evaluations, and such variations
could be material. These evaluations are based in part on the assumed success of
exploitation activities intended to be undertaken in future years. The reserves
and estimated cash flows to be derived therefrom contained in such evaluations
will be reduced to the extent that such exploitation activities do not achieve
the level of success assumed in the evaluations.
20
Defects In The Chain Of Title With Respect To Our Oil And Gas Properties Could
Hurt Our Financial Condition
Although title reviews will be done according to industry standards prior to the
purchase of most oil and natural gas producing properties or the commencement of
drilling wells as determined appropriate by management, such reviews do not
guarantee or certify that an unforeseen defect in the chain of title will not
arise to defeat a claim of ours which could result in a reduction of the revenue
received by us.
Costs Associated With Compliance With Environmental Regulations May Adversely
Affect Our Results Of Operations And Financial Condition
All phases of the oil and natural gas business present environmental risks and
hazards and are subject to environmental regulation pursuant to a variety of
international conventions and state and municipal laws and regulations.
Environmental legislation provides for, among other things, restrictions and
prohibitions on spills, releases or emissions of various substances produced in
association with oil and gas operations. The legislation also requires that
wells and facility sites be operated, maintained, abandoned and reclaimed to the
satisfaction of applicable regulatory authorities. Compliance with such
legislation can require significant expenditures and a breach may result in the
imposition of fines and penalties, some of which may be material. Environmental
legislation is evolving in a manner expected to result in stricter standards and
enforcement, larger fines and liability and potentially increased capital
expenditures and operating costs. The discharge of oil, natural gas or other
pollutants into the air, soil or water may give rise to liabilities to foreign
governments and third parties and may require us to incur costs to remedy such
discharge. No assurance can be given that environmental laws will not result in
a curtailment of production or a material increase in the costs of production,
development or exploration activities or otherwise adversely affect our
financial condition, results of operations or prospects.
Canada is a signatory to the United Nations Framework Convention on Climate
Change and has ratified the Kyoto Protocol established thereunder to set legally
binding targets to reduce nationwide emissions of carbon dioxide, methane,
nitrous oxide and other so-called "greenhouse gases". Our exploration and
production facilities and other operations and activities emit a small amount of
greenhouse gases which may subject us to legislation regulating emissions of
greenhouse gases. The Government of Canada has put forward a Climate Change Plan
for Canada which suggests further legislation will set greenhouse gases emission
reduction requirements for the various industrial activities, including oil and
gas exploration and production. Future federal legislation, together with
provincial emission reduction requirements, such as those proposed in Alberta's
Bill 32: Climate Change and Emissions Management, may require the reduction of
emissions or emissions intensity with our operations and facilities. The direct
or indirect costs of these regulations may adversely affect our business.
Foreign Currency Exchange Rate Risk Could Impact Our Operating Results
As energy commodity prices are primarily priced in US dollars a portion of our
revenue stream is affected by U.S./Canadian dollar exchange rates. We do not
hedge this exposure. While to date this exposure has not been material it may
become so in the future. In addition to oil and gas commodity prices we have a
subordinated promissory note payable in US dollars. As the Canadian dollar
depreciates the value of our debt increases.
21
Compliance With The Kyoto Protocol May Increase Our Operating Expenses
The Kyoto protocol, ratified by the Canadian Federal Government in December
2002, came into force on February 16, 2005. The protocol commits Canada to
reducing greenhouse gas emissions to six percent below 1990 levels over the
period 2008-2012. The Federal Government released a framework outlining its
Climate Change action plan on April 13, 2005. The plan as released contains few
technical details regarding the implementation of the Government's greenhouse
gas reduction strategy. The Climate Change Working Group of the Canadian
Association of Petroleum Producers continues to work with the Federal and
Alberta governments to develop an approach for implementing targets and enabling
greenhouse gas control legislation, which protects the industry's
competitiveness, limits the cost and administrative burden of compliance and
supports continued investment in the sector. As the federal government has yet
to release a detailed Kyoto compliance plan, we are unable to predict the impact
of potential regulations upon our business. It is possible however, that we will
experience increases in operating costs in complying with the greenhouse gas
emissions legislation.
Unavailability Of Drilling Equipment And Access Restrictions May Delay Our
Exploration And Development Activities
Oil and natural gas exploration and development activities are dependent on the
availability of drilling and related equipment in the particular areas where
such activities will be conducted. Demand for such limited equipment or access
restrictions may affect the availability of such equipment to the Corporation
and may delay exploration and development activities.
We Do Not Intend To Pay Dividends On Our Common Stock For The Foreseeable
Future, Which May Reduce Your Return On Investment In Our Common Stock
We have not paid any cash dividends, nor do we contemplate or anticipate paying
any dividends upon our common stock in the foreseeable future. Any future
decision to pay dividends will be made by our board of directors and will depend
on our results of operations, financial condition, contractual and legal
restrictions and other factors the board deems relevant.
We May Need Additional Financing Which May Not Be Available And, If Available,
Might Only Be Available On Unfavorable Terms. Our Failure To Obtain Financing,
If Needed, Would Hinder Our Operations And Our Ability To Achieve Profitability.
We have principally funded our operations to date through sales of our equity
and debt securities. We expect to continue to raise funds in the future through
sales of our debt or equity securities and through loans until such time, if
ever, as we are able to operate profitably. There can be no assurance given that
we will be able to obtain funds in such manner or on terms that are beneficial
to us. Our inability to obtain needed funding can be expected to have a material
adverse effect on our operations and our ability to achieve profitability.
22
Sales Of Shares Eligible For Future Sale Could Depress The Market Price For Our
Common Stock. As of June 10, 2005 we had issued and outstanding:
o 24,384,844 shares of our common stock;
o options to purchase 1,385,000 shares of our common stock at an
exercise price of $1.25(US$ 1.00) per share;
o warrants to purchase 8,907,600 shares of our common stock at
exercise prices ranging from $0.42 (US$.333) to $5.06 (US$4.05) per share;
o 17,500 shares of convertible Series A Preferred Stock convertible
into approximately 1,750,000 shares of our common stock; and
o 5,250 shares of convertible Series B Preferred Stock convertible
into approximately 450,000 shares of our common stock.
Subsequent to June 10, 2005 we issued an aggregate of 434,681 shares of our
common stock, an aggregate of 530,200 warrants expired, and an aggregate of
1,385,000 options were cancelled.
All of the shares of Series A Preferred Stock and Series B Preferred Stock are
presently convertible. All of our outstanding options are presently exercisable.
All of our outstanding warrants are presently exercisable. In addition, if our
future financing needs require us to issue additional shares of common stock or
securities convertible into common stock, the supply of common stock available
for resale could be increased which could stimulate trading activity and cause
the market price of our common stock to drop, even if our business is doing
well.
While these securities are outstanding, the holders will have the opportunity to
profit from a rise in the price of our securities with a resulting dilution
(upon exercise or conversion) in the value of the interests of our other
security holders. Our ability to obtain additional financing during the period
these convertible securities are outstanding may be adversely affected and their
existence may have a negative effect on the price of our securities. The holders
of these securities are likely to exercise them at a time when we would, in all
likelihood, be able to obtain any needed capital by a new offering of securities
on terms more favorable to us than those of the outstanding warrants and
convertible promissory notes.
We Are Not Subject To The Same Corporate Governance Standards As Exchange Listed
Companies. This May Affect Market Confidence And Company Performance. As A
Result, Our Business Could Be Harmed And The Price Of Our Stock Could Decrease.
Registered exchanges and the Nasdaq National Market have adopted enhanced
corporate governance requirements that apply to issuers that list their
securities on those markets. These standards deal with the rights and
responsibilities of a company's management, its board, shareholders and various
stakeholders. How well companies are run may affect market confidence as well as
company performance. Our common stock is quoted on the OTC Bulletin Board, which
does not have comparable requirements. As a result, our business and the price
of our stock may be adversely affected.
23
Our Administrative Costs And Expenses Resulting From The Sarbanes-Oxley
Regulations Have Increased And Will Continue To Increase, Adversely Affecting
Our Financial Condition And Results Of Operations.
We face corporate governance requirements under the Sarbanes-Oxley Act of 2002
and SEC rules adopted thereunder. These regulations increased our legal and
financial compliance and made some activities more difficult, time-consuming and
costly. Our expenses may continue to increase as we continue to implement these
new regulations.
Corporate Governance Requirements And The Small Market Location Of Our Principal
Office Have Made It More Difficult To Attract Qualified Officers and Directors.
As A Result, Our Business May Be Harmed And The Price Of Our Stock May Be
Adversely Affected.
Corporate governance requirements have increased the role and responsibilities
of directors and executive officers of public companies. We have obtained
directors and officers liability insurance to mitigate any potential risks.
Our principal office is located in Calgary, Alberta, Canada which is a small
market city that is a center for many oil and gas companies in Canada. As such
we have difficulty attracting and retaining the skilled people necessary to
efficiently run a public oil and gas company. An inability to attract and retain
the proper people could result in missed opportunities, lost production, an
over-reliance on outside consultants, or inefficient operations. Further,
efforts to meet public company filing deadlines in a timely manner could be
affected.
If We Fail To Maintain Effective Internal Controls Over Financial Reporting, The
Price Of Our Common Stock May Be Adversely Affected.
We are required to establish and maintain appropriate internal controls over
financial reporting. Our internal controls over financial reporting may have
weaknesses and conditions that need to be addressed, the disclosure of which may
have an adverse impact on the price of our common stock.
Failure to establish those controls, or any failure of those controls once
established, could adversely impact the public disclosures regarding our
business, financial condition or results of operations. In addition,
management's assessment of internal controls over financial reporting may
identify other weaknesses and conditions that need to be addressed in our
internal controls over financial reporting or other matters that may raise
concerns for investors. Any actual or perceived weaknesses and conditions that
need to be addressed, disclosure of management's assessment of our internal
controls over financial reporting or disclosure of our independent registered
public accounting firm's attestation to or report on management's assessment of
our internal controls over financial reporting may have an adverse impact on the
price of our common stock.
Standards For Compliance With Section 404 Of The Sarbanes-Oxley Act Of 2002 Are
Uncertain, And If We Fail To Comply In A Timely Manner, Our Business Could Be
Harmed And Our Stock Price Could Decline.
Rules adopted by the SEC pursuant to Section 404 of the Sarbanes-Oxley Act of
2002 require annual assessment of our internal control over financial reporting,
and attestation of this assessment by our independent registered public
accountant. This requirement will first apply to our annual report for our
fiscal year ending December 31, 2006. The standards that must be met for
24
management to assess the effectiveness of the internal control over financial
reporting are complex, and require significant documentation, testing and
possible remediation to meet the detailed standards. We may encounter problems
or delays in completing the implementation of any requested improvements and
receiving an attestation of our assessment by our independent registered public
accountants. If management cannot assess our internal control over financial
reporting as effective, or our independent registered public accounting firm is
unable to issue an unqualified attestation report on such assessment, investor
confidence and share value may be negatively impacted.
There Is A Limited Public Market For Our Common Stock. Unless Such Market Is
Expanded You May Have Difficulty Selling Shares Of Our Common Stock.
To date there has been only a limited and sporadic public market for our common
stock. There can be no assurance that an active and more reliable public market
will develop in the future or, if developed, that such market will be sustained.
Purchasers of shares of our common stock may, therefore, have difficulty in
reselling such shares. As a result, investors may find it impossible to
liquidate their investment in us should they desire to do so. Our common stock
is currently traded in the over-the-counter market and quoted on the OTC
Bulletin Board. As at the date hereof, we are not eligible for inclusion in
NASDAQ or for listing on any US national stock exchange. At the present time, we
are unable to state when, if ever, we will meet the Nasdaq application
standards. Unless we are able to increase our net worth and market valuation
substantially, we will never be able to meet the eligibility requirements of
NASDAQ. Moreover, even if we meet the minimum requirements to apply for
inclusion in The Nasdaq SmallCap Market, there can be no assurance that approval
will be received or, if received, that we will meet the requirements for
continued listing on the Nasdaq SmallCap Market. Further, Nasdaq reserves the
right to withdraw or terminate a listing on the Nasdaq SmallCap Market at any
time and for any reason in its discretion. If we are unable to obtain or to
maintain a listing on the Nasdaq SmallCap Market, quotations, if any, for "bid"
and "asked" prices of the common stock would be available only on the OTC
Bulletin Board where our common stock is currently quoted or in the "pink
sheets". This can result in an investor's finding it more difficult to dispose
of or to obtain accurate quotations of prices for our common stock than would be
the case if our common stock were quoted on the Nasdaq Small Cap Market.
Irrespective of whether or not our common stock is included in the Nasdaq
SmallCap system, there can be no assurance that the public market for our common
stock will become more active or liquid in the future.
Failure To Achieve A Canadian Stock Exchange Listing Will Result In Decreased
Liquidity For Our Common Stock
Our common stock is not presently listed on a Canadian stock exchange. The
absence of such a listing may provide decreased liquidity in respect of our
common shares.
ITEM 4. INFORMATION ON THE COMPANY
A. History and Development of the Company
History
We are an independent energy company engaged in the exploration, development,
acquisition and production of petroleum and natural gas from properties
primarily located in Western Canada. We were incorporated on August 11, 1999 in
the State of Delaware under the name Inventoy.com, Inc. On May 1, 2002 we
amended our Certificate of Incorporation to change our name to Assure Energy,
25
Inc.
We effected a stock split on a 4 for 1 basis following the close of business on
March 6, 2002, and as a result the 5,221,000 common shares issued and
outstanding on the record date of February 25, 2002 were increased after March
6, 2002 to 20,884,000 common shares. We effected a further stock split on a 3
for 2 basis following the close of business on September 17, 2002, where the
shareholders of record holding 10,244,000 common shares as of the close of
business on September 10, 2002 held, after the close of business on September
17, 2002, an aggregate of 15,366,000 shares.
On September 11, 2003, we reincorporated from Delaware to Nevada for the purpose
of taking advantage of the Nevada continuance statute. The reincorporation was
effected through a plan and agreement of merger between Assure Energy, Inc., a
Delaware corporation, hereinafter referred to as "Assure Delaware", and us. The
merger was approved by the shareholders holding a majority of the outstanding
shares of Assure Delaware.
Effective February 6, 2004, we continued from the State of Nevada into the
Province of Alberta, pursuant to Articles of Continuance. As an Alberta
corporation we are subject to the Alberta Business Corporations Act.
On December 17, 2004 our then wholly owned subsidiary, Assure Holdings Inc.
amalgamated with Quarry Oil & Gas Ltd. pursuant to Section 184(1) of the Alberta
Business Corporations Act and continued as Assure Holdings Inc. Immediately
thereafter, Assure Holdings Inc. amalgamated with us pursuant to Section 184(1)
of the Alberta Business Corporations act and continued as Assure Energy, Inc.
Our registered and principal office is located at Suite 800, 521 - 3rd Avenue
S.W., Calgary Alberta, T2P 3T3. Our telephone number at this address is (403)
266-4975. Our books and financial records are located in our registered and
principal offices and can be viewed during normal business hours. Our public
filings can be accessed and viewed through the Electronic Data Gathering and
Retrieval System at www.sec.gov and through the System for Electronic Data
Analysis and Retrieval (SEDAR) at www.sedar.com. Our registrar and stock
transfer agent is Continental Stock Transfer & Trust Company, 17 Battery Place,
New York, New York 10004-1123. Our common stock trades on the NASD OTC BB under
the symbol ASURF
General Development of our Business
We are an independent energy company engaged in the acquisition, exploration,
development and production of petroleum and natural gas from properties
primarily located in Western Canada.
From our inception through April, 2002, we had the objective to license toy
designs to toy manufacturers and act as a toy inventor's agent in licensing toy
designs developed by others. No operations in this area were ever commenced. Our
management looked at other areas of business to enhance shareholder value, and
effective April 23, 2002 signed an acquisition agreement with Assure Oil & Gas
Corp., an Ontario, Canada corporation and its shareholders. Prior to that
transaction, we signed an asset purchase agreement with an affiliated entity,
Inventoy.com International, Inc. effective March 14, 2002, assigning all rights,
titles and inclusive interests in and to all patents, trademarks, trade names,
technical processes, know-how and other intellectual property owned by us.
26
Acquisition of Assure Oil & Gas Corp.
Effective April 23, 2002, we signed an acquisition agreement (the "Acquisition
Agreement") to acquire Assure Oil & Gas Corp. The Acquisition Agreement involved
the acquisition of all of Assure Oil & Gas Corp.'s issued and outstanding
capital stock, making Assure Oil & Gas Corp. a wholly owned subsidiary, in
exchange for 2,400,000 units, each unit consisting of one share, one Class A
Warrant and one Class B Warrant. Each Class A Warrant, as amended, entitles the
holder thereof to acquire one share of our common stock at a price of US$0.50
per share at any time or from time to time during the four year period
commencing on October 1, 2003 and expiring on September 30, 2007. Each Class B
Warrant, as amended, entitles the holder thereof to acquire one share of our
common stock at a price of US$1.00 per share at any time or from time to time
during the four year period commencing on July 1, 2004 and expiring on June 30,
2008. As the result of the September 17, 2002 3:2 forward stock split the
2,400,000 units became 3,600,000 units, consisting of 3,600,000 common shares,
3,600,000 Class A Warrants and 3,600,000 Class B Warrants. Similarly, the
exercise price for each Class A Warrant became US$0.333 and the exercise price
for each Class B Warrant became US$0.667 per share. As at June 10, 2005 we had
1,593,900 A Warrants and 3,600,000 B Warrants outstanding. In furtherance of the
Acquisition Agreement, on May 1, 2002 we amended our Certificate of
Incorporation to change our name from Inventoy.com, Inc. to Assure Energy, Inc.
Business of Assure Oil & Gas Corp.
Assure Oil & Gas Corp. is actively engaged in the exploration, development,
acquisition and production of petroleum and natural gas properties primarily
located in Western Canada. In October 2000 Assure Oil & Gas Corp. commenced its
oil and gas operations as part of an initiative to create cash flow by
participating in a Farmout Agreement to drill a prospective Elkton zone natural
gas well. As at December 31, 2004, Assure Oil & Gas Corp. has acquired varying
interests, through farmout participations, asset purchases and acquisitions of
crown land rights in approximately 5713 gross acres (2384 net acres) of both
producing and prospective petroleum and natural gas properties in the Western
Sedimentary Basin of Western Canada. Assure Oil & Gas Corp. has 61 producing oil
wells with working interests therein ranging from 36%-100%. Assure Oil & Gas
Corp. has 10 producing gas wells. Working interests in these gas wells vary from
12% to 100%.
Assure Oil & Gas Corp. plans to continue to explore, develop or acquire
petroleum and natural gas properties to increase cash flow, and to build
petroleum and natural gas reserves. Assure Oil & Gas Corp. anticipates
continuing exploration and development activities that could include infill
drilling of current proved and producing properties, seismic interpretation of
prospective properties and exploratory drilling. Acquisitions could include
lands, licenses and leases, producing well bores or corporate acquisitions
and/or mergers. Assure Oil & Gas Corp. also may from time to time acquire, or
enter into strategic alliances with complementary businesses to achieve these
objectives.
Acquisition of Westerra 2000 Inc.
On May 30, 2002 Assure Oil & Gas Corp. entered into a share purchase agreement
(the "Share Purchase Agreement") with the three shareholders of Westerra 2000
Inc., an Alberta, Canada corporation engaged in the exploration, development and
production of oil and gas properties primarily located in Alberta and
Saskatchewan, Canada. Pursuant to the Share Purchase Agreement, Assure Oil & Gas
Corp. acquired all of the capital stock of Westerra 2000 Inc. The purchase price
was CDN$3,450,000 consisting of (i) CDN$2,677,704 paid, on behalf of Westerra
2000 Inc., to Alta Gas Services Inc. pursuant to a June 1, 2001 Loan Agreement
between Westerra 2000 Inc. and Alta Gas Services Inc.; (ii) CDN$422,296 paid to
the three shareholders of Westerra 2000 Inc. on a pro rata basis in proportion
to their share ownership in Westerra 2000 Inc.; and (iii) CDN$350,000 payable to
the three shareholders of Westerra 2000 Inc. on a pro rata basis in proportion
27
to their share ownership in Westerra 2000 Inc. following the resolution of title
deficiencies on certain properties. The parties deemed the effective date of the
Share Purchase Agreement to be April 1, 2002. As a consequence thereof, Assure
Oil & Gas Corp. paid an additional CDN$34,165 to Alta Gas Services Inc., which
represented additional interest due under the loan agreement. As a further
consequence, net revenues and prepaid expenses of Westerra 2000 Inc.,
attributable to the period ending after April 1, 2002 but received by Westerra
2000 Inc. prior to May 30, 2002, were credited to Assure Oil & Gas Corp. The
title deficiencies referred to above were resolved in January 2003 but Assure
did not release the CDN $350,000 to the three shareholders of Westerra 2000 Inc.
based on certain disputes. Consequently, the three shareholders commenced an
action against us in Calgary, Alberta on February 19, 2003 seeking release of
the CDN $350,000 together with interest. The disputes were resolved pursuant to
our February 10, 2004 settlement of this action.
Business of Westerra 2000 Inc.
As at December 31, 2004, Westerra 2000 Inc. owns certain natural gas and oil
interests in approximately five sections of land (3,621 acres gross - 2,237
acres net) in the Lloydminster area along the provincial border of Alberta and
Saskatchewan (the "Westerra interests"). Westerra 2000 Inc. has 10 producing oil
wells with working interests therein ranging from 22% to 100%. Westerra 2000
Inc. also has 10 producing gas wells, each with a working interest of 60%.
Westerra 2000 Inc. plans to continue to explore, develop or acquire petroleum
and natural gas properties to increase cash flow, and to build petroleum and
natural gas reserves. Westerra 2000 Inc. anticipates an exploration program that
could include infill drilling of current proved and producing properties,
seismic interpretation of prospective properties and exploratory drilling.
Acquisitions could include lands, licenses and leases, producing well bores or
corporate acquisitions. Westerra 2000 Inc. also may from time to time acquire,
or enter into strategic alliances with complementary business to achieve these
objectives.
Acquisition of Quarry
Effective, July 28, 2003 we completed the acquisition of 6,267,500 common shares
of Quarry Oil & Gas Ltd. ("Quarry"), pursuant to a March 6, 2003 Share Purchase
Agreement (the "Share Purchase Agreement") among us, Quarry, and certain Quarry
shareholders including Al J. Kroontje, Trevor G. Penford, Karen Brawley-Hogg,
Donald J. Brown and Troon Investments, Ltd. (collectively the "Sellers"). We
subsequently received an additional 482,500 Quarry shares from the Sellers
resulting in the aggregate purchase of 6,750,000 Quarry shares (the "Acquisition
Shares") pursuant to the Share Purchase Agreement. These 6,750,000 shares
together with the 169,900 Quarry shares already owned by us represented
approximately 48.5% of the outstanding common shares of Quarry. The Acquisition
Shares were purchased by us at a price of CDN$1.3278 per share or CDN$9,611,706
on an aggregate basis.
28
The Share Purchase Agreement provided for the transfer of certain Quarry assets
(the "Excluded Assets") by Quarry, prior to closing, to a Quarry subsidiary, 51%
of which was sold to a company controlled by Al J. Kroontje one of the Sellers
on the closing date of the Share Purchase Agreement, at a purchase price of
CDN$867,662. The purchase price represented 51% of the adjusted net book value
of the Excluded Assets as at the date of the Share Purchase Agreement. The Share
Purchase Agreement also provided for the payment by Quarry to Al Kroontje or his
designees, the sum of CDN$592,500 representing:
(a) salary compensation to Mr. Kroontje for the six years ended December
31, 2000 when Mr. Kroontje did not receive any compensation for
serving as an officer and director of Quarry;
(b) severance pay; and
(c) a retirement allowance.
Payment in full was made to Mr. Kroontje at closing. In furtherance of our
obligations under the Share Purchase Agreement, in September 2003, we presented
to Quarry and the Sellers, an experienced, previously successful management team
for Quarry. The members of the management team were Harvey Lalach, Colin McNeil,
Timothy Chorney, Cameron Bogle and Colin Emerson. Through Assure Oil & Gas
Corp., effective September 15, 2003, we entered into a Management Services
Agreement with Quarry whereby we supplied Quarry with the services of certain
employees that had management or operational expertise including, but not
limited to, the services of Messrs. Chorney, Bogle and Emerson. In consideration
thereof, Quarry was paying us a monthly fee equal to a percentage of the costs
incurred by Assure in providing such services.
Effective June 2004, Assure acquired on a non-brokered private placement basis,
1,000,000 units of Quarry at a price of $0.75 per Unit for cash proceeds of
$750,000. Each Unit consisted of one common share of Quarry and one warrant of
Quarry entitling the holder to purchase one common share of Quarry at a price of
$0.80 for a period of two years.
On November 9, 2004, Quarry raised CDN $1,405,855 through a non-brokered private
placement at CDN $0.70 of which 1,251,221 common shares of Quarry were
subscribed for by arms length parties and 757,143 common shares of Quarry were
subscribed for by us (through Assure Holdings Inc.). After giving effect to the
private placement we beneficially owned 8,677,043 common shares of Quarry
representing approximately 50.20% of the 17,284,704 issued and outstanding
common shares of Quarry.
On December 17, 2004 we acquired 8,607,661 of the issued and outstanding common
shares of Quarry not already owned by in exchange for 3,098,758 shares of our
common stock on the basis of 0.360 shares of our common stock for each share of
common stock of Quarry. The acquired Quarry shares were transferred to our
wholly owned subsidiary, Assure Holdings Inc. ("AHI"). AHI and Quarry
amalgamated on December 17, 2004 pursuant to section 184(1) of the Alberta
Business Corporations Act and continued as AHI. Immediately thereafter, AHI was
amalgamated with us pursuant to Section 184(1) of the Alberta Business
Corporations Act and continued as Assure Energy, Inc. All warrants to acquire
Quarry common shares were cancelled.
Business of Quarry
Prior to the amalgamation, Quarry was a junior oil and natural gas exploration
and development company located in Calgary, Canada with properties in Alberta
and British Columbia, Canada. Its shares were listed on the TSX Venture Exchange
under the symbol "QUC". We made the Quarry acquisition for purposes of
increasing our presence in the oil and gas industry in Canada. The acquisition
of Quarry expanded our production base, our inventory of prospective lands and
increased our revenues. This contributed to an increase in overall operations
and exploration and production activities and caused us to expand our management
team.
29
As at December 17, 2004, Quarry had acquired varying interests, through farmout
participations, asset purchases and acquisitions of crown land rights in
approximately 26,500 gross acres (16,200) net acres) of both producing and
prospective petroleum and natural gas properties in the Western Sedimentary
Basin of Canada. Quarry had producing oil wells with working interests therein
ranging from 50%- 100%. Quarry had 6 producing gas wells. Working interests in
these gas wells vary from 36% to 100%.
Disposition of Inventoy.com
On August 27, 2002 we entered into a stock exchange agreement (the "Stock
Exchange Agreement") with Inventoy.com International, Inc., Kaplan Design Group,
Douglas Kaplan, Ed Kaplan and Ron Beit-Halachmy. At the time of the Stock
Exchange Agreement, Kaplan Design Group, Douglas Kaplan, Ed Kaplan and Ron
Beit-Halachmy (collectively the "Shareholders") owned an aggregate of 14,440,000
of our common shares (the "Shares"). Pursuant to the Stock Exchange Agreement,
the Shareholders exchanged the Shares for all of the issued and outstanding
shares of Inventoy.com International, Inc., our inactive wholly-owned
subsidiary. Inventoy.com International, Inc. owned patents, trademarks,
tradenames, technical processes, know-how and other intellectual property
intended to be utilized in a business involving the licensing of toy designs
developed by others. The Shareholders included certain founders of ours that
contributed the Inventoy assets upon our formation. The Shares had been received
by the Shareholders in consideration of their contribution of the Inventoy
assets. The decision to sell Inventoy.com International, Inc. to the
Shareholders was based upon the determination that Inventoy.com International,
Inc. did not fit into our then current operations which primarily consisted of
the exploration, development, and acquisition of petroleum and gas properties
located in Western Canada. Pursuant to the Stock Exchange Agreement, the Shares
were cancelled and returned to the status of authorized but unissued shares.
Appointment of Financial Advisor
On April 21, 2005 we engaged the services of Haywood Securities Inc. ("Haywood")
a TSE member firm as our exclusive agent to assist us in evaluating strategic
alternatives to maximize shareholder value. In the event that such alternatives
result in a merger, takeover or business combination (the "Transaction") with
another company, Haywood was to earn a commission equivalent to 0.9% of the
Transaction value. On June 1, 2005 the agreement with Haywood was amended and
Haywood will earn a commission equivalent to 1.0% of the Transaction value. On
July 8, 2005 we entered into an Arrangement Agreement with GEOCAN Energy Inc.
(GEOCAN"), pursuant to which GEOCAN will, subject to satisfaction of certain
conditions, acquire all of our issued and outstanding common stock in exchange
for GEOCAN common shares on the basis of .70 of a GEOCAN common share for each
share of our common stock.
B. Business Overview
For the three fiscal years ending December 31, 2004, December 31, 2003 and
December 31, 2002 the total revenue net of royalties and tax credits, derived
from the sale of petroleum and natural gas from our oil and gas interests was as
follows:
30
Total
2004 $ 12,563,361
2003 $ 6,933,524
2002 $ 1,505,654
The table below contains a glossary of terms applicable to our business.
GLOSSARY OF TERMS
...............................................................................
Natural Gas
...............................................................................
Mcf 1,000 cubic feet
...............................................................................
MMcf 1,000,000 cubic feet
...............................................................................
Mcf/d 1,000 cubic feet per day
...............................................................................
Bcf 1,000,000,000 cubic feet
...............................................................................
Oil and Natural Gas Liquids
...............................................................................
Bbl Barrel
...............................................................................
Mbbls 1,000 barrels
...............................................................................
Boe Barrels of oil equivalent using a conversion
ratio of 6 Mcf to 1 bbl of oil. (1)
...............................................................................
Mboe 1,000 boe
...............................................................................
Mmboe 1,000,000 boe
...............................................................................
Bpd Barrels per day
...............................................................................
Boepd Barrels of oil equivalent per day
...............................................................................
Bopd Barrels of oil per day
...............................................................................
NGLs Natural gas liquids
...............................................................................
(1) Disclosure provided herein in respect of BOEs may be misleading,
particularly if used in isolation. A BOE conversion ration of 6 Mcf: 1 Bbl
is based on an energy equivalency conversion method primarily applicable
at the burner tip and does not represent a value equivalency at the
wellhead.
The following table sets forth certain standard conversions between Standard
Imperial Units and the International System of Units (or metric units).
To Convert From To Multiply By
-------------------------------------------------------------------------
Mcf Cubic metres 28.317
Cubic metres Cubic feet 35.494
Bbls Cubic metres 0.159
Cubic metres Bbls 6.292
Feet Metres 0.305
Metres Feet 3.281
Miles Kilometers 1.609
Kilometers Miles 0.621
Acres (Alberta, Saskatchewan) Hectares 0.405
Hectares (Alberta, Saskatchewan) Acres 2.471
Acres (British Columbia) Hectares 0.405
Hectares (British Columbia) Acres 2.471
31
Working Interests
The following table sets forth the number of wells in which we held a working
interest as at December 31, 2004:
Oil Natural Gas
-------------------- -------------------
Gross(1) Net(1) Gross(1) Net(1)
-------- ------ -------- ------
Location -Alberta
Producing 25 25 16 8
Non-producing 34 34 2 2
Location -British Columbia
Producing -- -- 6 4.3
Non-producing -- -- 8 5
Location -Saskatchewan
Producing 8 4.8 8 4.8
Non-producing 4 2.4 6 3.6
Oil and Gas Properties
A brief description of our oil and gas properties as at December 31, 2004 is set
forth below:
Buick, British Columbia
-----------------------
We have assembled 21 sections (approximately 13,000 gross acres - 7,500 net) of
land through Crown land sales and farm-in agreements. We have an average 61%
working interest in the area with two shut-in gas wells.
Chestermere, Alberta
--------------------
Chestermere, located approximately 15 miles east of Calgary, produces both gas
and oil from the Rundle zone.
o Quarry has a 100% working interest in the 5-34 horizontal well and a
50% working interest in the 7-33 well and battery.
On April 21, 2005 the Company sold all of its working interests in the
Chestermere property for proceeds of $5,500,000. The effective date of the sale
was January 1, 2005.
Currant/Osborne, British Columbia
---------------------------------
Currant/Osborne are properties located approximately 50 miles north of Fort St.
John which has oil and natural gas prospects in multiple formations. The
property is adjacent to the Westcoast pipeline.
o We have a 50% to 100% working interest in 13 sections of land
Flatrock, British Columbia
--------------------------
Flatrock is an oil play near Fort St. Johns, British Columbia offering
year-round access. Oil and natural gas prospects are being developed at this
property.
o We have a 60% working interest in four sections of land.
32
Rigel, British Columbia
-----------------------
We have an average 75% working interest in 6 sections of land which are located
approximately 20 miles from the West Currant property, situated within potential
trends in the Gething, Baldonnel, and Halfway Formations.
o We have a 100% working interest in a standing gas well and an
average 55% working interest in two other producing gas welsl.
Doe East
--------
The Doe Prospect area is located approximately 70 miles northwest of Grande
Prairie, Alberta and approximately six miles east of the British
Columbia/Alberta border.
o We have a 25% working interest in one section of land
Golden Spike, Alberta
---------------------
Golden Spike, located 15 miles southwest of Edmonton, is prospective for light
oil from the Leduc and Nisku Formations as well as gas from the Basal Quartz
formation.
o We have a 100% working interest in one section of land with four
shut-in wells, one producing gas well and one producing oil well.
Ansell, Alberta
---------------
We have a 25% working interest in one section of land located in Ansell, Alberta
which produces from the Notikewin formation.
Chauvin/Ribstone, Alberta
-------------------------
The Chauvin property, located in East Central Alberta, produces oil from highly
porous, waterflood-supported sandstone including the Sparky, GP, and
Lloydminster Formations.
o We have a 100% working interest in 3.75 sections of land.
Lloydminster, Alberta
---------------------
We own working interests, subject to Crown and various overriding royalties in
two oil and two natural gas wells assigned reserves located in Township 50,
Ranges 1 and 2, W4M.
o We have an average 55% working interest.
Lloydminster, Saskatchewan
--------------------------
We own working interests, subject to Crown and various overriding royalties in
5.5 sections of land in Lloydminster, Saskatchewan
o We have working interests ranging from 21.8% to 100%
Enchant
-------
We acquired 6.5 sections of land in the Enchant Area of Alberta located at
Townships 15 Range 16 W4M and are productive from the Glauconitic and
Livingstone formations.
o We have working interests ranging from 17% to 95%
33
Caroline
--------
We have interests in the Caroline area of Alberta located in Section 29-33-4
W5M.
o We have a 16.8% working interest in one section of land
Royce
-----
We have interests in the Royce area of Alberta located in Section 26-83-7 W6M.
o We have a 16.8% working interest in one section of land.
We also have minor interests in the Lomond, Hamburg, Haynes and North Killam
areas of Alberta.
Capital Expenditures
The following table summarizes the capital expenditures made by us on oil and
natural gas properties for the years ended December 31, 2004, 2003 and 2002.
Property Acquisition Costs Exploration Costs Development Costs
($) ($) ($)
------------------------------------------- ----------------- -------------------
Proved Properties Unproved Properties
----------------- ------------------- ----------------- -------------------
2004 49,704 374,753 5,072 8,818,607
----------------- ------------------- ----------------- -------------------
2003 447,182 49,683 73,680 4,322,455
----------------- ------------------- ----------------- -------------------
2002 -- -- -- 2,111,197
----------------- ------------------- ----------------- -------------------
Exploration and Development Activities
The following table sets forth the number of exploratory and development wells
which we completed during our 2004, 2003 and 2002 fiscal years:
Exploratory Wells Development Wells
----------------- -----------------
Gross(1) Net(1) Gross(1) Net(1)
-------- ------ -------- ------
2004
Oil Wells -- -- 3 3
Gas Wells -- -- 9 6.1
Service Wells -- -- -- --
Dry Holes -- -- 1 0.25
-------- ------ -------- ------
Total Completed Wells -- -- 13 9.35
======== ====== ======== ======
Exploratory Wells Development Wells
----------------- -----------------
Gross(1) Net(1) Gross(1) Net(1)
-------- ------ -------- ------
2003
Oil Wells -- -- 6 6
Gas Wells -- -- 2 1.4
Service Wells -- -- -- --
Dry Holes 1 0.4 -- --
-------- ------ -------- ------
Total Completed Wells 1 0.4 8 7.4
======== ====== ======== ======
Exploratory Wells Development Wells
----------------- -----------------
Gross(1) Net(1) Gross(1) Net(1)
-------- ------ -------- ------
2002
Oil Wells -- -- 14 14
Gas Wells -- -- 3 2.75
Service Wells -- -- -- 0
Dry Holes -- -- 2 2
-------- ------ -------- ------
Total Completed Wells -- -- 19 18.75
======== ====== ======== ======
34
Our current and likely exploration and development activities in Canada are as
follows:
o Three wells have been licensed in the Buick area which we anticipate
will be drilled in the third and fourth quarters of 2005.
o Two wells are licensed in the Osborne area of Northeast British
Columbia plus an additional three potential location on the recent
purchase by us in the Osborne area.
o Lands at Buick Creek will continue to be developed and exploited.
Properties with No Attributable Reserves
Our developed and undeveloped landholdings as at December 31, 2004, are set
forth in the following table:
Undeveloped Developed Total
----------------------- ----------------------- -----------------------
2004 Gross(1) Net(2) Gross(1) Net(2) Gross(1) Net(2)
---------- ---------- ---------- ---------- ---------- ----------
Alberta 7872 3071 241 165 8113 3236
British Columbia 17371 10636 1354 751 18725 11387
---------- ---------- ---------- ---------- ---------- ----------
Total 25243 13707 1595 916 26838 14623
Undeveloped Developed Total
----------------------- ----------------------- -----------------------
2003 Gross(1) Net(2) Gross(1) Net(2) Gross(1) Net(2)
---------- ---------- ---------- ---------- ---------- ----------
Alberta 7430 3640 11449 6825 18879 10465
Saskatchewan 480 259 3682 1988 4162 2247
British Columbia 14062 8423 4679 2207 18741 10630
---------- ---------- ---------- ---------- ---------- ----------
Total 21972 12322 19810 11020 41782 23342
Notes:
(1) "Gross" means the total number of acres in which we have an interest.
(2) "Net" means the aggregate of the percentage working interests we have in
the gross acres.
Abandonment and Reclamation Costs
Asset retirement obligations are estimated by our engineers. As at December 31,
2004, our estimated future cash flows to settle asset retirement obligations are
$3,122,932 (undiscounted) and $1,279,702 (discounted at 7.6%) for 117 wells. The
amount of the estimated future cash flows to settle asset retirement obligations
was not deducted in estimating future net revenue.
35
Production History
The following table sets forth certain information in respect of production,
product prices received, royalties, production costs and netbacks received by us
for each year ended December 31, 2004, 2003, and 2002:
-----------------------------------------------------------------------------------------------------------------------
Year Ended Year Ended Year Ended
December 31, 2004 December 31, 2003 December 31, 2002
-----------------------------------------------------------------------------------------------------------------------
OPERATIONS
Production:
Crude oil & NGL's (Bbl/d) 715 696 36
Natural gas (Mcf/d) 2,417 2,361 860
Total (Boe/d) 1,118 1,090 179
Average sales prices:
Crude oil ($/Bbl) $ 38.95 $ 33.04 $ 37.75
Natural gas ($/Mcf) $ 6.53 $ 6.23 $ 4.33
Total ($/boe) $ 39.04 $ 34.95 $ 28.32
Royalty expense ($/ Boe) $ (8.34) $ (5.88) $ (5.27)
Operating expense ($/ Boe) $ (13.91) $ (12.73) $ (7.18)
Netback ($/ Boe) $ 16.78 $ 16.35 $ 15.87
FINANCIAL
Revenues:
Crude oil & NGL's $ 10,195,428 $ 4,390,809 $ 490,689
Natural gas 5,781,337 3,943,571 1,359,327
-----------------------------------------------------------------------------------------------------------------------
15,976,765 8,334,380 1,850,016
Royalty expenses (3,413,404) (1,400,856) (344,362)
Operating expenses (5,694,504) (3,035,185) (468,848)
-----------------------------------------------------------------------------------------------------------------------
Net revenue from oil and gas production 6,868,857 3,898,339 1,036,803
Recent Events
Sale of Chestermere
Effective January 1, 2005 we sold our Chestermere property for net proceeds of
$5.21 million. The proceeds from the sale were used for general working capital.
Expiration of C Warrants
Effective December 4, 2004 all 1,578,500 of our issued and outstanding C
warrants expired.
Material Bank Matters
On March 7, 2005, we signed a term sheet outlining the terms and conditions of a
proposed financing to replace our existing bank loan. Subject to certain credit
approval conditions, we will have available a $7,100,000 revolving operating
demand loan facility with a Canadian chartered bank. The loan will bear interest
at the bank's prime rate, which was 4.25% at March 7, 2005, plus 2% interest
subject to a standby fee of 0.125% per annum. We will also have available, a
$2,700,000 non-revolving development demand loan facility at the same bank with
interest payable at the bank's prime rate, which was 4.25 % at March 7, 2005,
plus 2.5% subject to a drawdown fee of 1% a standby fee of 0.125% per annum.
This facility is subject to completion of the bank's credit approval process.
The facilities will be secured by a $10 million debenture over all the assets of
Oil & Gas, a $10 million guarantee from Assure and Westerra, and a $40 million
supplemental debenture over the major producing petroleum and natural gas
reserves of Assure, Oil & Gas, and Westerra. These facilities will be reviewed
by July 15, 2005 and upon our fiscal year end December 31, 2005, and not later
than April 30, 2006. This new facility would replace both ours and Oil & Gas'
facilities. A commitment fee in the amount of $500,000 is also payable upon
delivery of a commitment to us, payable in monthly payments of $100,000 per
month commencing April 1, 2005. An earnest fee in the amount of $50,000 was paid
on April 1, 2005.
36
Engagement of Financial Advisor; Entry into Arrangement Agreement with GEOCAN
Energy, Inc.
On April 21, 2005 we engaged the services of Haywood Securities Inc. ("Haywood")
a TSE member firm, as our exclusive financial advisor to assist us in evaluating
strategic alternatives to maximize shareholder value. In the event that such
alternatives result in a merger, takeover or business combination (the
"Transaction") with another company, Haywood was to earn a commission equivalent
to 0.9% of the Transaction value. On June 1, 2005 the agreement with Haywood was
amended and Haywood will earn a commission equivalent to 1.0% of the Transaction
value. In connection therewith, effective July 8, 2005 we entered into an
Arrangement Agreement with GEOCAN Energy, Inc. ("GEOCAN") whereby, subject to
satisfaction of certain conditions, all of our issued and outstanding common
shares will be acquired by GEOCAN in exchange for GEOCAN common shares on the
basis of 0.70 of a GEOCAN common share for each of our common shares.
Amendment of Employment Agreements
On April 27, 2005 we amended certain employment agreements such that in the
event of a Transaction, as described above under Engagement of Financial
Advisor, our President and two Vice Presidents are entitled to receive severance
pay of approximately $600,000 in the aggregate. As part of this amendment, our
President and our two Vice Presidents were granted an aggregate of 510,000 stock
options. See "Issuance of Stock Options" below.
Exercise Of Class A Warrants
In February 2005, the holder of 234,000 Class A Warrants exercised such warrants
at a price of $0.433 (US$.333) per share resulting in proceeds of approximately
$101,220 (US$78,000).
Series A Preferred Stock Dividend
In June 2005 we issued an aggregate of 98,315 shares of our common stock to the
holders of our Series A Preferred Stock which represented payment of $109,225
(US$87,500) due to them as an annual dividend for the twelve month period ended
May 31, 2005.
Issuance Of Units
In June 2005 we issued an aggregate of 48,200 units to the subscribers in our
private offerings completed on June 30, 2004, in which we sold an aggregate of
482,000 units, due to our failure to register the common stock, including the
common stock underlying warrants constituting part of the units, purchased by
the subscribers in the original offering, by December 31, 2004. The units issued
were identical to the units sold in the original offering and consisted of one
share of our common stock and one Class E warrant to purchase an additional
share of our common stock at an exercise price of $5.00 (US$4.00) at any time up
to June 29, 2005.
37
Principal And Interest Payments On Outstanding Notes
In January 2005 we issued 101,202 shares representing principal ($197,495)
(US$162,000) and interest ($68,688) (US$56,343) due to the holder of our
US$3,240,000 subordinated promissory note dated December 5, 2003 with respect to
the three month period ended December 15, 2004.
In January 2005 we issued 32,955 shares representing principal ($50,000) and
interest ($15,894) due to holder of Assure Oil & Gas Corp.'s $1,000,000
subordinated promissory note dated December 28, 2002 with respect to the three
month period ended December 28, 2004.
In April 2005 we issued 229,745 shares representing principal ($195,518)
(US$162,000) and interest ($63,517) (US$52,628) due to the holder of our
US$3,240,000 subordinated promissory note dated December 5, 2003 with respect to
the three month period ended March 15, 2005.
In April 2005 we issued 52,832 shares representing principal ($50,000) and
interest ($14,795) due to the holder of Assure Oil & Gs Corp.'s $1,000,000
subordinated promissory note dated December 28, 2002 with respect to the three
month period ended March 28, 2005.
In July 2005 we issued 229,873 shares representing principal ($200,961)
(US$162,000) and interest ($62,810) (US$50,633) due to the holder of our
US$3,240,000 subordinated promissory note dated December 5, 2003 with respect to
the three month period ended June 15, 2005.
In July 2005 we issued 58,293 shares representing principal ($50,000) and
interest ($14,178) due to the holder of Assure Oil & Gas Corp.'s $1,000,000
subordinated promissory note dated December 28, 2002 with respect to the three
month period ended June 28, 2005.
Issuance Of Stock Options
Effective April 27, 2005 we issued an aggregate of 510,000 stock options to our
President, Vice-President - Geology, and Vice-President - Operations, and an
aggregate of 80,000 stock options to our non-employee directors. Each option has
an exercise price of $1.25 (US$1.00) per share, vested upon issuance, and is
exercisable for a period of one year from issuance. All of the options are
subject to earlier termination in the event the holder ceases to be an employee
or director of ours, as the case may be.
Cancellation Of Stock Options
During the period January 17, 2005 through March 31, 2005 we cancelled an
aggregate of 310,000 stock options. On June 30, 2005 all of our 1,385,000 then
outstanding stock options were cancelled.
Expiration of Class E Warrants
On June 29, 2005 an aggregate of 530,200 Class E Warrants expired as did the
right of the holders thereof to acquire Class F Warrants on exercise of Class E
Warrants.
Management Changes
On April 27, 2005, our manager of exploration, Ed Asuchak and manager of
geology, Colin Emerson, were appointed as our Vice President of Exploration and
Vice President - Geology, respectively. Effective June 30, 2005 we appointed Jim
Cassina as a director.
38
Our Business Strategy
We were established to capitalize on the improving business conditions for
emerging junior oil and gas companies operating in the Western Canadian
Sedimentary Basin. Industry consolidation and the refocusing of senior company
activity towards higher risk frontier and offshore projects have created a
market for smaller companies to acquire and exploit underdeveloped properties in
the Western Canadian Sedimentary Basin. In addition, the current higher
commodity pricing, the increased demand and the expected future demand for
natural gas has created an environment in which smaller, more efficient
operators can excel.
We pursue a strategy designed to maximize shareholder value through a
combination of exploration and low risk development operations, corporate
acquisitions and strategic alliances with competitors in significant growth
areas.
Our management team concentrates on internal generation of prospects in order to
control the pace of exploration and development and maximize returns from the
producing assets.
Competition
The oil and gas industry is highly competitive. We encounter competition from
numerous companies in all of our activities, particularly in acquiring rights to
explore for crude oil and natural gas. Most of our competitors are larger and
have substantially greater financial and human resources than we do.
The oil and gas business involves large-scale capital expenditures and
risk-taking. In the search for new oil and gas reserves, long lead times are
often required from successful exploration to subsequent production. Operations
in the oil and gas industry depend on a depleting natural resource. The number
of areas where it can be expected that oil and gas will be discovered in
commercial quantities is constantly diminishing and exploration risks are high.
Areas where oil or gas may be found are often in remote locations where
exploration and development activities are capital intensive and operating costs
are high.
Our future success will depend, to a significant extent, on our ability to make
good decisions regarding our capital expenditures, especially when taking into
consideration our limited resources. We can give no assurance that we will be
able to overcome the competitive disadvantages we face as a small company with
limited capital.
Regulation
We are subject to environmental regulations pursuant to a variety of provincial
and federal laws. Such laws provide for restrictions and prohibitions on the
release or emission of various substances produced in association with certain
oil and gas industry operations. In addition, such laws require that well and
facility sites be abandoned and reclaimed to the satisfaction of provincial
authorities. Compliance with such legislation can require significant
expenditures and a breach of such requirements may result in suspension or
revocation of necessary licenses and authorizations, civil liability for
pollution damage and the imposition of material fines and penalties.
39
We are committed to meeting our responsibilities to protect the environment
wherever we operate and anticipate making increased expenditures as a result of
the increasingly stringent laws relating to the protection of the environment
and will be taking such steps as required to ensure compliance with applicable
laws in the jurisdictions in which we operate. We believe that we are in
material compliance with applicable environmental laws and regulations. We also
believe that it is reasonably likely that the current trend towards stricter
standards in environmental legislation and regulation will continue.
As an oil and gas company with operations in Alberta, Canada, Saskatchewan,
Canada, and British Columbia, Canada we are subject to the rules and regulations
of the Alberta Energy and Utilities Board (the "EUB") the Saskatchewan Industry
and Resources ("SIR"), and the British Columbia Oil & Gas Commission ("OGC") The
function of the EUB, SIR and OGC is to insure that the discovery, development
and delivery of oil and gas and other natural resources takes place in a manner
that is fair, responsible and in the public interest. The EUB, SIR, and OGC
establish guidelines which we follow with respect to our oil and gas operations.
Our operating costs are materially affected by these requirements.
Supplies and Suppliers
Any raw materials required by us in the operation of our business are available
at competitive rates from many suppliers. We are not dependent on any one
supplier for raw materials.
Research and Development
We have not engaged in any research and development activities since our
inception.
Customers
No single customer accounts for a significant portion of our revenues.
Financing Transactions
Our financing transactions during the fiscal years ended December 31, 2004,
2003, and 2002 were as follows:
On April 23, 2002 we completed a US$1,250,000 (approximately CDN$1,909,855) debt
financing with an accredited investor. The debt was evidenced by our demand
promissory note dated April 23, 2002 and bore interest at the rate of 1% above
the prime rate charged by Citicorp. The note was subsequently cancelled and the
principal amount thereof was utilized to purchase US$1,250,000 (approximately
CDN$1,909,855) of our Series A Preferred Stock. The note was issued pursuant to
the exemption from registration contained in Section 4(2) of the Securities Act
of 1933, as amended.
On May 8, 2002 we completed a US$1,750,000 (approximately CDN$2,749,843) equity
financing with three accredited persons pursuant to the exemption from the
registration provisions of the Securities Act of 1933, as amended, provided by
Rule 506 of Regulation D. In connection therewith, we issued an aggregate of
1,400,00 units at a purchase price of US$1.25 (approximately CDN$1.96) per unit.
Each unit consists of one share of our common stock and one common stock
purchase warrant. Each warrant as amended, entitled the holder to purchase one
share of our common stock at a price of US$1.50 (approximately CDN$2.36) per
share for a period of four years commencing July 1, 2003. As the result of the
September 17, 2002 3:2 forward stock split the 1,400,000 unit shares became
2,100,000 shares and the 1,400,000 warrants became 2,100,000 warrants, each with
an exercise price of US$1.00 (approximately CDN$1.57) per share. Both the shares
underlying the units and the shares underlying the unit warrants have piggyback
registration rights.
40
As of June 1, 2002 we entered into a Preferred Stock Purchase Agreement with
three accredited persons pursuant to which we sold them 17,500 shares of our
Convertible Series A Preferred Stock at a price of US$100 (approximately
CDN$153) per share (the "Stated Value") or an aggregate of US$1,750,000
(approximately CDN$2,673,797). The Series A Preferred Stock was issued pursuant
to Section 4(2) of the Securities Act of 1933, as amended. One of the purchasers
was the purchaser of our US$1,250,000 (approximately CDN$1,909,855) note
described above, which pursuant to a Note Termination and Conversion Agreement
with us dated as of June 1, 2002 terminated the April 23, 2002 note referred to
above and applied the US$1,250,000 (approximately CDN$1,909,855) principal
amount thereof to the purchase of 12,500 shares of our Series A Preferred Stock.
The Series A Preferred Stock is convertible by the holder after 2 years, or if
called for redemption by us, into units. The initial conversion price for the
conversion of the Series A Preferred Stock is US$1.50 (approximately CDN$1.80)
of Stated Value. Each unit consists of one share of our common stock and one
common stock purchase warrant. Each warrant entitles the holder there of to
purchase one share of our common stock at a price of US$1.75 (approximately
CDN$2.10) per share at any time during the four year period commencing one year
after the date of issuance. Piggyback registration rights apply to the shares
underlying the units and unit warrants issuable upon conversion of the Series A
Preferred Stock. As the result of the September 17, 2002 3:2 forward stock
split, the initial conversion price of the Series A Preferred Stock became
US$1.00 (approximately CDN$1.20) of Stated Value and the exercise price for each
share underlying the unit warrants issuable upon conversion of the Series A
Preferred Stock became approximately US$1.166 (approximately CDN$1.40) per
share. The holders of the Series A Preferred Stock are entitled to receive out
of funds legally available for the payment of dividends, dividends in cash or
stock at the rate of 5% per annum on the Stated Value of each share of Series A
Preferred Stock. Dividends on the Series A Preferred Stock are cumulative from
the issuance date.
As of August 27, 2002 we entered into a Preferred Stock Purchase Agreement with
an accredited person pursuant to which we sold such person 5,250 shares of our
Convertible Series B Preferred Stock at a price of US$100 (approximately
CDN$155) per share (the "Stated Value") or an aggregate of US$525,000
(approximately CDN$815,724). The Series B Preferred Stock was issued pursuant to
Section 4(2) of the Securities Act of 1933, as amended. The Series B Preferred
Stock is convertible by the holder after 2 years, or if called for redemption by
us, into units. The initial conversion price for the conversion of the Series B
Preferred Stock is US$1.75 (approximately CDN$2.10) of Stated Value. Each unit
consists of one share of our common stock and one common stock purchase warrant.
Each warrant entitles the holder thereof to purchase one share of our common
stock at a price of US$2.00 (approximately CDN$2.40) per share at any time
during the four year period commencing one year after the date of issuance.
Piggyback registration rights apply to the shares underlying the units and the
unit warrants issuable upon conversion of the Preferred Stock. As the result of
the September 17, 2002 3:2 forward stock split, the initial conversion price of
the Series B Preferred Stock became approximately US$1.166 (approximately
CDN$1.40) of Stated Value and the exercise price for each share underlying the
unit warrants issuable upon conversion of the Series B Preferred Stock became
approximately US$1.333 (approximately CDN$1.60) per share. The holders of the
Series B Preferred Stock are entitled to receive out of funds legally available
for the payment of dividends, dividends in cash or stock at the rate of 5% per
annum on the Stated Value of each share of Series B Preferred Stock. Dividends
on the Series B Preferred Stock are cumulative from the issuance date.
41
On December 28, 2002 Assure O&G completed a $1,000,000 debt financing with an
accredited investor. The debt is evidenced by a six year promissory note which
bears interest at the rate of 3 1/2% above the prime rate charged by Royal Bank
of Canada in Toronto. No interest or principal is due on the note during the
first year of the note. On the first anniversary of the note, all interest then
due on the note is payable in full. Thereafter, for the balance of the term of
the note, interest and principal is payable quarterly. The debt is subordinated
to all present and future bank debt of ours, including our subsidiaries.
Effective June 1, 2004 the note was revised via an Addendum that provides that
during the 20 month period commencing on June 28, 2004, which includes the
payment obligation due June 28, 2004, all principal and interest due to the
holder under the note may, at our option, be paid in cash or in shares of our
restricted common stock. Following such 20 month period, for the remaining term
of the note, all principal and interest payments due to holder under the note
may, at holder's option, be paid in cash or in restricted shares of our common
stock. In July 2004 we paid the interest $18,699 (approximately US$14,182) and
principal $50,000 (approximately US$37,925), representing an aggregate
obligation of $68,699 (approximately US$52,107) due to the holder with respect
to the three month period ended March 28, 2004 through the issuance of 12,377
shares of our restricted common stock. The issuance was based on a price of
$5.55 (US$4.21) per share, which was the average share price for our common
stock during the 10 trading day period ended March 28, 2004. Pursuant to the
Addendum, in July 2004 we paid the interest $17,959 (approximately US$13,335)
and principal $50,000 (approximately US$37,128) representing an aggregate
obligation of $67,958.90 (approximately US$50,463.28) due to the holder with
respect to the 3 month period ended June 28, 2004 through the issuance of 12,308
shares of our restricted common stock. The issuance was based on a price of
$5.52 (US$4.10) per share, which was the average closing price for our common
stock during the 10 trading day period ended June 28, 2004. Pursuant to the
Addendum, in September 2004 we paid the interest $17,013.70 (approximately
US$13,373) and principal $50,000 (approximately US$39,300.00) representing an
aggregate obligation of $67,014 (approximately US$52,672.77) due to the holder
with respect to the 3 month period ended September 28, 2004 through the issuance
of 18,812 shares of our restricted common stock. The issuance was based on a
price of $3.56 (US$2.80) per share, which was the average closing price for our
common stock during the 10 trading day period ended September 28, 2004. Pursuant
to the Addendum, subsequent to December 31, 2004 we paid the interest $15,894
(approximately US$12,925) and principal $50,000 (approximately US$40,660)
representing an aggregate obligation of $65,894 (approximately US$53,585) due to
the holder with respect to the 3 month period ended December 28, 2004 through
the issuance of 32,955 shares of our restricted common stock. The issuance was
based on a price of $2.00 (US$1.63) per share, which was the average closing
price for our common stock during the 10 trading day period ended December 28,
2004.
On February 26, 2003 we completed a US$2,400,750 (approximately CDN$3,629,561)
equity financing in which we sold 1,067,000 units to 2 accredited investors at a
price of US$2.25 (approximately CDN$2.70) per unit. Each unit consists of 1
share of our common stock and 1/2 warrant. Each full warrant entitles the holder
to purchase one share of our common stock at a price of $3.00 (US$2.50) per
share for a period of five years, commencing February 26, 2003.
On March 15, 2003 we completed a US$4,500,000 (approximately CDN$5,409,000) debt
financing with an accredited investor. The debt is evidenced by a six year
promissory note which bears interest at the rate of 3 1/2 % above prime rate
charged by Citibank in New York. No interest or principal is due on the note
during the first year of the note. On the first anniversary of the note, all
interest then due on the note is payable in full. Thereafter, for the balances
of the term of the note, interest and principal is payable quarterly. The debt
is subordinated to all present and future bank debt of ours, including our
subsidiaries. In consideration of the financing, we also issued 450,000 warrants
(the "Note Warrants") to the investor dated March 15, 2003. Each warrant
entitles the holder to purchase 1 share of our common stock at a price of $3.73
(US$3.10) per share during the 5 year period commencing July 1, 2003. Effective
December 5, 2003, the holder of the note agreed to convert US$1,260,000
(approximately CDN$1,514,520) of the principal amount of the note into 350,000
units offered in our private offering which was completed on December 5, 2003.
In connection therewith, the US$4,500,000 note was cancelled and replaced with a
US$3,240,000 (approximately CDN$3,894,480) note dated December 5, 2003. The
holder utilized part of the interest and principal due on the note as at March
15, 2004 to exercise 100,000 of the Note Warrants. In connection therewith,
100,000 shares were issued to the holder in April 2004. Effective June 1, 2004
42
the note was revised via an Addendum that provides that during the 20 month
period commencing on June 15, 2004 which includes the payment obligation due
June 15, 2004, all principal and interest due to the holder under the note may,
at our option, be paid in cash or in shares of our restricted common stock.
Following such 20 month period, for the remaining term of the note, all
principal and interest payments due to holder under the note may, at holder's
option, be paid in cash or in restricted shares or our common stock. Pursuant to
the Addendum, in July 2004 we paid the interest $85,928 (US$63,291) and
principal $219,942 (US $162,000), representing an aggregate obligation of
$225,291, due to the holder with respect to the 3 month period ended June 15,
2004 through the issuance of 53,769 shares of our restricted common stock. The
issuance was based on a price of $5.69 (US$4.19) per share, which was the
average closing price for our common stock during the 10 trading day period
ended June 15, 2004. Pursuant to the Addendum, in October 2004 we paid the
interest $77,430 (US$60,126) and principal $208,622 (US$162,000), representing
an aggregate obligation of $286,052 (US$222,126), due to the holder with respect
to the 3 month period ended September 15, 2004 through the issuance of 94,121
shares of our restricted common stock. The issuance was based on a price of
$3.04 (US$2.36) per share, which was the average closing price for our common
stock during the 10 trading day period ended September 15, 2004. Pursuant to the
Addendum, in January 2005 we paid the interest $68,688 (US$56,343) and principal
$197,495 (US$162,000), representing an aggregate obligation of $218,343, due to
the holder with respect to the 3 month period ended December 15, 2004 through
the issuance of 101,202 shares of our restricted common stock. The issuance was
based on a price of $2.63 (US$2.16) per share, which was the average closing
price for our common stock during the 10 trading day period ended December 15,
2004.
In October 2003, persons holding an aggregate of 1,538,100 Class A Warrants
exercised such warrants at an exercise price of US$.333 (approximately CDN$0.44)
per share resulting in proceeds of approximately $677,037 (US$512,187).
In October 2003, a person holding 10,000 warrants exercisable at US$3.00
(approximately CDN$3.97) per share exercised such warrants resulting in proceeds
of US$30,000 (approximately CDN$39,655).
During the period November 21, 2003 through December 5, 2003 we engaged in a
private offering of up to 1,500,000 units at a price of US$3.60 (approximately
CDN$4.70) per unit. The offering was completed on December 5, 2003 with the sale
of 1,435,000 units to 6 persons resulting in gross proceeds of US$5,166,000
(approximately CDN$6,746,280). These proceeds included US$1,260,000
(approximately CDN$1,644,479) received from the holder of a March 15, 2003
promissory note upon the partial conversion thereof. Each unit consisted of 1
share of our common stock (the "Shares") and one Class C redeemable common stock
purchase warrant. Each Class C Warrant entitled the holder to purchase one share
of our common stock (the "C Warrant Shares") at an exercise price of $4.81
(US$4.00) per share during the six month period commencing on the earlier of the
registration of the shares underlying the Class C Warrants or 1 year from the
date of issuance of the Class C Warrants. The C Warrants were redeemable by us
43
upon 10 days prior written notice if, during the exercise period, the closing
bid price of our common stock was equal to or greater than $5.41 (US$4.50) per
share for 10 consecutive trading days. Upon exercise of all or part of the C
Warrants, the holder was entitled to receive such number of Class D common stock
purchase warrants that is equal to the number of C Warrants exercised. Each D
Warrant entitled the holder to purchase one share of our common stock at a price
of $5.11 (US$4.25) per share for a period of 2 years from issuance. The offering
of the units, including the underlying securities was made in reliance on
Regulation S under the Securities Act of 1933, as amended. In connection with
this offering, we agreed to use our best efforts to register the Shares and C
Warrant Shares as soon as practicable following the completion of the offering.
We were unable to do so for a period in excess of six months following the
completion of the offering and subsequently agreed, in recognition thereof, to
issue to all subscribers in the offering, additional units (the "10% Units"), at
no charge, equal to 10% of each subscriber's original subscription. In August
2004 we issued an aggregate of 143,500 additional units to the subscribers. The
C Warrants comprising part of the original units and 10% Units and the
corresponding right to acquire D Warrants expired on December 4, 2004
On December 29, 2003, the holder of 234,000 Class A Warrants exercised such
warrants at a price of $0.44 (US$.333) per share resulting in proceeds of
approximately $102,143 (US$78,000).
Effective February 12, 2004 we issued 28,224 shares of our common stock to the
holders of our Series A Preferred Stock which represented payment of $113,444
(US$87,500) due to them as an annual dividend for the twelve month period ended
May 31, 2003. On the same date we issued 8,750 shares of our common stock to the
holder of our Series B Preferred Stock which represented payment of $34,034
(US$26,250) due to it as an annual dividend for the twelve month period ended
August 26, 2003.
In July 2004, we issued 21,135 shares of our common stock to the holders of our
Series A Preferred Stock which represented payment of $118,794 (US$87,500) due
to them as an annual dividend for the 12 months ended May 31, 2004
In September 2004, we issued 10,254 shares of our common stock to the holders of
our Series B Preferred Stock which represented payment of $34,434 (US$26,250)
due to them as an annual dividend for the 12 months ended August 26, 2004
During the period May 15, 2004 through June 30, 2004 we engaged in a private
offering of up to 1,000,000 units at a price of US$3.60 (approximately CDN$4.96)
per unit. The offering was completed on June 30, 2004 with the sale of 287,000
units to 4 persons resulting in gross proceeds of US$1,033,200 (approximately
CDN$1,423,417). These proceeds included an aggregate of US$32,400 (approximately
CDN$43,989) received from 3 employees, each of whom paid US$10,800
(approximately CDN$14,663) they had received in June 2004 as a cash bonus in
recognition of their hard work and dedication. Each unit consists of 1 share of
our common stock (the "Shares") and one Class E redeemable common stock purchase
warrant. Each Class E Warrant entitles the holder to purchase one share of our
common stock (the "E Warrant Shares") at an exercise price of $4.81 (US$4.00)
44
per share during the six month period commencing on the earlier of the
registration of the shares underlying the Class E Warrants or 1 year from the
date of issuance of the Class E Warrants. The E Warrants are redeemable by us
upon 10 days prior written notice if, during the exercise period, the closing
bid price of our common stock is equal to or greater than $5.41 (US$4.50) per
share for 10 consecutive trading days. Upon exercise of all or part of the E
Warrants, the holder will be entitled to receive such number of Class F common
stock purchase warrants that is equal to the number of E Warrants exercised.
Each F Warrant will entitle the holder to purchase one share of our common stock
at a price of $5.11 (US$4.25) per share for a period of 2 years from issuance.
The offering of the units, including the underlying securities was made in
reliance on Regulation S under the Securities Act of 1933, as amended. In
connection with this offering, we agreed to use our best efforts to register the
Shares and E Warrant Shares by December 31, 2004. If we failed to do so, we
agreed to issue to all subscribers in the offering additional units (the "10%
Units"), at no charge, equal to 10% of each subscriber's original subscription.
We were unable to register the Shares and E Warrant Shares. In June 2005 we
issued an aggregate of 28,700 Units to the subscribers. The E Warrants
comprising part of the original units and 10% Units and the corresponding right
to acquire F Warrants expired on June 29, 2005.
During the period June 1, 2004 through June 30, 2004 we engaged in a private
offering of up to 700,000 units at a price of US$3.60 (approximately CDN$4.89)
per unit. The offering was completed on June 30, 2004 with the sale of 195,000
units to 3 persons resulting in gross proceeds of US$702,000 (approximately
CDN$953,076). Each unit consists of 1 share of our common stock and one Class E
redeemable common stock purchase warrant. Each Class E Warrant entitles the
holder to purchase one share of our common stock (the "E Warrant Shares") at an
exercise price of $4.81 (US$4.00) per share during the six month period
commencing on the earlier of the registration of the shares underlying the Class
E Warrants or 1 year from the date of issuance of the Class E Warrants. The E
Warrants are redeemable by us upon 10 days prior written notice if, during the
exercise period, the closing bid price of our common stock is equal to or
greater than $5.41 (US$4.50) per share for 10 consecutive trading days. Upon
exercise of all or part of the E Warrants, the holder will be entitled to
receive such number of Class F common stock purchase warrants that is equal to
the number of E Warrants exercised. Each F Warrant will entitle the holder to
purchase one share of our common stock at a price of $5.11 (US$4.25) per share
for a period of 2 years from issuance. The offering of the units, including the
underlying securities was made in reliance on Rule 506 of Regulation D and
Section 4(2) under the Securities Act of 1933, as amended. In connection with
this offering, we agreed to use our best efforts to register the Shares and E
Warrant Shares by December 31, 2004. If we failed to do so, we agreed to issue
to all subscribers in the offering additional units (the "10% Units"), at no
charge, equal to 10% of each subscriber's original subscription. We were unable
to register the Shares and E Warrant Shares. In June 2005 we issued an aggregate
of 19,500 Units to the subscribers. The E Warrants comprising part of the
original units and 10% Units and the corresponding right to acquire F Warrants
expired on June 29, 2005.
C. Organizational Structure
Our corporate structure is set out below:
-----------------------------------------
ASSURE ENERGY, INC.
(Alberta)
-----------------------------------------
|
----------------------------------------
Assure Oil & Gas Corp.
(Ontario)
100%
----------------------------------------
|
----------------------------------------
Westerra 2000 Inc.
(Alberta)
100%
----------------------------------------
45
D. Property, Plant and Equipment
Our crude oil, NGL and natural gas reserves have been evaluated by Sproule
Associates Limited ("Sproule") in the Evaluation of P&NG Reserves of ours using
constant prices and costs (as of December 31, 2004) ("Company's Reserve
Report"). The Company's Reserve Report has been prepared in accordance with
National Instrument 51-101 Standards of Disclosure for Oil & Gas Activities ("NI
51-101"). The table below summarizes the crude oil, NGL and natural gas reserves
and the net present value of future net cash flows associated with such reserves
as evaluated in the Company's Reserve Report, based on constant price
assumptions. All future cash flows are stated prior to provision for income
taxes and indirect costs and after deduction of royalties, estimated future
capital expenditures and well abandonment costs. It should not be assumed that
the present worth of estimated future cash flows shown below is representative
of the fair market value of the reserves. There is no assurance that such price
and cost assumptions will be attained and variances could be material. The
recovery and reserve estimates of our crude oil, NGL and natural gas reserves
provided herein are estimates only and there is no guarantee that the estimated
reserves will be recovered. Actual reserves may be greater than or less than the
estimates provided herein.
46
Summary of the Evaluation of Company's P&NG Reserves
as of December 31
(Based on Constant Price Assumptions)
----------------------------- --------------------------------- ------------------------------- ------------------------------
2004 2003 2002
--------------------------------- -------------------------------- ------------------------------
Remaining NPV @ Remaining NPV @ Remaining NPV @
Reserves 10% (CDN) Reserves 10% (CDN) Reserves 10% (CDN)
----------------------------- ---------------- ---------------- --------------- --------------- --------------- -------------
Light/Medium Oil (Mbbl)
Proved Developed Producing 1,153.0 10,702.0 1,069.9 16,132.0 71.8 1,826.0
Proved Developed Non Producing 35.0 478.0 35.2 483.0 -- --
Proved Undeveloped 4.9 303.0 136.3 880.0 -- --
--------------- ---------------- --------------- --------------- --------------- -------------
Total Proved 1,192.9 11,483.0 1,241.4 17,495.0 71.8 1,826.0
----------------------------- --------------- ---------------- --------------- --------------- --------------- -------------
Heavy Oil (Mbbl)
Proved developed Producing 33.7 110.0 114.4 1,029.0 88.1 1,241.0
--------------- ---------------- --------------- --------------- --------------- -------------
Total proved 33.7 110.0 114.4 1,029.0 88.1 1,241.0
----------------------------- --------------- ---------------- --------------- --------------- --------------- -------------
Solution Gas (MMcf)(Values
included with lt/med oil)
Proved Developed Producing 786.0 892.0 -- 168.0 --
Proved Undeveloped 50.0 -- -- -- --
--------------- --------------- --------------- --------------- -------------
Total Proved 836.0 892.0 168.0
----------------------------- --------------- ---------------- --------------- --------------- --------------- -------------
Pipeline Gas (MMcf)
Proved Developed Producing 1,955.0 7,624.0 1,141.0 4,070.0 1,506.0 4,965.0
Proved Developed Non Producing 250.0 581.0 -- -- -- --
Proved Undeveloped 522.0 1,074.0 165.0 717.0 207.0 702.0
--------------- ---------------- --------------- --------------- --------------- -------------
Total Proved 2,727.0 9,279.0 1,306.0 4,787.0 1,713.0 5,667.0
----------------------------- --------------- ---------------- --------------- --------------- --------------- -------------
Natural Gas Liquids (Mbbl)
(values included
with lt/med oil and gas)
Proved Developed Producing 41.2 45.0 -- 6.2 --
Proved Developed Non Producing 3.1 -- -- -- --
Proved Undeveloped 8.4 3.5 -- -- --
--------------- --------------- --------------- --------------- -------------
Total Proved 52.7 48.5 6.2
--------------- ---------------- --------------- --------------- --------------- -------------
GRAND TOTAL (Mboe)
Proved Developed Producing 1,684.7 18,436.0 1,568.1 21,231.0 445.1 8,032.0
Proved Developed Non Producing 79.7 1,059.0 35.2 483.0 -- --
Proved Undeveloped 108.5 1,377.0 167.3 1,597.0 34.5 702.0
--------------- ---------------- --------------- --------------- --------------- -------------
Total Proved 1,872.9 20,872.0 1,770.6 23,311.0 479.6 8,734.0
----------------------------- --------------- ---------------- --------------- --------------- --------------- -------------
Notes:
(1) The reserves definitions and ownership classification used in this
evaluation are the standards defined by COGEH reserves definitions and
consistent with NI 51-101 and used by Sproule. The oil reserves are
presented in thousands of barrels, at stock tank conditions. The pipeline
gas reserves are presented in millions of cubic feet, at base conditions
of 14.65 psia and 60 degrees Fahrenheit. The natural gas liquids reserves
are presented in thousands of barrels, at base conditions of 60 degrees
Fahrenheit and equilibrium pressure.
(a) Proved Reserves are those reserves that can be estimated with a high
degree of certainty to be recoverable. It is likely that the actual
remaining quantities recovered will exceed the estimated proved
reserves.
47
(b) Developed Reserves are those reserves that are expected to be
recovered from existing wells and installed facilities or, if
facilities have not been installed, that would involve a low
expenditure (e.g., when compared to the cost of drilling a well) to
put the reserves on production. The developed category may be
subdivided into producing and non-producing.
(c) Developed Producing Reserves are those reserves that are expected to
be recovered from completion intervals open at the time of the
estimate. These reserves may be currently producing or, if shut in,
they must have previously been on production, and the date of
resumption of production must be known with reasonable certainty.
(d) Developed Non-Producing Reserves are those reserves that either have
not been on production, or have previously been on production, but
are shut in, and the date of resumption of production is unknown.
(e) Pipeline Gas Reserves are gas reserves remaining after deducting
surface losses due to process shrinkage and raw gas used as lease
fuel.
(f) Remaining Recoverable Reserves are the total remaining recoverable
reserves associated with the acreage in which we have an interest.
(g) Company Gross Reserves are our working, lessor royalty, and
overriding royalty interest share of the remaining reserves, before
deduction of any royalties.
(h) Company Net Reserves are the gross remaining reserves of the
properties in which the Corporation has an interest, less all Crown,
freehold, and overriding royalties and interests owned by others.
(i) Net Production Revenue is income derived from the sale of net
reserves of oil, pipeline gas, and gas by-products, less all capital
and operating costs.
(j) Fair Market Value is defined as the price at which a purchaser
seeking an economic and commercial return on investment would be
willing to buy, and a vendor would be willing to sell, where neither
is under compulsion to buy or sell and both are competent and have
reasonable knowledge of the facts.
(k) Barrels of Oil Equivalent (BOE) Reserves - BOE is the sum of the oil
reserves, plus the gas reserves divided by a factor of 6, plus the
natural gas liquid reserves, all expressed in barrels or thousands
of barrels.
(2) In the preparation of this evaluation, a field inspection of the
properties was not performed. The relevant engineering data were made
available by the Company or obtained from public sources and the
non-confidential files at Sproule. No additional information regarding the
reserves evaluation would have been obtained by an on-site visit.
(3) The net present values of the reserves are presented on a before income
tax basis in Canadian dollars discounted at 10% and are based on annual
projections of net revenue, which were discounted at various rates using
the mid-period discounting method.
(4) The price forecasts that formed the basis for the revenue projections in
the evaluation were based on Sproule's December 31, 2004, 2003 and 2002
pricing model.
Additional information regarding our oil and gas reserves data as at December
31, 2004 may be found in our Form 6K filing for the month of May 2005 as filed
with the Securities and Exchange Commission on May 6, 2005.
Offices
The current lease at our registered and principal office in Calgary, Alberta
covers approximately 8,772 square feet of space, runs through January 31, 2007
and involves base rent payments of $7,310 (approximately US$6,081) per month
together with our share of taxes and other operating expenses related to the
premises. We believe that the space is sufficient to handle our present and
immediate future needs. In the event our lease is terminated for any reason or
not renewed upon the expiration of the present term, space sufficient to handle
our then present and expected future needs is expected to be available from
several alternative sources at comparable rates.
We sublet our prior location at 2750 - 140 4th Avenue SW, Calgary, Alberta T2P
3N3 which covered approximately 1,836 square feet of space, runs through
December 31, 2005 and involves base rent of $2,142 (approximately US$1,782) per
month together with our share of taxes and other operating expenses related to
the premises. We are currently subletting this space for $1,300 (approximately
US$1,082) per month together with the share of taxes and other operating
expenses related to this space.
For a discussion of our oil and gas properties see Item 4B - Business Overview
48
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
The following discussion contains management's explanation of factors that have
affected our financial condition and results of operations for the historical
periods covered by our financial statements and management's assessment of
factors and trends which are anticipated to have a material effect on our
financial condition and results of operations. It should be read together with
the Item 3.A -- "Selected Financial Data" and our consolidated financial
statements and their notes included elsewhere in this annual report. Our
consolidated financial statements are prepared and the information below is
presented in accordance with accounting principles generally accepted in Canada.
See Item 3.D -- "Risk Factors" and "Forward-Looking Statements" for a discussion
of factors that could cause our future financial condition and results of
operations to be different from those discussed below. Unless otherwise
indicated all dollar amounts reflect Canadian dollars.
A. Operating Results
General
We are engaged in the exploration, development and production of oil and natural
gas in the Canadian provinces of Alberta, Saskatchewan and British Columbia. Our
results of operations for the year ended December 31, 2004 include the accounts
of Assure Oil & Gas Corp. ("Oil & Gas"), and Westerra 2000 Inc. ("Westerra"). We
acquired Quarry, effective July 28, 2003, and increased our ownership in Quarry
to 51.84%, effective June 30, 2004. Pursuant to a Plan of Arrangement, on
December 17, 2004 we acquired 8,607,661 of the issued and outstanding common
shares of Quarry not already owned by us for 3,098,758 shares of our common
stock on the basis of 0.360 of an Assure common share for each Quarry common
share. The acquired Quarry shares were transferred to our then wholly owned
subsidiary, Assure Holdings Inc. ("AHI"), AHI and Quarry amalgamated on December
17, 2004 pursuant to section 184(1) of the Alberta Business Corporation Act. We
and AHI also amalgamated on December 17, 2004 pursuant to section 184(1) of the
Alberta Business Corporation Act. All warrants to acquire Quarry common shares
were cancelled.
Our results of operations for the year ended December 31, 2003 include the
accounts of our wholly owned subsidiaries, Oil & Gas and Westerra, and our
partially-owned subsidiary, Quarry from July 28, 2003. We effectively controlled
Quarry's operations and, as a result, included the accounts of Quarry on a
consolidated basis at December 31, 2003. The interest of the remaining Quarry
shareholders in Quarry's operations were recorded as minority interest in
consolidated subsidiary in the December 31, 2003 consolidated financial
statements.
Our financial results depend on many factors, including, but not limited to,
commodity prices, exploration and development success, control of capital
expenditures, and operating and overhead costs. These factors impact our ability
to obtain financing for our operations. Many of these factors are outside of our
control.
The following discussion may contain forward-looking statements. See "Forward
Looking Statements" on page 5 of this Annual Report.
49
Most of our operations are conducted by our Canadian subsidiaries in Canadian
dollars. As only limited operations are conducted in United States dollars we
adopted Canadian dollars as our reporting currency effective January 1, 2003.
Comparative figures for the prior period have been restated using the current
rate method of currency translation as though the Canadian dollar was the
reporting currency in that period. The net effect of adopting Canadian dollars
as our reporting currency reduces the foreign currency fluctuations recorded as
a result of translating our Canadian subsidiaries into US dollars. As
substantially all of our operations are now in Canada, management is of the
opinion that the Canadian dollar will more accurately reflect the balance sheet
and the net exposure in US dollars will be appropriately recognized through the
income statement. The net exposure to the US dollar will primarily come from US
dollar denominated accounts such as cash, trade payables and long term debt.
Results Of Operations
Year ended December 31, 2004 compared to year ended December 31, 2003
---------------------------------------------------------------------
Revenues
Revenues from oil and natural gas production, before deduction of royalties and
operating costs, increased by $7,642,385 to $15,976,765 in 2004 from $8,334,380
in 2003.
Net revenue from oil and natural gas production, after deduction of royalties
and operating costs, increased by $2,970,518 to $6,868,857 in 2004 from
$3,898,339 in 2003.
Our net loss decreased by $8,747,204 to $3,662,782 in 2004 from $12,409,986 in
2003.
Our production increased by 28 boe/d to 1,118 boe/d in 2004 compared to 1,090
boe/d in 2003.
Our production and operating results for the year ended December 31, 2004
include the accounts of Quarry for the 350 day period ended December 16, 2004.
For the comparable period in 2003, our production and operating results include
the accounts of Quarry for the period July 28, 2003 to December 31, 2003.
Production
For the year ending December 31, 2004 our average oil and NGLs production per
day increased by 19 bbls/d to 715 bbls/d compared to 696 bbls/d for the
comparable period in 2003. The increase in average oil production of 19 bbls/d
for the year ending December 31, 2004 was primarily related to the Ribstone area
which increased by 78 bbls/d over 2003. This increase was offset by natural
declines in other areas with the largest declines of 36 bbls/d and 34 bbls/d
coming from the Lloydminster area in Saskatchewan and the Chauvin area of
Alberta. The remaining 11 bbls/d increase was attributed to other areas.
Our oil production from the Chauvin, Ribstone, Chestermere and Enchant areas of
Alberta for the year ending December 31, 2004 were 245 bbls/d, 243 bbls/d, 110
bbls/d and 32 bbls/d, respectively. Our Lloydminster area of Saskatchewan
produced 59 bbls/d and 26 bbls/d were attributed to other areas.
For the year ending December 31, 2004 the average natural gas production per day
increased by 56 mcf/d to 2,417 mcf/d compared to 2,361 mcf/d for the comparable
period in 2003. The biggest increase came from the Currant area of British
Columbia, which increased by 700 mcf/d and the inclusion of Quarry for a full
year versus part year in 2003.
50
The Ansell, Haynes, and Lamond areas of Alberta increased by 65 mcf/d, 39 mcf/d,
and 24 mcf/d, respectively with the remaining increase of 40 mcf/d from other
areas. The Lloydminster area of Saskatchewan experienced the largest decrease,
423 mcf/d. The Enchant, Chestermere and Royce areas of Alberta decreased 170
mcf/d, 118 mcf/d, and 101 mcf/d respectively.
Our natural gas production for December 31, 2004 includes 1,179 mcf/d and 330
mcf/d, respectively, from the West Currant and Rigel areas of British Columbia.
Lloydminster in Saskatchewan produced 349 mcf/d of natural gas. The Enchant and
Chestermere areas at production levels of 144 mcf/d and 133 mcf/d respectively,
were the largest natural gas producing areas in Alberta. The remaining natural
gas production of 282 mcf/d arose from other areas of Alberta. The production
from West Currant was added at the end of March 2004 as a result of our
2003/2004 winter drilling program.
Crude oil & NGLs production increased 12 bbls/d from 158 bbls/d in the fourth
quarter of 2003 to 170 bbls/d in the fourth quarter of 2004. Natural gas
production decreased 69 mcf/d from 589 mcf/d in the fourth quarter of 2003 to
520 mcf/d in the fourth quarter of 2004.
Prices
The average oil price realized by us in 2004 was $38.95 per barrel, an increase
of 18% from $33.04 per barrel in 2003. Higher average prices for oil during 2004
compared to 2003 were the major contributing factor. All oil producing
properties experienced a price increase in 2004 over 2003 except for the
Caroline area, which saw its average oil price drop from $38.39 in 2003 to
$33.78 in 2004.
The average natural gas price realized by us in 2004 was $6.53 per mcf, an
increase of 5% from $6.23 per mcf in 2003. Similar to oil prices, average prices
for natural gas were higher in 2004 compared to 2003.
The average oil price realized by us in the last quarter of 2004 was $35.11 per
barrel, an increase of 22% from $28.75 per barrel in the last quarter of 2003.
The average natural gas price realized by us in the last quarter of 2004 was
$6.28 per mcf, an increase of 15% from $5.47 per mcf in the last quarter of
2003.
Petroleum and natural gas sales
Revenues from oil and natural gas production, before deduction of royalties and
operating costs, increased by $7,642,385 to $15,976,765 in 2004, due primarily
to the inclusion of $6,644,873 from Quarry for 2004 ($10,659,254 December 31,
2004 less $4,014,381 August to December 2003) compared to $8,334,380 in 2003.
In the fourth quarter of 2004, revenues from oil and natural gas production,
before deduction of royalties and operating costs, increased by $542,701 to
$3,378,793 compared to $2,836,092 for the last quarter of 2003.
Royalties
Royalties increased from $1,400,856 or $5.88 per boe in 2003 to $3,413,404 or
$8.34 per boe in 2004 due primarily to the inclusion of $1,440,075 from Quarry
for 2004 ($1,985,395 December 31, 2004 less $545,320 August to December 2003).
Royalties as a percentage of revenues increased from 17% to 21%.
51
Royalties increased from $520,990 or $5.57 per boe in the last quarter of 2003
to $687,143 or $7.32 per boe in the last quarter of 2004.
Operating Costs
Operating costs increased by $2,659,319 to $5,694,504 in 2004 compared to
$3,035,185 in 2003 primarily due to the inclusion of $2,978,261 from Quarry
($4,478,182 December 31, 2004 less $1,499,921, August to December 2003).
Operating costs increased by $155,125 in the last quarter of 2004 to $1,363,569
compared to $1,208,444 in the last quarter of 2003.
Operating costs on a boe basis increased by $1.18 per boe from $12.73 per boe in
2003 to $13.91 per boe in 2004. Operating costs were high due to work-over costs
incurred to maintain and improve production from its properties in the Ribstone
and Chauvin areas of Alberta.
Operating costs on a boe basis increased by $1.60 per boe from $12.92 per boe in
the last quarter of 2003 to $14.52 per boe in the last quarter of 2004.
General and administrative expenses
General and administrative expenses increased $2,442,455 to $4,933,565 in 2004
partly due to the inclusion of $1,303,050 from Quarry for the year ended
December 31, 2004 compared to $2,491,110 in 2003. Excluding the effect of
Quarry, Assure O&G's general and administrative expenses increased by $1,514,301
reflecting the increase in the Company's level of activities and increased costs
relating to its regulatory filings in the United States and its application to
obtain a Canadian listing and related equity financings.
Interest expense
Interest expense increased by $9,198 to $865,545 for us in 2004 compared to
interest expense of $856,347 in 2003. Included in interest expense for 2003 is
$250,014 in respect of warrants issued in conjunction with a US subordinated
note payable. As well, interest on the US subordinated note payable decreased
$183,176 compared to last year due to a principal reduction of US $1,260,000 on
December 5, 2003 and quarterly principal repayments of US $162,000 on June 15
and September 15 of this year. The decrease due to the US subordinated note
payable was offset by an increase of approximately $51,000 in interest expense
on the Canadian note payable due to a timing difference on the interest expense
accruals last year compared to 2004.
Interest expense increased by $10,105 to $178,955 in the fourth quarter of 2004
compared to $168,850 in the fourth quarter of 2003.
52
Depletion and depreciation
Depletion and depreciation expense decreased by $6,698,321 to $6,609,732
compared to $13,308,053 in 2003. The decrease was mainly due to the inclusion of
$3,013,556 in 2004 from Quarry ($4,289,827 for 2004 less $1,276,271 for August
to December 2003) which offset the reduction of $9,078,379 related to last
year's ceiling test writedown. On a boe basis, depletion and depreciation was
$16.15 per boe for the year ended December 31, 2004 compared to $55.81 per boe
for the year ended December 31, 2003 which included last year's ceiling test
writedown recorded as depletion. As well, additional natural gas reserves in
West Currant added in the first half of 2004 reducing the depletion rate for
2004.
Depletion and depreciation expense decreased by $9,631,950 from $11,267,843 in
the fourth quarter of 2003 to $1,635,893 in the fourth quarter of 2004.
Excluding the ceiling test writedown of $9,078,379 recorded in the fourth
quarter of 2003, depletion and depreciation expense decreased by $553,571 from
$2,189,464 in the fourth quarter of 2003 to $1,635,893 in the fourth quarter of
2004. On a boe basis and excluding the ceiling test writedown, depletion and
depreciation was $17.42 per boe for the fourth quarter of 2004 compared to
$23.40 for the fourth quarter of 2003.
Foreign Exchange Gain (Loss)
Most of our operations are conducted by our Canadian subsidiaries in Canadian
dollars with the remainder conducted in United States dollars. We convert our
United States dollar transactions using the current rate method of currency
translation. Under this method, monetary assets and liabilities are translated
at the rate of exchange in effect at the balance sheet date and revenue and
expense items are translated at the rate of exchange in effect on the dates on
which such items are recognized in income during the period. Unrealized foreign
currency gains and losses are recognized in current period earnings. In 2004, we
realized a foreign exchange gain of $112,242 compared to a foreign exchange loss
of $133,547 in 2003.
Income Taxes
As of February 6, 2004, we changed our domicile from Nevada to Alberta, the net
operating loss carryforwards of approximately US $816,000 will no longer be
available for use due to this change.
We and our wholly-owned subsidiaries have a net operating loss of approximately
$2,330,000 (2003 - $931,273) under The Income Tax Act (Canada). These net
operating losses can be carried back three years and forward seven to 10 years
to offset future taxable income. We and our wholly owned subsidiaries have
recorded a future tax recovery of $1,476,501 (2003 - $90,524) for 2004.
The net future tax liability results primarily from the difference in the tax
basis and carrying value of property, plant and equipment.
Minority interest in consolidated subsidiary
Minority interest represents the minority interest share of the net loss of
Quarry for the period ended December 16, 2004.
53
Equity Income
The equity income arises from Quarry's 39.77% interest in Keantha Holdings Inc.,
a private company.
Net loss and net loss per share
We recorded a net loss, after deduction of depletion and other non-cash items,
of $3,662,782 or $0.18 per common share for the year ended December 31, 2004
compared to a net loss of $12,409,986 or $0.77 per common share for the same
period in 2003.
In the fourth quarter, we recorded a net loss, after deduction of depletion and
other non-cash items, of $963,679 or $0.05 per common share compared to a net
loss of $9,667,477 or $0.60 per common share for the fourth quarter of 2003
which includes the ceiling test writedown. Excluding the ceiling test writedown
of $9,078,379, the fourth quarter loss for 2003 was $589,098 or $0.04 per common
share.
SUMMARY OF QUARTERLY RESULTS
2004
------------------------------------------------------------------------------------------------
Q4 Q3 Q2 Q1
------------------------------------------------------------------------------------------------
Net petroleum and natural gas revenue $ 3,087,961 $ 3,902,164 $ 2,857,986 $ 2,715,250
Net loss $ (963,679) $ (500,729) $(1,092,742) $(1,105,632)
Net loss per share - basic $ (0.05) $ (0.02) $ (0.06) $ (0.06)
2003
------------------------------------------------------------------------------------------------
Q4 Q3 Q2 Q1
------------------------------------------------------------------------------------------------
Net petroleum and natural gas revenue $ 2,836,745 $ 2,047,061 $ 895,369 $ 1,154,349
Net loss $(9,667,477) $(1,538,633) $ (702,989) $ (500,887)
Net loss per share - basic $ (0.60) $ (0.09) $ (0.04) $ (0.03)
The financial information for each of the quarters in the year ended December
31, 2003 has been restated into Canadian dollars using the translation of
convenience method. Amounts previously reported in US Dollars have been
translated into Canadian dollars using the average exchange rate for the year
ended December 31, 2003 of Cdn $1.2991 for each US $1.00.
Acquisitions
Effective June 30, 2004, we purchased 1,000,000 units (the "Units") of Quarry at
a price of $0.75 per Unit for a total cost of $750,000. Each Unit consists of
one common share and one warrant (a "Warrant"). Each Warrant entitled the holder
to purchase one common share of Quarry at a price of $0.80 for a period of two
years. Taking into account the issuance of the 1,000,000 common shares, Quarry
had 15,276,340 common shares issued and outstanding. As a result, we owned and
controlled a total of 7,919,900 common shares representing 51.84% of the issued
and outstanding common shares of Quarry. The purchase price of $750,000 was
allocated to the assets acquired and liabilities assumed based upon their fair
values at the date of acquisition.
On November 10, 2004, Quarry completed a non-brokered private placement and
issued 2,008,364 common shares at a price per share of $0.70 for gross proceeds
of $1,405,855. Assure Holdings Inc., Quarry's largest shareholder, participated
in the private placement, purchasing 757,143 common shares. These shares were
subject to a four-month hold period, ending March 10, 2005. The proceeds raised
from the private placement were used to retire certain debt obligations of
Quarry. As a result, we held 8,677,043 common shares of Quarry, 50.2% of the
outstanding common shares.
54
On December 17, 2004 we acquired 8,607,661 of the issued and outstanding common
shares of Quarry not already owned by us for shares of our common stock on the
basis of 0.360 of an Assure common share for each Quarry Oil & Gas Ltd.
("Quarry") common share. The acquired Quarry shares were transferred to our
wholly owned subsidiary, Assure Holdings Inc. ("AHI"). AHI and Quarry
amalgamated on December 17, 2004 pursuant to section 184(1) of the Alberta
Business Corporation Act. All warrants to acquire Quarry common shares were
cancelled. We and AHI also amalgamated on December 17, 2004 pursuant to section
184(1) of the Alberta Business Corporation Act
Year ended December 31, 2003 compared to year ended December 31, 2002
---------------------------------------------------------------------
Our activities during the two years ended December 31, 2003 relate primarily to
our oil and gas operations, except for approximately $164,871 (US$105,000) of
general and administrative expenses incurred during the first quarter of 2002
when we were still engaged in toy design activities.
Our 2002 operating results include the operations of Oil & Gas and Westerra from
April 1, 2002. The 2003 operating results include the operations of Oil & Gas
and Westerra for a full year and the operations of Quarry from July 28, 2003.
Revenues
Net operating revenues increased to $6,933,524 in 2003 from $1,505,654 in 2002.
Expenses in 2003 were $19,803,057 in 2003 compared to $2,492,073 in 2002. The
loss in 2003, before deduction of income taxes, minority interest in
consolidated subsidiary, and equity income in unconsolidated subsidiary, was
$12,869,833 compared to a loss of $986,419 in 2002. The net loss for 2003 was
$12,409,986 or $0.77 per share compared to a net loss of $1,030,208 or $0.04 per
share in 2002.
The primary reason for the increase in operating expenses in excess of the
increase in revenues was a $9.1 million ceiling test write down recorded in
2003. Our independent engineers prepared their report on our reserves at
December 31, 2003 in accordance with new reporting requirements for Canadian oil
and gas companies introduced in the fourth quarter of 2003 by Canadian
securities regulators and there was a technical revision in estimated quantities
of reserves which was the primary reason for the ceiling test write-down.
Oil and gas operations
The operating results from our oil and gas operations are disclosed in the
following table:
55
Year ended December 31
--------------------------
2003 2002 Change
-------------------------------------------
Production:
Crude oil & NGL's (Bbls) 132,892 13,000 119,892
Natural gas (Mcf) 633,246 314,000 319,246
-------------------------------------------
Total (Boe) 238,433 65,333 173,100
===========================================
Average sales prices:
Crude oil ($/Bbl) $ 33.04 $ 37.75 $ (4.71)
-------------------------------------------
Natural gas ($/Mcf) $ 6.23 $ 4.33 $ 1.90
-------------------------------------------
Revenues:
Crude oil & NGL's $ 4,390,809 $ 490,689 $ 3,900,120
Natural gas 3,943,571 1,359,327 2,584,244
-------------------------------------------
8,334,380 1,850,016 6,484,364
Royalties 1,400,856 344,362 1,056,494
Operating expenses 3,035,185 468,848 2,566,337
-------------------------------------------
Net revenue from oil and gas production $ 3,898,339 $ 1,036,806 $ 2,861,536
===========================================
Net revenue ($/ Boe) $ 16.35 $ 15.87 $ 0.47
-------------------------------------------
Operating expense ($/Boe) $ 12.73 $ 7.18 $ 5.55
-------------------------------------------
The increase in crude oil volumes of 119,892 barrels was due to the inclusion of
87,471 barrels from Quarry, 4,333 barrels resulting from a full year of
Assure/Westerra operations, and an increase of 28,088 barrels resulting from an
increased level of activities in the Assure/Westerra operations. The increase in
natural gas volumes of 319,246 Mcf was due to the inclusion of 164,949 Mcf from
Quarry, 104,677 Mcf resulting from a full year of Assure/Westerra operations,
and 49,620 Mcf resulting from an increased level of activities.
The increase in crude oil volumes of 328 Bbl/d is due to the inclusion of 240
Bbl/d from Quarry, 12 Bbl/d resulting from a full year of Assure/Westerra
operations, and an increase of 76 Bbl/d resulting from an increased level of
activities in the Assure/Westerra operations. The increase in natural gas
volumes of 875 Mcf/d is due to the inclusion of 452 Mcf/d from Quarry, 287 Mcf/d
resulting from a full year of Assure/Westerra operations, and 136 Mmcf/d
resulting from an increased level of activities.
The increase in the price of natural gas in 2003 reflects the impact on demand
and prices of colder than normal winter temperatures in the first and last
quarters, and higher storage demand in the second and third quarters. Demand for
crude oil and natural gas has historically been subject to seasonal influences,
with peak demand and higher prices in the winter heating season.
The 2003 increase in revenues, operating expenses and net revenue from oil and
gas producing activities is attributed to the inclusion of Quarry for 5 months,
the inclusion of a full year of operations for Assure/Westerra and a general
increase in the level of activities in our operations, as analyzed in the
following table:
Operating Net Revenue
Revenues Royalties Expense Oil and Gas
---------------------------------------------------------
Inclusion of Quarry for 5 months $ 3,785,401 $ 496,419 $ 1,472,013 $ 1,816,969
Inclusion of Oil & Gas/Westerra for full year 505,505 259,045 496,355 (249,895)
Increase in volumes 674,439 -- -- 674,439
Increase in selling prices 1,519,022 -- -- 1,519,022
Increase in royalties/operating expenses -- 301,030 597,969 (898,999)
---------------------------------------------------------
Increase $ 6,484,367 $ 1,056,494 $ 2,566,337 $ 2,861,536
=========================================================
The increase in income from oil and gas producing activities (before deduction
of minority interest, depletion and depreciation and accretion of asset
retirement obligation) is primarily attributable to the inclusion of Quarry's
operations together with an increase in prices and volumes, offset by higher
royalties and operating expenses.
56
The increase in royalties and operating expenses is due mainly to the higher
level of production.
During 2003, Quarry had used commodity contracts to hedge the selling prices of
its oil and gas production. These contracts were completed at December 31, 2003
and we have no current intention of entering into any new contracts.
General and administrative expenses
General and administrative expenses increased to $2,491,110 in 2003 from
$1,065,957 in 2002 due to the expanded level of operations. We hired a new
management team in 2003 to operate and administer the expanded operations
resulting from the acquisition activities in 2002 and 2003. Overhead and support
costs increased as a result of the increased number of staff, and costs
associated with our regulatory filings increased. $393,653 of the increase was
due to the inclusion of Quarry's operations from July 28, 2003. Expenses
included $143,433 for expensing the fair value of stock options granted to
employees, and $129,903 for expensing the fair value of warrants issued to a
consultant for services.
Interest expense
Interest expense increased by $818,514to $856,347 in 2003 due to the higher
level of debt incurred in 2003 in connection with our acquisition and capital
expenditure program.
Depletion and depreciation
The increase of $12,204,961 in depletion and depreciation expense to $13,308,053
in 2003 reflects the increase in production during 2003 due to the inclusion of
Quarry, the inclusion of Assure/Westerra for a full year, and the increased
level of production. Included in this amount is a $9.1 million ceiling test
write-down at December 31, 2003 as a result of new reserves reporting
requirements for Canadian oil and gas companies introduced by Canadian
securities regulators and technical and operating issues which negatively
impacted the measurement of proved reserves.
Minority interest of subsidiary
The minority interest in loss of subsidiary of $21,451 reflects the interest of
the remaining shareholders of Quarry in the results of operations of Quarry for
the 5 months ended December 31, 2003.
Equity income in unconsolidated subsidiary
During 2003, we recorded equity income of $68,531 from Quarry's unconsolidated
subsidiary, Keantha Holdings Inc., a Canadian company.
B. LIQUIDITY AND CAPITAL RESOURCES
Year ended December 31, 2004 compared to year ended December 31, 2003
---------------------------------------------------------------------
During the year ended December 31, 2004, our cash decreased by $4,515,745
compared to an increase of $2,708,864 in the prior year. The components of the
change are set out below.
57
Year ended December 31
2004 2003 Change
--------------------------------------------
Net income after adjustment for non-cash items $ 2,176,012 $ 1,387,875 $ 788,137
Reduction (increase) in working capital 727,222 1,586,665 (859,443)
--------------------------------------------
Provided by operating activities 2,903,234 2,974,540 (71,306)
Used in investing activities (10,402,820) (16,453,788) 6,050,968
Provided by financing activities 2,983,841 16,188,112 (13,204,271)
--------------------------------------------
Net change in cash $ (4,515,745) $ 2,708,864 $ (7,224,609)
============================================
Cash flow from operations
Cash flow from operations for the year ended December 31, 2004, after adjustment
for non-cash items and before changes in working capital, increased by $788,137
to $2,176,012. The contribution to cash flows from an increase of $2,970,518 in
revenues from oil and gas activities in 2004 was offset by higher general and
administrative expenses. Cash flow from operations, after an increase of
$727,222 in working capital, decreased by $71,306 from $2,974,540 for the 2003
year.
Cash flow provided by financing activities
During the year ended December 31, 2004, we issued 482,000 common shares at
$4.73 (US $3.60) per share and 482,000 warrants to purchase common shares at
$5.25 per share (US$4.00 per share) under a private placement for total proceeds
of $2,376,492 (US $1,735,200). Of this amount, $2,216,596 (US $1,618,452) was
allocated to common shares and $159,896 (US $116,748) was allocated to warrants.
In November 2004, when still a partially-owned subsidiary of ours, Quarry
completed a non-brokered private placement raising cash proceeds of $796,409.
During the year, Quarry collected an outstanding loan from a former employee in
the amount of $112,500.
Other sources of financing were $2,520,372 advances from shareholders, which are
unsecured, non-interest bearing and have no fixed terms of repayment.
We reduced our demand bank loan by $1,650,000 and repaid the debenture of
$1,250,000 which matured on November 1, 2004.
Cash flow used in investing activities
Cash flow of $12,554,802 was used in investing activities for our capital
expenditure program.
During the year ended December 31, 2004, we and our subsidiaries participated in
drilling 9.33 net wells, as follows:
- six (five net) natural gas wells in Northeastern British Columbia. 2
wells were completed and tied-in, one well is currently being
completed and is scheduled for tie in during the 3rd quarter of 2004
and the 2 remaining wells are scheduled for completion and tie in
during the 4th quarter of 2004;
- one (0.25 net) natural gas well in Alberta that was abandoned;
58
- one (0.25 net) natural gas well in the Edson area of Alberta;
- three (3 net) heavy oil wells in the Lloydminster area of Alberta;
- two natural gas wells in the Enchant area, one with a 35.625%
working interest and the other with a 47.5% working interest.
In addition, we completed six 100% working interest oil wells in the Ribstone
area of Alberta that had been drilled in 2003.
At December 31, 2004, we had no present commitments for capital expenditures
other than exploration, drilling, completion and equipping expenditures to be
incurred in the normal course of business. We anticipated that these
expenditures would be funded out of existing capital resources.
Working Capital
We had a working capital deficiency of $14,110,781 at December 31, 2004,
including payables and accrued liabilities of $8,269,333, a demand bank loan of
$6,150,000, advances from a shareholder of $2,520,372, current portion of
long-term debt of $978,896 and interest payable of $11,245. We anticipate that
we will be able to fund this deficiency out of cash flows from operations, bank
borrowings, proceeds from the sale of our Chestermere property and new equity.
At December 31, 2003 we had a working capital deficiency of $7,199,436,
including payable and accrued liabilities of $5,801,845, a debenture payable of
$1,250,000, a demand bank loan of $7,800,000 and the current portion of
long-term debt of $830,105.
Demand Bank Loan - Assure
Effective November 15, 2004, we had available a $6,550,000 (December 31, 2004
$6,400,000) revolving operating demand loan facility with a Canadian chartered
bank. The facility reduces by $75,000 per month commencing November 30, 2004 and
reduces by $275,000 per month commencing January 31, 2005. The loan bears
interest at the bank's prime rate, which was 4.25% at December 31, 2004, plus
1.5% interest subject to a standby fee of 0.125% per annum. We also had
available, a $1,200,000 non-revolving acquisition and development demand loan
facility at the same bank with interest payable at the bank's prime rate, which
was 4.25% at December 31, 2004, plus 1.5% subject to a drawdown fee of 0.375%
(acquisition) or 0.50% (development) and a standby fee of 0.125% per annum. The
facilities are secured by a $20 million debenture over all of our assets.
As at December 31, 2004, we had drawn down $5,700,000 (2003 - $7,800,000)
against these facilities and this amount has been classified as a current
liability.
Under our credit facility agreement with The National Bank of Canada, we are
subject to certain covenants. As at December 31, 2004, we were not in compliance
with the covenant requiring it to maintain an adjusted working capital ratio of
not less than 1 to 1. The National Bank of Canada has not demanded payment of
the loan as a result of this covenant violation and has provided a waiver for
the working capital covenant at December 31, 2004 (see Subsequent event note b).
59
Demand Bank Loan - Oil & Gas
As at December 31, 2004, we had available, through our wholly owned subsidiary
Oil & Gas a $1,200,000 revolving, operating demand loan facility with a Canadian
chartered bank. The loan bears interest at the bank's prime rate, which was
4.25% at December 31, 2004, plus 1.0% interest subject to a standby fee of
0.125% per annum. We also had available through Oil & Gas a $450,000
non-revolving acquisition and development demand loan facility at the same bank
with interest payable at the bank's prime rate, which was 4.25% at December 31,
2004, plus 1.25% subject to a drawdown fee of 0.25% (acquisition) or 0.50%
(development) and a standby fee of 0.125% per annum. The facilities are secured
by a $10 million debenture over all the assets of Oil & Gas and a $10 million
guarantee from Assure and Westerra.
As at December 31, 2004, Oil & Gas had drawn down $450,000 (2003 - $ nil)
against these facilities and this amount has been classified as a current
liability.
Under the credit facility agreement with The Bank of Canada we are subject to
certain covenants. As at December 31, 2004, we were not in compliance with the
covenant requiring us to maintain an adjusted working capital ratio of not less
than 1 to 1. The bank has not demanded payment of the loan as a result of this
covenant violation and has provided a waiver for the working capital covenant at
December 31, 2004 (see Subsequent event note b).
Commitments and Contingencies
Litigation
We are currently involved in litigation with a former officer of Quarry who is
claiming $240,000 in respect of termination and severance pay. We are contesting
this claim and have not accrued any amounts for this litigation. Examinations
for discovery have occurred and the matter is currently in abeyance as of
December 31, 2004 as the plaintiff has not moved the litigation forward.
Year ended December 31, 2003 compared to year ended December 31, 2002
---------------------------------------------------------------------
Our sources of liquidity consist primarily of cash flows from oil and gas
producing activities, bank and other borrowings, and proceeds of equity issues.
We believe that these sources will be adequate to fund our ongoing capital
expenditure program, and cover interest and overhead expenses, interest and
principal repayments on our debt, and any other obligations.
Sources and uses of cash
Sources of cash during 2003 and 2002 were as follows:
2003 2002
---- ----
Cash Flows provided by (used in) Operating Activities 2,974,540 39,827
Cash Flows used in Investing Activities (16,453,788) (5,387,164)
Cash Flows provided by Financing Activities 16,188,112 7,239,364
------------- -------------
Net Increase in Cash and Cash Equivalents 2,708,864 1,892,027
============= =============
60
Cash flow from operations
Cash flows from operating activities increased in 2003 due to higher natural gas
prices and increased volumes resulting from the inclusion of a full year of
operations for Oil & Gas and Westerra and five months of operations for Quarry
and an increase in the level of operations.
The level of cash flows depends on many factors, such as the price of crude oil
and natural gas, the success of the Company's exploration and development
program, and the Company's ability to control operating and overhead costs.
Cash flows used in investing activities
Cash flows used in investing activities increased due to the purchase of Quarry
and due to a higher level of capital expenditures in 2003. Expenditures were as
follows:
Year ended December 31
------------------------------------
2003 2002
------------------------------------
Property and equipment $4,893,000 $2,144,919
Disposition of commodity hedging 517,557 --
Restricted cash -- 86,600
Acquisitions 11,043,231 3,155,645
------------------------------------
$16,453,788 $5,387,164
====================================
During 2003, we drilled 7 gross wells (6.4 net wells), including 6 gross wells
(6 net wells) drilled by Quarry after July 28, 2003, and incurred $4,893,000 on
exploration and development work. The $11,043,231 for acquisition expenditures
consists of $9,611,706 related to the acquisition of Quarry.
Cash flows provided by financing activities
Cash flows from financing activities were derived from the following sources:
Year ended December 31
------------------------------------
2003 2002
------------------------------------
Proceeds from sale of common stock $ 9,550,197 $ 2,749,843
Proceeds from sale of preferred stock -- 1,579,666
Proceeds from issue of long-term debt, net 5,603,065 2,909,855
Proceeds from demand bank loan 1,034,850 --
====================================
Total $ 16,188,112 $ 7,239,364
====================================
61
During 2003, we issued 3,934,100 common shares for proceeds of $9,550,197. In
addition, we received net proceeds of $5,603,065 from the issue of long-term
debt.
Long-term debt
Our long-term debt consists of a $4,200,700 (US$3,240,000) six-year Subordinated
Promissory Note Payable (the "US dollar note") and a five-year note payable (the
"CDN dollar note")in the principal amount of $1,000,000 (US$771,300).
On March 15, 2003 we entered into the US dollar note with a foreign entity with
a principal balance of $5,834,306 (US$4,500,000). This Subordinated Note accrues
interest at Citibank's US prime rate (4.25% per annum at December 31, 2003) plus
3.5% per annum. No interest was due until March 14, 2004, at which time all
accrued and outstanding interest became due and payable. Thereafter, quarterly
payments of principal and interest are due each June 15, September 15, December
15 and March 15. This note is subordinated to all present and future bank debt
of the Company and its subsidiaries. On December 5, 2003, the Company and the
foreign entity agreed to a pay-down by the Company of $1,633,606 (US$1,260,000)
of the principal amount of the Subordinated Note. The foreign entity agreed to
apply the pay-down amount to the purchase of 350,000 units of the Company's
December 5, 2003 equity financing. As a result of the pay-down, the Subordinated
Note was cancelled and a new Subordinated Promissory Note Payable in the amount
of $4,200,700 (US$3,240,000) was issued on December 5, 2003 under the same terms
and conditions as the Subordinated Note.
On December 28, 2002 we obtained a six-year note payable in the principal amount
of $1,000,000 (US$771,300). This note payable accrues interest at the Canadian
bank prime rate (which was 4.5% per annum at December 31, 2003) plus 3.5% per
annum. Quarterly payments of principal and interest are due on the note payable
on March 28, June 28, September 28, December 28 and March 15 for five years
until maturity on December 28, 2008. This note is subordinated to all present
and future bank debt of the Company and its subsidiaries.
The aggregate maturities of long-term debt at December 31, 2003 are as follows:
US Dollars Cdn Dollars
2004 $ 640,260 $ 830,105
2005 802,260 1,040,140
2006 802,260 1,040,140
2007 802,260 1,040,140
2008 802,260 1,040,140
2009 162,000 210,035
------------ ------------
$ 4,011,300 $ 5,200,700
============ ============
Short-term debt
At December 31, 2003, we had available, through Quarry, a $8.3 million (US$6.3
million) revolving, operating demand loan facility with a Canadian chartered
bank. The loan bears interest at the bank's prime rate plus 1% interest. We also
had available through Quarry, a $2.5 million (US$1.9 million) non-revolving
acquisition and development demand loan facility at the same bank with interest
payable at the bank's prime rate plus 1.25%. The facilities are secured by a $20
million (US$15.4 million) debenture over all the assets of Quarry.
62
Effective March 1, 2004 the available facilities were changed to $8.2 million
(US$6.4 million) to cover both the operating loan facility and the
acquisition/development loan facility for the period March to April 2004.
As at December 31, 2003 Quarry had drawn down $7,800,000 (US$6,016,140) against
the bank's credit facilities.
Quarry has issued a debenture payable for $1,250,000 (US$964,125) to a company
controlled by a former officer of Quarry which grants to the holder a security
position over all the assets of the Quarry (subordinated to the bank's security
position), matures on November 1, 2004 and bears interest at the rate of 9% per
annum, payable monthly. The holder has the right to convert the debenture into
common shares of Quarry at any time after July 22, 2004 and prior to maturity at
a price equal to the lesser of $1.33 per share (US$1.00 per share) or the 10 day
weighted average trading price of Quarry's common shares, not to be lower than
$0.75 per share (US$0.58 per share).
Accounts Payable
Accounts payable and accrued expenses of $5,801,845 (US$4,474,963) as of
December 31, 2003, consists of trade payables and accrued liabilities. We pay
our suppliers within normal credit terms for the oil and gas industry. We
anticipate that trade payables will be settled out of cash flows from
operations, cash on hand of $4,628,405 (US$3,569,889) and collection of accounts
receivable of $3,302,813 (US$2,547,460 ).
Preferred stock
Our preferred stock consists of 17,500 shares of Series A Preferred Stock
("Series A") and 5,250 shares of Convertible Series B Preferred Stock ("Series
B").
The Series A has a stated value of $152.79 (US$100) with a cumulative 5%
dividend payable in cash or shares of the Company's common stock. At December
31, 2003 the Series A had accumulated a dividend payable of $113,444 (US$87,500)
paid through the issuance of common stock in February 2004.
The Series B has a stated value of $155.38 (US$100), a cumulative 5% dividend
payable annually in cash or common stock of the Company. At December 31, 2002
the Series B has a cumulative dividend of $34,034 (US$26,250) paid through the
issuance of common stock in February 2004.
Common Stock
Our common stock at December 31, 2003 consisted of authorized and issued capital
of 100,000,000 shares and 19,650,100 shares, respectively. During February 2004,
36,974 common shares were issued to satisfy the dividends due on the preferred
shares.
Commitments
At December 31, 2003, we had no commitments for capital expenditures other than
for exploration, drilling and completion and equipping expenditures to be
incurred in the normal course of business. We anticipated that these
expenditures would be funded out of existing capital resources.
63
Lease
We have operating leases for our corporate headquarters. The leases expire on
December 31, 2005 and January 31, 2007 and annual payments due under the leases
are as follows:
Canadian Dollars U.S Dollars
2004 $ 150,778 $ 116,296
2005 159,375 122,927
2006 103,175 79,580
2007 8,598 6,632
Production Bonus Pool
We maintain a production bonus pool that is a cash pool to be funded by us based
on the sustained barrel of oil per day or its natural gas equivalent production
of all oil and gas properties in which we or our subsidiaries have a working
interest. Initial funding of the pool will commence if we reach 2,000 barrels of
oil or its natural gas equivalent production per day for a period of 120
consecutive days. Additional funding is required upon our reaching additional
production milestones. Maximum funding in the aggregate amount of $1,075,000
(US$829,155), payable in stock or cash is required if we reach sustained
production for 120 consecutive days of 5,000 barrels of oil or its natural gas
equivalent per day. Allocations from the production bonus pool are subject to
the discretion of our board of directors which shall also determine the other
employees of ours and our subsidiaries eligible for participation in the pool.
Effective April 27, 2005 the production bonus pool was cancelled.
Asset retirement obligations
We have obligations for site restoration and abandonment costs at the end of the
useful lives of its properties. We have established an asset retirement
obligation liability to record the fair value of these obligations.
In the ordinary course of business, we and our subsidiaries enter into contracts
which contain indemnification provisions, such as loan agreements, purchase
contracts, service agreements, licensing agreements, asset purchase and sale
agreements, joint venture agreements, operating agreements, leasing agreements,
land use agreements etc. In such contracts, we may indemnify counterparties to
the contracts if certain events occur. These indemnification provisions vary on
an agreement by agreement basis. In some cases, there are no pre-determined
amounts or limits included in the indemnification provisions and the occurrence
of contingent events that will trigger payment under them is difficult to
predict. Therefore, the maximum potential future amount that we could be
required to pay cannot be estimated.
64
Summary of Significant Accounting Policies
a) Change in reporting currency and foreign currencies
Most of our operations are conducted by our Canadian subsidiaries in
Canadian dollars. As only limited operations are conducted in United
States dollars we adopted Canadian dollars as its reporting currency
effective January 1, 2002. Comparative figures for the prior period
have been restated using the current rate method of currency
translation as though the Canadian dollar was the reporting currency
in that period. The net effect of adopting Canadian dollars as our
reporting currency reduces the foreign currency fluctuations
recorded as a result of translating our Canadian subsidiaries into
US dollars. As substantially all of our operations are now in
Canada, management is of the opinion that the Canadian dollar will
more accurately reflect the balance sheet and the net exposure in US
dollars will be appropriately recognized through the income
statement. The net exposure to the US dollar will primarily come
from US dollar denominated accounts such as cash and trade payables.
All numbers reported in these financial statements are stated in
Canadian dollars unless otherwise denoted.
b) Petroleum and natural gas properties and equipment
i) Capitalized Costs
We follow the full cost method of accounting for our petroleum
and natural gas operations. Under this method, all costs
related to the acquisition, exploration and development of
petroleum and natural gas reserves, including asset retirement
obligations, are capitalized. Such costs include land
acquisition costs, geological and geophysical expenses,
carrying charges on non-producing properties, costs of
drilling both productive and non-productive wells, related
plant and production equipment costs, site restoration and
abandonment costs and overhead charges directly related to
acquisition, exploration and development activities.
ii) Depletion and Depreciation
We accounts for our petroleum and natural gas operations in
accordance with the Canadian Institute of Chartered
Accountants' ("CICA") guideline on full cost accounting
(AcG-16) in the petroleum and natural gas industry.
Capitalized costs, excluding costs related to unproved
properties, are depleted and depreciated using the
unit-of-production method based on estimated proven oil and
natural gas reserves before deduction of royalties as
determined by independent petroleum engineers. Petroleum and
natural gas reserves and production are converted to
equivalent units of crude oil using a ratio of six thousand
cubic feet of natural gas to one barrel of oil.
Costs of acquiring and evaluating unproved properties are
initially excluded from depletion calculations. These
unevaluated properties are assessed periodically to ascertain
whether impairment has occurred. When proved reserves are
assigned or the property is considered to be impaired, the
cost of the property or the amount of the impairment is added
to costs subject to depletion calculations.
Proceeds from the sale of petroleum and natural gas properties
are applied against capitalized costs, with no gain or loss
recognized, unless such a sale would result in a greater than
20% change in the depletion and depreciation rate.
65
Furniture and equipment is depreciated on a straight-line
basis at rates expected to write off the carrying values, net
of expected future recoveries, over the estimated useful lives
of the assets.
iii) Impairment Test
We apply an impairment test ("ceiling test") to determine if
capitalized costs are not recoverable and exceed their fair
value. Capitalized costs are not recoverable if they are
greater than estimated undiscounted cash flows from future
production of proven reserves plus the cost (net of
impairment) of unproved properties. Commodity prices used in
calculating estimated cash inflows are based on quoted
benchmark prices in the futures market. Costs used in
estimating cash outflows are based on expected future
production and other costs and include abandonment and site
restoration costs associated with developed properties. An
impairment loss is recognized if capitalized costs are greater
than their recoverable amount. The impairment loss is measured
as the amount by which capitalized costs exceed the fair value
of proved and probable reserves plus the cost (net of
impairment) of unproved properties. Fair value is determined
based on the present value of future cash flows, after
deducting abandonment and site restoration costs associated
with developed properties, discounted at a risk free interest
rate, adjusted for prevailing market conditions. Any
impairment loss is charged to earnings as additional
depletion.
c) Asset Retirement Obligations
We have adopted the new recommendation of the CICA relating to
accounting for asset retirement obligations effective January
1, 2003. This recommendation replaces the previous method of
accounting for site restoration costs on an accrual basis.
There was no material impact of adopting this standard on
prior years. We have adopted the new standard on a retroactive
basis in accordance with the CICA recommendations on
Accounting Changes. Under the new standard, a liability for
the fair value of environmental and site restoration
obligations is recorded when the obligations are incurred and
the fair value can be reasonably estimated. The obligations
are normally incurred at the time the related assets are
brought into production. The fair value of the obligations is
based on the estimated cash flow required to settle the
obligations discounted using the Government of Canada Bond
Rate for the applicable term adjusted for our credit rating.
The fair value of the obligations is recorded as a liability
with the same amount recorded as an increase in capitalized
costs. The amounts included in capitalized costs are depleted
using the unit-of-production method. The liability is adjusted
for accretion expense representing the increase in the fair
value of the obligations due to the passage of time. The
accretion expense is recorded as an operating expense.
d) Investments
We own 39.77% (2003 - 49%) of the common shares of Keantha
Holdings Inc. ("Keantha"). We account for our investment in
Keantha using the equity method of accounting, whereby the
investment was initially recorded at cost and adjusted to
recognize after-tax income or losses and reduced by dividends
received. The investment is carried at the lower of cost or
market value, if the decrease in value is of a permanent
nature.
66
e) Joint ventures
From time to time, certain petroleum and natural gas
activities are conducted jointly with others. These financial
statements reflect only our proportionate interest in such
activities.
f) Revenue recognition
Petroleum and natural gas sales are recognized when the
product is delivered.
g) Earnings per share
Earnings per share is determined based upon the weighted
average number of common shares outstanding during the period.
Diluted earnings per share is determined by applying the
treasury stock method to the exercise of outstanding stock
options and share purchase warrants, except to the extent that
the inclusion of these items would be anti-dilutive to the
resulting earnings per share calculation.
h) Stock based compensation
Effective January 1, 2003, we adopted the recommendations of
the CICA Handbook Section 3870 "Stock Based Compensation and
Other Stock-Based Payments". This section was amended to
require the expensing of all stock based compensation awards
for fiscal years beginning after January 1, 2003. The Company
has chosen to adopt the recommendation prospectively thereby
recording the fair value of the stock options issued since
January 1, 2003 in the income statement using the
Black-Scholes option-pricing model.
i) Future income taxes
We record future income taxes on the liability method of tax
accounting. Under this method, future tax assets and
liabilities are determined based on the difference between the
tax value of each asset or liability and its carrying value on
the balance sheet and are measured using substantially enacted
tax rates and laws that are expected to be in effect when the
differences reverse.
j) Commodity contracts
During 2003, Quarry traded petroleum products and derivative
instruments. Quarry entered into commodity contracts in the
normal course of its business to establish future sales and
purchase prices and manage the future cash flow risk
associated with price volatility of the commodities traded.
Commodity contracts may be designated as hedges of financial
risk exposure of anticipated transactions if, both at the
inception of the hedge and throughout the hedge period, the
changes in fair value of the contract substantially offset the
effect of the commodity price changes on the anticipated
transactions and if it is probable that the transactions will
occur. Quarry monitored its commodity exposures and ensured
that contracted amounts did not exceed the amounts of
underlying exposures.
Gains and losses were recognized on the delivery of the
petroleum product or settlement of the financial contract. The
market value of the outstanding commodity hedging option
contracts were determined at the reporting date and any
differences from the unamortized proceeds were recorded as an
adjustment to the unamortized portion of commodity hedging
contracts. Quarry deferred the impact of changes in the market
value of these contracts until such time as the associated
transactions was completed. In the event of early settlement
or re-designation of hedging transactions, gains or losses
were deferred and brought into income at the delivery dates
originally designated.
67
Where anticipated transactions were no longer expected to
occur, with the effect that the risk that was hedged no longer
exists, unrealized gains and losses were recognized in income
at the time such determination is made.
Cash flows arising in respect of these contracts were
recognized under cash flow from operating activities. Quarry's
commodity contracts expired in 2003. Quarry had no commodity
contracts in place at December 31, 2003. No commodity
contracts were undertaken in 2004 by us or our subsidiaries.
k) Financial instruments
Financial instruments of ours consist of cash, accounts
receivable, income taxes payable, accounts payable and accrued
liabilities, due to shareholders, the debenture payable, long
term debt and the bank loan. It is management's opinion that
we are not exposed to significant risks associated with these
financial instruments except as otherwise disclosed. The fair
value of these financial instruments approximates their
carrying value unless otherwise noted.
l) Measurement uncertainty
Amounts recorded for depreciation, depletion and amortization,
asset retirement costs and obligations and amounts used for
ceiling test and impairment calculations are based on
estimates of oil and natural gas reserves and future costs
required to develop those reserves. By their nature, these
estimates of reserves and the related future cash flows are
subject to measurement uncertainty, and the impact on the
financial statements of future periods could be material. .
m) Foreign Currency
Most of our operations are conducted by our Canadian
subsidiaries in Canadian dollars with the remainder conducted
in United States dollars. We convert our United States dollar
transactions using the current rate method of currency
translation. Under this method, monetary assets and
liabilities are translated at the rate of exchange in effect
at the balance sheet date and revenue and expense items are
translated at the rate of exchange in effect on the dates on
which such items are recognized in income during the period.
Unrealized foreign currency gains and losses are recognized in
current period earnings.
C. Research and Development, Patents and Licenses, Etc.
As an oil and gas exploration and development company we do not engage in
research and development activities.
D. Trend Information
The level of activity in the Canadian oil and gas industry is influenced by
seasonal weather patterns. Wet weather and spring thaw make the ground unstable.
Consequently, municipalities and provincial transportation departments enforce
road bans that restrict the movement of rigs and other heavy equipment, thereby
reducing activity levels. Also, certain oil and gas producing properties located
in swampy terrain are only accessible during winter months. Seasonal factors and
unexpected weather patterns may lead to declines in exploration and production
activity and increased consumer demand or changes is supply during certain
months of the year may influence the commodity prices
68
Our business is not a seasonal business, but increased consumer demand or
changes in supply in certain months of the year can influence the price of
produced hydrocarbons, depending on the circumstances. Production from our oil
and gas properties is the primary determinant for the volume of sales during the
year.
E. Off Balance Sheet Arrangements
We have no off balance sheet arrangements.
F. Tabular Disclosure of Contractual Obligations
Description Total 2005 2006 2007 2008 2009
------------------------------------------------------------------------------------------------------------------------------------
Operating Leases (note 1) $ 208,454 $ 113,424 $ 87,720 $ 7,310 $ -- $ --
Note Payable (note 2) 800,000 200,000 200,000 200,000 200,000 --
Subordinated Note Payable (note 3) 3,310,308 778,896 778,896 778,896 778,896 194,724
-------------------------------------------------------------------------------------------
Total Contractual Obligations (note 4) $ 4,318,762 $ 1,092,320 $ 1,066,616 $ 986,206 $ 978,896 $ 194,724
===========================================================================================
(1) Effective August 1, 2004, we entered into a new lease for the rental of
office space for the period to January 31, 2007. We are committed to payments of
$87,720 per annum for rent plus a proportionate share of operating costs. We
have also entered into a sublease that expires December 31, 2005. We are
committed to payments of $25,704 per annum for rent plus a proportionate share
of operating costs.
(2) Our long-term debt consists of a six-year note payable (the "Note Payable")
issued by our wholly owned subsidiary Oil & Gas in the principal amount of
$800,000 (December 31, 2003 - $1,000,000) and a six-year Subordinated Promissory
Note Payable (the "Subordinated Note") in the principal amount of US $2,754,000,
equivalent to Canadian $3,310,308 (December 31, 2003 - US $3,240,000, equivalent
to Canadian $4,200,700).
The Note Payable was issued on December 28, 2002 and matures on December 28,
2008. The note accrues interest at 7.5% per annum. Quarterly payments of
principal and interest are due on March 28, June 28, September 28 and December
28. The note is subordinated to all present and future bank debt of Oil & Gas
and its subsidiaries.
(3) The Subordinated Note was issued on March 15, 2003, as amended on December
5, 2003, and matures on March 15, 2009. The note accrues interest at 7.75% per
annum. Quarterly payments of principal and interest are due and payable in US
dollars on March 15, June 15, September 15 and December 15. The note is
unsecured and is subordinated to all present and future bank debt of us and our
subsidiaries. In connection with the issuance of the Subordinated Note, we
issued 450,000 common stock purchase warrants to purchase an equal number of
shares of our common stock with an exercise price of $3.73 (US $3.10) per share.
These common stock purchase warrants may be exercised at any time during the
five year period that commenced July 1, 2003.
(4) Our long-term debt also consists of future income taxes in the amount of
$2,220,885 and an asset retirement obligation of $1,279,702. The payment and
timing of future income taxes is not certain. The timing of the payments
required for future asset retirement obligations is expected to occur between
2010 and 2020.
69
G. Safe Harbor
This annual report includes "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995. Such forward-looking
statements may include conclusions of pre-feasibility and feasibility studies,
estimates of future production, capital and operating costs, market prices of
resources and our products and services and other known and unknown risks. These
and other factors and uncertainties may cause material differences from future
results as expressed or implied by these forward-looking statements. These
risks, uncertainties and other factors include but are not limited to the risks
involved in our businesses.
All statements, other than statements of historical facts, included in this
annual report that address activities, events or developments which we expect or
anticipate will or may occur in the future are forward-looking statements. The
words "believe", "intend", "expect", "anticipate", "project", "estimate",
"predict" and similar expressions are also intended to identify forward-looking
statements.
Our estimated or anticipated future results or other non-historical facts are
forward-looking and reflect our current perspective of existing trends and
information. These statements involve risks and uncertainties that cannot be
predicted or quantified, and consequently actual results may differ materially
from those expressed or implied by such forward-looking statements. Such risks
and uncertainties include, among others, the success of our exploration and
development activities, environmental and other regulatory requirements, foreign
exchange issues, petroleum and natural gas reserve estimates and prices,
competition by other resource companies, financing risks, and other risks and
uncertainties detailed in this report and from time to time in our other public
filings.
Consequently, all of the forward-looking statements made in this annual report
are qualified by these cautionary statements. We cannot assure you that the
actual results or developments anticipated by us will be realized or, even if
substantially realized, that they will have the expected effect on us or our
business or operations.
Forward-looking statements are subject to a variety of risks and uncertainties
in addition to the risks referred to in "Risk Factors" under Item 3.D above.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. Directors and Senior Management
Set forth below is information concerning our current directors, senior
management and key employees as of June 10, 2005:
Date of Election or
Name Age Position Appointment as Director
---- --- -------- -----------------------
Harvey Lalach 39 President, Chief Executive September 12, 2002
and Financial Officer,
Chairman
James Golla 72 Director April 23, 2002
Colin McNeil 58 Director December 17, 2004
Colin Emerson 35 Vice-President - Geology N/A
Edward Asuchak 45 Vice President - Operations N/A
70
In September 2004 our chief financial officer Martin Eden resigned. Ying Yuen
was appointed as CFO on October 18,2004 and subsequently resigned on Dec 17,
2004. Harvey Lalach our current president has assumed the role of CFO since the
departure of Mr. Yuen. On June 30, 2005 we appointed JimCassina as a director.
The following is a brief biography of each of our directors, senior management
and key employees as of June 10, 2005. There are no family relationships between
any of such persons.
Harvey Lalach has served as a director for us since September 12, 2002, as a
vice president from September 19, 2002 through December 6, 2002, as our
president and chief executive officer since December 6, 2002 and as our chief
financial officer from December 13, 2002 until January 26, 2004 and from
December 17, 2004 through the present. He served as the president and chief
executive officer of Quarry Oil & Gas Ltd. from July 28, 2003 until December 17,
2004, the date of the amalgamation between Quarry Oil & Gas Ltd. and Assure
Holdings Inc. He also serves as president, chief executive and financial officer
and as a director for each of Assure O&G and Westerra. From July 22, 2003 to the
present he has served as a director for Keantha Holdings Inc., a private company
that is 39.77% owned by us. Mr. Lalach was employed in the investment industry
from 1987 to 1997 where he served as a securities trader, a floor trader and
ultimately a branch manager for Green Line Investor Services, Inc. Mr. Lalach
was the manager of administration and corporate relations for Goldtex Resources
Ltd., a public mining company listed on TSX Venture Exchange Inc., from July
1997 to November 1998. He was the founder, president and director of Global Net
Care, Inc. an Internet company whose shares are publicly traded on the OTC
Bulletin Board, from November 1998 to March 2001. From September 2001 to July
2002, Mr. Lalach was the vice-president and director of Aubryn International
Corp., a company that was mining for spring water in Southern California whose
shares are publicly on the OTC Bulletin Board.
James Golla has served as a director of ours since April 23, 2002. He served as
our interim president and chief executive officer from August 1, 2002 until
September 12, 2002. He served as our secretary and treasurer from August 1, 2002
until January 26, 2004. Mr. Golla was a sports and business journalist with the
Globe and Mail, Canada's national newspaper, from 1954 until his retirement in
November 1996. Mr. Golla is also currently a director of Altair Nanotechnologies
Inc. and has been since May 1994, a company that is developing nanomaterial
products and is listed on the NASDAQ small-cap market. Mr. Golla is a director
of several other public companies including Apogee Minerals Ltd. (since February
1998), a public oil and gas exploration company listed on the TSX Venture
Exchange, Inc., European Gold, a public gold exploration company listed on the
TSX Venture Exchange, Inc., Radiant Energy Corp., a high tech company
manufacturing products for the airline industry listed on the TSX Venture
Exchange, Inc.
Colin McNeil has served as a director of ours since December 17, 2004 He is the
president and founder of C. McNeil & Associates Inc., a private company formed
in Alberta that provides geophysical consulting services with respect to both
Canadian and international projects. From September 2000 until May 2004 Mr.
McNeil served as president for Zidane Energy, Inc., a private oil and natural
gas company.
71
Colin Emerson has served as our vice president - geology since April 2005. From
September 2003 until March 2005 he served as our Manager of Exploration. From
April 2003 until September 2003 he was a geologist for Devlin Exploration. From
July 2000 until December 2002 he was a geologist for Samson Canada. From August
1997 until June 2000 he was a geologist for Apache Canada.
Edward Asuchak has served as our vice president - operations since April 2005.
From January 2004 until April 2005 he was a consultant to us. From September
1994 until April 2005 he was self employed as a drillings and completions
engineer.
There are no family relationships, arrangements or understandings between any
two or more directors or executive officers.
B. Compensation
The following table sets forth information concerning the total compensation
paid or accrued by us in Canadian dollars during the three fiscal years ended
December 31, 2004 to all individuals that served as a director for us at any
time during the fiscal year ended December 31, 2004 and all individuals that
served as members of administrative, supervisory, or management bodies for us at
any time during the fiscal year ended December 31, 2004.
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term Compensation
Restricted
Fiscal Year Securities Stock
Name and principal Ended Other Underlying Awards Stock LTP All Other
position December 31 Salary Bonus Compensation Options/SARs Awards Payouts Compensation
Harvey Lalach 2004 90,000 14,663 3,665(5) 175,000(1)(4) -- -- --
President and CEO 2003 90,000 -- 3,462(2) -- -- -- --
2002 14,885 -- -- 100,000(3)(4) -- -- --
Ying Yeung, Chief 2004 16,667 -- -- -- -- -- --
Financisl Officer(6)
Martin Eden Chief 2004 68,590 14,663 -- 150,000(9) -- -- --
Financial Officer(7)
Colin McNeil, Director 2004 -- -- -- (10) -- -- --
Lisa Komoroczy,
Director(8) 2004 -- -- 4,110(5) -- -- -- --
2003 -- -- -- 30,000(11) -- -- --
James Golla, Director 2004 -- -- 3,165(5) 10,000(12) -- -- --
2003 -- -- -- -- -- -- --
2002 -- -- -- 20,000(13) -- -- --
(1) Consists of 75,000 stock options issued on June 25, 2004 with an exercise
price of $4.86 (US$4.05) per share expiring June 24, 2009 and 100,000
stock options issued September 21, 2004 with an exercise price of $3.00
(US$2.50) per share expiring September 20, 2009.
(2) Consists of accrued vacation pay.
(3) Consists of 100,000 stock options issued to Mr. Lalach on October 1, 2002
with an exercise price of $4.34 (US$2.75) per share.
(4) These options were cancelled effective June 30, 2005.
(5) Consists of directors' fees
(6) Resigned December 16, 2004
72
(7) Resigned September 7, 2004
(8) Resigned December 17, 2004
(9) Consists of 75,000 stock options issued on March 4, 2004 with an exercise
price of $5.04 (US$4.20) per share expiring on March 3, 2009 and 75,000
stock options issued on June 25, 2004 with an exercise price of $4.86
(US$4.05) per share expiring June 24, 2009. All of these options were
cancelled on October 7, 2004.
(10) On August 28, 2003 we issued 50,000 stock options to Mr. McNeil in his
capacity as a consultant with an exercise price of $3.60 (US$3.00) per
share. These options were cancelled effective June 30, 2005.
(11) Consists of 30,000 stock options issued on September 4, 2003 with an
exercise price of $3.60 (US$3.00) per share expiring September 3, 2006.
These options were cancelled on January 17, 2005.
(12) Consists of 10,000 stock options issued on October 1, 2002 with an
exercise price of $4.34 (US$2.75) per share expiring September 30, 2005.
These options were cancelled effective June 30, 2005.
(13) Consists of 20,000 stock options issued on September 21, 2004 with an
exercise price of $3.00 (US$2.50) expiring September 20, 2009. These
options were cancelled effective June 30, 2005.
Effective September 1, 2004 we adopted a fee structure for our directors.
Pursuant thereto, our Chairman is receiving an annual fee of $2,000 payable
quarterly. Our other directors are receiving an annual fee of $5,000 payable
quarterly. Each committee chair is receiving an annual fee of $1,500 payable
quarterly. Further, each director is receiving a fee of $250 for each board or
committee meeting that they attend.
For the fiscal year ended December 31, 2004 Harvey Lalach received $3,665 in
directors' fees, Colin McNeil received $2,922 in directors' fees, James Golla
received $3,165 in directors' fees and Lisa Kozmoroczky received $4,110 in
directors' fees.
Option/SAR Grants in Last Fiscal Year
The following table sets forth certain information concerning stock options
granted during fiscal 2004 to the executive officers listed in the Summary
Compensation Table above, referred to as the Named Executive Officers:
Individual Grants
------------------------------
Number of Percent of Total
Securities Options/SAR's Exercise
Underlying Granted to Price
Options/SAR's Employees in per
Name Granted Fiscal Year Share Expiration Date
---- ------- ----------- ----- ---------------
Harvey Lalach 75,000 9.2% $ 4.86(1) 6/24/2009(3)
100,000 12.3% $ 3.00(2) 9/20/2009(3)
James Golla 10,000 N/A $ 3.00(2) 9/20/2009(3)
Ying Yuen N/A N/A N/A N/A
Martin Eden 75,000 9.2% $ 5.05(4) 3/03/2009(6)
75,000 9.2% $ 4.86(5) 6/24/2009(6)
Colin McNeil 50,000 N/A $ 3.61(7) 8/27/2006(8)
Lisa Komorocozy 30,000 N/A $ 3.60(9) 9/03/2006(10)
James Golla 10,000 N/A $ 4.34(11) 9/30/2005(12)
(1) US$4.05
(2) US$2.50
(3) These options were cancelled effective June 30, 2005.
(4) US$4.20
(5) US$4.05
(6) These options were cancelled effective October 7, 2004
(7) US$3.00
73
(8) These options were cancelled effective June 30, 2005.
(9) US$3.00
(10) These options were cancelled effective January 17, 2005.
(11) US$2.75
(12) These options were cancelled effective June 30, 2005.
Aggregate Option/SAR Exercises in Last Fiscal Year and Fiscal Year-End
Option/SAR Values
The following table sets forth certain information concerning the number and
value of unexercised options to purchase shares of our common stock held at the
end of fiscal 2004 by the Named Executive Officers and the number and value of
the shares received from the exercise of options during fiscal 2004 by such
Named Executive Officers:
Number of
Unexercised Value of Unexercised
Securities Underlying In-the-Money
Options/SARs Fiscal Options/SARs at
Shares Year-End Fiscal Year-End ($)
Acquired on Value Realized (#)Exercisable / Exercisable/
Name Exercise (#) ($) Unexercisable Unexercisable
---- ------------ --- ------------- -------------
Harvey Lalach N/A N/A 275,000
150,000 Exercisable N/A
125,000 Unexercisable N/A
James Golla N/A N/A 30,000
20,000 Exercisable N/A
10,000 Unexercisable N/A
Ying Yuen N/A N/A N/A N/A
Martin Eden N/A N/A N/A N/A
Colin McNeil N/A N/A 50,000
50,000 Exercisable N/A
0 Unexercisable N/A
Lisa Komorocozy N/A N/A 30,000
30,000 Exercisable N/A
0 Unexercisable N/A
Long Term Incentive Plan Awards
We made no long-term incentive plan awards to the persons listed in the Summary
Compensation Table or any other persons since our inception other than listed
below.
Production Bonus Pool
---------------------
We previously announced plans to create a production bonus pool that was a cash
pool to be funded by us based on the sustained barrel of oil per day or its
natural gas equivalent production of all oil and gas properties in which we or
our subsidiaries had a working interest. Initial funding of the pool was to
commence if we reached 2,000 barrels of oil or its natural gas equivalent
production per day for a period of 120 consecutive days. Additional funding was
required upon our reaching additional production milestones. Maximum funding in
the aggregate amount of $1,075,000 (US$829,155), payable in stock or cash was
required if we reached sustained production for 120 consecutive days of 5,000
barrels of oil or its natural gas equivalent per day. Allocations from the
production bonus pool were subject to the discretion of our board of directors
which was to also determine the employees of ours, including employees of our
subsidiaries, eligible for participation in the pool. The production bonus pool
was never created and effective April 27, 2005 we terminated our plan to create
it.
74
Employment Agreements
Effective September 30, 2002 we entered into a nine-month employment agreement
with Harvey Lalach to serve as our Vice-President-Corporate Affairs. The
agreement was automatically renewable for successive six-month terms unless
either party delivered written notice of termination to the other at least 15
days prior to the end of the then existing term. Upon the December 6, 2002
resignation of Suzanne West, Mr. Lalach succeeded to the positions of president
and chief executive officer and the agreement was deemed terminated except with
respect to the options granted to Mr. Lalach thereunder. The agreement provided
for a base salary of $3,000 per month and the grant of 100,000 3-year
non-statutory stock options with an exercise price of $US$2.75 per share. The
options contained anti-dilution provisions. 50,000 of the options vested on each
of March 31, 2003 and March 31, 2004. In recognition of his added duties,
commencing December 6, 2002 we were paying Mr. Lalach a salary of $7,500 per
month (approximately US$5,000) under a verbal month to month arrangement.
Effective September 2, 2003 we entered into a 2 year written employment
agreement with Mr. Lalach. Thereunder, we were paying Mr. Lalach a base annual
salary of $90,000. On January 3, 2005 we executed a letter agreement with Mr.
Lalach revising the compensation payable to Mr. Lalach effective January 17,
2005. The agreement provided for the payment of $10,000 per month to Mr. Lalach
as salary, and the issuance of 350,000 stock options at $2.17 (US$1.78) per
share, and the right to receive one year's salary as compensation in the event
we are a party to a merger, takeover, or business combination in which we are
acquired or taken over. It further provided that we could cancel all options
previously issued to Mr. Lalach, exclusive of 100,000 fully vested options with
an exercise price of $4.34 (US$2.75) per share (the "Excluded Options") and that
we could cancel all rights of Mr. Lalach to participate in our proposed
production bonus pool. The 350,000 options required to be issued pursuant to
this agreement were never issued by mutual agreement between Mr. Lalach and us.
Effective April 27, 2005 the terms of Mr. Lalach's employment were further
amended to provide for the payment of two years of salary to Mr. Lalach, rather
than one, in the event we are a party to a merger, takeover or business
combination in which we are acquired or taken over. This later amendment further
provided, that in lieu of the 350,000 options issuable to Mr. Lalach under the
January 3, 3005 agreement that 250,000 options with an exercise price of $1.25
(US$1.00) per share be issued to Mr. Lalach. These options which were issued on
April 27, 2005 (the "April 2005 Options"), vested on issuance and were
exercisable for a period of one year from issuance. Effective June 30, 2005 we
cancelled an aggregate of 525,000 options previously issued to Mr. Lalach,
including, with the approval of Mr. Lalach, the Excluded Options, and the April
2005 Options.
On January 3, 2005 we entered into a letter agreement with Ed Asuchak effective
January 17, 2005 pursuant to which we engaged Mr. Asuchak to serve as our Senior
Engineer and Vice President-Operations. The agreement provided for a monthly
salary of $10,000, a signing bonus of $25,000, the issuance of 225,000 stock
options, each exercisable for the purchase of one share of our common stock at a
price of $2.17 (US$1.78 per share), and the right to receive six months of
salary as compensation in the event we were a party to a merger, takeover or
business combination in which we were acquired or taken over. The 225,000
options required to be issued pursuant to the agreement were never issued by
mutual agreement between us and Mr. Asuchak. Effective April 27, 2005 the terms
of Mr. Asuchak's employment agreement were amended to provide for the payment of
eighteen months of salary to Mr. Asuchak, rather than six months, in the event
we were a party to a merger, takeover or business combination in which we were
acquired or taken over. The amendment further provided that 130,000 stock
options with an exercise price of $1.25 (US$1.00) per share be issued to Mr.
Asuchak. These options, which were issued on April 27, 2005 (the "April 2005
Options"), vested on issuance and were exercisable for a period of one year from
issuance. Effective June 30, 2005 we cancelled an aggregate of 235,000 options
previously issued to Mr. Asuchak, including the April 2005 Options.
75
On January 3, 2005 we entered into a letter agreement with Colin Emerson
effective January 17, 2005 pursuant to which we engaged Mr. Emerson to serve as
our Explorations Manager and Vice President-Geology. The agreement provided for
a monthly salary of $10,000, the issuance of 225,000 stock options each
exercisable for the purchase of one share of our common stock at a price of
$2.17 (US$1.78 per share), and the right to receive one year of salary as
compensation in the event we were a party to a merger, takeover or business
combination in which we were acquired or taken over. The 225,000 options
required to be issued pursuant to the agreement were never issued by mutual
agreement between us and Mr. Emerson. Effective April 27, 2005 the terms of Mr.
Emerson's employment were amended to provide for the payment of eighteen months
of salary to Mr. Emerson, rather than one year, in the event we were a party to
a merger, takeover or business combination in which we were acquired or taken
over. The amendment further provided that 130,000 stock options with an exercise
price of $1.25 (US$1.00) per share be issued to Mr. Emerson. These options which
were issued on April 27, 2005 (the "April 2005 Options"), vested on issuance and
were exercisable for a period of one year from issuance. Effective June 30, 2005
we cancelled an aggregate of 380,000 options previously issued to Mr. Emerson,
including the April 2005 Options.
Defined Benefit or Actuarial Plan Disclosure
We do not provide retirement benefits for directors and executive officers.
C. Board Practices
Our directors hold office for a term of one year or until our next annual
general meeting, at which time all directors retire, and are eligible for
re-election. We have no arrangement to provide benefits to our directors upon
termination.
Our audit committee is comprised of Harvey Lalach, James Golla, and Colin
McNeil. Each is financially literate but none qualifies as an audit committee
financial expert. Of these members, only James Golla is independent. The audit
committee is appointed by the board of directors and its members hold office
until removed by the board of directors or until our next annual general
meeting, at which time their appointments expire and they are then eligible for
re-appointment. The audit committee reviews our audited financial statements and
liaises with our auditors and recommends to the board of directors whether or
not to approve such statements. At the request of our auditors, the audit
committee must convene a meeting to consider any matters which the auditor
believes should be brought to the attention of the board of directors or our
shareholders.
The audit committee operates pursuant to a charter adopted by the board of
directors. The audit committee is responsible primarily for monitoring: (i) the
integrity of our financial statements; (ii) compliance with legal and regulatory
requirements; and (iii) the independence and performance of our internal and
external auditors.
76
We also have an oil and gas committee, a compensation and a corporate governance
committee. Each of these committees have the same composition as the audit
committee, and are not comprised of a majority of non-management directors and
unrelated directors.
D. Employees
During the fiscal years ended December 31, 2004, 2003 and 2002, we had an
average of 6 employees. At December 31, 2004 we had 6 employees and 3
contractors.
E. Share Ownership
The following table sets forth information with respect to the ownership of our
common stock, stock options, and common stock purchase warrants as at June 10,
2005 by each of the persons listed in Item 6A hereof. As at June 10, 2005 none
of the persons listed owned more than 1% of our outstanding common stock on a
fully diluted basis.
-------------------------------------- ------------------------------ ---------------------------- ----------------------------
Name Common Stock Stock Options Warrants
-------------------------------------- ------------------------------ ---------------------------- ----------------------------
Harvey Lalach 31,000 525,000(1) 20,000(2)
-------------------------------------- ------------------------------ ---------------------------- ----------------------------
James Golla 0 70,000(3) 0
-------------------------------------- ------------------------------ ---------------------------- ----------------------------
Colin McNeil 0 90,000(4) 0
-------------------------------------- ------------------------------ ---------------------------- ----------------------------
Colin Emerson 0 380,000(5) 23,300(6)
-------------------------------------- ------------------------------ ---------------------------- ----------------------------
Ed Asuchak 0 235,000(7) 0
-------------------------------------- ------------------------------ ---------------------------- ----------------------------
(1) Represents (i) 100,000 stock options, each exercisable for the
purchase of one share of our common stock at a price of $4.34
(US$2.75) per share during the period ending September 30, 2005;
(ii) 100,000 stock options, each exercisable for the purchase of one
share of our common stock at a price of $3.00 (US$2.50) per share
during the period ending September 20, 2009; (iii) 75,000 stock
options, each exercisable for the purchase of one share of our
common stock at a price of $4.86 (US$4.05) per share during the
period ending June 23, 2009; and (iv) 250,000 stock options, each
exercisable for the purchase of one share of our common stock at a
price of $1.25 (US$1.00) per share during the period ending April
26, 2006. All of these options were cancelled effective June 30,
2005.
(2) Represents 20,000 Class B Warrants, each exercisable for the
purchase of one share of our common stock at a price of US$.667 per
share during the period ending June 30, 2008.
(3) Represents (i) 20,000 stock options, each exercisable for the
purchase of one share of our common stock at a price of $4.34
(US$2.75) per share during the period ending September 30, 2005;
(ii) 10,000 stock options, each exercisable for the purchase of one
share of our common stock at a price of $3.00 (US$2.50) per share
during the period ending September 20, 2009; and (iii) 40,000 stock
options, each exercisable for the purchase of one share of our
common stock at a price of $1.25 (US$1.00) per share during the
period ending April 26, 2006. All of these options were cancelled
effective June 30, 2005.
(4) Represents (i) 50,000 stock options, each exercisable for the
purchase of one share of our common stock at a price of $3.60
(US$3.00) per share during the period ending August 27, 2006; and
(ii) 40,000 stock options, each exercisable for the purchase of one
share of our common stock at a price of $1.25 (US$1.00) per share
during the period ending April 26, 2006. All of these options were
cancelled effective June 30, 2005.
77
(5) Represents (i) 100,000 stock options, each exercisable for the
purchase of one share of our common stock at a price of $3.00
(US$2.50) per share during the period ending September 20, 2009;
(ii) 75,000 stock options, each exercisable for the purchase of one
share of our common stock at a price of $4.86 (US$4.05) per share
during the period ending June 23,2009; (iii) 75,000 stock options,
each exercisable for the purchase of one share of our common stock
at a price of $3.60(US$3.00) per share during the period ending
August 27, 2006; and (iv) 130,000 stock options, each exercisable
for the purchase of one share of our common stock at a price of
$1.25 (US$1.00) per share during the period ending April 26, 2006.
All of these options were cancelled effective June 30, 2005.
(6) Represents 10,000 Class A Warrants, each exercisable for the
purchase of one share of our common stock at a price of US$.333 per
share during the period ending June 30, 2007; and 10,000 Class B
Warrants, each exercisable for the purchase price of one share of
our common stock at a price of US$.667 per share during the period
ending June 30, 2008.
(7) Represents (i) 20,000 stock options, each exercisable for the
purchase of one share of our common stock at a price of $3.00
(US$2.50) per share during the period ending September 20, 2009;
(ii) 45,000 stock options, each exercisable for the purchase of one
share of our common stock at a price of $4.86 (US$4.05) per share
during the period ending June 23,2009; (iii) 40,000 stock options,
each exercisable for the purchase of one share of our common stock
at a price of $4.94 (US$4.11) per share during the period ending May
15, 2009; and (iv) 130,000 stock options, each exercisable for the
purchase of one share of our common stock at a price of $1.25
(US$1.00) per share during the period ending April 26, 2006. All of
these options were cancelled effective June 30, 2005.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. Major Shareholders
To the best of our knowledge, as at June 1, 2005, no shareholders of ours
beneficially owned more than 5% of our common stock.
As of June 1, 2005, we had 24,384,844 common shares outstanding of which
1,636,552 common shares were registered to 18 shareholders in Canada.
B. Related Party Transactions
On August 27, 2002 we entered into a Stock Exchange Agreement with Inventoy.com
International Inc., Kaplan Design Group, Douglas Kaplan, Ed Kaplan and Ron
Beit-Halachmy whereby we transferred ownership of our then inactive subsidiary,
Inventoy.com International Inc., to Kaplan Design Group, and Messrs.
Beit-Halachmy, Kaplan and Kaplan in exchange for an aggregate of 14,440,000
shares of our common stock.
Effective October 1, 2002 we issued 100,000 and 20,000 stock options,
respectively, to Harvey Lalach and James Golla. The options had a three year
term that was to expire on September 30, 2005 and were exercisable for the
purchase of shares of our common stock at an exercise price of $4.34 (US$2.75)
per share. These options were cancelled effective June 30, 2005.
78
Effective September 12, 2002 we entered into a three year employment agreement
with Suzanne West. The agreement was terminated effective December 6, 2002.
Effective September 16, 2002 we entered into a two year employment agreement
with Cameron Smigel pursuant to which he served as a vice president and as our
chief financial officer until the termination of his employment with us
effective December 13, 2002. The agreement provided for an annual base salary of
$86,000(US$54,513) and the issuance of 150,000 stock options exercisable for the
purchase of one share of our common stock at a price of $4.34 (US$2.75) per
share. The options were never issued and upon Mr. Smigel's termination of his
employment, our obligation to issue the options ceased.
Effective September 30, 2002 we entered into a nine month employment agreement
with Harvey Lalach. Subsequent thereto Mr. Lalach was employed under a verbal
month to month arrangement. Effective September 2, 2003 we entered into a two
year employment agreement with Mr. Lalach. The terms of Mr. Lalach's employment
were further amended by letter agreements dated January 3, 2005 and April 27,
2005. See Item 6B - Compensation - Employment Agreements.
Effective August 28, 2003 we entered into a six month consulting contract with
C. McNeil and Associates Inc., under which C. McNeil and Associates Inc.
received a monthly consulting fee of $5,000 (US$3,569) for geophysical services.
Subsequently, on October 23, 2003 Colin McNeil became a director of Quarry. As
of March 1, 2004 C. McNeil and Associates agreed to provide further services on
an as needed basis for $80(US$61) an hour. Effective August 28, 2003 we issued
50,000 non-statutory stock options to C. McNeil and Associates Inc. each
exercisable, upon vesting, to purchase one share of our common stock at a price
of $3.61 (US$3.00) per share during the five year period commencing on the date
of vesting. These options were cancelled effective June 30, 2005.
Effective September 15, 2003, Assure O&G entered into a Management Services
Agreement with Quarry for supplying Quarry with the services of certain
employees that had management or operational expertise including, but not
limited to, the services of Messrs. Tim Chorney, Cameron Bogle and Colin
Emerson. In consideration thereof, Quarry paid a monthly fee to Assure equal to
a percentage of the costs incurred in providing such services and the extent of
the services provided.
Effective September 4, 2003 we issued 30,000 non-statutory stock options to Lisa
Komoroczy a director. The options had a term of three years that were set to
expire on September 3, 2006 and were exercisable for the purchase of shares of
our common stock at an exercise price of $3.60 (US$3.00) per share. These
options were cancelled effective January 17, 2005.
In October 2003 we issued 21,600 shares of our common stock to Lisa Komoroczy in
connection with her exercise of a like number of Class A Warrants at an exercise
price of $0.43 (US$.333) per share.
In October 2003, we issued 20,000 shares of our common stock to Harvey Lalach in
connection with his exercise of a like number of Class A Warrants at an exercise
price of $0.43(US$.333) per share.
Effective December 1, 2003 we entered into an agreement, through Assure O&G,
with Quarry pursuant to which we paid Quarry a $450,000 (US$347,088) prospect
fee and drilled two wells at our sole expense, on certain farmout lands of
Quarry located in northeast British Columbia. We earned a 100% working interest
in the two wells before payout and a 50% working interest thereafter.
Additionally, we earned 50% of Quarry's pre-farmout interest in the balance of
the farmout land.
79
Effective March 4, 2004 we issued 75,000 non-statutory options to Martin Eden,
our secretary, treasurer and chief financial officer. Each option was
exercisable, upon vesting, to purchase one share of our common stock during the
five year period commencing on the date of vesting at a price of $5.05 (US$4.20)
per share. These options were cancelled effective October 7, 2004 2004.
Effective March 3, 2004 we agreed to enter into a 1 year written employment
agreement with Martin Eden pursuant to which we would pay Mr. Eden a salary of
$100,000 per year and grant him eligibility to participate in our production
bonus pool.
In June 2004 we issued cash bonuses of $14,663 (US$10,800) to each of Harvey
Lalach and Martin Eden in recognition of their hard work and dedication. Each of
Messrs. Lalach and Eden utilized the bonus to purchase 3,000 units in our
Regulation S private placement which we completed on June 30, 2004.
Effective June 30, 2004, we acquired 1,000,000 common shares of Quarry,
comprising part of the Units issued under a private placement. On November 1,
2004, we advanced $1,250,000 to Quarry. This amount is unsecured, non-interest
bearing and without fixed or agreed repayment terms. Quarry used these funds to
repay the debenture which matured on November 1, 2004 (See Note 8 of the audited
consolidated financial statements). On November 10, 2004, we participated in a
non-brokered private placement and acquired 757,143 common shares of Quarry at
$0.70. As a result, we directly held a total of 8,677,043 common shares
representing 50.2% of the total issued and outstanding common shares of Quarry.
Effective December 17, 2004 through our wholly owned subsidiary, we acquired the
remaining 49.79% outstanding common shares of Quarry (See note 2 of the audited
consolidated financial statements).
At December 31, 2004, included in our accounts receivable was $249,938 and
included in our accounts payable was $377,339 due to companies controlled by our
director who was appointed on December 17, 2004. These accounts receivable and
payable arise as we share an interest in oil and gas properties with this
director that we operate.
Effective June 25, 2004 we issued 75,000 stock options to each of Harvey Lalach
and Martin Eden. The options had an exercise price of $4.86 (US$4.05) per share,
were exercisable through June 24, 2009, and were to vest in equal amounts on
each of December 24, 2004; June 24, 2005; and December 24, 2005. The Eden
options were cancelled effective October 7, 2004. The Lalach options were
cancelled effective June 30, 2005.
On January 3, 2005 we entered into employment agreements with each of Harvey
Lalach, Colin Emerson and Edward Asuchak. Each of these agreements was effective
as of January 17, 2005 and was amended on April 27, 2005. For a description of
these agreements see Item 6B. Employment Agreements.
Effective April 27, 2005 we issued an aggregate of 510,000 stock options to our
three executive officers and an aggregate of 80,000 stock options to our two
non-employee directors. Each option vested upon issuance and is exercisable for
the purchase of one share of our common stock at a price of $1.25 (US$1.00) per
share during the one year period ending April 26, 2006. Each of these options
were cancelled effective June 30, 2005.
80
C. Interests of Experts and Counsel
This Form 20-F is being filed as an Annual Report under the Exchange Act and, as
such, there is no requirement to provide any information under this item.
ITEM 8. FINANCIAL INFORMATION
See Item 17 - "Financial Statements" for our consolidated financial statements
and other financial information, as well as for information regarding changes
since the date of our consolidated financial statements.
The consolidated financial statements for the year ended December 31, 2004 and
2003 have been audited by BDO Dunwoody LLP and the consolidated financial
statements for the year ended December 31, 2002 were audited by Rogoff & Company
PC and comprise the following:
Reports of Independent Registered Public Accounting Firms
Balance sheets
Income statements (Statement of Operations)
Statements of cash flows
Notes to financial statements
Note 12 of the financial statements - "Share Capital" shows the changes in share
capital since December 31, 2002.
The financial statements cover the period from 2002 through 2004 and thus cover
the requirements for the Form 20F disclosure.
Export sales are not a significant portion of the sales volume.
Other than as discussed below, there are no pending or threatened material legal
actions against us. We are subject to litigation in the normal course of
business, but we do not believe that the resolution of any of these proceedings
will have a material impact on our financial position or profitability.
Litigation
We are currently involved in litigation with a former officer of Quarry who is
claiming $240,000 in respect of termination and severance pay. We are contesting
this claim and have not accrued any amounts for this litigation. Examinations
for discovery have occurred and the matter is currently in abeyance as of
December 31, 2004 as the plaintiff has not moved the litigation forward.
Dividends
We have never paid and do not intend, at this stage, to declare or pay cash
dividends on our common stock in the foreseeable future.
81
ITEM 9. THE OFFER AND LISTING
A. Offer and Listing Details
There is no offer associated with this annual report.
Trading History
Our common stock is quoted on the OTC Bulletin Board of the National Association
of Securities Dealers, Inc. (the "NASD") under the symbol "ASURF." From November
6, 2001 until May 1, 2002, the date we changed our name from Inventoy.com, Inc.
to Assure Energy, Inc., our common stock was quoted under the symbol "INVY."
From May 1, 2002 until on or about February 6, 2004, the date we effected our
continuance from Nevada to Alberta, Canada our stock was quoted under the symbol
"ASUR". The prices reflect our 4:1 forward stock split which took effect after
the close of business on March 6, 2002 and our 3:2 forward stock split which
took effect after the close of business on September 17, 2002.
The following tables sets forth the high and low market prices for our common
stock for the four most recent fiscal years ended December 31, 2004. Although
eligible to be traded commencing November 1, 2001, our common stock did not
commence trading until 2002.
--------------------------------------- ----------------------------- -----------------------------
YEARS ENDING DECEMBER 31 HIGH MARKET PRICE (US$) LOW MARKET PRICE (US$)
--------------------------------------- ----------------------------- -----------------------------
2004 $4.64 $1.45
--------------------------------------- ----------------------------- -----------------------------
2003 4.66 2.95
--------------------------------------- ----------------------------- -----------------------------
2002 3.74 0.25
--------------------------------------- ----------------------------- -----------------------------
The following table sets forth the high and low market prices for our common
stock for each full quarterly period during the three fiscal years ended
December 31, 2004 and the current year through May 31, 2005.
------------------------------------------ -------------------------- --------------------------
PERIOD HIGH MARKET PRICE US$ LOW MARKET PRICE US$
------------------------------------------ -------------------------- --------------------------
2005
Second Quarter (through June 10, 2005) $1.35 $0.86
First Quarter $2.25 $0.86
------------------------------------------ -------------------------- --------------------------
2004
Fourth Quarter $3.23 $1.45
Third Quarter $4.14 $2.10
Second Quarter $4.55 $4.03
First Quarter $4.64 $4.20
------------------------------------------ -------------------------- --------------------------
2003
Fourth Quarter $4.66 $3.73
Third Quarter $3.95 $2.95
Second Quarter $3.15 $3.00
First Quarter $3.08 $3.06
------------------------------------------ -------------------------- --------------------------
2002
Fourth Quarter $3.11 $3.00
Third Quarter $3.74 $2.56
Second Quarter $2.55 $0.25
First Quarter $0.25 $0.25
------------------------------------------ -------------------------- --------------------------
82
The following table sets forth the high and low market prices for our common
stock during the most recent six months:
------------------------------------- -------------------- ----------------
MONTH HIGH MARKET LOW MARKET
PRICE (US$) PRICE (US$)
------------------------------------- -------------------- ----------------
May 2005 $1.02 $.80
------------------------------------- -------------------- ----------------
April 2005 $1.38 $.95
------------------------------------- -------------------- ----------------
March 2005 $1.09 $.83
------------------------------------- -------------------- ----------------
February 2005 $.91 $.70
------------------------------------- -------------------- ----------------
January 2005 $2.50 $1.40
------------------------------------- -------------------- ----------------
December 2004 $2.72 $1.40
------------------------------------- -------------------- ----------------
There have been no trading suspensions in the prior three years.
B. Plan of Distribution
This Form 20-F is being filed as an Annual Report under the Exchange Act and, as
such, there is no requirement to provide any information under this item.
C. Markets
Our common stock currently trades on the NASD OTC Bulletin Board under the
symbol "ASURF" and on the Frankfurt Stock Exchange under the symbol "ASL".
During 2004 we applied for listing on the American Stock Exchange and the
Toronto Stock Exchange. Both of these listings were subsequently withdrawn.
D. Selling Shareholders
This Form 20-F is being filed as an Annual Report under the Exchange Act and, as
such, there is no requirement to provide any information under this item.
E. Dilution
This Form 20-F is being filed as an Annual Report under the Exchange Act and, as
such, there is no requirement to provide any information under this item.
F. Expenses of the Issue
This Form 20-F is being filed as an Annual Report under the Exchange Act and, as
such, there is no requirement to provide any information under this item.
83
ITEM 10. ADDITIONAL INFORMATION
A. Share Capital
We are authorized to issue 100,000,000 common shares without nominal or par
value ("Common Shares"), 4,977,250 preferred shares without nominal or par value
("Preferred Shares"), 17,500 Series A Preferred Shares, and 5,250 Series B
Preferred Shares. At December 31, 2004 23,868,265 Common Shares, 17,500 Series A
Preferred Shares and 5,250 Series B Preferred Shares were issued and
outstanding. At June 10, 2005 24,384,844 Common Shares, 17,500 Series A
Preferred Shares, 5,250 Series B Preferred Shares were issued and outstanding.
All of our issued and outstanding common shares are fully paid. More than 10% of
our share capital has been paid for with assets other than cash. We do not own
any of our Common Shares.
Common Shares
The holders of the Common Shares are entitled to dividends as and when declared
by the directors, to one vote per share at meetings of shareholders of the
Company, and upon liquidation, subject to the rights of the holders of Preferred
Shares, are entitled to share rateably with the holders of the Common Shares in
all distributions of assets of the Company.
Preferred Shares
Preferred Shares may be issued from time to time in one or more series or
classes. Our board of directors is expressly authorized to provide by resolution
or resolutions duly adopted prior to issuance, for the creation of each such
series and class of preferred stock and to fix the designation and the powers,
preferences, rights, qualifications, limitations, and restrictions relating to
the shares of each such series. The authority of the board of directors with
respect to each series of preferred stock shall include, but not be limited to,
determining the following:
o the designation of such series, the number of shares to constitute
such series and the stated value thereof if different from the par
value thereof;
o whether the shares of such series shall have voting rights, in
addition to any voting rights provided by law, and, if so, the term
of such voting rights, which may be general or limited;
o the dividends, if any, payable on such series, whether any such
dividends shall be cumulative, and, if so, from what dates, the
conditions and dates upon which such dividends shall be payable, and
the preference or relation which such dividends shall bear to the
dividends payable on any shares or shares of any other class or any
other series of Preferred Shares;
o whether the shares of such series shall be subject to redemption by
us, and, if so, the times, prices and other conditions of such
redemption;
o the amount or amounts payable upon shares of such series upon, and
the rights of the holders of such series in, the voluntary or
involuntary liquidation, dissolution or winding up, or upon any
distribution of our assets;
o whether the shares of such series shall be subject to the operation
of a retirement or sinking fund and, if so, the extent to and manner
in which any such retirement or sinking fund shall be applied to the
purchase or redemption of the shares of such series for retirement
or other corporate purposes and the terms and provisions relating to
the operation thereof;
84
o whether the shares of such series shall be convertible into, or
exchangeable for, shares or shares of any other class or any other
series of Preferred Shares or any other securities and, if so, the
price or prices or the rate or rates of conversion or exchange and
the method, if any, of adjusting the same, and any other terms and
conditions of conversion or exchange;
o the conditions or restrictions, if any, upon the creation of
indebtedness by us or upon the issue of any additional shares,
including additional shares of such series or of any other series of
Preferred Shares or of any other class; and
o any other powers, preferences and relative, participating, options
and other special rights, and any qualifications, limitations and
restrictions, thereof.
The powers, preferences and relative, participating optional and other special
rights of each series of Preferred Shares, and the qualifications, limitations
or restrictions thereof, if any, may differ from those of any and all other
series at any time outstanding. All shares of any one series of Preferred Shares
shall be identical in all respects with all other shares of such series, except
that shares of any one series issued at different times may differ as to the
dates from which dividends thereof shall be cumulative.
Series A Shares
This series of preferred shares consists of seventeen thousand five hundred
(17,500) shares of convertible Series A Shares with a stated value of one
hundred dollars per share. The holders of Series A Shares are entitled to
receive dividends at the rate of five percent (5%) per annum on the stated value
of each share of Series A Shares. Dividends on the Series A Shares are
cumulative from the date of issuance. So long as any shares of the Series A
Shares are outstanding, no dividends shall be declared or paid or set apart for
payment or other distribution declared or made upon junior securities including
our common shares. The outstanding shares of Series A Shares are convertible
into units of the Company as is determined by dividing the stated value by the
conversion price, as defined below, at the option of the holder in whole or in
part. Each unit consists of one common share and one common share purchase
warrant which may be exercised for the purchase of one additional common share
at an exercise price of US$1.166 per share at any time during the four year
period commencing one year after the date of issuance of the units. The present
conversion price for the conversion of a share of Series A Shares into units is
US$1.00 of stated value and is subject to anti-dilution provisions.
The Series A Shares are redeemable at our sole option at any time prior to our
receipt of a notice of conversion to the extent funds are legally available
therefore, at any time and from time to time, in whole or in part, at a
redemption price equal to 105% of the stated value of each Series A Shares being
redeemed plus accrued and unpaid dividends thereon.
The Series A Shares as to dividends, redemptions, and the distribution of assets
upon our liquidation, dissolution or winding up, ranks (i) prior to our common
shares; (ii) prior to any class or series of capital shares of ours that, by its
terms, ranks junior to the Series A Shares; (iii) junior to any class or series
of capital shares of ours which by its terms ranks senior to the Series A
Shares; and (iv) pari passu with any other series of preferred shares of ours
which by its terms ranks on a parity with the Series A Shares.
85
Series B Shares
This series of preferred shares consists of five thousand two hundred fifty
(5,250) Series B Shares, with a stated value of one hundred dollars per share.
The Series B Shares rank pari passu with the Series A Shares and are identical
in all respects, except that the warrants issuable upon conversion have an
exercise price of US$1.333 per share and the present price for the conversion of
a Series B Share into units is US$1.166 of stated value.
Warrants
There were 9,093,400 and 8,907,600 warrants outstanding at December 31, 2004 and
June 10, 2005, respectively. In addition, there were 2,730,200 warrants that
would be issued if the overlying primary warrants and Series A and B Preferred
Shares were exercised or converted.
The 8,907,600 warrants outstanding at June 10, 2005 consisted of the following:
o 1,593,900 shares underlying Class A Warrants with an exercise price
of US$0.333 per share. Full exercise of the Class A Warrants will
result in proceeds of approximately US$530,769;
o 3,600,000 shares underlying Class B Warrants with an exercise price
of US$0.667 per share. Full exercise of the Class B Warrants will
result in proceeds of approximately US$2,401,200;
o 2,100,000 shares underlying May 8, 2002 warrants with an exercise
price of US$1.00 per share. Full exercise of the May 8, 2002
warrants will result in proceeds of US$2,100,000;
o 90,000 shares underlying April 2003 warrants with an exercise price
of US$3.00 per share. Full exercise of the April 2003 warrants will
result in proceeds of US$270,000;
o 350,000 shares underlying March 15, 2003 warrants with an exercise
price of US$3.10 per share. Full exercise of the warrants will
result in proceeds of US$1,085,000;
o 533,500 shares underlying February 26, 2003 warrants with an
exercise price of 2.50 per share. Full exercise of the warrants will
result in proceeds of US$1,333,750;
o 530,200 shares underlying Class E Warrants with an exercise price
US$4.00. Full exercise of the Class E Warrants will result in
proceeds of US$2,120,800;
o 60,000 shares underlying June 25, 2004 Warrants with an exercise
price of US$4.05 per share. Full exercise of the Warrants will
result in proceeds of US$243,000; and
o 50,000 shares underlying September 1, 2004 Warrants with an exercise
price of US$2.50 per share. Full exercise of the Warrants will
result in proceeds of US$125,000.
The 2,730,200 warrants that were issuable at June 10, 2005 if the overlying
warrants and Series A and B Preferred stock were exercised/converted consisted
of:
o 530,200 shares underlying Class F Warrants with an exercise price of
US$4.25 per share. Exercise of the Class F Warrants is dependent
upon prior exercise of the Class E Warrants. Full exercise of the
Class F Warrants will result in proceeds of US$2,253,350;
86
o 1,750,000 shares issuable upon exercise of Warrants comprising part
of the units issuable upon conversion of the Series A Preferred
Stock. The Warrants have an exercise price of US$1.166 per share.
Full exercise of the Warrants will result in proceeds of
US$2,040,500; and
o 450,000 shares issuable upon exercise of Warrants comprising part of
the units issuable upon conversion of the Series B Preferred Stock.
The Warrants have an exercise price of US$1.333 per shares. Full
exercise price of the Warrants will result in proceeds of
US$599,850.
At June 10, 2005, if all of the referenced warrants were exercised or converted
we would have issued an aggregate of 11,637,800 shares and received aggregate
proceeds of approximately US$15,103,219. This would have resulted in an average
exercise price of approximately US$1.30 per share.
Subsequent to June 10, 2005, we issued an aggregate of 434,681 shares of our
common stock and an aggregate of 530,200 Class E Warrants expired. The
expiration of the Class E Warrants precludes our issuance of any Class F
Warrants.
Options
There were 1,105,000 and 1,385,000 stock options outstanding at December 31,
2004 and June 10, 2005 respectively, held by certain of our directors, officers
and employees. All of the outstanding options were cancelled effective June 30,
2005.
CAPITALIZATION
The following table presents our consolidated capitalization (expressed in
Canadian dollars) as at March 31, 2005, December 31, 2004, December 31, 2003 and
December 31, 2002
As at As at As at As at
Description of Capital Authorized March 31, 2005 December 31, 2004 December 31, 2003 December 31, 2002
---------------------- ---------- -------------- ----------------- ----------------- -----------------
(unaudited) (audited) (audited) (audited)
Long-term debt(1) N/A $2,901,462 $3,131,412 $4,370,595 1,000,000
Shareholders' equity
Common Shares 100,000,000 24,384,842 23,868,265 19,650,100 15,366,000
Preferred Shares 4,977,250 Nil Nil Nil Nil
Series A Shares 17,500 17,500 17,500 17,500 17,500
Series B Shares 5,250 5,250 5,250 5,250 5,250
Warrants N/A 8,859,400 9,093,400 10,036,400 7,200,000
Notes:
(1) Long term debt is net of the current portion, and consists of debentures
which are held by one private investor with varying dates of repayments
ranging from March 2004 to March 2009.
B. Memorandum and Articles of Association
The information required by this section can be found in our Registration
Statement on Form S-4 (Registration No. 333-107233) that was declared effective
by the Securities and Exchange Commission on December 18, 2003.
87
C. Material Contracts
As at December 31, 2004 there were no material contracts other than contracts
entered into in the ordinary course of business. Subsequent to December 31, 2004
we entered into the following material contracts:
On January 3, 2005 we entered into employment agreements with each of Harvey
Lalach, Colin Emerson and Edward Asuchak. Each of these agreements was effective
as of January 17, 2005 and was amended on April 27, 2005. For a description of
these agreements see Item 6B. Employment Agreements.
On April 21, 2005 we engaged the services of Haywood Securities Inc. ("Haywood")
a TSE member firm as our exclusive agent to assist us in evaluating strategic
alternatives to maximize shareholder value. In the event that such alternatives
result in a merger, takeover or business combination (the "Transaction") with
another company, Haywood was to earn a commission equivalent to 0.9% of the
Transaction value. On June 1, 2005 the agreement with Haywood was amended and
Haywood will earn a commission equivalent to 1.0% of the Transaction value. In
connection therewith, on July 8, 2005 we entered into an Arrangement Agreement
with GEOCAN Energy, inc. ("GEOCAN") pursuant to which GEOCAN will ,subject to
satisfaction of certain conditions, acquire all of our issued and outstanding
common stock on the basis of .70 of a GEOCAN common share for each share of our
common stock.
D. Exchange Controls
There are no governmental laws, decrees or regulations existing in Canada (where
we are incorporated), which restrict the export or import of capital, or the
remittance of dividends, interest or other payments to non-resident holders of
our security. Further, Canada does not have foreign exchange currency controls.
E. Taxation
Material Canadian Federal Income Tax Consequences
We believe that the following general summary accurately describes all material
Canadian federal income tax consequences applicable to a holder of our common
shares who is a resident of the United States and who is not a resident of
Canada and who does not use or hold, and is not deemed to use or hold, his
common shares of Assure in connection with carrying on a business in Canada (a
"non-resident holder").
This summary is based upon the current provisions of the Income Tax Act (Canada)
(the "ITA"), the regulations thereunder (the "Regulations"), the current
publicly announced administrative and assessing policies of Canada, Customs and
Revenue Agency, and all specific proposals (the "Tax Proposals") to amend the
ITA and Regulations announced by the Minister of Finance (Canada) prior to the
date hereof. This summary assumes that the Tax Proposals will be enacted in
their form as of the date of this annual report. This description, except for
the Tax Proposals, does not take into account or anticipate any changes in law,
whether by legislative, government or judicial action, nor does it take into
account provincial, territorial, or foreign tax considerations which may differ
significantly from those discussed herein.
88
Dividends
Dividends paid on our common shares to a non-resident holder will be subject to
withholding tax. The Canada-U.S. Income Tax Convention (1980) (the "Treaty")
provides that the normal 25% withholding tax rate under the ITA is reduced to
15% on dividends paid on shares of a corporation resident in Canada (such as
Assure) to beneficial owners of the dividends who are residents of the United
States, and also provides for a further reduction of this rate to 5% where the
beneficial owner of the dividends is a corporation that is a resident of the
United States which owns at least 10% of the voting shares of the corporation
paying the dividend.
Capital Gains
Under the ITA, a taxpayer's capital gain or capital loss from a disposition of a
share of our company is the amount, if any, by which his proceeds of disposition
exceed (or are exceeded by) the aggregate of his adjusted cost base of the share
and reasonable expenses of disposition. One half of a capital gain (the "taxable
capital gain") is included in income, and one half of a capital loss in a year
(the "allowable capital loss") is deductible from taxable capital gains realized
in the same year. The amount by which a shareholder's allowable capital loss
exceeds his taxable capital gains in a year may be deducted from a taxable
capital gain realized by the shareholder in the three previous or any subsequent
year, subject to certain restrictions in the case of a corporate shareholder.
A non-resident holder is not subject to tax under the ITA in respect of a
capital gain realized upon the disposition of a share of a public corporation
unless the share represents "taxable Canadian property" to the holder thereof.
We are a public corporation for purposes of the ITA and a common share of ours
will be taxable Canadian property to a non-resident holder if, at any time
during the period of five years immediately preceding the disposition, the
non-resident holder, persons with whom the non-resident holder did not deal at
arm's length, or the non-resident holder and persons with whom he did not deal
at arm's length together owned not less than 25% of the issued shares of any
class of shares of ours.
Where a non-resident holder who is an individual ceased to be resident in
Canada, and at the time he ceased to be a Canadian resident elected to have his
shares treated as taxable Canadian property, he will be subject to Canadian tax
on any capital gain realized on disposition of our shares, subject to the
relieving provisions of the Treaty described below. Our shares may also be
taxable Canadian property to a holder if the holder acquired them pursuant to
certain tax-deferred "rollover" transactions whereby the holder exchanged
property that was taxable Canadian property for our shares.
Where the non-resident holder realized a capital gain on a disposition of our
shares that constitute taxable Canadian property, the Treaty relieves the
non-resident shareholder from liability for Canadian tax on such capital gains
unless:
(a) the value of the shares is derived principally from "real property" in
Canada, including the right to explore for or exploit natural resources
and rights to amounts computed by reference to production from natural
resources, which is the case for Assure,
(b) the non-resident holder is an individual who was resident in Canada for
not less than 120 months during any period of 20 consecutive years
preceding, and at any time during the 10 years immediately preceding, the
disposition and the shares were owned by him when he ceased to be resident
in Canada or are property substituted for property that was owned at that
time, or
89
(c) the shares formed part of the business property of a "permanent
establishment" or pertained to a fixed base used for the purpose of
performing independent personal services that the shareholder has or had
in Canada within the 12 months preceding the disposition.
Material United States Federal Income Tax Consequences
The following summary is a general discussion of the material United States
Federal income tax considerations to U.S. holders of our shares under current
law. This discussion assumes that U.S. holders hold their shares of our common
stock as capital assets within the meaning of Section 1221 of the Internal
Revenue Code of 1986, as amended (the "Code"). It does not discuss all the tax
consequences that may be relevant to particular holders in light of their
circumstances or to holders subject to special rules, such as tax-exempt
organizations, qualified retirement plans, financial institutions, insurance
companies, real estate investment trusts, regulated investment companies,
broker-dealers, non-resident alien individuals or foreign corporations whose
ownership of our shares is not effectively connected with the conduct of a trade
or business in the United States, shareholders who acquired their stock through
the exercise of employee stock options or otherwise as compensation,
shareholders who hold their stock as ordinary assets and not capital assets and
any other non-U.S. holders. In addition, U.S. holders may be subject to state,
local or foreign tax consequences. No opinion or representation with respect to
the United States Federal income tax consequences to any such holder or
prospective holder is being made by us herein. Holders and prospective holders
should therefore consult with their own tax advisors with respect to their
particular circumstances. This discussion covers all material tax consequences.
The following discussion is based upon the sections of the Code, Treasury
Regulations, published Internal Revenue Service ("IRS") rulings, published
administrative positions of the IRS and court decisions that are currently
applicable, any or all of which could be materially and adversely changed,
possibly on a retroactive basis, at any time. This decision does not consider
the potential effects, both adverse and beneficial, of any recently proposed
legislation that, if enacted, could be applied, possibly on a retroactive basis,
at any time. Accordingly, holders and prospective holders of our shares should
consult their own tax advisors about the Federal, state, local, estate, and
foreign tax consequences of purchasing, owning and disposing of our shares.
U.S. Holders
As used herein, a "U.S. Holder" includes a holder of our shares who is a citizen
or resident of the United States, a corporation created or organized in or under
the laws of the United States or of any political subdivision thereof, any
entity that is taxable as a corporation for U.S. tax purposes and any other
person or entity whose ownership of our shares is effectively connected with the
conduct of a trade or business in the United States. A U.S. Holder does not
include persons subject to special provisions of Federal income tax law, such as
tax exempt organizations, qualified retirement plans, financial institutions,
insurance companies, real estate investment trusts, regulated investment
companies, broker-dealers, non-resident alien individuals or foreign
corporations whose ownership of our shares is not effectively connected with
conduct of trade or business in the United States, shareholders who acquired
their stock through the exercise of employee stock options or otherwise as
compensation and shareholders who hold their stock as ordinary assets and not as
capital assets.
90
Distributions on our Common Shares
U.S. Holders receiving dividend distribution (including constructive dividends)
with respect to our shares are required to include in gross income for United
States Federal income tax purposes the gross amount of such distribution to the
extent that we have current or accumulated earnings and profits as defined under
U.S. Federal tax law, without reduction for any Canadian income tax withheld
from such distributions. Such Canadian tax withheld may be credited, subject to
certain limitations, against the U.S. Holder's United States Federal income tax
liability or, alternatively, may be deducted in computing the U.S. Holder's
United States Federal taxable income by those who itemize deductions. (See more
detailed discussion at "Foreign Tax Credit" below). To the extent that
distributions exceed our current or accumulated earnings and profits, they will
be treated first as a return of capital up to the U.S. Holder's adjusted basis
in the shares and thereafter as gain from the sale or exchange of the shares.
Preferential tax rates for long-term net capital gains are applicable to a U.S.
Holder that is an individual, estate or trust. There are currently no
preferential tax rates for long term capital gains for a U.S. Holder that is a
corporation.
Dividends paid on our shares will not generally be eligible for the dividends
received deduction provided to corporations receiving dividends from certain
United States corporations. A U.S. Holder that is a corporation may, under
certain circumstances, be entitled to a 70% deduction of the United States
source portion of dividends received from us (unless we qualify as a "foreign
personal holding company" or a "passive foreign investment company", as defined
below) if such U.S. Holder owns shares representing at least 10% of the voting
power and value of Assure. The availability of this deduction is subject to
several complex limitations that are beyond the scope of this discussion.
In the case of foreign currency received as a dividend that is not converted by
the recipient into U.S. dollars on the date of receipt, a U.S. Holder will have
a tax basis in the foreign currency equal to its U.S. dollar value on the date
of receipt. Generally, any gain or loss recognized upon a subsequent sale or
other disposition of the foreign currency, including the exchange for U.S.
dollars, will be ordinary income or loss. However, for tax years after 1997, an
individual whose realized foreign exchange gain does not exceed U.S. $200 will
not recognize that gain, to the extent that there are not expenses associated
with the transaction that meet the requirement for deductibility as a trade or
business expense other than travel expenses in connection with a business trip
(or as an expense for the production of income).
Foreign Tax Credit
A U.S. Holder who pays (or has withheld from distribution) Canadian income tax
with respect to the ownership of our shares may be entitled, at the option of
the U.S. Holder, to either a deduction or a tax credit for such foreign tax paid
or withheld. Generally, it will be more advantageous to claim a credit because a
credit reduces United States Federal income taxes on a dollar-for-dollar basis,
while a deduction merely reduces the taxpayer's income subject to tax. This
election is made on a year-by-year basis and applies to all foreign taxes paid
by (or withheld from) the U.S. Holder during the year. There are significant and
complex limitations that apply to the credit, among which is the general
limitation that the credit cannot exceed the proportionate share of the U.S.
Holder's United States Federal income tax liability that the U.S. Holder's
foreign source income bears to this or its worldwide taxable income. In the
determination of the application of this limitation, the various items of income
and deduction must be classified into foreign and domestic sources. Complex
rules govern this classification process. There are further limitations on the
foreign tax credit for certain types of income such as "passive income", "high
withholding tax interest", "financial services income", "shipping income", and
certain other classifications of income. The availability of the foreign tax
credit and the application of the limitations on the credit are fact specific
and holders and prospective holders of our shares should consult their own tax
advisors regarding their individual circumstances.
91
Information Reporting and Backup Withholding
U.S. information reporting requirements may apply with respect to the payment of
dividends to U.S. Holders of our common shares. Under Treasury regulations
currently in effect, non-corporate holders may be subject to backup withholding
at a 31% rate with respect to dividends when such holder (1) fails to finish or
certify a correct taxpayer identification number to the payor in the required
manner, (2) is notified by the IRS that it has failed to report payments of
interest or dividends properly or (3) fails, under certain circumstances, to
certify that it has been notified by the IRS that it is subject to backup
withholding for failure to report interest and dividend payments. Any amounts
withheld under the backup withholding rules from a payment to a U.S. Holder
generally will be allowed as a credit against the U.S. Holder's U.S. federal
income tax liability and may entitle the U.S. Holder to a refund, provided that
the required information is furnished to the IRS. Certain U.S. Holders,
including corporations, are not subject to backup withholding.
Disposition of Our Common Shares
A U.S. Holder will recognize a gain or loss upon the sale of our shares equal to
the difference, if any, between (i) the amount of cash plus the fair market
value of any property received, and (ii) the shareholder's tax basis in our
shares. This gain or loss will be a capital gain or loss if the shares are a
capital asset in the hands of the U.S. Holder, and will be a short-term or
long-term capital gain or loss depending upon the holding period of the U.S.
Holder. Gains and losses are netted and combined according to special rules in
arriving at the overall capital gain or loss for a particular tax year.
Deductions for net capital loss are subject to significant limitations.
Corporate capital losses (other than losses of corporations electing under
Subchapter S of the Code) are deductible to the extent of capital gains.
Non-corporate taxpayers may deduct net capital losses, whether short-term or
long-germ, up to U.S. $3,000 a year (U.S. $1,500 in the case of a married
individual filing separately). For U.S. Holders which are individuals, any
unused portion of such net capital loss may be carried over to be used in later
tax years until such net capital loss is thereby exhausted. For U.S. Holders
which are corporations (other than corporations subject to Subchapter S of the
Code), an unused net capital loss may be carried back three years from the loss
year and carried forward five years from the loss year to be offset against
capital gains until such net capital loss is thereby exhausted.
Currency Exchange Gains or Losses
U.S. holders generally are required to calculate their taxable incomes in United
States dollars. Accordingly, a U.S. holder who purchases our common shares with
Canadian dollars will be required to determine the tax basis of such shares in
United States dollars based on the exchange rate prevailing on the settlement
date of the purchase (and may be required to recognize the unrealized gain or
loss, if any, in the Canadian currency surrendered in the purchase transaction).
Similarly, a U.S. holder receiving dividends or sales proceeds from our common
shares in Canadian dollars will be required to compute the dividend income or
the amount realized on the sale, as the case may be, in United States dollars
based on the exchange rate prevailing at the time of receipt in the case of
dividends and on the settlement date in the case of sales on an established
securities exchange. Gain or loss, if any, recognized on a disposition of
Canadian currency in connection with the described transactions generally will
be treated as ordinary gain or loss.
92
Other Considerations
In the following circumstances, the above sections of this discussion may not
describe the United States Federal income tax consequences resulting from the
holding and disposition of our common shares (we do not believe that it will
qualify in the next year, or has qualified within the past three fiscal years,
as a "foreign personal holding company", "foreign investment company", "passive
foreign investment company" or "controlled foreign corporation" as discussed
below):
Foreign Personal Holding Company
If at any time during a taxable year more than 50% of the total combined voting
power or the total value of our outstanding shares is owned, directly or
indirectly, by five or fewer individuals who are citizens of the United States
and 60% or more of our gross income for such year was derived from certain
passive sources (e.g., from dividends received from our subsidiaries), we would
be treated as a "foreign personal holding company". In that event, U.S. Holders
that hold our common shares (on the earlier of the last day of our tax year or
the last date in which we were a foreign personal holding company) would be
required to include in gross income for such year their allocable portions of
such passive income to the extent we do not actually distribute such income.
Foreign Investment Company
If 50% or more of the combined voting power or total value of our outstanding
shares are held, directly or indirectly, by citizens or residents of the United
States, United States domestic partnerships or corporations, or estates or
trusts other than foreign estates or trusts (as defined by the Code Section
7701(a)(31)), and we are found to be engaged primarily in the business of
investing, reinvesting, or trading in securities, commodities, or any interest
therein, it is possible that we might be treated as a "foreign investment
company" as defined in Section 1246 of the Code, causing all or part of any gain
realized by a U.S. Holder selling or exchanging our common shares to be treated
as ordinary income rather than capital gains.
Passive Foreign Investment Company
As a foreign corporation with U.S. Holders, we could potentially be treated as a
passive foreign investment company ("PFIC"), as defined in Section 1297 of the
Code, depending upon the percentage of our income which is passive, or the
percentage of our assets which are producing passive income (generally 75% or
more of our gross income in a taxable year is passive income, or the average
percentage of our assets (by value) during the taxable year which produce
passive income or which are held for production of same is at least 50%).
Passive income is generally defined to include gross income in the nature of
dividends, interest, royalties, rents and annuities; excess of gains over losses
from certain transactions in any commodities not arising inter alia from a PFIC
whose business is actively involved in such commodities; certain foreign
currency gains; and other similar types of income. U.S. Holders owning shares of
a PFIC are subject to an additional tax and to an interest charge based on the
value of deferral of tax for the period during which the common shares of the
PFIC are owned, in addition to treatment of gain realized on the disposition of
common shares of the PFIC as ordinary income rather than capital gain. However,
if the U.S. Holder makes a timely election to treat a PFIC as a qualified
electing fund ("QEF") with respect to such shareholder's interest therein, the
above-described rules generally will not apply. Instead, the electing U.S.
Holder would include annually in his gross income his pro rata share of the
PFIC's ordinary earnings and net capital gain regardless of whether such income
or gain was actually distributed. A U.S. Holder of a QEF can, however, elect to
defer the payment of United States Federal income tax on such income inclusions.
Special rules apply to U.S. Holders who own their interests in a PFIC through
intermediate entities or person.
93
Effective for tax years of U.S. Holders beginning after December 31, 1997, U.S.
Holders who hold, actually or constructively, marketable stock of a foreign
corporation that qualifies as a PFIC may elect to mark such stock to the market
(a "mark-to-market election"). If such an election is made, such U.S. Holder
will not be subject to the special taxation rules of PFIC described above for
the taxable year for which the mark-to-market election is made. A U.S. Holder
who makes such an election will include in income for the taxable year an amount
equal to the excess, if any, of the fair market value of our shares as of the
close of such tax year over such U.S. Holder's adjusted basis in such shares. In
addition, the U.S. Holder is allowed a deduction for the lesser of (i) the
excess, if any, of such U.S. Holder's adjusted tax basis in the shares over the
fair market value of such shares as of the close of the tax year, or (ii) the
excess, if any of (A) the mark-to-market gains for our shares included by such
U.S. Holder for prior tax years, including any amount which would have been
included for any prior year but for Section 1291 interest on tax deferral rules
discussed above with respect to a U.S. Holder, who has not made a timely QEF
election during the year in which he holds (or is deemed to have held) our
shares and we are a PFIC ("Non-Electing U.S. Holder"), over (B) the
mark-to-market losses for shares that were allowed as deductions for prior tax
years. A U.S. Holder's adjusted tax basis in our shares will be increased or
decreased to reflect the amount included or deducted as a result of
mark-to-market election. A mark-to-market election will apply to the tax year
for which the election is made and to all later tax years, unless the PFIC stock
ceases to be marketable or the IRS consents to the revocation of the election.
The IRS has issued proposed regulations that, subject to certain exceptions,
would treat as taxable certain transfers of PFIC stock by a Non-Electing U.S.
Holder that are generally not otherwise taxed, such as gifts, exchanges pursuant
to corporate reorganizations, and transfers at death. Generally, in such cases,
the basis of our shares in the hands of the transferee and the basis of any
property received in the exchange for those shares would be increased by the
amount of gain recognized. A U.S. Holder who has made a timely QEF election (as
discussed below) will not be taxed on certain transfers of PFIC stock, such as
gifts, exchanges pursuant to corporate reorganization, and transfers at death.
The transferee's basis in this case will depend on the manner of transfer. The
specific tax effect to the U.S. Holder and the transferee may vary based on the
manner in which our shares are transferred. Each U.S. Holder should consult a
tax advisor with respect to how the PFIC rules affect their tax situation.
The PFIC and QEF election rules are complex. U.S. Holders should consult a tax
advisor regarding the availability and procedure for making the QEF election as
well as the applicable method for recognizing gains or earnings and profits
under the foregoing rules.
Controlled Foreign Corporation
If more than 50% of the voting power of all classes of stock or total value of
our stock is owned, directly or indirectly, by citizens or residents of the
United States, United States domestic partnerships and corporations or estates
or trusts other than foreign estates or trusts, each of whom owns 10% or more of
the total combined voting power of all classes of our stock("United States
shareholder"), we could be treated as a "controlled foreign corporation" under
Subpart F of the Code. This classification would effect many complex results
including the required inclusion by such United States shareholders in income of
94
their pro rata shares of "Subpart F income" (as specifically defined by the
Code) of Assure. Subpart F requires current inclusions in the income of United
States shareholders to the extent of a controlled foreign corporation's
accumulated earnings invested in "excess passive" assets (as defined by the
Code). In addition, under Section 1248 of the Code, gain from sale or exchange
of stock by a holder of our common shares who is or was a United States
shareholder at any time during the five year period ending with the sale or
exchange is treated as ordinary dividend income to the extent of our earnings
and profits attributable to the stock sold or exchanged. Because of the
complexity of Subpart F, and because it is not clear that Subpart F would apply
to the holders of our common shares, a more detailed review of these rules is
outside the scope of this discussion.
We are both a PFIC and controlled foreign corporation, we will generally not be
treated as a PFIC with respect to United States shareholders of the controlled
foreign corporation. This rule generally will be effective for our taxable years
ending with or within such taxable years of United States shareholders.
The foregoing summary is based upon the sections of the Internal Revenue Code of
1986, as amended (the "Code"), Treasury Regulations, published Internal Revenue
Service ("IRS") rulings, published administrative positions of the IRS and court
decisions that are currently applicable, any or all of which could be materially
and adversely changed, possibly on a retroactive basis, at any time. This
discussion does not consider the potential effects, both adverse and beneficial,
of any recently proposed legislation that, if enacted, could be applied,
possibly on a retroactive basis, at any time. Accordingly, holders and
prospective holders of our shares should consult their own tax advisors about
the Federal, state, local, estate, and foreign tax consequences of purchasing,
owning and disposing of our shares.
F. Dividends and Paying Agents
This Form 20-F is being filed as an Annual Report under the Exchange Act and, as
such, there is no requirement to provide any information under this item.
G. Statement by Experts
This Form 20-F is being filed as an Annual Report under the Exchange Act and, as
such, there is no requirement to provide any information under this item.
H. Documents on Display
You can read our SEC filings at the SEC's website at www.sec.gov. You may also
read and copy, at prescribed rates, any document we file with the SEC at its
public reference facilities at 450 Fifth Street, N.W., Washington, D.C. 20549.
Please call the SEC at 1-800-SEC-0330 for further information on the operation
of the public reference facilities.
I. Subsidiary Information
To the best of our knowledge there is no information relating to our
subsidiaries that is required to be disclosed in this section.
95
ITEM 11. QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Disclosures about Market Risk
Credit risk
Substantially all of our accounts receivable are with customers and joint
venture partners in the oil and gas industry and are subject to normal industry
credit risks. As we market our commodities through oil and gas marketing
companies, we are also exposed to the risks associated with these companies. In
addition, we are exposed to credit risk in our trade accounts receivable
included in receivables. At year end one company accounted for 17% of our total
accounts receivable.
Interest rate risk management
Our fixed rate debt is subject to interest rate price risk as the value will
fluctuate as a result of changes in market rates. Floating rate debt is subject
to interest rate cash flow risk as the required cash flows to service the debt
will fluctuate as a result of changes in market rates.
At December 31, 2004 and December 31, 2003, we had fixed the interest rates on
the following interest bearing obligations:
December 31, 2004 December 31, 2003
------------------------------- ------------------------------ --------------------------
Debenture payable $ - $ 1,250,000
Long term debt 4,110,308 5,200,700
------------------------------- ------------------------------ --------------------------
$ 4,110,308 $ 6,450,700
------------------------------- ------------------------------ --------------------------
Our contractual obligations at December 31, 2004 are as follows:
Description Total 2005 2006 2007 2008 2009
------------------------------------------------------------------------------------------------------------------------------------
Operating Leases (note 1) $ 208,454 $ 113,424 $ 87,720 $ 7,310 $ -- $ --
Note Payable (note 2) 800,000 200,000 200,000 200,000 200,000 --
Subordinated Note Payable
(note 3) 3,310,308 778,896 778,896 778,896 778,896 194,724
-----------------------------------------------------------------------------------------------
Total Contractual Obligations
(note 4) $ 4,318,762 $ 1,092,320 $ 1,066,616 $ 986,206 $ 978,896 $ 194,724
===============================================================================================
(1) Effective August 1, 2004, we entered into a new lease for the rental of
office space for the period to January 31, 2007. We are committed to
payments of $87,720 per annum for rent plus a proportionate share of
operating costs. We have also entered into a sublease that expires
December 31, 2005. We are committed to payments of $25,704 per annum for
rent plus a proportionate share of operating costs.
(2) Our long-term debt consists of a six-year note payable (the "Note
Payable") issued by our wholly owned subsidiary Oil & Gas in the principal
amount of $800,000 (December 31, 2003 - $1,000,000) and a six-year
Subordinated Promissory Note Payable (the "Subordinated Note") in the
principal amount of US $2,754,000, equivalent to Canadian $3,310,308
(December 31, 2003 - US $3,240,000, equivalent to Canadian $4,200,700).
The Note Payable was issued on December 28, 2002 and matures on December
28, 2008. The note accrues interest at 7.5% per annum. Quarterly payments
of principal and interest are due on March 28, June 28, September 28 and
December 28. The note is subordinated to all present and future bank debt
of Oil & Gas and its subsidiaries.
(3) The Subordinated Note was issued on March 15, 2003, as amended on December
5, 2003, and matures on March 15, 2009. The note accrues interest at 7.75%
per annum. Quarterly payments of principal and interest are due and
payable in US dollars on March 15, June 15, September 15 and December 15.
The note is unsecured and is subordinated to all present and future bank
debt of us and our subsidiaries. In connection with the issuance of the
Subordinated Note, we issued 450,000 common stock purchase warrants to
purchase an equal number of shares of our common stock with an exercise
price of $3.73 (US $3.10) per share. These common stock purchase warrants
may be exercised at any time during the five year period that commenced
July 1, 2003.
96
(4) Our long-term debt also consists if future income taxes in the amount of
$2,220,885 and asset retirement obligation of $1,279,702, the payment and
timing of these amount are not certain.
Foreign currency rate risk
A significant portion of our debt is denominated in the United States dollars.
We do not have any exposure to any highly inflationary foreign currencies. The
amount of debt denominated in United States dollars at December 31, 2004 is
US$2,754,000 (2003 - US$3,240,000). The increase or decrease in net earnings
before taxes for each 1 percent change in foreign exchange rate on the US
denominated debt amounts to approximately $28,000 (2003 - $32,000) per annum.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
This Form 20-F is being filed as an Annual Report under the Exchange Act and, as
such, there is no requirement to provide any information under this item.
PART II
ITEM 13. DEFAULTS, DIVIDENDS ARREARAGES AND DELINQUENCIES
There has not been a material default in the payment of principal, interest, a
sinking or purchase fund installment, or any other material default not cured
within thirty days, relating to our indebtedness or any of our significant
subsidiaries. There are no payments of dividends by us in arrears, nor has there
been any other material delinquency relating to any class of our preference
shares.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS
Not Applicable.
ITEM 15. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. Our chief executive and
financial officer evaluated the effectiveness of our disclosure controls
and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the
Exchange Act), as of the year end of December 31, 2004. Based on such
evaluation, he concluded that as of such date, our disclosure controls and
procedures are effective and designed to ensure that information required
to be disclosed by us in reports that we file or submit under the Exchange
Act is recorded, processed, summarized and reported within the time
periods specified in applicable SEC rules and forms.
97
(b) Management's annual report on internal control over financial reporting
Since we are a Foreign Private Issuer this information is not presently
required.
(c) Attestation Report of registered public accounting firm
Since we are a Foreign Private Issuer this information is not presently
required.
(d) Changes in internal controls over financial reporting. There were no
significant changes in our internal controls over financial reporting
identified in connection with the evaluation required by paragraph (d) of
17 CFR 240.13a-15 or 240.15d-15 that occurred during the period covered by
this annual report that has affected, or is reasonably likely to
materially affect our control over financial reporting.
ITEM 16. [RESERVED]
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
Our audit committee does not have a financial expert since no member of our
Board of Directors meets the definition of financial expert. Since our stock
trades on the NASD OTC Bulletin Board we are not required to have an audit
committee financial expert.
ITEM 16B. CODE OF ETHICS
(a) On October 13, 2004 our Board of Directors adopted a code of ethics
that applies to our chief executive officer, chief financial officer, principal
accounting officer or controller, or persons performing similar functions.
(b) We have filed with the Commission a copy of this code of ethics that
applies to our chief executive officer, chief financial officer, principal
accounting officer or controller, or persons performing similar functions. This
Code of Ethics was filed as Item 2 of our Form 6-K for October 2004 that was
filed with the Commission on October 21, 2004 and is incorporated herein by
reference.
(c) The text of our Code of Ethics has been posted on our website at
www.assure-energy.com
(d) The text of this code of ethics is available on request, without
charge, by contacting us at either of the principal offices listed in part 4A of
this report or by e-mail to hlalach@assure-energy.com
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The nature of the services provided by BDO Dunwoody, LLP - under each of the
categories indicated in the table is described below.
98
------------------------------------ ----------------------------------------------- -----------------------------------------------
Principal Accountant Service For the fiscal year ended December 31, 2004 For the fiscal year ended December 31, 2003
------------------------------------ ----------------------------------------------- -----------------------------------------------
Audit Fees $155,695 (US$120,500) $84,050 (US$63,850)
------------------------------------ ----------------------------------------------- -----------------------------------------------
Audit Related Fees $0 $0
------------------------------------ ----------------------------------------------- -----------------------------------------------
Tax Fees $0 $2,300(US$1,750)
------------------------------------ ----------------------------------------------- -----------------------------------------------
All Other Fees $0 $0
------------------------------------ ----------------------------------------------- -----------------------------------------------
Audit Fees
Audit fees were for professional services rendered by BDO Dunwoody, LLP for the
audit of our annual consolidated financial statements and services provided in
connection with statutory and regulatory filing or engagements.
Audit Related Fees
Audit related fees were for assurance and related services reasonably related to
the performance of the audit or review of the annual consolidated statements or
bi-annual states that are not reported under "Audit Fees" above.
Tax Fees
Tax fees were for tax compliance, tax advice and tax planning professional
services. These services consisted of: tax compliance including the review of
tax returns, and tax planning and advisory services relating to common forms of
domestic and international taxation (i.e. income tax, capital tax, goods and
services tax, payroll tax and value added tax).
All Other Fees
Fees disclosed in the table above under the item "all other fees" were incurred
for services other than the audit fees, audit-related fees and tax fees
described above. These services consist of assistance in the review and
documentation of processes and controls.
Pre-Approved Policies and Procedures
It is within the mandate of our Audit Committee to approve all audit and
non-audit related fees. The Audit Committee has pre-approved specifically
identified non-audit related services, including tax compliance, review of tax
returns and documentation of processes and controls as submitted to Audit
Committee from time to time. The auditors also present the estimate for the
annual audit related services to the Audit Committee for approval prior to
undertaking the annual audit of our consolidated financial statements.
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
Our common stock trades on the NASD OTC Bulletin Board. Accordingly, we are not
presently subject to the audit committee requirements mandated by the
Sarbanes-Oxley Act of 2002.
ITEM 16E. PURCHASE OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
There were no purchases made by or on behalf of the issuer or any "affiliated
purchaser " as defined in ss.240.10b-18(a)(3), of shares or other units of any
class of the issuer's equity securities that is registered by the issuer
pursuant to section 12 of the Exchange Act (15 U.S.C. 781).
99
PART III
ITEM 17. FINANCIAL STATEMENTS
Our financial statements are stated in Canadian Dollars (CDN$) and are prepared
in accordance with Canadian Generally Accepted Accounting Principles (GAAP), the
application of which, in our case, conforms in all material respects for the
periods presented with United States GAAP, except as discussed in footnotes to
the financial statements.
The financial statements as required under Item 17 are attached hereto. The
audit reports of BDO Dunwoody, LLP and Rogoff & Company, P.C. are included
herein immediately preceding the financial statements and schedules.
Audited Financial Statements
Reports of Independent Registered Public Accounting Firms
Consolidated Balance Sheets as of December 31, 2003 and 2004
Consolidated Statements of Operations and Deficit for the Years Ended December
31, 2002, 2003 and 2004
Consolidated Statements of Cash Flows for the Years Ended December 31, 2002,
2003 and 2004
Notes to Consolidated Financial Statements
No Schedule II information has been provided as the information required to be
disclosed in this Schedule is available in the notes to the consolidated
financial statements. We had no material allowances for doubtful accounts in any
of the reporting periods.
ITEM 18. FINANCIAL STATEMENTS
We have elected to provide financial statements pursuant to Item 17.
ITEM 19. EXHIBITS
(a) Index to consolidated financial statements:
Page
----
Reports of Independent Registered Public Accounting Firms F-1-F-3
Consolidated Balance Sheets as of December 31, 2003 and 2004 F-4
Consolidated Statements of Operations and Deficit for the Years
Ended December 31, 2002, 2003 and 2004 F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2002, 2003 and 2004 F-6
Notes to Consolidated Financial Statements F-7
(b) Exhibits to this Annual Report:
100
EXHIBITS
SEC Report
Reference
Exhibit No. Number Description
----------- ------ -----------
2.1 2.1 Asset Purchase Agreement dated March 14, 2002 between Registrant and
Inventoy.com International, Inc.(1)
2.2 2.1 Acquisition Agreement dated April 23, 2002 by and among Registrant,
Assure Oil & Gas Corp. ("Assure") and the shareholders of Assure (2)
2.3 2.1 Share Purchase Agreement dated May 30, 2002 by and among Assure Oil and
Gas Corp., and Gary Freitag, Garth R. Keyte and Evan Stephens.(3)
2.4 2.1 Stock Exchange Agreement dated August 27, 2002 by and among Registrant,
Inventoy.com International Inc., Kaplan Design Group, Douglas Kaplan,
Ed Kaplan and Ron Beit-Halachmy.(4)
2.5 2.1 Share Purchase Agreement dated March 6, 2003 by and among Assure
Energy, Inc., and Al J. Kroontje, Trevor G. Penford, Karen
Brawley-Hogg, Donald J. Brown, Troon Investments, Ltd., and Quarry Oil
& Gas, Ltd. (9)
2.6 2.2 Amending Agreement dated March 26, 2003 to March 6, 2003 Share Purchase
Agreement. (9)
2.7 2.3 Amending Agreement No. 2 dated April 11, 2003 to March 6, 2003 Share
Purchase Agreement. (9)
2.8 2.1 Agreement and Plan of Merger dated as of September 9, 2003 between
Assure Energy, Inc., a Delaware corporation and Assure Energy, Inc., a
Nevada corporation. (10)
2.9 2.2 Certificate of Merger as filed with the Delaware Secretary of State
effective September 11, 2003. (10)
2.10 2.3 Articles of Merger as filed with the Nevada Secretary of State on
September 11, 2003. (10)
3.1 3.1 Certificate of Incorporation of Registrant as filed August 11, 1999.(5)
3.2 3.1 Certificate of Amendment to Certificate of Incorporation of Registrant
filed February 15, 2002.(6)
3.3 3.1 Certificate of Amendment to Certificate of Incorporation of Registrant
filed May 1, 2002.(2)
3.4 3.2 By-Laws of Assure Energy, Inc., a Delaware corporation.(5)
101
SEC Report
Reference
Exhibit No. Number Description
----------- ------ -----------
3.5 3.1 Articles of Incorporation of Assure Energy, Inc., a Nevada corporation
as filed with the Nevada Secretary of State on September 3, 2003. (10)
3.6 3.2 By-Laws of Assure Energy, Inc., a Nevada corporation. (10)
3.7 Appendix A Form of Articles of Conversion (13)
3.8 Appendix B Form of Plan of Conversion (13)
3.9 Appendix C Form of Articles of Continuance (13)
3.10 Appendix D Form of By-laws of Assure Energy, Inc. an Alberta Canada corporation. (13)
4.1 4.1 Registration Rights Agreement dated as of April 23, 2002 by and between
Registrant and the shareholders of Assure Oil & Gas Corp.(1)
4.3 4.3 Certificate of Designation, Preferences and Rights of Series A
Preferred Stock of Registrant as filed on June 7, 2002. (8)
4.4. 4.1 Certificate of Designation, Preferences and Rights of Series B
Preferred Stock of Registrant as filed on August 28, 2002.(4)
10.1 10.1 Promissory Note dated April 23, 2002 (2)
10.2 10.1 Convertible Preferred Stock Purchase Agreement dated August 27, 2002 (4)
10.3 10.1 Employment Agreement dated as of September 12, 2002 between Registrant
and Suzanne West.(7)
10.4 10.4 Convertible Preferred Stock Purchase Agreement dated as of June 1, 2002(8)
10.5 10.5 Employment Agreement dated as of September 17, 2002 between Registrant
and Harvey Lalach(8)
10.6 10.6 Stock Option Agreement made as of September 17, 2002 between Registrant
and Harvey Lalach(8)
10.7 10.7 Stock Option Agreement made as of October 1, 2002 between Registrant
and James Golla(8)
10.8 10.8 Stock Option Agreement made as of October 1, 2002 between Registrant
and Primoris Group Inc. (8)
10.9 10.9 Subordinated Promissory Note dated December 28, 2002(8)
102
SEC Report
Reference
Exhibit No. Number Description
----------- ------ -----------
10.10 10.10 Subordinated Promissory Note with Warrant dated March 15, 2003(8)
10.11 10.11 Management and Operational Services Agreement dated as of September 15,
2003 between Assure Oil & Gas Corp. and Quarry Oil & Gas Ltd. (11)
10.12 10.12 Employment Agreement dated as of August 29, 2003 among Registrant,
Assure Oil & Gas Corp. and Colin Emerson(11)
10.13 10.13 Employment Agreement dated as of August 29, 2003 among Registrant,
Assure Oil & Gas Corp. and Tim Chorney(11)
10.14 10.14 Employment Agreement dated as of August 29, 2003 among Registrant,
Assure Oil & Gas Corp. and Cameron Bogle(11)
10.15 10.15 Stock Option Agreement made as of September 4, 2003 between Registrant
and Lisa Komoroczy(11)
10.16 Item 2 Arrangement Agreement dated November 10, 2004 between Registrant and
Quarry Oil & Gas Limited. (13)
10.17 Item 1 Arrangement Agreement dated as of July 8, 2005 between Registrant and
GEOCAN Energy, Inc. including Plan of Arrangement and form of Lock Up
Agreement. (14)
14 Item 2 Code of Ethics(12)
21 List of subsidiaries of Registrant. (15)
31.1 Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) under
the Securities Exchange Act of 1934, as amended(15)
31.2 Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) under
the Securities Exchange Act of 1934, as amended(15)
32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(15)
32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(15)
(1) Filed with the Securities and Excha nge Commission on May 1, 2002 as an
exhibit, numbered as indicated above, to the Registrant's Quarterly Report
on Form 10-QSB for the quarterly period ended January 31, 2002, which
exhibit is incorporated herein by reference.
103
(2) Filed with the Securities and Exchange Commission on May 8, 2002, as an
exhibit, numbered as indicated above, to the Registrant's Current Report
on Form 8-K dated April 23, 2002, which Exhibit is incorporated herein by
reference.
(3) Filed with the Securities and Exchange Commission on June 14, 2002, as an
exhibit, numbered as indicated above, to the Registrant's Current Report
on Form 8K dated May 30, 2002, which exhibit is incorporated herein by
reference.
(4) Filed with the Securities and Exchange Commission on September 11, 2002,
as an exhibit, numbered as indicated above, to the Registrant's Current
Report on Form 8K dated August 27, 2002, which exhibit is incorporated
herein by reference.
(5) Filed with the Securities and Exchange Commission on May 25, 2001 as an
exhibit, numbered as indicated above, to the Registrants' registration
statement on Form SB-2, which exhibit is incorporated herein by reference.
(6) Filed with the Securities and Exchange Commission on April 8, 2002, as an
exhibit, numbered as indicated above, to the Registrant's Transition
Report on Form 10-QSB for the transition period from August 1, 2001 to
December 31, 2001, which exhibit is incorporated herein by reference.
(7) Filed with the Securities and Exchange Commission on November 19, 2002, as
an exhibit, numbered as indicated above, to the Registrant's Quarterly
Report on Form 10-QSB for the quarterly period ended September 30, 2002,
which exhibit is incorporated herein by reference.
(8) Filed with the Securities and Exchange Commission on April 15, 2003, as an
exhibit, numbered as indicated above, to the Registrant's Annual Report on
Form 10KSB for the year ended December 31, 2002, which exhibit is
incorporated herein by reference.
(9) Filed with the Securities and Exchange Commission on August 11, 2003, as
an exhibit, numbered as indicated above, to the Registrant's Current
Report on Form 8K dated July 28, 2003, which exhibit is incorporated
herein by reference.
(10) Filed with the Securities and Exchange Commission on September 25, 2003,
as an exhibit, numbered as indicated above to the Registrant's Current
Report on Form 8K dated September 11, 2003, which exhibit is incorporated
herein by reference.
(11) Filed with the Securities and Exchange Commission on December 8, 2003, as
an exhibit, numbered as indicated above, to Amendment No. 2 to
Registrant's Registration Statement on Form S-4.
(12) Filed with the Securities and Exchange Commission on October 21, 2004, as
an exhibit, identified as indicated above, to the Registrant's Report of
Foreign Private Issuer on Form 6-K for the month of October 2004.
(13) Filed with the Securities and Exchange Commission on December 2, 2004, as
an exhibit, identified as indicated above, to the Registrant's Report of
Foreign Private Issuer on Form 6-K for the month of November 2004.
(14) Filed with the Securities and Exchange Commission on July 25, 2005, as an
exhibit, identified as indicated above, to the Registrant's Report of
Foreign Private Issuer on Form 6-K for the month of July 2005.
(15) Filed herewith.
104
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for
filing on Form 20-F and that it has duly caused and authorized the undersigned
to sign this annual report on its behalf.
Dated: August 5, 2005
Alberta, Canada ASSURE ENERGY, INC.
By: /s/ Harvey Lalach
-----------------
Harvey Lalach
President, Chief Executive and
Financial Officer, and Director
105
================================================================================
Independent Registered Public Accounting Firm Report
--------------------------------------------------------------------------------
To the Shareholders of Assure Energy, Inc.
We have audited the Consolidated Balance Sheets of Assure Energy, Inc. as at
December 31, 2004 and 2003 and the Consolidated Statements of Operations and
Deficit and Cash flows for each of the years in the two-year ended December 31,
2004. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted auditing
standards and the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform an audit to
obtain reasonable assurance whether the consolidated financial statements are
free of material misstatement. Our audits included examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation.
In our opinion, the consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at December 31, 2004
and 2003 and the results of its operations and its cash flows for each of the
years in the two-year period ended December 31, 2004 in accordance with Canadian
generally accepted accounting principles.
As described in Note 21 of the accompanying financial statements, the auditors'
report and financial statements dated March 2, 2005 have been withdrawn and
revised.
/s/ BDO Dunwoody LLP
Chartered Accountants
Calgary, Canada
April 27, 2005
F-1
================================================================================
Comments by Auditors for US Readers on Canada -
United States Reporting Differences
--------------------------------------------------------------------------------
Public Company Accounting Oversight Board reporting standards for auditors
require the addition of an explanatory paragraph when the financial statements
reflect a change in accounting policy, such as described in Note 3(b) for
changes in reporting currency from US to Canadian dollars. Although we conducted
our audits in accordance with both Canadian generally accepted auditing
standards and Public Company Accounting Oversight Board auditing standards, our
report dated April 27, 2005 is expressed in accordance with Canadian reporting
standards which do not permit reference to such an event in the auditors' report
when it is adequately disclosed in the financial statements.
/s/ BDO Dunwoody LLP
Chartered Accountants
Calgary, Canada
April 27, 2005
F-2
[LOGO] ROGOFF & COMPANY, P.C.
================================================================================
Certified Public Accountants
Report of Independent Registered Accounting Firm
To the Stockholders' and the Board of Directors
of Assure Energy, Inc.
We have audited the accompanying consolidated balance sheet (not presented
herein) of Assure Energy, Inc. and Subsidiaries as of December 31, 2002, and the
related statements of operations and deficit, stockholders' equity, and cash
flows for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position (not presented herein) of Assure
Energy, Inc. and Subsidiaries at December 31, 2002, and the results of its
operations and its cash flows for the year then ended in conformity with
accounting principles generally accepted in Canada.
We also have reported separately on the consolidated financial statements of
Assure Energy, Inc. and Subsidiaries for the same period, presented in
accordance with accounting principles generally accepted in the United States of
America. The significant differences between the accounting principles generally
accepted in Canada and those generally accepted in the United States of America
are summarized in Note 22 to the financial statements.
/s/ Rogoff & Company P.C.
New York, New York
March 28, 2003, except for notes 2 and 13(a),
as to which the date is March 5, 2004; and note 22,
as to which the date is June 29, 2005.
275 Madison Avenue, New York, New York 10016-1101 o (212) 557-5666
o fax (212) 557-9330
F-3
Assure Energy, Inc.
Consolidated Balance Sheets
(Expressed in Canadian Dollars)
--------------------------------------------------------------------------------
As at December 31, 2004 2003
--------------------------------------------------------------------------------
ASSETS Note 3(b)
Current Assets
Cash $ 112,660 $ 4,628,405
Receivables 3,224,863 3,302,813
Deposits and prepaid expenses 481,542 551,296
--------------------------------------------------------------------------------
3,819,065 8,482,514
Deposits (note 5) 53,200 159,581
Investment (note 6) 927,626 899,601
Property and equipment (note 7) 34,282,243 25,551,279
--------------------------------------------------------------------------------
Total Assets $ 39,082,134 $ 35,092,975
================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Payables and accrued liabilities $ 8,269,333 $ 5,801,845
Debenture payable (note 8) -- 1,250,000
Bank loan (note 9) 6,150,000 7,800,000
Due to shareholders (note 11) 2,520,372 --
Interest payable (note 10) 11,245 --
Current portion of long term debt (note 10) 978,896 830,105
--------------------------------------------------------------------------------
17,929,846 15,681,950
Long term debt (note 10) 3,131,412 4,370,595
Asset retirement obligation (note 4) 1,279,702 1,088,682
Future income taxes (note 13) 2,220,885 2,716,255
Minority interest in consolidated subsidiary -- 3,285,564
--------------------------------------------------------------------------------
24,561,845 27,143,046
--------------------------------------------------------------------------------
Shareholders' Equity
Common shares (note 12 b) 25,256,913 15,597,103
Preferred shares (note 12 c) 3,489,521 3,489,521
Warrants (note 12 e) 2,070,001 1,976,913
Contributed surplus (note 12 b) 995,950 288,623
Currency exchange adjustment (Note 3(b)) 319,960 319,960
Deficit (17,612,056) (13,722,191)
--------------------------------------------------------------------------------
14,520,289 7,949,929
--------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $ 39,082,134 $ 35,092,975
================================================================================
Commitments and contingencies and Subsequent Events (Notes 15, 17 and 23) The
accompanying notes are an integral part of these consolidated financial
statements.
On behalf of the Board:
Signed "Harvey Lalach" Director
---------------------------------------------
Harvey Lalach
Signed "Colin McNeil" Director
---------------------------------------------
Colin McNeil
F-4
Assure Energy, Inc.
Consolidated Statements of Operations and Deficit
(Expressed in Canadian Dollars)
------------------------------------------------------------------------------------------------------------
Year ended Year ended Year ended
December 31, 2004 December 31, 2003 December 31, 2002
------------------------------------------------------------------------------------------------------------
Note 3(b)
REVENUE
Petroleum and natural gas sales $ 15,976,765 $ 8,334,380 $ 1,850,016
Less: royalties, net of tax credits 3,413,404 1,400,856 344,362
------------------------------------------------------------------------------------------------------------
Net petroleum and natural gas revenue 12,563,361 6,933,524 1,505,654
Equity income 28,025 68,531 --
Interest and other income (loss) (656) -- --
------------------------------------------------------------------------------------------------------------
12,590,730 7,002,055 1,505,654
------------------------------------------------------------------------------------------------------------
EXPENSES
Asset retirement obligation - accretion 78,507 (21,185) --
Depletion and depreciation 6,609,732 13,308,053 1,103,092
Foreign exchange loss (gain) (112,242) 133,547 (183,658)
General and administrative 4,933,565 2,491,110 1,065,957
Interest 865,545 856,347 37,833
Production and operating costs 5,694,504 3,035,185 468,848
------------------------------------------------------------------------------------------------------------
18,069,611 19,803,057 2,492,073
------------------------------------------------------------------------------------------------------------
Loss before income taxes (5,478,881) (12,801,002) (986,419)
------------------------------------------------------------------------------------------------------------
Income tax expense (recovery) - current (note 13) 38,223 (279,041) 360
Income tax expense - future (note 13) (1,476,501) (90,524) 43,429
------------------------------------------------------------------------------------------------------------
Total income tax expense (1,438,278) (369,565) 43,789
------------------------------------------------------------------------------------------------------------
Net loss after taxes (4,040,603) (12,431,437) (1,030,208)
Minority interest in consolidated subsidiary 728,222 21,451 --
Loss on dilution (350,401) -- --
------------------------------------------------------------------------------------------------------------
Net loss for the year (3,662,782) (12,409,986) (1,030,208)
Deficit, beginning of year (13,722,191) (1,164,727) (134,519)
Dividends (227,083) (147,478) --
------------------------------------------------------------------------------------------------------------
Deficit, end of year $(17,612,056) $(13,722,191) $ (1,164,727)
------------------------------------------------------------------------------------------------------------
Earnings per share - Basic $ (0.18) $ (0.77) $ (0.04)
Weighted average common shares outstanding
- Basic 20,489,457 16,210,220 27,924,740
(Diluted earnings per share have not been presented as such would be
antidilutive)
The accompanying notes are an integral part of these consolidated financial
statements
F-5
Assure Energy, Inc.
Consolidated Statements of Cash Flows
(Expressed in Canadian Dollars)
-------------------------------------------------------------------------------------------------------------------
Year Ended Year Ended Year Ended
December 31, 2004 December 31, 2003 December 31, 2002
-------------------------------------------------------------------------------------------------------------------
Note 3(b)
OPERATING ACTIVITIES
Net loss for the year $ (3,662,782) $(12,409,986) $ (1,030,208)
Add (deduct) items not affecting cash:
Depreciation and depletion 6,609,732 13,308,053 1,103,092
Asset retirement obligation - accretion 78,507 (21,185) --
Minority interest (728,222) (21,451) --
Future income taxes (1,476,501) (90,524) 43,429
Equity share of earnings of investment (28,025) (68,531) --
Sale of Toy division -- -- 4,711
Interest paid thru issuance of shares 369,226 -- --
Warrants issued for interest -- 129,903 --
Warrant expense -- 145,190 --
Stock compensation expense 707,327 143,433 --
Accrued interest payable 11,245 418,467 --
Consulting expense paid through the issuance of
shares 33,000 -- --
Bad debt expense 24,346 -- --
Loss on dilution 350,401 -- --
Foreign exchange (gain) loss (112,242) 133,547 (183,658)
Provision for income tax -- (279,041) --
-------------------------------------------------------------------------------------------------------------------
2,176,012 1,387,875 (62,634)
Net change in non-cash operating working capital 727,222 1,586,665 102,461
-------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 2,903,234 2,974,540 39,827
-------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Proceeds (repayments) from/to long term debt (34,174) 5,603,065 2,909,855
Repayment of debenture payable (1,250,000) -- --
Bank loan advances (repayments) (1,650,000) 1,034,850 --
Collection of employee advance 112,500 -- --
Shareholders advances 2,520,372 -- --
Proceeds raised by subsidiary from third parties 796,409 -- --
Proceeds from the issue of preferred stock -- -- 1,579,666
Proceeds from the issue of common stock 2,376,492 9,550,197 2,749,843
Foreign exchange from financing activities 112,242 -- --
-------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 2,983,841 16,188,112 7,239,364
-------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Expenditures on property and equipment (12,554,802) (4,893,000) (2,144,919)
Net change in non-cash investing working capital 2,151,982 -- --
Restricted Cash -- -- (86,600)
Disposition of commodity hedging -- (517,557) --
Acquisition of business, net of cash acquired -- (11,043,231) (3,155,645)
-------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (10,402,820) (16,453,788) (5,387,164)
-------------------------------------------------------------------------------------------------------------------
Net cash flow for the year (4,515,745) 2,708,864 1,892,027
Cash, beginning of year 4,628,405 1,919,541 27,514
-------------------------------------------------------------------------------------------------------------------
Cash, end of year $ 112,660 $ 4,628,405 $ 1,919,541
-------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements
F-6
Assure Energy, Inc.
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
(Express in Canadian Dollars)
--------------------------------------------------------------------------------
1. NATURE OF THE BUSINESS AND BASIS OF PRESENTATION
Assure Energy, Inc. (the "Company" or "Assure") and its subsidiaries are
engaged in the exploration, development and production of oil and natural
gas in the Canadian provinces of Alberta, Saskatchewan and British
Columbia.
On September 11, 2003, the Company changed its state of domicile from
Delaware to Nevada. Effective February 6, 2004, the Company changed its
place of domicile from Nevada to Alberta, Canada.
On December 17, 2004 the Company acquired 8,607,661 of the issued and
outstanding common shares of Quarry not already owned by Assure for common
shares of Assure on the basis of 0.360 of an Assure common share for each
Quarry Oil & Gas Ltd. ("Quarry") common share. The acquired Quarry shares
were transferred to its wholly owned subsidiary, Assure Holdings Inc.
("AHI"). AHI and Quarry amalgamated on December 17, 2004 pursuant to
section 184(1) of the Alberta Business Corporation Act. All warrants to
acquire Quarry common shares were cancelled.
The consolidated balance sheet of Assure and its subsidiaries as at
December 31, 2004 and the accompanying consolidated statements of
operations and cash flows for the year ended December 31, 2004 and the
notes thereto are the responsibility of the Company's management.
These consolidated financial statements are presented in Canadian dollars
and have been prepared by management in accordance with accounting
principles generally accepted in Canada.
The consolidated financial statements present the results of operations of
the Company for the year ended December 31, 2004 and its wholly owned
subsidiaries, Assure Oil & Gas Corp. ("Oil & Gas") and Westerra 2000 Inc.
("Westerra"). All material inter-company accounts and transactions have
been eliminated on consolidation.
2. BUSINESS COMBINATION
On December 17, 2004, the Company acquired an additional 49.79% interest
in Quarry such that Quarry became a wholly owned subsidiary. The Company
realized a dilution loss of $350,401 upon settlement of the carrying value
attributed to the minority interest on the consolidated balance sheet of
the Company. The purchase price for the remaining 8,607,661 shares in
Quarry was $5,508,903, using the closing trading price of $0.64 for each
Quarry shares. The excess of the purchase price over the book value of
Quarry's net assets of $1,692,251 is attributable to oil and natural gas
properties based on management's best estimates.
F-7
Assure Energy, Inc.
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
(Express in Canadian Dollars)
--------------------------------------------------------------------------------
2. BUSINESS COMBINATION - CONT'd
Quarry Carrying Values at December 17, 2004
Current assets $ 3,904,700
Current Liabilities 12,410,397
------------
Working capital deficiency (8,505,697)
Oil and natural gas properties 18,183,713
Other assets 978,989
Asset retirement obligation (955,020)
Future taxes payable (2,036,485)
------------
Net assets of Quarry $ 7,665,500
------------
Remaining 49.79% interest of Quarry purchased $ 3,816,652
Less: purchase price being value attributed to 3,098,758
shares of Assure Issued 5,508,903
------------
Purchase price discrepancy $ 1,692,251
------------
Purchase price discrepancy allocated to:
Property, plant and equipment $ 2,673,382
Future tax liability (981,131)
------------
Purchase price discrepancy $ 1,692,251
------------
Effective July 28, 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
$9,611,706 (US$6,947,988) 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. Prior
to the Acquisition certain non-oil and gas assets had been transferred to a new
entity, Keantha Holdings Inc. ("Keantha"), which is a Canadian subsidiary of
Quarry. Quarry retained a 49% interest in this new entity. The 49% interest was
recorded by Quarry as an investment in an unconsolidated subsidiary on an equity
basis (note 6).
The Company made the Quarry acquisition for purposes of increasing its presence
in the oil and gas industry in Canada. The 2003 acquisition of Quarry was
accounted for as a purchase. The purchase price of $9,611,705 (US$6,947,988) was
allocated to the assets acquired and liabilities assumed based upon their fair
values at the date of acquisition. The purchase price included the excess of the
fair value over book basis of $6,164,874 (US$4,518,102) which was attributable
entirely to the oil and natural gas properties based upon an independent
evaluation of proved oil and natural gas reserves.
F-8
Assure Energy, Inc.
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
(Express in Canadian Dollars)
--------------------------------------------------------------------------------
2. BUSINESS COMBINATION - CONT'd
Total consideration paid was allocated as follows:
CDN$ US$
----------------------------------
Current assets $ 1,554,921 $ 1,124,002
Investment in unconsolidated subsidiary 833,636 602,608
Oil and natural gas properties 25,253,893 18,255,216
Asset retirement obligation (826,436) (597,404)
Accounts payable and accrued expenses (2,509,398) (1,813,962)
Future taxes payable (2,820,741) (2,039,022)
Notes payable bank (7,067,155) (5,108,616)
Debenture payable (1,500,000) (1,084,301)
Minority interest (3,307,014) (2,390,533)
----------------------------------
Purchase price (including $250,682 (US$181,210)of bank
indebtedness in Quarry as of the acquisition date.) $ 9,611,706 $ 6,947,988
==================================
The results of operations of Quarry are included on a consolidated basis
in the Company's operating results effective July 28, 2003.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements have been prepared by management in
accordance with generally accepted accounting principles in Canada.
a) Basis of consolidation
The consolidated financial statements of the Company have been
prepared by management. The policies adopted by the Company comply
in all material aspects with generally accepted accounting
principles in Canada. The preparation of the consolidated financial
statements requires management to make estimates and assumptions
that affect the amount reported in the consolidated financial
statements and accompanying notes. Actual results could differ from
those estimates. The consolidated financial statements have, in
management's opinion, been properly prepared using careful judgment
within reasonable limits of materiality and within the framework of
the significant accounting policies summarized below.
The consolidated financial statements include the accounts of Assure
Energy, Inc. ("the Company" or "Assure"), and the accounts of its
wholly owned subsidiaries Assure Oil & Gas Corp. ("Oil & Gas"),
Westerra 2000 Inc. ("Westerra") and Quarry.
b) Change in reporting currency and foreign currencies
Most of the Company's operations are conducted by its Canadian
subsidiaries in Canadian dollars. As only limited operations are
conducted in United States dollars the Company adopted Canadian
dollars as its reporting currency effective January 1, 2002.
Comparative figures for the prior period have been restated using
the current rate method of currency translation as though the
Canadian dollar was the reporting currency in that period. The net
effect of adopting Canadian dollars as the Company's reporting
currency reduces the foreign currency fluctuations recorded as a
result of translating the Company's Canadian subsidiaries into US
dollars. As substantially all of the operations are now in Canada,
management is of the opinion that the Canadian dollar will more
accurately reflect the balance sheet and the net exposure in US
dollars will be appropriately recognized through the income
statement. The net exposure to the US dollar will primarily come
from US dollar denominated accounts such as cash and trade payables.
All numbers reported in these financial statements are stated in
Canadian dollars unless otherwise denoted.
F-9
Assure Energy, Inc.
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
(Express in Canadian Dollars)
--------------------------------------------------------------------------------
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONT'd
c) Petroleum and natural gas properties and equipment
i) Capitalized Costs
The Company follows the full cost method of accounting for its
petroleum and natural gas operations. Under this method, all
costs related to the acquisition, exploration and development
of petroleum and natural gas reserves, including asset
retirement obligations, are capitalized. Such costs include
land acquisition costs, geological and geophysical expenses,
carrying charges on non-producing properties, costs of
drilling both productive and non-productive wells, related
plant and production equipment costs, site restoration and
abandonment costs and overhead charges directly related to
acquisition, exploration and development activities.
ii) Depletion and Depreciation
The Company accounts for its petroleum and natural gas
operations in accordance with the Canadian Institute of
Chartered Accountants' ("CICA") guideline on full cost
accounting (AcG-16) in the petroleum and natural gas industry.
Capitalized costs, excluding costs related to unproved
properties, are depleted and depreciated using the
unit-of-production method based on estimated proven oil and
natural gas reserves before deduction of royalties as
determined by independent petroleum engineers. Petroleum and
natural gas reserves and production are converted to
equivalent units of crude oil using a ratio of six thousand
cubic feet of natural gas to one barrel of oil.
Costs of acquiring and evaluating unproved properties are
initially excluded from depletion calculations. These
unevaluated properties are assessed periodically to ascertain
whether impairment has occurred. When proved reserves are
assigned or the property is considered to be impaired, the
cost of the property or the amount of the impairment is added
to costs subject to depletion calculations.
Proceeds from the sale of petroleum and natural gas properties
are applied against capitalized costs, with no gain or loss
recognized, unless such a sale would result in a greater than
20% change in the depletion and depreciation rate.
Furniture and equipment is depreciated on a straight-line
basis at rates expected to write off the carrying values, net
of expected future recoveries, over the estimated useful lives
of the assets.
iii) Impairment Test
The Company applies an impairment test ("ceiling test") to
determine if capitalized costs are not recoverable and exceed
their fair value. Capitalized costs are not recoverable if
they are greater than estimated undiscounted cash flows from
future production of proven reserves plus the cost (net of
impairment) of unproved properties. Commodity prices used in
calculating estimated cash inflows are based on quoted
benchmark prices in the futures market. Costs used in
estimating cash outflows are based on expected future
production and other costs and include abandonment and site
restoration costs associated with developed properties. An
impairment loss is recognized if capitalized costs are greater
than their recoverable amount. The impairment loss is measured
as the amount by which capitalized costs exceed the fair value
of proved and probable reserves plus the cost (net of
impairment) of unproved properties. Fair value is determined
based on the present value of future cash flows, after
deducting abandonment and site restoration costs associated
with developed properties, discounted at a risk free interest
rate, adjusted for prevailing market conditions. Any
impairment loss is charged to earnings as additional
depletion.
F-10
Assure Energy, Inc.
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
(Express in Canadian Dollars)
--------------------------------------------------------------------------------
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONT'd
d) Asset Retirement Obligations
The Company has adopted the new recommendation of the CICA relating
to accounting for asset retirement obligations effective January 1,
2003. This recommendation replaces the previous method of accounting
for site restoration costs on an accrual basis. There was no
material impact of adopting this standard on prior years. The
Company has adopted the new standard on a retroactive basis in
accordance with the CICA recommendations on Accounting Changes.
Under the new standard, a liability for the fair value of
environmental and site restoration obligations is recorded when the
obligations are incurred and the fair value can be reasonably
estimated. The obligations are normally incurred at the time the
related assets are brought into production. The fair value of the
obligations is based on the estimated cash flow required to settle
the obligations discounted using the Government of Canada Bond Rate
for the applicable term adjusted for the Company's credit rating.
The fair value of the obligations is recorded as a liability with
the same amount recorded as an increase in capitalized costs. The
amounts included in capitalized costs are depleted using the
unit-of-production method. The liability is adjusted for accretion
expense representing the increase in the fair value of the
obligations due to the passage of time. The accretion expense is
recorded as an operating expense.
e) Investments
The Company owns 39.77% (2003 - 49%) of the common shares of Keantha
Holdings Inc. ("Keantha"). The Company accounts for its investment
in Keantha using the equity method of accounting, whereby the
investment was initially recorded at cost and adjusted to recognize
after-tax income or losses and reduced by dividends received. The
investment is carried at the lower of cost or market value, if the
decrease in value is of a permanent nature.
f) Joint ventures
From time to time, certain petroleum and natural gas activities are
conducted jointly with others. These financial statements reflect
only the Company's proportionate interest in such activities.
g) Revenue recognition
Petroleum and natural gas sales are recognized when the product is
delivered.
h) Earnings per share
Earnings per share is determined based upon the weighted average
number of common shares outstanding during the period. Diluted
earnings per share is determined by applying the treasury stock
method to the exercise of outstanding stock options and share
purchase warrants, except to the extent that the inclusion of these
items would be anti-dilutive to the resulting earnings per share
calculation.
i) Stock based compensation
Effective January 1, 2003, the Company adopted the recommendations
of the CICA Handbook Section 3870 "Stock Based Compensation and
Other Stock-Based Payments". This section was amended to require the
expensing of all stock based compensation awards for fiscal years
beginning after January 1, 2003. The Company has chosen to adopt the
recommendation prospectively thereby recording the fair value of the
stock options issued since January 1, 2003 in the income statement
using the Black-Scholes option-pricing model.
j) Future income taxes
The Company records future income taxes on the liability method of
tax accounting. Under this method, future tax assets and liabilities
are determined based on the difference between the tax value of each
asset or liability and its carrying value on the balance sheet and
are measured using substantially enacted tax rates and laws that are
expected to be in effect when the differences reverse.
F-11
Assure Energy, Inc.
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
(Express in Canadian Dollars)
--------------------------------------------------------------------------------
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONT'd
k) Commodity contracts
During 2003, Quarry traded petroleum products and derivative
instruments. Quarry entered into commodity contracts in the normal
course of its business to establish future sales and purchase prices
and manage the future cash flow risk associated with price
volatility of the commodities traded. Commodity contracts may be
designated as hedges of financial risk exposure of anticipated
transactions if, both at the inception of the hedge and throughout
the hedge period, the changes in fair value of the contract
substantially offset the effect of the commodity price changes on
the anticipated transactions and if it is probable that the
transactions will occur. Quarry monitored its commodity exposures
and ensured that contracted amounts did not exceed the amounts of
underlying exposures.
Gains and losses were recognized on the delivery of the petroleum
product or settlement of the financial contract. The market value of
the outstanding commodity hedging option contracts were determined
at the reporting date and any differences from the unamortized
proceeds were recorded as an adjustment to the unamortized portion
of commodity hedging contracts. Quarry deferred the impact of
changes in the market value of these contracts until such time as
the associated transactions was completed. In the event of early
settlement or re-designation of hedging transactions, gains or
losses were deferred and brought into income at the delivery dates
originally designated. Where anticipated transactions were no longer
expected to occur, with the effect that the risk that was hedged no
longer exists, unrealized gains and losses were recognized in income
at the time such determination is made.
Cash flows arising in respect of these contracts were recognized
under cash flow from operating activities. Quarry's commodity
contracts expired in 2003. Quarry had no commodity contracts in
place at December 31, 2003. No commodity contracts were undertaken
in 2004 by the Company or its subsidiaries.
l) Financial instruments
Financial instruments of the Company consist of cash, accounts
receivable, income taxes payable, accounts payable and accrued
liabilities, due to shareholders, the debenture payable, long term
debt and the bank loan. It is management's opinion that the Company
is not exposed to significant risks associated with these financial
instruments except as otherwise disclosed. The fair value of these
financial instruments approximates their carrying value unless
otherwise noted.
m) Measurement uncertainty
Amounts recorded for depreciation, depletion and amortization, asset
retirement costs and obligations and amounts used for ceiling test
and impairment calculations are based on estimates of oil and
natural gas reserves and future costs required to develop those
reserves. By their nature, these estimates of reserves and the
related future cash flows are subject to measurement uncertainty,
and the impact on the financial statements of future periods could
be material. .
n) Foreign Currency
Most of the Company's operations are conducted by its Canadian
subsidiaries in Canadian dollars with the remainder conducted in
United States dollars. The Company converts its United States dollar
transactions using the current rate method of currency translation.
Under this method, monetary assets and liabilities are translated at
the rate of exchange in effect at the balance sheet date and revenue
and expense items are translated at the rate of exchange in effect
on the dates on which such items are recognized in income during the
period. Unrealized foreign currency gains and losses are recognized
in current period earnings.
F-12
Assure Energy, Inc.
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
(Express in Canadian Dollars)
--------------------------------------------------------------------------------
4. ASSET RETIREMENT OBLIGATION
In 2003, the Company adopted the CICA recommendation for recording of
asset retirement obligations. The asset retirement obligation of
$1,279,702 at December 31, 2004 (2003 - $1,088,682) is based on the
estimated cash flows required to settle any abandonment and site
restoration obligations relating to the Company's oil and natural gas
properties at the end of their useful lives. Payments to settle the
obligations will occur on an ongoing basis over the lives of the related
assets estimated to be for a period of up to 17 years. Cash flows have
been discounted at 7% for purposes of determining the asset retirement
obligation.
The schedule below is a reconciliation of the Company's liability for
years ended December 31, 2004 and 2003:
2004 2003
-------------------------
Present value of obligation at
January 1, 2003 $ 1,088,682 $ 308,424
Acquisitions -- 750,344
New obligations during the year 112,513 51,099
Accretion expense 78,507 (21,185)
-------------------------
$ 1,279,702 $ 1,088,682
=========================
The Company estimates its obligations related to existing facilities and
drilling activities will be settled in periods up to 2020.
5. DEPOSITS
Deposits are $53,200 (2003 - $159,581) for well abandonments.
6. INVESTMENT
As described in Note 3(e), the Company owns 39.77% (2003 - 49%) of Keantha
and uses the equity method to account for this investment. The balance in
the investment account as at December 31, 2004 was $927,626 (2003 -
$899,601). For the year ending December 31, 2004, the Company recorded
$28,025 (2003 - $68,531) as investment income from Keantha. The fair value
of this investment is not readily determinable as it is a private company.
7. PROPERTY AND EQUIPMENT
Accumulated
Depletion and
December 31, 2004 Cost Depreciation Net Book Value
-------------------------------------------------------------------------------------------------
Petroleum and natural gas properties and equipment $62,339,292 $ 28,083,446 $ 34,255,846
Furniture and equipment 124,136 97,739 26,397
-------------------------------------------------------------------------------------------------
$62,463,428 $ 28,181,185 $ 34,282,243
=================================================================================================
Accumulated
Depletion and
December 31, 2003 Cost Depreciation Net Book Value
-------------------------------------------------------------------------------------------------
Petroleum and natural gas properties and equipment $46,455,696 $ 20,940,748 $ 25,514,948
Furniture and equipment 105,831 69,500 36,331
-------------------------------------------------------------------------------------------------
$46,561,527 $ 21,010,248 $ 25,551,279
=================================================================================================
At December 31, 2004, costs amounting to $1,169,342 (2003 - $1,493,389)
that were incurred on unproven properties have been excluded from costs
subject to depletion.
F-13
Assure Energy, Inc.
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
(Express in Canadian Dollars)
--------------------------------------------------------------------------------
7. PROPERTY AND EQUIPMENT - CONT'd
The Company applied an impairment test to capitalized costs at December
31, 2004 to determine whether such costs may be recovered in the future.
Capitalized costs were compared to estimated future cash flows from
production of proven oil and natural gas reserves plus the cost (net of
impairment) of unproved properties. Commodity prices used in the
determination of cash flows were based on the following quoted benchmark
prices in the futures market adjusted for quality and transportation
differentials:
Natural gas
WTI (US$/bbl) Edmonton (Cdn$/MMBtu)
------------- ---------- ------------
(Cdn$/bbl)
2005 44.29 51.25 6.97
2006 41.60 48.03 6.66
2007 37.09 42.64 6.21
2008 33.46 38.31 5.73
2009 31.84 36.36 5.37
2010 and thereafter escalated by 1.5% per annum.
No impairment loss was determined in 2004 (2003 - $9,078,379) as a result
of applying the ceiling test. Impairment losses are recognized in
depletion and depreciation on the consolidated statement of operations.
8. DEBENTURE PAYABLE
During 2004 the Company repaid a debenture payable in the amount of
$1,250,000 (2003 - $1,250,000). The debenture matured on November 1, 2004
and bore interest at the rate of 9% per annum, payable monthly. In the
prior year, the Company's subsidiary, Quarry repaid $250,000 of this
amount. The holder had the right to convert the debenture into common
shares of Quarry at any time after July 22, 2004 and prior to maturity at
a price equal to the lesser of $1.33 per share or the 10 day weighted
average trading price of Quarry's common shares, not to be lower than
$0.75 per share. The equity component of this debenture had not been
segregated as the value attributable to the equity component was not
material.
9. BANK LOAN
a) Assure Energy Inc.
Effective November 15, 2004, the Company had available a $6,550,000
(December 31, 2004 $6,400,000) revolving operating demand loan
facility with a Canadian chartered bank. The facility reduces by
$75,000 per month commencing November 30, 2004 and reduces by
$275,000 per month commencing January 31, 2005. The loan bears
interest at the bank's prime rate, which was 4.25% at December 31,
2004, plus 1.5% interest subject to a standby fee of 0.125% per
annum. The Company also had available, a $1,200,000 non-revolving
acquisition and development demand loan facility at the same bank
with interest payable at the bank's prime rate, which was 4.25% at
December 31, 2004, plus 1.5% subject to a drawdown fee of 0.375%
(acquisition) or 0.50% (development) and a standby fee of 0.125% per
annum. The facilities are secured by a $20 million debenture over
all the assets of the Company. These facilities will be reviewed no
later than April 30, 2005. As at December 31, 2004, the Company had
drawn down $5,700,000 (2003 - $7,800,000) against these facilities
and this amount has been classified as a current liability. Under
the credit facility agreement with the bank, the Company is subject
to certain covenants. As at December 31, 2004, the Company was not
in compliance with the covenant requiring it to maintain an adjusted
working capital ratio of not less than 1 to 1. The bank has not
demanded payment of the loan as a result of this covenant violation
and has provided a waiver for the working capital covenant at
December 31, 2004.
F-14
Assure Energy, Inc.
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
(Express in Canadian Dollars)
--------------------------------------------------------------------------------
9. BANK LOAN - CONT'd
b) Assure Oil & Gas Corp. ("Oil & Gas")
As at December 31, 2004, the Company had available, through its
wholly owned subsidiary Oil & Gas a $1,200,000 revolving, operating
demand loan facility with a Canadian chartered bank. The loan bears
interest at the bank's prime rate, which was 4.25% at December 31,
2004, plus 1.0% interest subject to a standby fee of 0.125% per
annum. The Company also had available through Oil & Gas a $450,000
non-revolving acquisition and development demand loan facility at
the same bank with interest payable at the bank's prime rate, which
was 4.25% at December 31, 2004, plus 1.25% subject to a drawdown fee
of 0.25% (acquisition) or 0.50% (development) and a standby fee of
0.125% per annum. The facilities are secured by a $10 million
debenture over all the assets of Oil & Gas and a $10 million
guarantee from Assure and Westerra. These facilities will be
reviewed no later than April 30, 2005. As at December 31, 2004, Oil
& Gas had drawn down $450,000 (2003 - $ nil) against these
facilities and this amount has been classified as a current
liability. Under the credit facility agreement with the bank, the
Company is subject to certain covenants. As at December 31, 2004,
the Company was not in compliance with the covenant requiring it to
maintain an adjusted working capital ratio of not less than 1 to 1.
The bank has not demanded payment of the loan as a result of this
covenant violation and has provided a waiver for the working capital
covenant at December 31, 2004.
Subsequent to year end, the bank loans for the Company and Oil and
Gas have been combined and refinanced subject to certain credit
approval conditions (note 17(b)).
10. LONG TERM DEBT
The Company's long term debt consists of a six-year note payable issued by
its wholly owned subsidiary Oil & Gas in the principal amount of $800,000
(December 31, 2003 - $1,000,000) (the "CDN dollar Note") and a six-year
subordinated promissory note payable in the principal amount of US
$2,754,000, equivalent to Canadian $3,310,308 (December 31, 2003 - US
$3,240,000, equivalent to Canadian $4,200,700) (the "US dollar Note").
The CDN dollar Note was issued on December 28, 2002 and amended on June 1,
2004 and matures on December 28, 2008. The note accrues interest at 7.75 %
per annum. Quarterly payments of principal and interest are due on March
28, June 28, September 28, and December 28. The note is subordinated to
all present and future bank debt of Oil & Gas and its subsidiaries.
The US dollar Note was issued on March 15, 2003, as amended on December 5,
2003, and further amended on June 1, 2004 and matures on March 15, 2009.
The note accrues interest at 7.75% per annum. Quarterly payments of
principal and interest are due and payable in US dollars on June 15,
September 15, December 15, and March 15. The note is unsecured and is
subordinated to all present and future bank debt of the Company and its
subsidiaries. In connection with the issuance of the US dollar Note, the
Company issued 450,000 common stock purchase warrants to purchase an equal
number of the Company's common stock with an exercise price of $3.73 (US
$3.10) per share. These common stock purchase warrants may be exercised at
any time during the five years commencing July 1, 2003.
On June 1, 2004 the CDN dollar Note and the US dollar Note were amended
such that during the 20 month period immediately following the date of
amendment all principal and interest payments due to the Note Holder under
the Notes may at, the Company's option, be paid in common shares of the
Company. Following such 20 month period all principal and interest
payments due to the Note Holder under the Notes may, at the Holder's
option, be paid in common shares of the Company. For the purposes of
payments under the Notes in common shares, the common shares will be
valued at the average closing price of the Company's common shares during
the 10 day trading period immediately preceding the due date for the
payment.
Principal payments of $50,000 plus $18,699 of interest due on March 28,
2004, and principal of $50,000 and $17,959 of interest due on June 28,
2004, and principal of $50,000 and $17,014 of interest due on September
28, 2004 on the CDN dollar Note were satisfied by the issue by the Company
of 12,377 common shares at US $4.21 (Cdn $5.55) per share, 12,308 common
shares at US $4.10 (Cdn $5.52) per share, and 18,812 common shares at US
$2.80 (Cdn $3.56) per share, respectively. Subsequent to year end, 32,955
common shares at US $1.63 (Cdn $2.00) per share were issued in
satisfaction of principal of $50,000 and $15,894 of interest due on
December 28, 2004 on the Cdn dollar Note.
F-15
Assure Energy, Inc.
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
(Express in Canadian Dollars)
--------------------------------------------------------------------------------
10. LONG TERM DEBT - CONT'd
During the year ended December 31, 2004, interest of $440,677 (US
$336,061) due for the period from the date of issuance of the US dollar
Note to March 15, 2004 was satisfied by the exercise of 100,000 warrants
for proceeds of $406,503 (US $310,000) and the payment in cash by the
Company of $34,174 (US $26,061). Interest of $85,929 (US $63,292) and
principal of $219,941 (US $162,000) due on June 15, 2004, interest of
$77,430 (US $60,126) and principal of $208,622 (US $162,000) due on
September 15, 2004 on the US dollar Note have been satisfied by the issue
of 53,769 common shares at $5.69 (US $4.19) per share and the issue of
94,121 common shares at $3.04 (US $2.36) per share respectively.
Subsequent to year end, 101,202 common shares at $2.63 (US $2.16) per
share were issued in satisfaction of interest of $68,688 (US $56,343) and
principal of $197,495 (US $162,000) due on December 15, 2004 on the US
dollar Note.
11. DUE TO SHAREHOLDERS
Due to shareholders is $2,520,372 as at December 31, 2004 (2003 - $nil)
advanced from certain shareholders. The funds were advanced for general
operational purposes, are unsecured, non-interest bearing and without
fixed or agreed repayment terms and are subordinated to the bank.
12. EQUITY INSTRUMENTS
a) Authorized
Preferred Shares - 4,977,250 Blank Check non-voting Preferred
Shares, 17,500 Series A Preferred Shares and 5,250 Series B
Preferred Shares. Common Shares - 100,000,000 shares without par
value.
b) Common Shares
Year Ended Year Ended
December 31, 2004 December 31, 2003
--------------------------------------------------------------------------------------------------------------------
Contributed Contributed
# Shares Amount Surplus # Shares Amount Surplus
--------------------------------------------------------------------------------------------------------------------
Beginning balance 19,650,100 $15,597,103 $ 288,623 15,366,000 $ 6,249,437 $ --
Payment of dividend on preferred
shares (i) 68,363 300,705 -- -- -- --
Exercise of warrants (ii) 100,000 506,503 -- 1,782,100 831,824 --
Private placement (iii) 482,000 2,216,596 -- 2,152,000 6,871,363 --
Payment of principal and
interest on long term debt (iv) 191,387 795,594 -- 350,000 1,644,479 --
Pursuant to 2003 private
placement (v) 143,500 -- -- -- -- --
Quarry amalgamation (vi) 3,098,758 5,508,903 -- -- -- --
Warrants expense -- -- -- -- -- 145,190
Stock compensation (note 12(d)) -- -- 707,327 -- -- 143,433
To be issued for payment of
principal and interest on long
term debt (iv) 134,157 331,509
--------------------------------------------------------------------------------------------------------------------
Ending balance 23,868,265 $25,256,913 $ 995,050 19,650,100 $15,597,103 $ 288,623
--------------------------------------------------------------------------------------------------------------------
Year Ended
December 31, 2002
---------------------------------------------------------------------------------------
Contributed
# Shares Amount Surplus
---------------------------------------------------------------------------------------
Beginning balance 31,326,000 $ 129,750 $ --
Pursuant to 2002 private placement (vii) 2,100,000 2,749,842 --
Assure acquisition (viii) 3,600,000 3,370,777 --
Sale of Toy Division (ix) (21,660,000) (932) --
---------------------------------------------------------------------------------------
Ending balance 15,366,000 $ 6,249,437 $ --
---------------------------------------------------------------------------------------
F-16
Assure Energy, Inc.
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
(Express in Canadian Dollars)
--------------------------------------------------------------------------------
12. EQUITY INSTRUMENTS - CONT'd
(i) During the year the Company issued 68,363 common shares to settle
dividends on Series A and B preferred share dividends as disclosed
in note 12(c).
(ii) During the year 100,000 warrants were exercised on settlement of
interest on long term debt (Note 10).
(iii) During the year, the Company issued 482,000 units consisting of
482,000 common shares at US $3.60 per share (CDN $4.73 per share)
and 482,000 warrants to purchase common shares at US $4.00 per share
(CDN $5.25 per share) were issued under a private placement. Two
officers of the Company purchased 6,000 units as part of the private
placement.
(iv) During the year the Company issued 191,387 common shares and,
subsequent to the year end the Company issued 134,157 common shares
in settlement of principal and interest payments due during the
period on long term debt as disclosed in Note 10.
(v) During the year, the Company issued an additional 143,500 common
shares related to a private placement that closed in December 2003
in recognition of a delay in effecting registration of the
securities purchased beyond six months from the closing date.
(vi) On December 17, 2004 the Company issued 3,098,758 common shares for
the remaining 49.79% interest in Quarry as disclosed in note 2.
(vii) On May 8, 2002 we completed a US$1,750,000 (approximately
CDN$2,749,843) equity financing. In connection therewith, we issued
an aggregate of 1,400,000 units at a purchase price of US$1.25
(approximately CDN$1.96) per unit. Each unit consists of one share
of our common stock and one common stock purchase warrant. Each
warrant as amended, entitled the holder to purchase one share of our
common stock at a price of US$1.50 (approximately CDN$2.36) per
share for a period of four years commencing July 1, 2003. As the
result of the September 17, 2002 3:2 forward stock split the
1,400,000 unit shares became 2,100,000 shares and the 1,400,000
warrants became 2,100,000 warrants, each with an exercise price of
US$1.00 (approximately CDN$1.57) per share. Both the shares
underlying the units and the shares underlying the unit warrants
have piggyback registration rights.
(viii) Effective April 23, 2002 the Company issued 2,400,000 common shares
for all the outstanding stock of Assure Oil & Gas Ltd. As a result
of the September 17, 2002 3:2 forward stock split the 2,400,000
common shares became 3,600,000 common shares.
(ix) On August 27, 2002 the Company entered into a stock exchange
agreement where certain shareholders exchanged a total of 14,440,000
of the Company's shares for the all of the issued and outstanding
shares of Inventoy.com International, Inc., an inactive wholly owned
subsidiary. As a result of the September 17, 2002 3:2 forward stock
split the exchanged 14,400,000 common shares became 21,660,000
common shares.
F-17
Assure Energy, Inc.
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
(Express in Canadian Dollars)
--------------------------------------------------------------------------------
12. EQUITY INSTRUMENTS - CONT'd
c) Preferred Shares
Year Ended Year Ended Year Ended
December 31, 2004 December 31, 2003 December 31, 2002
-----------------------------------------------------------------------------------------------
# Shares Amount # Shares Amount # Shares Amount
-----------------------------------------------------------------------------------------------
Beginning balance 22,750 $3,489,521 22,750 $3,489,521 -- $ --
Shares issued(i) -- -- -- -- 22,750 3,489,521
-----------------------------------------------------------------------------------------------
Ending balance 22,750 $3,489,521 22,750 $3,489,521 22,750 $3,489,521
-----------------------------------------------------------------------------------------------
On June 1, 2002, the Company sold 17,500 shares of Series A
Preferred Stock ("Series A") with a stated value of US $100 (CDN
$153) and a cumulative 5% dividend payable in cash or shares of the
Company's common stock raising US $1,750,000 (Cdn$2,684,247). The
Series A is convertible at the option of the holder after two years,
or if called for redemption by the Company, transferred into units
of the Company at US $1.50 per unit for every US $1 of stated value.
Units consist of one share of the Company's common stock and one
common stock purchase warrant. Each common stock purchase warrant
entitles the holder to purchase one share of the Company's common
stock exercisable at US $1.75 per share at any time during the four
year period commencing one year after the date of issuance.
On August 27, 2002, the Company issued 5,250 shares of its
Convertible Series B Preferred Stock ("Series B") raising US
$525,000 (CDN $815,724). The Series B has a stated value of US $100
(CDN $155), a cumulative 5% dividend payable annually in cash or
common stock of the Company, and the right to convert the Series B
into units commencing on the second anniversary of the issuance of
the Series B at US $1.75 per unit for every US $1 of stated value of
preferred stock. Each unit consists of one share of the Company's
common stock and one common stock purchase warrant exercisable at US
$2.00 per share, at any time during the four year period commencing
one year from the date of issuance of the units.
d) Stock Options
Year Ended Year Ended
December 31, 2004 December 31, 2003
------------------------------------------------------------------------------------------------------------------------
Wtd Avg Wtd Avg Wtd Avg Wtd Avg Wtd Avg Wtd Avg
Price Price remain Price Price remaining
# Options (US $) (Cdn $)(1) life (yrs) # Options (US $) (Cdn $)(1) life (yrs)
------------------------------------------------------------------------------------------------------------------------
Options outstanding,
beginning of period 425,000 $ 2.93 $ 3.52 3.69 320,000 $ 2.75 $ 4.34 1.6
Issued 1,120,000 3.29 3.96 305,000 3.00 3.89
Cancelled (440,000) 3.40 4.09 (200,000) 2.75 3.57
------------------------------------------------------------------------------------------------------------------------
Options outstanding,
end of period 1,105,000 $ 3.20 $ 3.85 3.92 425,000 $ 2.93 $ 3.52 3.69
------------------------------------------------------------------------------------------------------------------------
Options exercisable,
end of period 442,500 $ 3.22 $ 3.87 75,000 $ 2.80 $ 3.63
------------------------------------------------------------------------------------------------------------------------
(1) See exchange rates used to convert from United States to
Canadian dollars in Note 18
F-18
Assure Energy, Inc.
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
(Express in Canadian Dollars)
--------------------------------------------------------------------------------
12. EQUITY INSTRUMENTS - CONT'd
Year Ended
December 31, 2002
---------------------------------------------------------------------------------------
Wtd Avg Wtd Avg Wtd Avg
Price Price remain
# Options (US $) (Cdn $)(1) life (yrs)
---------------------------------------------------------------------------------------
Options outstanding, beginning ofperiod -- $ -- $ -- --
Issued 320,000 2.75 4.34
---------------------------------------------------------------------------------------
Options outstanding, end of period 320,000 $ 2.75 $ 4.34 1.60
---------------------------------------------------------------------------------------
Options exercisable, end of period 200,000 $ 2.75 $ 4.34
---------------------------------------------------------------------------------------
The fair value of options issued in 2004 was determined using an
appropriate option pricing model and the following assumptions:
expected volatility of 27% to 53%, risk free interest rate of 3.5%,
expected lives of three to five years and dividend yield of 0%. The
fair value of the options is recognized and expensed over the
vesting period of the options. During 2004 $707,327 (2003 -
$143,433) was recorded in stock compensation expense as disclosed in
note 12(b) using the Black-Scholes option-pricing model.
e) Warrants
Year Ended Year Ended
December 31, 2004 December 31, 2003
------------------------------------------------------------------------------------------------------
# Warrants Amount # Warrants Amount
------------------------------------------------------------------------------------------------------
Beginning balance 10,036,400 $ 1,976,913 7,200,000 $ --
Issued in connection with private placement
and investor relations 675,500 160,088 -- --
Issued for investor relation services 60,000 33,000 -- --
Issued on completion of equity financing -- -- 2,100,000 --
Subscription agreement -- -- 533,500 770,000
In connection with financing -- -- 450,000 450,000
For consulting services -- -- 100,000 129,903
Issued in connection with financing 1,435,000 640,000
Expiration of warrants (1,578,500) -- -- --
Exercise of warrants (100,000) (100,000) (1,782,100) (12,990)
------------------------------------------------------------------------------------------------------
Ending balance 9,093,400 $ 2,070,001 10,036,400 $ 1,976,913
------------------------------------------------------------------------------------------------------
Year Ended
December 31, 2002
-----------------------------------------------------------------------------------------
# Warrants Amount
-----------------------------------------------------------------------------------------
Beginning balance -- $ --
Issued in connection with the acquisition of Assure Oil & Gas Ltd. 7,200,000 --
-----------------------------------------------------------------------------------------
Ending balance 7,200,000 $ --
-----------------------------------------------------------------------------------------
F-19
Assure Energy, Inc.
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
(Express in Canadian Dollars)
--------------------------------------------------------------------------------
12. EQUITY INSTRUMENTS - CONT'd
December 31, 2004 December 31, 2003
------------------------------------------------------------------------------------------------------------------------------
Wtd Avg Wtd Avg Wtd Avg
Exercise Exercise Wtd Avg Price
Price Price Price (Cdn $)
# Warrants (US $) (Cdn $)(1) # Warrants (US $) (1)
------------------------------------------------------------------------------------------------------------------------------
Beginning balance 10,036,400 $ 1.38 $ 1.89 7,200,000 $ 0.50 $ 0.79
Issued in connection with equity financing -- -- -- 2,100,000 1.00 1.30
Issued in connection with subscription agreement -- -- -- 533,500 2.50 3.24
Issued in connection with financing -- -- -- 450,000 3.10 4.02
Issued in connection with consulting services -- -- -- 100,000 3.00 3.89
Exercised during the year (Class A) -- -- -- (1,772,100) 0.33 0.43
Exercised during the year (Other) -- -- -- (10,000) 3.00 3.89
Issued in connection with financing -- -- -- 1,435,000 4.00 5.19
Exercised in payment of interest (100,000) 3.10 3.73 -- -- --
Issued in connection with private placement 482,000 4.00 4.81 -- -- --
Issued in connection with investor relation services 60,000 4.05 4.89 -- -- --
Issued in connection with investor relation services 50,000 2.50 3.02 -- -- --
Issued in connection with private placement 143,500 4.00 4.81 -- -- --
Expiration of warrants (1,578,500) 4.00 4.81 -- -- --
------------------------------------------------------------------------------------------------------------------------------
Ending balance 9,093,400 $ 1.11 $ 1.59 10,036,400 $ 1.38 $ 1.89
------------------------------------------------------------------------------------------------------------------------------
(1)See exchange rates used to convert from United States to Canadian
dollars in Note 18
December 31, 2002
----------------------------------------------------------------------------------
Wtd Avg Wtd Avg
Exercise Exercise
Price Price
# Warrants (US $) (Cdn$)(1)
----------------------------------------------------------------------------------
Beginning balance -- $ -- $ --
Issued in connection with the acquisition of
Assure Oil & Gas Ltd. 7,200,000 0.50 0.79
----------------------------------------------------------------------------------
Ending balance 7,200,000 $ 0.50 $ 0.79
----------------------------------------------------------------------------------
During 2004, the Company has included $nil (2003 - $129,903) in general
and administrative expenses for share purchase warrants issued during the
year.
The Company's calculations for warrants during the year ended December 31,
2004 were made using an appropriate option-pricing model using the
following assumptions: expected volatility 17%, risk free interest rate
2.4%, expected life in years ranging from 1.5 - 3, and dividend yield 0%.
13.
F-20
Assure Energy, Inc.
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
(Express in Canadian Dollars)
--------------------------------------------------------------------------------
13. INCOME TAXES
As of February 6, 2004, the Company changed its domicile from Nevada to
Alberta, the net operating loss carryforwards of approximately US $816,000
will no longer be available for use due to this change.
The Company and its wholly-owned subsidiaries have a net operating loss of
approximately $2,330,000 (2003 - $931,273) under The Income Tax Act
(Canada). These net operating losses can be carried back three years and
forward seven to 10 years to offset future taxable income. The Company and
its wholly owned subsidiaries have recorded a future tax recovery of
$1,476,501 (2003 - $90,524) for 2004.
The net future tax liability results primarily from the difference in the
tax basis and carrying value of property, plant and equipment.
Total income taxes were different than the amounts computed by applying
the statutory federal income tax rate as follows:
Year ended December 31
2004 2003
---------------------------
Combined income tax rate 36.7% 36.7%
Expected income tax $(2,010,654) $(4,697,968)
Change in valuation allowance (111,823) 518,081
Income attributed to equity and minority interests (277,542) (23,149)
Resource related differences, Crown 481,259 219,957
Resource related differences, Resource allowance (261,969) (202,389)
Stock based compensation 259,589 52,640
Non-deductible write down of property and equipment -- 3,483,486
Expiry of losses 414,245 --
Non-deductible, non-cash items -- 53,285
Other 30,394 226,492
---------------------------
$(1,476,501) $ (369,565)
---------------------------
The tax effects of temporary differences that resulted in future tax
liabilities and assets at December 31, 2004 and 2003 were as follows:
2004 2003
---------------------------
Future tax liabilities:
Property and equipment $(2,699,906) $(2,928,298)
Future tax assets:
Net operating losses 856,091 730,124
Share issue costs 29,188 --
Valuation allowance (406,258) (518,081)
---------------------------
Net future tax liability $(2,220,885) $(2,716,255)
---------------------------
F-21
Assure Energy, Inc.
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
(Express in Canadian Dollars)
--------------------------------------------------------------------------------
14. RISK MANAGEMENT
a) Credit risk
Substantially all of the Company's accounts receivable are with
customers and joint venture partners in the oil and gas industry and
are subject to normal industry credit risks. As the Company markets
its commodities through oil and gas marketing companies, the Company
is also exposed to the risks associated with these companies. In
addition, the Company is exposed to credit risk in its trade
accounts receivable included in receivables. At year end one company
accounted for 17% of the total accounts receivable.
b) Interest rate risk management
The Company's fixed rate debt is subject to interest rate price risk
as the value will fluctuate as a result of changes in market rates.
Floating rate debt is subject to interest rate cash flow risk as the
required cash flows to service the debt will fluctuate as a result
of changes in market rates.
At December 31, 2004, the Company had fixed the interest rates on
the following interest bearing obligations:
December 31, 2004 December 31, 2003
------------------------------------------------------------------
Debenture payable $ -- $ 1,250,000
Long term debt 4,110,308 5,200,700
------------------------------------------------------------------
$ 4,110,308 $ 6,450,700
------------------------------------------------------------------
c) Foreign currency rate risk
A significant portion of the Company's debt is denominated in the
United States dollars. The Company does not have any exposure to any
highly inflationary foreign currencies. The amount of debt
denominated in United States dollars is US$2,754,000 (2003 -
US$3,240,000). The increase or decrease in net earnings before taxes
for each 1 percent change in foreign exchange rate on the US
denominated debt amounts to approximately $28,000 (2003 - $32,000)
per annum.
15. COMMITMENTS AND CONTINGENCIES
The Company is currently involved in litigation with a former officer of
Quarry who is claiming $240,000 in respect of termination and severance
pay. The Company is contesting this claim and has not accrued any amounts
for this litigation. Examinations for discovery have occurred and the
matter is currently in abeyance as of December 31, 2004 as the plaintiff
has not moved the litigation forward.
Effective August 1, 2004, the Company entered into a new lease for the
rental of office space for the period to January 31, 2007. The Company is
committed to payments of $87,720 per annum for rent plus a proportionate
share of operating costs. The Company has also entered into a sublease
that expires December 31, 2005. The Company is committed to payments of
$25,704 per annum for rent plus a proportionate share of operating costs.
The Company is subject to various regulatory and statutory requirements
relating to the protection of the environment. These requirements, in
addition to contractual agreements and management decisions, result in the
accrual of estimated future removal and site restoration costs. These
costs are accrued based on estimates of reserves and future costs. Any
changes in these will affect future earnings. Costs attributable to these
commitments and contingencies are expected to be incurred over an extended
period of time and are to be funded mainly from the Company's cash
provided by operating activities. Although the ultimate impact of these
matters on net earnings cannot be determined at this time, it could be
material for any one-quarter or year.
The Company currently has employment agreements with certain employees of
the Company. The Employment Agreements specify that certain employees are
entitled to a lump sum severance payment in the event that the Company is
sold (Refer to note 17(c)).
F-22
Assure Energy, Inc.
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
(Express in Canadian Dollars)
--------------------------------------------------------------------------------
17. COMMITMENTS AND CONTINGENCIES - CONT'd
In the ordinary course of business, the Company and its subsidiaries enter
into contracts which contain indemnification provisions, such as loan
agreements, purchase contracts, service agreements, licensing agreements,
asset purchase and sale agreements, joint venture agreements, operating
agreements, leasing agreements, land use agreements etc. In such
contracts, the Company may indemnify counterparties to the contracts if
certain events occur. These indemnification provisions vary on an
agreement by agreement basis. In some cases, there are no pre-determined
amounts or limits included in the indemnification provisions and the
occurrence of contingent events that will trigger payment under them is
difficult to predict. Therefore, the maximum potential future amount that
the Company could be required to pay cannot be estimated.
16. RELATED PARTY TRANSACTIONS
a) Quarry Oil & Gas Ltd.
Effective June 30, 2004, Assure acquired 1,000,000 common shares of
Quarry, comprising part of the Units issued under a private
placement. On November 1, 2004, Assure advanced $1,250,000 to
Quarry. This amount is unsecured, non-interest bearing and without
fixed or agreed repayment terms. Quarry used these funds to repay
the debenture which matured on November 1, 2004 (See Note 8). On
November 10, 2004, Assure participated in a non-brokered private
placement and acquired 757,143 common shares of Quarry at $0.70. As
a result, Assure directly holds a total of 8,677,043 common shares
representing 50.2% of the total issued and outstanding common shares
of Quarry. Effective December 17, 2004 the Company through its
wholly owned subsidiary acquired the remaining 49.79% outstanding
common shares of Quarry, as disclosed in note 2.
b) Other
Included in accounts receivable is $249,938 and included in accounts
payable is $377,339 due to companies controlled by a director of the
Company appointed on December 17, 2004. These accounts receivable
and payable arise as the Company and this director share an interest
in oil and gas properties that the Company operates.
All related party transactions have been recorded at the agreed to
exchange amount which reflects fair value.
17. SUBSEQUENT EVENTS
a) Chestermere Sale
Subsequent to year end the Company entered into a sale and purchase
agreement effective January 1, 2005 to sell the Chestermere property
for net proceeds of $5.15 million.
F-23
Assure Energy, Inc.
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
(Express in Canadian Dollars)
--------------------------------------------------------------------------------
17. SUBSEQUENT EVENTS - CONT'd
b) Bank loan
On March 7, 2005, the Company, signed a term sheet outlining the
terms and conditions of proposed financing to replace the existing
bank loan. Subject to certain credit approval conditions, the
Company will have available a $7,100,000 revolving operating demand
loan facility with a Canadian chartered bank. The loan will bear
interest at the bank's prime rate, which was 4.25% at March 7, 2005,
plus 2% interest subject to a standby fee of 0.125% per annum. The
Company will also have available, a $2,700,000 non-revolving
development demand loan facility at the same bank with interest
payable at the bank's prime rate, which was 4.25 % at March 7, 2005,
plus 2.5% subject to a drawdown fee of 1% a standby fee of 0.125%
per annum. This facility is subject to completion of the bank's
credit approval process. The facilities will be secured by a $10
million debenture over all the assets of Oil & Gas, a $10 million
guarantee from Assure and Westerra, and a $40 million supplemental
debenture over the major producing petroleum and natural gas
reserves of Assure, Oil & Gas, and Westerra. These facilities will
be reviewed by July 15, 2005 and upon the Company's fiscal year end
December 31, 2005, and not later than April 30, 2006. This new
facility would replace both the Company's and Oil & Gas' facilities
described in Note 9. A commitment fee in the amount of $500,000 is
also payable upon delivery of a commitment to the Company, payable
in monthly payments of $100,000 per month commencing April 1, 2005.
An earnest fee in the amount of $50,000 will also be payable on
April 1, 2005.
c) Engagement of Financial Advisor and Amendment of Employment
Agreements
On April 21, 2005 the Company engaged the services of Haywood
Securities Inc. ("Haywood") a TSE member firm, as its exclusive
financial advisor to assist the Company in evaluating strategic
alternatives to maximize shareholder value. In the event that such
alternatives result in a merger, takeover or business combination
(the "Transaction") with another company, Haywood would earn a
commission equivalent to 0.9% of the Transaction value. On April 25,
2005 the Company amended its employment agreements such that in the
event of a Transaction the Company's President and two Vice
Presidents are entitled to receive severance pay of approximately
$600,000 in the aggregate. As part of this amendment, 3 employees of
the Company were granted a total of 510,000 stock options,
exercisable at $1.25Cdn for 1 year from the date of grant.
18. EXCHANGE RATES
The United States dollar amounts have been converted into Canadian dollar
amounts for convenience purposes using either the average or the period
end exchange rates shown below:
Twelve months ended December 31, 2004 $1.2991
Twelve months ended December 31, 2003 $1.3161
As at December 31, 2004 $1.2020
As at December 31, 2003 $1.2965
As at December 31, 2002 $1.5776
19. STATEMENT OF CASH FLOWS AND NON-CASH TRANSACTIONS
a) Interest Paid
-------------
2004 2003 2002
---- ---- ----
Interest Paid $524,873 $343,488 $37,833
b) Business acquisition
--------------------
During the year, the Company purchased Quarry via the issuance of
3,098,758 shares as per Note 2.
F-24
Assure Energy, Inc.
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
(Express in Canadian Dollars)
--------------------------------------------------------------------------------
19. STATEMENT OF CASH FLOWS AND NON-CASH TRANSACTIONS - CONT'd
c) Shares issued for principal and interest payments
-------------------------------------------------
During the year, the Company issued 191,387 shares (2003 - 350,000)
for the payment of $795,594 (2003 - 1,644,479) on principal and
interest on long term debt (Note 12(b)).
d) Shares issued for payment of dividends
--------------------------------------
During the year 100,000 warrants were exercised in exchange for the
settlement of $406,503 of interest on long term debt.
e) Shares issued for payment of dividends
--------------------------------------
During the year, the Company issued 68,363 shares for the payment of
$300,705 in dividends (Note 12(b)).
20. COMPARATIVE FINANCIAL STATEMENTS
Certain comparative figures have been restated for changes in accounting
policies as discussed below and to confirm to the current period
presentation (See Note 3(b)).
As described in Note 3(b), the Company changed its reporting currency to
Canadian dollars. As the Company changed its domicile to Canada, it is
reporting in accordance with Canadian generally accepted accounting
principles.
21. REVISED FINANCIAL STATEMENTS
As a result of events subsequent to March 2, 2005, management has
withdrawn its previously issued financial statements and prepared revised
financial statements based on information available to April 27, 2005 to
reflect the following:
a) Removed the going concern disclosure in Note 1 of the March 2, 2005
financial statements based on the completion of the sale of the
Chestermere property for net proceeds of $5.1million that reduce its
working capital deficiency (Note 17 (a)), finalized the terms of its
credit facility on April 1, 2005 (Note 17(b)), obtained agreement
from shareholders to subordinate their loans to the Company's bank
(Note 11) and amended the terms of the long term debt (Note 10).
b) Disclosed details of the Company's engagement with Haywood and the
amended employment agreements.
The previously issued financial statements and auditors' report dated
March 2, 2005 were not made publicly available by management and were only
issued to the Company's banker.
F-25
Assure Energy, Inc.
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
(Express in Canadian Dollars)
--------------------------------------------------------------------------------
22. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES
These consolidated financial statements have been prepared in accordance
with generally accepted accounting principles in Canada. Canadian
principles differ from U.S. principles as follows:
a) Reconciliation of Net Loss Under Canadian GAAP to U.S. GAAP
Consolidated Statement of Operations - U.S. GAAP
For the year ended
----------------------------------------
December 31, 2003 December 31, 2002
December 31, 2004 (restated Note 3b) (restated Note 3b)
-----------------
Net loss as reported in accordance with Canadian principles $ (3,662,782) (12,409,986) (1,030,208)
----------------- ------------------ ------------------
Impact of US principles:
Amortization of debt discount (debenture)(1) (109,200) (54,600) --
Amortization of debt discount (long term debt)(2) (152,153) (102,480) --
Asset retirement obligation(6) -- (86,700) --
Depletion(7) (1,542,224) (916,300) --
Future tax expense (7) 621,648 1,115,600 --
Stock compensation(3) 197,688 (184,366) (75,358)
Foreign exchange -- (8,400) --
----------------- ------------------ ------------------
Net U.S. GAAP adjustments (984,241) (237,246) (75,358)
----------------- ------------------ ------------------
Net loss for the year in accordance with
U.S. principles (4,647,023) (12,647,232) (1,105,566)
Less dividend on preferred shares (8) (227,083) (147,478) --
Less amortization of beneficial conversion
on preferred shares(8,9) (655,459) (1,412,220) (756,658)
----------------- ------------------ ------------------
Net loss attributed to common stock in
accordance with U.S. principles (5,529,565) (14,206,930) (1,862,224)
----------------------------------------------------------------------------------------------------------------------------
Loss per common share in accordance with
U.S. principles
Basic and diluted $ (0.27) (0.88) (0.07)
----------------------------------------------------------------------------------------------------------------------------
F-26
Assure Energy, Inc.
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
(Express in Canadian Dollars)
--------------------------------------------------------------------------------
22. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES - CONT'D
Year ended Year ended Year ended
December 31, 2004 December 31, 2003 December 31, 2002
----------------------------------------------------------------------------------------------------------
Note 3(b)
REVENUE
Petroleum and natural gas sales $ 15,976,765 $ 8,334,380 $ 1,850,016
Less: royalties, net of tax credits 3,413,404 1,400,856 344,362
----------------------------------------------------------------------------------------------------------
Net petroleum and natural gas revenue 12,563,361 6,933,524 1,505,654
EXPENSES
Asset retirement obligation - accretion 78,507 65,515 --
Depletion and depreciation 8,151,956 14,224,353 1,103,092
Foreign exchange gain (112,242) 141,947 (183,658)
General and administrative 4,735,877 2,675,476 1,141,315
Interest1, (2) 1,126,898 1,013,427 37,833
Production and operating costs 5,694,504 3,035,185 468,848
----------------------------------------------------------------------------------------------------------
19,675,500 21,155,903 2,567,431
----------------------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSES)
Equity income 28,025 68,531 --
Loss on dilution (350,401) -- --
Interest and other income (656) -- --
----------------------------------------------------------------------------------------------------------
(323,032) 68,531 --
----------------------------------------------------------------------------------------------------------
Loss before income taxes (7,435,171) (14,153,848) (1,061,777)
----------------------------------------------------------------------------------------------------------
Income tax expense (recovery) - current 38,223 (279,041) 360
Income tax expense (recovery) - future (2,098,149) (1,206,124) 43,429
----------------------------------------------------------------------------------------------------------
Total income tax expense (recovery) (2,059,926) (1,485,165) 43,789
----------------------------------------------------------------------------------------------------------
Net loss after taxes (5,375,245) (12,668,683) (1,105,566)
Minority interest in consolidated subsidiary 728,222 21,451 --
----------------------------------------------------------------------------------------------------------
Net loss for the period (4,647,023) (12,647,232) (1,105,566)
----------------------------------------------------------------------------------------------------------
F-27
Assure Energy, Inc.
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
(Express in Canadian Dollars)
--------------------------------------------------------------------------------
DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES - CONT'D
b) Comparative information
The revenue and net loss as reported in US GAAP for the year ended
December 31, 2003 differs from the amounts previously reported by an
immaterial amount due to a correction in the accounting for realized
hedging gains. The ending net equity amount remains unchanged.
c) Condensed Consolidated Balance Sheet
--------------------------------------------------------------------------------------------------------------
Canadian Canadian
Principles at US Principles at Principles at US Principles at
December 31, 2004 December 31, 2004 December 31, 2003 December 31, 2003
--------------------------------------------------------------------------------------------------------------
Assets
Current assets $ 3,819,065 $ 3,819,065 $ 8,482,514 $ 8,482,514
Deposits 53,200 53,200 159,581 159,581
Investment 927,626 927,626 899,601 899,601
Property and equipment (7,10) 34,282,243 33,140,501 25,551,279 24,659,279
-----------------------------------------------------------------------------
$ 39,082,134 $ 37,940,392 $ 35,092,975 $ 34,200,975
=============================================================================
Liabilities
Current liabilities (1) $ 17,929,846 $ 17,929,846 $ 15,681,950 $ 15,572,750
Long term debt (2) 3,131,412 2,825,765 4,370,595 3,912,795
Asset retirement obligation(6) 1,279,702 1,315,902 1,088,682 1,124,882
Future taxes (7) 2,220,885 1,041,178 2,716,255 1,683,855
Minority interest -- -- 3,285,564 3,285,564
-----------------------------------------------------------------------------
24,561,845 23,112,691 27,143,046 25,579,846
Shareholders' Equity (4,5) 14,520,289 14,827,701 7,949,929 8,621,129
-----------------------------------------------------------------------------
$ 39,082,134 $ 37,940,392 $ 35,092,975 $ 34,200,975
=============================================================================
F-28
Assure Energy, Inc.
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
(Express in Canadian Dollars)
--------------------------------------------------------------------------------
22. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES - CONT'D
d) Reconciliation of Shareholders' Equity under Canadian GAAP to US
GAAP:
December 31, 2004 December 31, 2003
--------------------------------------------------------------------------------------------------
Shareholders' Equity as reported with Canadian principles 14,520,289 7,949,929
Beneficial conversion feature(1) 163,800 163,800
Proceeds from warrant sale (long term debt) (2) 560,280 560,280
Stock compensation expense (recovery)(3) 62,037 259,724
Valuation of shares issued in amalgamation of
Quarry(10) 818,141 --
Amortization of debt discount (debenture)(1) (163,800) (54,600)
Amortization of debt discount (long term debt)(2) (254,633) (102,480)
Asset retirement obligation(6) (86,700) (86,700)
Depletion(7) (2,458,524) (916,300)
Future tax expense(7) 1,737,248 1,115,600
Stock compensation(3) (62,036) (259,724)
Foreign exchange (8,400) (8,400)
---------------------------------------
Shareholders' Equity in accordance with U.S. Principles 14,827,701 8,621,129
--------------------------------------------------------------------------------------------------
F-29
Assure Energy, Inc.
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
(Express in Canadian Dollars)
--------------------------------------------------------------------------------
22. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES - CONT'D
(1) On July 28, 2003, the Company issued through a subsidiary a debenture
payable for $1,250,000. The holder has the right to convert the debenture
into common shares of Quarry at any time after July 22, 2004 and prior to
maturity at a price equal to the lesser of $1.33 per share or the 10 day
weighted average trading price of Quarry's common shares, not to be lower
than $0.75 per share. In accordance with US principles, the face value of
the debenture payable has been reduced for the beneficial conversion
option of $163,800 and had been accounted for in the accompanying
consolidated statement of shareholders' equity as additional paid-in
capital and a discount on the debenture. This amount will be amortized
over 15 months. The charge for amortization in the period was $109,200
(December 31, 2003 - $54,600).
(2) On March 15, 2003, the Company entered into a six year Subordinated
Promissory Note Payable (the "Subordinated Note") with a foreign entity
with a principal balance of US $4,500,000. This Subordinated Note is
unsecured and accrues interest at 7.7.5% per annum. The Company issued
450,000 common stock purchase warrants to purchase an equal number of the
Company's common stock with an exercise price of US $3.10 per share. These
common stock purchase warrants may be exercised at any time during the
five years commencing July 1, 2003. In accordance with US principles, the
Company allocated the proceeds of the financing based on relative fair
values. The value attributed to the warrants was $560,280 (US$400,000) of
which $152,153 (US$108,681) was amortized in the period (December 31, 2003
- $102,480 (US$73,200)) as interest expense. The remaining $305,647
(US$218,318) has been netted against long-term debt as debt discount.
(3) The Company's functional and reporting currency is Canadian dollars
and the Company's stock options and exercise prices are denominated in US
dollars. In addition, there are options issued to consultants that vest
over a period of time. As a result, for U.S. principles, the options
issued prior to January 1, 2003 have been accounted for using variable
accounting under APB 25. Effective January 1, 2003 the Company adopted the
fair value basis of accounting under FAS 123 for all options issued after
January 1, 2003.
(4) In accordance with Canadian principles, the Company records dividends
in the statement of deficit. For US principles, preferred stock dividends
are to be recorded against contributed surplus. Under U.S principles,
preferred stock dividends are also considered in calculating the net loss
per common share.
(5) Foreign currency translation adjustment - Under Canadian GAAP, foreign
exchange gain translations of opening balance sheet information can be
done using a translation of convenience methodology in the initial period
when a Company changes its reporting currency. Any net gain or loss is
reflected as a separate component of equity. Under U.S. GAAP, such foreign
currency translation gains and losses are income to be reflected in the
earnings based on the rates prevailing during each fiscal period of
operations. As such, the amount included in the separate component of
shareholders' equity would be reclassified to deficit under US GAAP.
The above two GAAP differences identified above (4 and 5) will affect
accumulated deficit, but will have no net effect on total shareholders'
equity.
F-30
Assure Energy, Inc.
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
(Express in Canadian Dollars)
--------------------------------------------------------------------------------
22. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES - CONT'D
(6) In 2003, the Company early adopted the Canadian accounting standard
for asset retirement obligations, as outlined in the CICA handbook section
3110. This standard is equivalent to U.S. FAS 143 "Accounting for Asset
Retirement Obligations", which was effective for fiscal periods beginning
on or after January 1, 2003. Early adopting the Canadian standard avoided
a U.S. GAAP reconciling item in respect to accounting for the obligation.
No retroactive adjustment was made to 2002 as the net effect was not
material.
(7) The full cost method of accounting for crude oil and natural gas
operations under Canadian and U.S. GAAP differ in the following respects.
Under U.S. GAAP, a ceiling test is applied to ensure the unamortized
capitalized costs in each cost centre do not exceed the sum of the present
value, discounted at 10 percent, of the estimated unescalated future net
operating revenue from proved reserves plus unimpaired unproved property
costs less future development costs, related production costs and
applicable taxes. Under Canadian GAAP, a similar ceiling test calculation
is performed with the exception that cash flows from proved reserves are
undiscounted and utilize forecast pricing to determine whether impairment
exists. Any impairment amount is measured using the fair value of proved
and probable reserves excluding the tax effect of the write down.
In computing its consolidated net earnings for U.S. GAAP purposes, the
Company recorded additional depletion in 2003 as a result of the
application of the tax effect on the ceiling test. These charges were not
required under the Canadian GAAP ceiling tests. As a result, the depletion
base of unamortized capitalized costs is less for U.S. GAAP purposes.
In 2003, the Company adopted the new Canadian guideline AcG-16 which
restricts the capitalized costs less accumulated depletion from exceeding
an amount equal to the estimated undiscounted value of future net revenues
from proved oil and gas reserves, as determined by independent engineers,
based on sales prices achievable under existing contracts and posted
average reference prices in effect between the end of the year and the
finalization of the year end audit and current costs, and after deducting
estimated production related expenses, abandonment and reclamation costs,
and applicable taxes. When the carrying value of the cost center exceeds
the undiscounted value of future net revenues from proved oil and gas
reserves, the Company is required to determine the fair value of proved
and probable reserves and a writedown, if any is recorded. Commodity
prices used in calculating estimated cash inflows are based on quoted
benchmark prices as at the latest balance sheet date. Unproved properties
are tested separately for impairment. For U.S. principles, entities are
required to use discounted future net revenues (discounted at 10%) based
on unescalated current pricing.
For the ceiling test, under Canadian principles, impairment is measured
using discounted forecast prices of proved and probable reserves. Under
U.S. principles, impairment is measured using current prices of proved
reserves discounted at 10%. In computing its consolidated net earnings for
U.S. GAAP purposes for the Company there was a $1,693,864 writedown as a
result of the application of the US ceiling test at December 31, 2004
(December 31, 2003 - $963,900).
F-31
Assure Energy, Inc.
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
(Express in Canadian Dollars)
--------------------------------------------------------------------------------
22. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES - CONT'D
(8) In calculating earnings attributable to common shares under U.S. GAAP
principles requires deducting dividends on preferred shares and
amortization of the beneficial conversion feature of the preferred shares.
Under Canadian GAAP principles dividends are a reduction of shareholders
equity. Under Canadian GAAP principles does not recognize the amortization
of the beneficial conversion feature of the preferred shares.
(9) Under US GAAP the face value of the Series A and B preferred shares
has been reduced for the effect of the total beneficial conversion option
value of $2,824,337 (US$1,841,333) and has been accounted for in the
accompanying consolidated statement of stockholders' equity as additional
paid-in capital and a discount on these preferred shares for the year
ended December 31, 2002. This beneficial conversion amount will be
amortized over 2 years. The charge for amortization affecting the net loss
attributed to common stock in the accompanying statements of operations
for the year ended December 31, 2004 $655,459 (US$427,328) (December 31,
2003 was $1,412,220 (US$920,700) ,year ended December 31, 2002 $756,658
(US$493,305)). Under Canadian principles there is no recognition of the
beneficial conversion option value attributable to preferred shares.
(10) Under US GAAP principles the value ascribed to the transaction
between Assure and Quarry as described in Note 2 is to be based on trading
prices of Assure's stock around the announcement date. In Canadian GAAP,
consideration was given to block discounts and other qualitative factors.
As a result, the purchase price of the properties was determined to be
$1,292,482 higher of which $818,141 was attributed to the value of the
common shares issued and $474,341 to related future tax liabilities. As a
result of this additional purchase price discrepancy, depletion increased
for the year by an equivalent amount as the excess was written off as
additional depletion upon applying the U.S. GAAP ceiling test.
e) Recent Developments in Accounting Standards
In December of 2004, the Financial Accounting Standards Board
("FASB") issued SFAS "Share Based Payments" which addresses the
accounting for transactions in which an entity exchanges its equity
instruments for goods and services. It also addresses transactions
in which an entity incurs liabilities in exchange for goods or
services that are based on the fair value of the entity's equity
instruments or that may be settled by the issuance of those equity
instruments. This statement is a revision of FASB statement No. 123,
"Accounting for Stock-Based Compensation". This statement supersedes
APB Opinion No. 25 "Accounting for Stock Issued to Employees". Among
other things, this statement requires a public entity to measure the
cost of employee services received in exchange for an award of
equity instruments based on the grant-date fair value of the award.
That cost is recognized over the period during which an employee is
required to provide service in exchange for the award - the
requisite service period (usually the vesting period). This
statement is to be applied as of the beginning of the first interim
or annual period that begins after June 15, 2005, but earlier
adoption is encouraged. The Company adopted FAS 123 using the
modified prospective approach effective January 1, 2003There is no
expected impact upon adoption of FAS 123R.
In December of 2004, FASB issued SFAS No. 153 "Exchanges of
Nonmonetary Assets - An Amendment of APB Opinion No. 29". The
guidance in APB Opinion No. 29, "Accounting for Nonmonetary
Transactions" is based on the principle that exchanges of
nonmonetary assets should be measured based on the fair value of the
assets exchanged. The guidance in that Opinion, however, included
certain exceptions to that principle. This Statement amends Opinion
29 to eliminate the exception for nonmonetary exchanges of similar
productive assets and replaces it with a general exception for
exchanges of nonmonetary assets that do not have commercial
substance. A nonmonetary exchange has commercial substance if the
future cash flows of the entity are expected to change significantly
as a result of the exchange. The provisions of
F-32
Assure Energy, Inc.
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
(Express in Canadian Dollars)
--------------------------------------------------------------------------------
22. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES - CONT'D
this Statement are effective for nonmonetary asset exchanges
occurring in fiscal periods beginning after June 15, 2005. Earlier
application is permitted for nonmonetary asset exchanges occurring
in fiscal periods beginning after the date this Statement is issued.
The provisions of this Statement shall be applied prospectively. The
adoption of SFAS No. 153 will not have any impact on the Company's
financial statements.
23. SUBSEQUENT TRANSACTION (UNAUDITED)
On July 11, 2005 the Company announced that it had entered into an
arrangement agreement with TSX listed GEOCAN Energy Inc. ("GEOCAN")
whereby GEOCAN is to acquire all of the issued and outstanding shares of
the Company by issuing GEOCAN shares. The Company's shareholders will
receive 0.70 GEOCAN shares for each shares that they hold of the Company.
A total of approximately 19.3 million GEOCAN shares will be issued.
The transaction is subject to regulatory, shareholder and court approvals.
F-33