SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13a - 16 OR 15d - 16 OF
THE SECURITIES EXCHANGE ACT OF 1934
For the month of January 2005
Assure Energy, Inc.
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(Registrant's name)
521 3rd Avenue, S.W., Suite 800
Calgary, Alberta T2P 3T3
Canada
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(Address of principal executive office)
Indicate by check mark whether the registrant files or will file annual reports
under cover of Form 20-F or Form 40F
Form 20-F |X| Form 40-F |_|
Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
Yes |_| No |X|
If "Yes" is marked, indicate below the file number assigned to the registrant in
connection with Rule 12g3-2(b):
TABLE OF CONTENTS
1. Registrant's interim financial statements for the nine months ended
September 30, 2004.
2. Management's Discussion and Analysis of Financial Condition and Results of
Operations for the nine months ended September 30, 2004.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: January 20, 2005 ASSURE ENERGY, INC.
By: /s/Harvey Lalach
Name: Harvey Lalach
Title: President
2
1. Registrant's interim financial statements for the nine months ended
September 30, 2004.
Index to Interim Financial Statements of Assure Energy, Inc.
For The Nine Months Ended September 30, 2004
Consolidated Balance Sheets dated September 30, 2004 (unaudited)
and December 31, 2003.......................................................2
Consolidated Statements of Operations and Deficit (unaudited) for the
nine months ended September 30, 2004 and 2003...............................3
Consolidated Statements of Cash Flows (unaudited) for the
nine months ended September 30, 2004 and 2003...............................4
Notes to Consolidated Financial Statements (unaudited) for the
nine months ended September 30, 2004.....................................5-20
1
Assure Energy, Inc.
Consolidated Balance Sheets
September 30, 2004
(Unaudited)
(Canadian Dollars)
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September 30, 2004 December 31, 2003
(Unaudited) (Audited)
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ASSETS Restated - Note 3(b)
Current Assets
Cash $ 503,783 $ 4,628,405
Receivables 3,074,437 3,302,813
Deposits and prepaid expenses 532,197 551,296
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4,110,417 8,482,514
Deposits (note 5) 144,227 159,581
Investment (note 6) 927,783 899,601
Property and equipment (note 7) 31,070,229 25,551,279
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Total Assets $ 36,252,656 $ 35,092,975
========================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Payables and accrued liabilities $ 8,126,303 $ 5,801,845
Debenture payable (note 8) 1,250,000 1,250,000
Bank loan (note 9(a)) 6,650,000 7,800,000
Interest payable (note 10) 11,716 --
Due to shareholders (note 11) 410,020 --
Current portion of long term debt (note 10) 1,017,517 830,105
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17,465,556 15,681,950
Long term debt (note 10) 3,511,309 4,370,595
Asset retirement obligation (note 4) 1,248,185 1,088,682
Future income taxes 1,947,049 2,716,255
Minority interest in consolidated subsidiary 2,677,934 3,285,564
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26,850,033 27,143,046
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Shareholders' Equity
Common shares (note 12(b)) 19,482,588 15,597,103
Preferred shares (note 12(c)) 3,489,521 3,489,521
Warrants (note 12(e)) 2,003,913 1,976,913
Contributed surplus (note 12(b)) 611,421 288,623
Currency exchange adjustment (Note 3(b)) 434,109 319,960
Deficit (16,618,929) (13,722,191)
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9,402,623 7,949,929
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Total Liabilities and Shareholders' Equity $ 36,252,656 $ 35,092,975
========================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
2
Assure Energy, Inc.
Consolidated Statements of Operations and Deficit
September 30, 2004
(Unaudited)
(Canadian Dollars)
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9 Months Ended
September 30, 2004 September 30, 2003
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Restated - Note 3(b)
REVENUE
Petroleum and natural gas sales $ 12,107,320 $ 5,317,010
Less: royalties, net of tax credits 2,631,920 1,003,783
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Net petroleum and natural gas revenue 9,475,400 4,313,227
Equity income 28,182 37,077
Interest and other income 6,470 72,580
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9,510,052 4,422,884
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EXPENSES
Production and operating costs 4,319,242 1,683,194
General and administrative 3,509,055 1,723,280
Interest 686,590 758,415
Depletion and depreciation 4,973,839 2,497,647
Asset retirement obligation - accretion 59,042 20,265
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13,547,768 6,682,801
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Loss before income taxes (4,037,716) (2,259,917)
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Income tax expense - current 38,223 22,913
Income tax expense (recovery) - future (769,206) 339,161
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Total income tax expense (recovery) (730,983) 362,074
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Net loss after taxes (3,306,733) (2,621,991)
Minority interest in consolidated subsidiary 607,630 (187,000)
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Net loss for the period (2,699,103) (2,808,991)
Deficit, beginning of period (13,722,191) (1,292,899)
Dividends (197,635) --
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Deficit, end of period $(16,618,929) $ (4,101,890)
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Earnings per share - Basic $ (0.13) $ (0.17)
Weighted average common shares outstanding
- Basic 20,081,613 16,210,220
(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
3
Assure Energy, Inc.
Consolidated Statement of Cash Flows
September 30, 2004
(Unaudited)
(Canadian Dollars)
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9 Months Ended 9 Months Ended
September 30, 2004 September 30, 2003
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Restated - Note 3(b)
OPERATING ACTIVITIES
Net loss for the period $ (2,699,103) $ (2,808,991)
Add (deduct) items not affecting cash:
Depreciation and depletion 4,973,839 2,497,647
Asset retirement obligation - accretion 59,042 20,265
Amortized proceeds on sale of hedging contracts -- (129,461)
Future income taxes (769,206) 339,161
Equity share of earnings of investment (28,182) (37,077)
Interest paid thru issuance of shares 532,821 --
Warrants issued for interest -- 250,014
Options and warrants issued for services -- 175,862
Stock compensation expense 322,798 --
Accrued interest payable 11,716 418,467
Consulting expense paid through the issuance of shares 33,000 --
Provision for income tax -- (40,478)
Minority interest in income (607,630) 187,000
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Cash flow from operations 1,829,095 872,409
Net change in non-cash operating working capital 2,914,600 172,245
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Net cash provided by operating activities 4,743,695 1,044,654
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FINANCING ACTIVITIES
Proceeds (repayments) from/to long term debt -- 5,609,570
Bank loan advances (repayments) (1,150,000) 431,772
Intercompany advances 410,020 --
Proceeds from the sale of common stock 2,376,493 2,400,749
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Net cash provided by financing activities 1,636,513 8,442,091
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INVESTING ACTIVITIES
Expenditures on property and equipment (10,504,830) 860,966
Disposition of commodity hedging -- (191,567)
Acquisition of business, net of cash acquired -- (11,043,231)
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Net cash used in investing activities (10,504,830) (10,373,832)
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Net cash flow for the period (4,124,622) (887,087)
Cash, beginning of period 4,628,405 1,642,487
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Cash, end of period $ 503,783 $ 755,400
==================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements
4
Assure Energy, Inc.
Notes to Financial Statements
Nine Months Ended September 30, 2004
(Unaudited)
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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.
The interim consolidated balance sheet of Assure and its subsidiaries as
at September 30, 2004 and the accompanying interim consolidated statements
of operations and cash flows for the nine months ended September 30, 2004
and the notes thereto are the responsibility of the Company's management.
These interim consolidated financial statements of Assure are presented in
Canadian dollars and have been prepared by management in accordance with
accounting principles generally accepted in Canada. The disclosure that
follows is incremental to, and should be read in conjunction with, the
disclosure in the financial statements and notes thereto for the year
ended December 31, 2003.
The interim consolidated financial statements present the results of
operations of the Company for the nine months ended September 30, 2004 and
its wholly owned subsidiaries, Assure Oil & Gas Corp.("Oil & Gas") and
Westerra 2000 Inc. ("Westerra") and its partially-owned subsidiary Quarry
Oil & Gas Ltd. ("Quarry") from July 28, 2003, the effective date of its
acquisition.
The Company owns approximately 51.84% of the issued and outstanding stock
of Quarry. The Company has a management agreement with Quarry whereby
employees of the Company provide management, operations and administrative
services to Quarry. The Company effectively controls Quarry's operations
and, as a result, has included the accounts of Quarry on a consolidated
basis. All material inter-company accounts and transactions have been
eliminated on consolidation.
These interim consolidated financial statements have been prepared on a
going concern basis, which assumes that the Company will be able to
realize its assets at the amounts recorded and discharge its liabilities
in the normal course of business for the foreseeable future.
At September 30, 2004, the Company has a working capital deficiency of
approximately $13 million. This deficiency primarily relates to the
Company's partially-owned subsidiary Quarry. The Company has a net loss of
approximately $2.7 million for the nine months ended September 30, 2004.
Management is currently negotiating with a Canadian chartered bank to
increase the Company's operating line from $8 million to $10 million
collateralized by the assets of the Company and its subsidiaries.
Additionally, management is in the process of evaluating alternate
financing arrangements. However, there can be no certainty that management
will be successful in its efforts.
These interim financial statements do not include the adjustments if any
that might be necessary should the Company not be able to continue on a
going concern basis.
2. COMPARATIVE FINANCIAL STATEMENTS
Certain comparative figures have been restated for changes in accounting
policies as discussed below and to conform to the current period
presentation (See Note 3(b) and Note 18).
5
Assure Energy, Inc.
Notes to Financial Statements
Nine Months Ended September 30, 2004
(Unaudited)
--------------------------------------------------------------------------------
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The interim consolidated financial statements have been prepared by
management in accordance with generally accepted accounting principles in
Canada.
a) Basis of consolidation
The interim 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 interim consolidated
financial statements requires management to make estimates and
assumptions that affect the amount reported in the interim
consolidated financial statements and accompanying notes. Actual
results could differ from those estimates. The interim 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 interim consolidated financial statements include the accounts
of Assure Energy, Inc. ("the Company" or "Assure"), the accounts of
its wholly owned subsidiaries Assure Oil & Gas Corp. ("Oil & Gas"),
Westerra 2000 Inc. ("Westerra"), and the accounts of its
partially-owned subsidiary Quarry Oil & Gas Ltd. ("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, in the third quarter of 2004,
the Company adopted Canadian dollars as its reporting currency.
Comparative figures for the prior periods have been restated using
the current rate method of currency translation as though the
Canadian dollar was the reporting currency in those periods. 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.
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.
The Company adopted the full cost accounting policy in fiscal
2003. There was no impact to the prior year financial
statements. 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.
6
Assure Energy, Inc.
Notes to Financial Statements
Nine Months Ended September 30, 2004
(Unaudited)
--------------------------------------------------------------------------------
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. 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, discounted at a risk free interest
rate, adjusted for prevailing market conditions. Any
impairment loss is charged to earnings.
d) Asset Retirement Obligations
The Company has adopted the new recommendation of the Canadian
Institute of Chartered Accountants ("CICA") relating to accounting
for asset retirement obligations. This recommendation replaces the
previous method of accounting for site restoration costs on an
accrual basis. 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.
7
Assure Energy, Inc.
Notes to Financial Statements
Nine Months Ended September 30, 2004
(Unaudited)
--------------------------------------------------------------------------------
e) Investments
The Company, through its partially-owned subsidiary Quarry, owns 49%
of the common shares of Keantha Holdings Inc. ("Keantha"). Quarry
accounts for it's 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
shipped and ownership transfers.
h) Earnings and cash flow from operations 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, 2004. 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.
k) Commodity contracts
During 2003, the Company's partially-owned subsidiary, 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 ensures that contracted amounts do not
exceed the amounts of underlying exposures.
8
Assure Energy, Inc.
Notes to Financial Statements
Nine Months Ended September 30, 2004
(Unaudited)
--------------------------------------------------------------------------------
Gains and losses are 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. 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 theses financial
instruments. The fair value of these financial instruments
approximates their carrying value unless otherwise noted.
m) Measurement uncertainty
The amounts recorded for depletion and depreciation of petroleum and
natural gas properties and equipment and site restoration and
abandonment are based on estimates of reserves and future costs. By
their nature, these estimates, and those related to the future cash
flows used to assess impairment, could differ from actual results
and materially impact the financial statements of future periods.
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, 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.
4. CHANGES IN ACCOUNTING POLICIES AND PRACTICES
Asset retirement obligations
In 2003, the Company adopted the CICA recommendation for recording of
asset retirement obligations. The asset retirement obligation of
$1,248,185 at September 30, 2004 (December 31, 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 undiscounted amount of expected cash flows required to settle the
asset retirement obligations is estimated to be $3,346,302 as at September
30, 2004 (December 31, 2003 - $2,903,836).
9
Assure Energy, Inc.
Notes to Financial Statements
Nine Months Ended September 30, 2004
(Unaudited)
--------------------------------------------------------------------------------
5. DEPOSITS
Deposits are $144,227 (December 31, 2003 - $159,581) for well
abandonments.
6. INVESTMENT
As described in Note 3(e), the Company through its partially-owned
subsidiary Quarry owns 49% of Keantha and uses the equity method to
account for this investment. The balance in the investment account as at
September 30, 2004 was $927,783 (December 31, 2003 - $899,601). For the
nine month period ending September 30, 2004, Quarry recorded $28,182
(September 30, 2003 - $37,077) as investment income from Keantha. The fair
value of this investment is not readily determinable.
7. PROPERTY AND EQUIPMENT
Accumulated
Depletion and
September 30, 2004 Cost Depreciation Net Book Value
-----------------------------------------------------------------------------------------------------
Petroleum and natural gas properties and equipment $57,603,887 $26,567,361 $31,036,526
Furniture and equipment 124,136 90,433 33,703
-----------------------------------------------------------------------------------------------------
$57,728,023 $26,657,794 $31,070,229
=====================================================================================================
Accumulated
Depletion and
December 31, 2003 (Restated - Note 3(b)) 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 September 30, 2004, costs amounting to $2,243,266 (December 31, 2003 -
$1,493,389) that were incurred on unproven properties have been excluded
from costs subject to depletion.
8. DEBENTURE PAYABLE
The Company through its partially-owned subsidiary Quarry, has issued a
debenture payable to a company controlled by a former officer of Quarry in
the amount of $1,500,000, which grants to the holder a security position
over all the assets of 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. During 2003, Quarry repaid $250,000 of this
amount. 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. The equity component of this debenture has not been
segregated as the value attributable to the equity component is not
material. Subsequent to the period end, this debenture has been repaid.
9. BANK LOAN
a) Quarry Oil & Gas Ltd. ("Quarry")
As at September 30, 2004, the Company had available, through its
partially-owned subsidiary Quarry, an $8,350,000 revolving,
operating demand loan facility with a Canadian chartered bank. The
facility reduces by $450,000 per month commencing July 31, 2004. The
loan bears interest at the bank's prime rate, which was 4.00% at
September 30, 2004, plus 1.5% interest subject to a standby fee of
0.125% per annum. The Company also had available through Quarry, 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 4.00% at September 30, 2004, plus 1.75% 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 Quarry. As at September 30,
2004, Quarry had drawn down $6,650,000 (December 31, 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, Quarry is subject to certain covenants. As
at September 30, 2004, Quarry was not in compliance with the
covenant requiring it to maintain an adjusted working capital ratio
of not less than 1:0 to 1:0. 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 September 30, 2004.
10
Assure Energy, Inc.
Notes to Financial Statements
Nine Months Ended September 30, 2004
(Unaudited)
--------------------------------------------------------------------------------
b) Assure Oil & Gas Corp. ("Oil & Gas")
As at September 30, 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 4.00% at September 30,
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 4.00% at September 30, 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. The bank will review Oil & Gas'
credit facilities on or before April 30, 2005.
Oil & Gas has not drawn down any funds against this credit facility.
10. LONG TERM DEBT
The Company's long-term debt consists of a six-year note payable (the
"Note Payable") issued by its wholly owned subsidiary Oil & Gas in the
principal amount of $850,000 (December 31, 2003 - $1,000,000) and a
six-year Subordinated Promissory Note Payable (the "Subordinated Note") in
the principal amount of US $2,916,000, equivalent to Canadian $3,678,826
(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 September 28, December 28, March 28,
and June 28. The note is subordinated to all present and future bank debt
of Oil & Gas and its subsidiaries. Interest of $18,699 and principal of
$50,000 due on March 28, 2004 was satisfied by the Company by the issue by
the Company of 12,377 common shares at US $4.21 (Cdn $5.55) per share.
Interest of $17,959 and principal of $50,000 due on June 28, 2004 was
satisfied by the Company by the issue by the Company of 12,308 common
shares at US $4.10 (Cdn $5.52) per share. Interest of $17,014 and
principal of $50,000 due on September 28, 2004 was satisfied by the
Company by the issue by the Company of 18,812 common shares at US $2.80
(Cdn $3.56) per share.
11
Assure Energy, Inc.
Notes to Financial Statements
Nine Months Ended September 30, 2004
(Unaudited)
--------------------------------------------------------------------------------
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
Citibank's US prime rate of 4.25% plus 3.5% per annum. Quarterly payments
of principal and interest are due and payable in US dollars on September
15, December 15, March 15 and June 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 Subordinated 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 US
$3.10 (Cdn $4.07) per share. These common stock purchase warrants may be
exercised at any time during the five years commencing July 1, 2003.
During the nine months ended September 30, 2004, interest of US $336,061
due for the period from the date of issuance of the Subordinated Note to
March 15, 2004 was satisfied by the exercise of 100,000 warrants for
proceeds of US $310,000, equivalent to Canadian $406,503 and the payment
in cash by the Company of US $26,061. Interest of US $63,292 and principal
of US $162,000 due on June 15, 2004 was satisfied by the issue by the
Company of 53,769 common shares at US $4.19 (Cdn $5.69) per share for
proceeds of US $225,292, equivalent to Canadian $305,870. Interest of US
$60,126 and principal of US $162,000 due on September 15, 2004 was
satisfied by the issue by the Company of 94,121 common shares at US $2.36
(Cdn $3.04) per share for proceeds of US $222,126, equivalent to Canadian
$286,052.
11. DUE TO SHAREHOLDERS
Due to shareholders is $410,020 (US $325,000) as at September 30, 2004
(December 31, 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.
12. EQUITY INSTRUMENTS
a) Authorized
Preferred Shares - 4,977,250 Blank Check 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
9 Months Ended December 31, 2003
September 30, 2004 (Restated - Note 3(b))
-----------------------------------------------------------------------------------------------------------------
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 68,363 300,705 -- -- -- --
Exercise of warrants 100,000 506,503 -- 1,782,100 831,824 --
Private placement (1) 482,000 2,282,683 -- 2,152,000 6,871,363 --
Payment of principal and
interest on long term debt 191,387 795,594 -- 350,000 1,644,479 --
Pursuant to 2003 private
placement (2) 143,500 -- -- -- -- --
Warrants expense -- -- -- -- -- 145,190
Stock compensation -- -- 322,798 -- -- 143,433
=================================================================================================================
Ending balance 20,635,350 $19,482,588 $ 611,421 19,650,100 $15,597,103 $ 288,623
=================================================================================================================
(1) During the period, the Company issued 482,000 units consisting
of 482,000 common shares at US $3.60 per share (Cdn $4.93 per
share) and 482,000 warrants to purchase common shares at US
$4.00 per share were issued under a private placement. Two
officers of the Company purchased 6,000 units as part of the
private placement.
12
Assure Energy, Inc.
Notes to Financial Statements
Nine Months Ended September 30, 2004
(Unaudited)
--------------------------------------------------------------------------------
(2) During the period, 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.
c) Preferred Shares
Year Ended
9 Months Ended December 31, 2003
September 30, 2004 (Restated - Note 3(b))
-------------------------------------------------------------------
# Shares Amount # Shares Amount
-------------------------------------------------------------------
Beginning balance 22,750 3,489,521 22,750 3,489,521
Shares issued -- -- -- --
-------------------------------------------------------------------
Ending balance 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 and a
cumulative 5% dividend payable in cash or shares of the Company's
common stock raising US $1,750,000. 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
one 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 $1.166 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. The Series B has a stated value of US $100, a cumulative
5% dividend payable annually in cash or common stock of the Company,
and the issuer has the right to convert the Series B into units
commencing on the second anniversary of the issuance of the Series B
at one unit for every US $1.166 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 $1.333 per
share, at any time during the four year period commencing one year
from the date of issuance of the units.
d) Stock Options
The Company has a Stock Option Plan for the issuance of common
shares to employees, officers, directors and other key personnel
based on approval of the Board of Directors and regulatory
authorities. The maximum term of the options is five years and the
options vest in accordance with the resolution of the Board of
Directors pertaining to each grant, but normally over a period of
two years from the date granted.
Year Ended
9 Months Ended December 31, 2003
September 30, 2004 (Restated - Note 3(b))
--------------------------------------------------------------------------------------------------
Wtd Avg Wtd Avg Wtd Avg Wtd Avg
Price Price Price Price
# Options (US $) (Cdn $)(1) # Options (US $) (Cdn $)(1)
--------------------------------------------------------------------------------------------------
Options outstanding, 425,000 $ 2.93 $ 3.80 320,000 $ 2.75 $ 4.34
beginning of period
Issued 1,375,000 3.31 4.18 305,000 3.00 3.89
Cancelled -- -- -- (200,000) 2.75 3.57
--------------------------------------------------------------------------------------------------
Options outstanding,
end of period 1,800,000 $ 3.22 $ 4.09 425,000 $ 2.93 $ 4.38
--------------------------------------------------------------------------------------------------
Options exercisable,
end of period 477,500 $ 3.07 $ 3.87 75,000 $ 2.80 $ 3.63
--------------------------------------------------------------------------------------------------
13
Assure Energy, Inc.
Notes to Financial Statements
Nine Months Ended September 30, 2004
(Unaudited)
--------------------------------------------------------------------------------
(1) See exchange rates used to convert from United States to
Canadian dollars in Note 17
The fair value of share options were estimated using the
Black-Scholes option-pricing model with the following assumptions:
Dividend yield ($ Nil), Expected volatility (0.17), risk-free
interest rate (2.4%), and weighted average life of 3 to 5 years.
e) Warrants
-----------------------------------------------------------------------------------------
Year Ended
9 Months Ended December 31, 2003
September 30, 2004 (Restated - Note 3(b))
-----------------------------------------------------------------------------------------
# Warrants Amount # Warrants Amount
Beginning balance 10,036,400 $ 1,976,913 7,200,000 $ --
Issued in connection with
private placement 675,500 94,000
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
1,435,000 640,000
Exercise of warrants (100,000) (100,000) (1,782,100) (12,990)
-----------------------------------------------------------------------------------------
Ending balance 10,671,900 $ 2,003,913 10,036,400 $ 1,976,913
-----------------------------------------------------------------------------------------
Year Ended
9 Months Ended December 31, 2003
September 30, 2004 (Restated - Note 3(b))
-----------------------------------------------------------------------------------------------------------------
Wtd Avg Wtd Avg
Exercise Exercise Wtd Avg Wtd Avg
Price Price Price Price
# Warrants (US $) (Cdn $)(1) # Warrants (US $) (Cdn $)(1)
-----------------------------------------------------------------------------------------------------------------
Beginning balance 10,036,400 $ 1.38 $ 1.79 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 3.91 -- -- --
Issued in connection with
private placement 482,000 4.00 5.05 -- -- --
Issued in connection with
investor relation services 60,000 4.05 5.11 -- -- --
Issued in connection with
private placement 193,500 4.00 5.05 -- -- --
-----------------------------------------------------------------------------------------------------------------
Ending balance 10,671,900 $ 1.54 $ 1.99 10,036,400 $ 1.38 $ 1.89
-----------------------------------------------------------------------------------------------------------------
(1) See exchange rates used to convert from United States to
Canadian dollars in Note 17
14
Assure Energy, Inc.
Notes to Financial Statements
Nine Months Ended September 30, 2004
(Unaudited)
--------------------------------------------------------------------------------
13. 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. In addition, the
Company is exposed to credit risk in its trade accounts receivable
included in receivables.
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 September 30, 2004, the Company had fixed the interest rates on
the following interest bearing obligations:
December 31, 2003
September 30, 2004 (Restated - Note 3(b))
-------------------------------------------------------------------
Debenture payable $1,250,000 $1,250,000
Long term debt 4,528,826 5,200,700
-------------------------------------------------------------------
$5,778,826 $6,450,700
-------------------------------------------------------------------
14. COMMITMENTS AND CONTINGENCIES
The Company through its partially-owned subsidiary Quarry is currently
involved in litigation with a former officer of Quarry who is claiming
$240,000 in respect of termination and severance pay. Quarry is contesting
this claim. Examinations for discovery have occurred and the matter is
currently in abeyance as of September 30, 2004 as the plaintiff has not
moved the litigation forward.
Effective August 1, 2004, the Company, through its partially-owned
subsidiary Quarry, entered into a new lease for the rental of office space
for the period to January 31, 2007. Quarry is committed to payments of
rent and operating costs under the lease amounting to $75,500 in 2004,
$181,000 in 2005, $181,000 in 2006 and $15,000 in 2007.
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.
As at September 30, 2004, there has been no material change in the
remaining commitments and contingencies disclosed in Note 14 to the
financial statements for the year ended December 31, 2003.
15. RELATED PARTY TRANSACTIONS
Effective June 30, 2004, Assure acquired 1,000,000 common shares of
Quarry, comprising part of the Units issued under a private placement. At
September 30, 2004, Assure held a total of 7,919,900 common shares
representing 51.84% of the issued and outstanding common shares of Quarry.
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 (see Note 16). As a result, Assure currently holds a total
of 8,667,043 common shares representing 50.2% of the total issued and
outstanding common shares of Quarry.
15
Assure Energy, Inc.
Notes to Financial Statements
Nine Months Ended September 30, 2004
(Unaudited)
--------------------------------------------------------------------------------
Assure Oil & Gas Corp. ("Oil & Gas") is a wholly-owned subsidiary of
Assure. During 2003, Oil & Gas entered into a management services
agreement with Quarry whereby it supplies Quarry with the services of
certain of its employees that have management or operational expertise.
During the nine months ended September 30, 2004, Oil & Gas charged Quarry
$330,223 for such services. Quarry charged Oil & Gas $90,844 for rent and
office overheads in the nine months ending September 30, 2004.
Effective December 1, 2003, Oil & Gas entered into an agreement with
Quarry whereby it agreed to pay Quarry a $450,000 prospect fee and drill
two wells at its sole expense on or before January 31, 2004 on certain
farm-out lands of Quarry located in northeast British Columbia. The
prospect fee was paid in December 2003 and the two wells were drilled in
January 2004. Oil & Gas earned a working interest in four sections of land
as a result of drilling the wells and Quarry retained a gross overriding
royalty in these wells. In addition, Quarry farmed out and retains a
convertible gross overriding royalty in two additional gas wells in
British Columbia drilled by Oil & Gas during the first quarter of 2004.
The transactions between Oil & Gas and Quarry have been recorded at the
agreed to exchange amount which reflects fair value.
16. SUBSEQUENT EVENTS
a) Business Combination
On November 10, 2004, Assure and Quarry executed a formal
Arrangement Agreement to amalgamate the two entities. Assure and
Quarry have agreed to effect a combination by way of plan of
arrangement whereby Assure will, subject to certain conditions,
acquire all 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 common share. The
Special Meeting of Shareholders of Quarry was held December 17, 2004
where the Arrangement Agreement was approved by 96.23% of the
security holders of Quarry. Additionally, the Arrangement was
approved by 89.72% of the votes cast by certain disinterested
holders of Quarry securities (such votes do not include the votes
cast by Assure and management and directors of Assure). The final
order of the Court of Queen's Bench of Alberta approving the
Arrangement was also granted on December 17, 2004. All warrants to
acquire Quarry common shares have now been cancelled.
b) Private Placement
On November 10, 2004, the Company's partially-owned subsidiary
Quarry completed a non-brokered private placement and issued
2,008,364 common shares at a price per share of Cdn $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 are subject to a four-month hold
period, ending March 10, 2005. The proceeds raised from the private
placement will be used to retire certain debt obligations of Quarry.
As a result, Assure holds 8,677,043 common shares of Quarry, 50.2%
of the outstanding common shares.
c) Bank loan
16
Assure Energy, Inc.
Notes to Financial Statements
Nine Months Ended September 30, 2004
(Unaudited)
--------------------------------------------------------------------------------
i) Quarry Oil & Gas Ltd. ("Quarry")
On November 15, 2004, the Company, through its partially-owned
subsidiary, Quarry accepted and signed an indicative financing
proposal to replace the existing bank loan. Commencing
November 15, 2004, Quarry will have available an $6,550,000
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 November 15, 2004, plus
1.5% interest subject to a standby fee of 0.125% per annum.
The Company also had available through Quarry, 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 November 15, 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 Quarry. These facilities will be reviewed upon
Quarry's fiscal year end December 31, 2004, and not later than
April 30, 2005.
ii) Assure Oil & Gas Corp. ("Oil & Gas")
On November 15, 2004, the Company, through its wholly owned
subsidiary Oil & Gas accepted and signed an indicative
financing proposal. This proposal includes the amalgamation of
Assure with Quarry (See Note 16a). Upon completion of a
definitive agreement, Oil & Gas will have available, subject
to certain credit approval conditions, a $10,000,000 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 November 15, 2004, plus 1% interest subject to a
standby fee of 0.125% per annum. The Company will also have
available through Oil & Gas, a $10,000,000 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 November 15, 2004, plus 1.5% subject to a drawdown
fee of 0.25% (acquisition) or 0.50% (development) and a
standby fee of 0.125% per annum. This facility will be in
place once the Company has met the bank's required credit
approval process. The Company will also have available through
Oil & Gas, a $1,300,000 treasury risk facility at the same
bank with a maximum term of 26 months. 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, a $40
million supplemental debenture over the major producing
petroleum and natural gas reserves of Oil & Gas, and a $40
million guarantee from Assure, Westerra and Quarry. These
facilities will be reviewed upon the Company's fiscal year end
December 31, 2004, and not later than April 30, 2005. This new
facility would replace the Company's facility described in
Note 9
17. EXCHANGE RATES
The United States dollar amounts have been converted into Canadian dollar
amounts using either the average or the period end exchange rates shown
below:
Nine months, and three months, ended September 30, 2004 $1.3276
Nine months, and three months, ended September 30, 2003 $1.3793
As at September 30, 2003 $1.3499
As at September 30, 2004 $1.2616
As at December 31, 2002 $1.5776
As at December 31, 2003 $1.2965
Assure Energy, Inc.
Notes to Financial Statements
Nine Months Ended September 30, 2004
(Unaudited)
--------------------------------------------------------------------------------
18. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES
These interim consolidated financial statements have been prepared in
accordance with generally accepted accounting principles ("GAAP") in
Canada. Canadian principles differ from US principles as follows:
a) Reconciliation of Net Loss Under Canadian GAAP to US GAAP
Consolidated Statement of Operations - US GAAP
For the nine month period ended
September 30,
September 30, 2003
2004 (restated Note
3(b))
--------------------------------------------------------------------
Net loss as reported in
accordance with Canadian
principles $(2,699,103) $(2,808,991)
----------- -----------
Impact of US principles:
Amortization of debt discount
(debenture)(1) (98,280) (21,840)
Amortization of debt discount
(long term debt)(2) (133,996) (79,135)
Unrealized hedging gain(3) -- (123,521)
----------- -----------
(232,276) (224,496)
----------- -----------
Net adjustments
Net loss in accordance with US
principles $(2,931,379) $(3,033,487)
====================================================================
Loss per common share in
accordance with US principles
Basic and diluted (0.146) (0.187)
====================================================================
18
Assure Energy, Inc.
Notes to Financial Statements
Nine Months Ended September 30, 2004
(Unaudited)
--------------------------------------------------------------------------------
Statement of Comprehensive Income (Loss)
For the nine month period ended
September September 30,
30, 2004 2003
------------------------------------------------------------
Net loss - US GAAP $(2,931,379) $(3,033,487)
Unrealized hedging gain(3) -- 123,531
Comprehensive income (loss) $(2,931,379) $(2,909,956)
b) Condensed Consolidated Balance Sheet
-------------------------------------------------------------------------------------------------------
Canadian US Canadian US
Principles at Principles at Principles Principles at
September 30, September 30, at December December 31,
2004 2004 31, 2003 2003
-------------------------------------------------------------------------------------------------------
Assets (Restated
note 3(b))
Current assets 4,110,417 4,110,417 8,482,514 8,482,514
Deposits 144,227 144,227 159,581 159,581
Investment 927,783 927,783 899,601 899,601
Property and equipment 31,070,229 31,070,229 25,551,279 25,551,279
-------------------------------------------------------------
36,252,656 36,252,656 35,092,975 35,092,975
=============================================================
Liabilities
Current liabilities(1) 17,465,556 17,454,636 15,681,950 15,572,750
Long term debt(2) 3,511,309 3,187,505 4,370,595 3,889,450
Asset retirement
obligation 1,248,185 1,248,185 1,088,682 1,088,682
Future taxes 1,947,049 1,947,049 2,716,255 2,716,255
Minority interest 2,677,934 2,677,934 3,285,564 3,285,564
-------------------------------------------------------------
26,850,033 26,515,309 27,143,046 26,552,701
Shareholders' Equity 9,402,623 9,737,347 7,949,929 8,540,274
-------------------------------------------------------------
36,252,656 36,252,656 35,092,975 35,092,975
=============================================================
19
Assure Energy, Inc.
Notes to Financial Statements
Nine Months Ended September 30, 2004
(Unaudited)
--------------------------------------------------------------------------------
================================================================================
Reconciliation of Shareholders' Equity under Canadian GAAP to US
GAAP:
September 30, December 31,
2004 2003
--------------------------------------------------------------------
(Restated
note 3(b))
Shareholder's Equity as reported
with Canadian principles $9,402,623 $7,949,929
Debt discount (debenture)(1) 10,920 109,200
Debt discount (long term debt)(2) 323,804 481,145
--------------------------
Shareholders' Equity in
accordance with US
Principles $9,737,347 $8,540,274
====================================================================
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 would be reduced for the beneficial conversion option of
$163,800 and had been accounted for in the reconciliation of
stockholders' 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 would be $98,280 (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 Citibank's US
prime rate (4.25% per annum at December 31, 2003) plus 3.5% 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 would allocate the proceeds of the financing based on
relative fair values. The value attributed to the warrants would be
US $560,280 of which $133,996 would be amortized in the period
(December 31, 2003 - $102,480) as interest expense. The remaining
$323,804 has been netted against long-term debt as debt discount.
20
Assure Energy, Inc.
Notes to Financial Statements
Nine Months Ended September 30, 2004
(Unaudited)
--------------------------------------------------------------------------------
3 In accordance with Canadian principles, the Company records
unrealized hedging gains (losses) in the statement of operations.
For US principles, gains or losses arising from hedging are to be
included in other comprehensive income.
U.S. GAAP requires the disclosure, as other comprehensive income, of
changes in equity during the period from transactions and other
events from non-owner sources. Canadian GAAP does not require
similar disclosure.
There are no tax effects to the US GAAP adjustments as the Company
currently is not taxable and a valuation allowance has been recorded
for the entire balance of the future tax asset.
19. COMPARATIVE FIGURES
During the third quarter ended September 30, 2004, the Company adopted
Canadian GAAP and Canadian dollar reporting as detailed in Note 3(b). The
six month interim report prepared by the Company was reported in US GAAP
and US dollars. Consequently, no information is readily available for each
of the 3 month periods ended September 30, 2004 and 2003. As such, this
information has not been included herein.
21
2. Management's Discussion and Analysis of Financial Condition and Results of
Operations for the nine months ended September 30, 2004.
ASSURE ENERGY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
NINE MONTHS ENDED SEPTEMBER 30, 2004
--------------------------------------------------------------------------------
OVERVIEW
This Management's Discussion and Analysis ("MD&A") dated December 17, 2004, is a
review of the operating and financial activities of Assure Energy, Inc. (the
"Company" or "Assure") and its subsidiaries for the nine months ended September
30, 2004. This MD&A should be read in conjunction with the unaudited interim
consolidated financial statements of Assure for the nine months ended September
30, 2004 and the audited consolidated financial statements and MD&A of Assure
for the two years ended December 31, 2003. This MD&A is incremental to the
disclosure included in Assure's MD&A for the two years ended December 31, 2003.
Unless otherwise indicated, all dollar amounts in this MD&A are Canadian
dollars.
The unaudited interim consolidated financial statements of Assure have been
prepared by management in Canadian dollars and in accordance with Canadian
Generally Accepted Accounting Principles.
The Company's results of operations for the nine months ended September 30, 2003
include the results of its wholly owned subsidiaries, Assure Oil & Gas Corp.
("Oil & Gas"), and Westerra 2000 Inc. ("Westerra"), and its partially-owned
subsidiary, Quarry Oil & Gas Ltd. ("Quarry") from July 28, 2003. The results of
operations for the nine months ended September 30, 2004 include the results of
Oil & Gas, Westerra and Quarry. Assure acquired 48.5% of Quarry, effective July
28, 2003, and increased its ownership in Quarry to 51.84%, effective June 30,
2004. Assure effectively controls Quarry's operations and, as a result, has
included the accounts of Quarry on a consolidated basis. The interest of the
remaining Quarry shareholders in Quarry's operations is recorded as minority
interest in consolidated subsidiary in the consolidated financial statements.
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. Additional information relating to the
Company can be found on the website of the United States Securities and Exchange
Commission at www.sec.gov.
The Company's 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 the
Company's ability to obtain financing for its operations. Many of these factors
are outside of Assure's control. See the "Business Risks" section of the MD&A
for the two years ended December 31, 2003 for more information.
The information in this Management's Discussion and Analysis contains all
relevant considerations to that date.
The following Management Discussion and Analysis may contain forward-looking
statements. Forward-looking statements are based on current expectations that
involve a numbers of risks and uncertainties which could cause actual events or
results to differ materially from those reflected herein. Forward-looking
statements are based on the estimates and opinions of management of the Company
at the time the statements were made.
22
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, in the third quarter of 2004, the Company adopted Canadian dollars as
its reporting currency. Comparative figures for the prior periods have been
restated using the current rate method of currency translation as though the
Canadian dollar was the reporting currency in those periods. 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.
FINANCIAL AND OPERATING REVIEW
A summary of the Company's results of operations for the nine months ended
September 30, 2004 and 2003 is set out in the following table. The change
between 2004 and 2003 is analyzed between changes due to the inclusion of 9
months of Quarry in 2004 versus inclusion of only 2 months of Quarry in 2003,
and changes in the activities of Oil & Gas and Westerra ("Assure O&G").
---------------------------------------------------------------------------------------------------------------
Nine months ended September 30 %
2004 2003 Change Change
---------------------------------------------------------------------------------------------------------------
OPERATIONS
Production:
Crude oil & NGL's (Bbl/d) 713 275 438 159
Natural gas (Mcf/d) 2,448 1,532 916 60
Total (Boe/d) 1,121 530 591 112
Average sales prices:
Crude oil ($/Bbl) $ 39.58 $ 40.23 $ (0.65) (2)
Natural gas ($/Mcf) $ 6.52 $ 5.49 $ 1.03 19
Total ($/boe) $ 39.42 $ 36.75 $ 2.67 7
Royalty expense ($/ Boe) $ (8.57) $ (6.94) $ (1.63) 24
Operating expense ($/ Boe) $ (14.06) $ (11.63) $ (2.43) 21
Netback ($/ Boe) $ 16.79 $ 18.18 $ (1.39) (8)
FINANCIAL (UNAUDITED) (CDN$)
Revenues:
Crude oil & NGL's $ 7,732,729 $ 3,020,533 $ 4,712,196 156
Natural gas 4,374,591 2,296,476 2,078,114 90
---------------------------------------------------------------------------------------------------------------
12,107,320 5,317,010 6,790,310 128
Royalty expenses (2,631,920) (1,003,783) (1,628,137) 162
Operating expenses (4,319,242) (1,683,194) (2,636,048) 157
---------------------------------------------------------------------------------------------------------------
Net revenue from oil and gas production 5,156,158 2,630,033 2,526,125 96
---------------------------------------------------------------------------------------------------------------
Net loss $ (2,699,103) $ (2,808,991) $ 109,888 4
---------------------------------------------------------------------------------------------------------------
Net loss per share $ (0.13) $ (0.17) $ 0.04 24
---------------------------------------------------------------------------------------------------------------
Cash flow from operations before changes in
working capital* $ 1,829,095 $ 872,409 $ 956,686 110
---------------------------------------------------------------------------------------------------------------
Cash spent on investing activities $ 10,504,830 $ 10,373,832 $ 130,998 1
---------------------------------------------------------------------------------------------------------------
*Cash flow from operations is not a measure that has any standardized meaning
prescribed by Canadian GAAP and is considered a non GAAP measure. Therefore this
measure may not be comparable to similar measures presented by other issuers.
This measure has been presented in this MD&A as additional information regarding
the company's liquidity and ability to generate funds to finance its operations.
Cash flow from operations is calculated by adding back non-cash items to
earnings. This number is reconciled to the net income for the nine months in the
statement of cash flows included in the interim financial statements
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
23
------------------------------------------------------------------------------------------------------------------------------------
Less:
Quarry
Nine Months Nine Nine Months Less: Quarry Change:
Ended Months Assure O&G Ended Two Months Assure O&G Assure O&G
September 30, Sept 30, (Excluding September 30, Aug & Sept (Excluding (Excluding
2004 2004 Quarry) 2003 2003 Quarry) Quarry)
------------------------------------------------------------------------------------------------------------------------------------
OPERATIONS
Production:
Crude oil & NGL's (Bbl/d) 713 619 94 275 139 136 (41)
Natural gas (Mcf/d) 2,448 851 1,597 1,532 241 1,291 306
Total (Boe/d) 1,121 761 360 530 180 350 10
Average sales prices:
Crude oil $(/Bbl) $ 39.58 $ 40.42 $ 34.11 $ 40.23 $ 39.24 $ 41.26 $ (7.15)
Natural gas $(/Mcf) $ 6.52 $ 6.82 $ 6.37 $ 5.49 $ 4.84 $ 5.61 $ 0.76
Total $(/boe) $ 39.42 $ 40.50 $ 37.14 $ 36.75 $ 36.96 $ 36.64 $ 0.50
Royalty expense $(/ Boe) $ (8.57) $ (8.17) $ (9.41) $ (6.94) $ (6.14) $ (7.35) $ (2.06)
Operating expense $(/ Boe) $ (14.06) $ (17.60) $ (6.59) $ (11.63) $ (13.08) $ (10.89) $ 4.30
Netback $(/ Boe) $ 16.79 $ 14.72 $ 21.14 $ 18.18 $ 17.73 $ 18.41 $ 2.73
FINANCIAL
Revenues:
Crude oil & NGL's 7,732,729 6,849,683 883,047 3,020,533 1,494,230 1,526,303 (643,257)
Natural gas 4,374,591 1,588,974 2,785,616 2,296,476 318,332 1,978,144 807,472
------------------------------------------------------------------------------------------------------------------------------------
12,107,320 8,438,657 3,668,663 5,317,010 1,812,562 3,504,448 164,215
Royalty expenses (2,631,920) (1,702,906) (929,014) (1,003,783) (301,179) (702,604) (226,410)
Operating expenses (4,319,242) (3,668,218) (651,024) (1,683,194) (641,768) (1,041,426) 390,402
------------------------------------------------------------------------------------------------------------------------------------
Net revenue from oil and gas
production 5,156,158 3,067,533 2,088,625 2,630,033 869,615 1,760,418 328,207
Interest income 6,470 -- 6,470 72,580 38,177 34,403 (27,933)
General and administrative (3,509,055) (844,433) (2,664,622) (1,723,280) (104,288) (1,618,992) (1,045,630)
Interest expenses (686,590) (387,887) (298,703) (758,415) (77,279) (681,136) 382,433
Accretion (59,042) (44,649) (14,393) (20,265) (13,328) (6,937) (7,456)
Depletion and depreciation (4,973,839) (3,331,368) (1,642,471) (2,497,647) (436,715) (2,060,932) 418,461
Income taxes 730,983 365,667 365,316 (362,074) (15,631) (346,443) 711,759
Minority interest 607,630 607,630 -- (187,000) (187,000) -- --
Foreign exchange -- -- -- -- -- -- --
Equity income in
unconsolidated subsidiary 28,182 28,182 -- 37,077 -- 37,077 (37,077)
------------------------------------------------------------------------------------------------------------------------------------
Net loss $(2,699,103) $ (539,325) $ (2,159,778) $ (2,808,991) $ 73,551 $ (2,882,542) $ 722,764
====================================================================================================================================
NGL's - 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
24
Production
The Company's production results include the results of Quarry for the period
January to September 2004. For the comparable period in 2003, the Company's
production results include the results of Quarry for only two months of the
year, August and September 2003.
The increase of 438 bbls/d in oil and NGLs production in 2004 resulted from the
inclusion of Quarry's production of 619 bbls/d less Quarry's 2003 production of
139 bbls/d for the months of August and September 2003. Excluding the effect of
Quarry, there was a decrease of 42 bbls/d in Assure O&G production. Quarry's oil
production is primarily from the Chauvin, Ribstone and Chestermere areas of
Alberta, which produced 244 bbls/d, 254 bbls/d and 109 bbls/d, respectively.
Assure O&G's 2004 oil production of 94 bbls/d includes 35 bbls/d from the
Enchant area of Alberta, 51 bbls/d from the Lloydminster area of Saskatchewan
and 8 bbls/d from other areas. The reduction in Assure O&G's production in 2004
is due to natural declines in production of 51 bbls/d from Lloydminster, offset
by an increase of 9 bbls/d in production from Enchant and other areas.
The increase of 916 mcf/d in natural gas production resulted from the inclusion
of 851 mcf/d from Quarry less Quarry's 2003 production of 241 mcf/d for the
months of August and September 2003. Excluding the effect of Quarry, there was
an increase of 306 mcf/d in Assure O&G production. Quarry's natural gas
production includes 381 mcf/d and 271 mcf/d, respectively, from the Rigel and
West Currant areas of British Columbia, and 135 mcf/d from Chestermere, with the
remaining 64 mcf/d from other areas. Assure O&G's natural gas production of
1,597 mcf/d for 2004 includes 926 mcf/d from West Currant, 156 mcf/d from
Enchant, 358 mcf/d from Lloydminster and 157 mcf/d from other areas. The
production from West Currant was added at the end of March 2004 as a result of
the Company's 2003/2004 winter drilling program. The change in Assure O&G's
production is due to natural declines in gas production of 490 mcf/d in
Lloydminster, 118 mcf/d in Enchant and 12 mcf/d from other areas, which offset
the new production of 926 mcf/d from West Currant.
Prices
The average oil price realized by the Company in 2004 was $39.58 per barrel, a
decrease of 2% from $40.23 per barrel in 2003. Quarry's average oil price
realized in 2004 was $40.42 per barrel compared to $39.24 per barrel for the two
months of August and September 2003. Assure O&G's average oil price realized in
2004 was $34.11 per barrel, down from $41.26 per barrel in 2003, due to lower
average prices for heavier grades of oil.
The average natural gas price realized by the Company in 2004 was $6.52 per mcf,
an increase of 19% from $5.49 per mcf in 2003. Quarry's average gas price
realized in 2004 was $6.82 per mcf compared to $4.84 per mcf for the two months
of August and September 2003. Assure O&G's average gas price realized in 2004
was $6.37 per mcf, up from $5.61 per mcf in 2003.
Petroleum and natural gas sales
Revenues from oil and natural gas production, before deduction of royalties and
operating costs, increased by $6,790,310 in 2004, due primarily to the inclusion
of $6,626,095 from Quarry for 2004 ($8,438,657 September 30, 2004 less
$1,812,562 August and September 2003). Excluding the effect of Quarry, Assure
O&G's revenues increased by $164,215 due to higher natural gas volumes and
prices more than offsetting a decrease in oil volumes and prices.
Royalties increased from $1,003,783 or $6.94 per boe in 2003 to $2,631,920 or
$8.57 per boe in 2004 due primarily to the inclusion of $1,401,727 from Quarry
for 2004 ($1,702,906 September 30, 2004 less $301,179 August and September
2003). Royalties as a percentage of revenues increased from 19% to 22%.
Excluding the effect of Quarry, Assure O&G's royalties increased by $226,410 or
$2.06 per boe.
Operating costs increased by $2,636,048 to $4,319,242 in 2004 primarily due to
the inclusion of $3,026,450 from Quarry ($3,668,218 September 30, 2004 less
$641,768 August and September 2003). Excluding the effect of Quarry, Assure
O&G's operating costs decreased by $390,402.
Operating costs on a boe basis increased by $2.43 per boe to $14.06 per boe in
2004. Quarry's operating expenses averaged $17.60 per boe for the nine months
ended September 30, 2004 compared to $13.08 per boe for August and September
2003. Quarry's operating costs were high due to work-over costs incurred to
maintain and improve production from its properties. Excluding the effect of
Quarry, Assure O&G's operating expenses declined by $4.30 per boe to $6.59 in
2004.
25
General and administrative expenses
General and administrative expenses increased $1,785,775 to $3,509,055 in 2004
partly due to the inclusion of $740,145 from Quarry for 2004 ($844,433 September
2004 less $104,288 August and September 2003). Excluding the effect of Quarry,
Assure O&G's general and administrative expenses increased by $1,045,630
reflecting the increase in the Company's level of activities and increased costs
relating to its regulatory filings in the United States.
Interest expense
Interest expense decreased by $71,825 for the Company in 2004. Interest expense
for the year to date increased by $310,608 due to the inclusion of Quarry for
2004 ($387,887 September 2004 less $77,279 August and September 2003). Excluding
the effect of Quarry, Assure O&G's interest expense decreased by $382,433.
Included in interest expense for 2003 is $250,014 in respect of warrants issued
in conjunction with the 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.
Depletion and depreciation
Depletion and depreciation expense increased by $2,476,192 mainly due to the
inclusion of $2,894,653 from Quarry ($3,331,368 September 2004 less $436,715
August and September 2003). On a boe basis, depletion and depreciation was
$16.20 per boe for the nine months ended September 2004 compared to $17.24 per
boe in the same period in 2003. Quarry's depletion rate for 2004 was $15.99
compared to $8.90 for the two months of August and September 2003. Excluding the
effect of Quarry, Assure O&G's depletion rate was $16.63 per boe, a decrease
from $21.51 per boe in 2003, reflecting additional natural gas reserves in West
Currant added in the first half of 2004.
Minority interest in consolidated subsidiary
Minority interest represents the minority interest share of the net loss of
Quarry for the period ended September 30, 2004.
Equity Income
The equity income arises from Quarry's 49% interest in Keantha Holdings Inc., a
private company.
Net loss
Assure recorded a net loss, after deduction of depletion and other non-cash
items, of $2,699,103 or $0.13 per common share for the nine months ended
September 30, 2004 compared to a net loss of $2,808,991 or $0.17 per common
share for the same period in 2003.
ACQUISITIONS
Effective June 30, 2004, the Company purchased 1,000,000 units (the "Units") of
Quarry at a price of $0.75 per Unit for total cost of $750,000. Each Unit
consists of one common share and one warrant (a "Warrant"). Each Warrant
entitles 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 now has 15,276,340 common shares issued and outstanding.
As a result, the Company owns and controls 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.
26
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 are
subject to a four-month hold period, ending March 10, 2005. The proceeds raised
from the private placement will be used to retire certain debt obligations of
Quarry. As a result, Assure holds 8,677,043 common shares of Quarry, 50.2% of
the outstanding common shares.
On November 10, 2004, Assure and Quarry executed a formal Arrangement Agreement
to amalgamate the two entities. Assure and Quarry have agreed to effect a
combination by way of plan of arrangement whereby Assure will, subject to
certain conditions, acquire all 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 common share. The Special
Meeting of Shareholders of Quarry was held December 17, 2004 where the
Arrangement Agreement was approved by 96.23% of the security holders of Quarry.
Additionally, the Arrangement was approved by 89.72% of the votes cast by
certain disinterested holders of Quarry securities (such votes do not include
the votes cast by Assure and management and directors of Assure). The final
order of the Court of Queen's Bench of Alberta approving the Arrangement was
also granted on December 17, 2004. All warrants to acquire Quarry common shares
have now been cancelled.
FINANCIAL RESOURCES AND LIQUIDITY
During the nine months ended September 30, 2004, the Company's cash decreased by
$4,124,622. The components of the change are set out below.
Nine months ended September 30
2004 2003 Change
----------------------------------------------------------------------------------------------
Net income after adjustment for non-cash items $ 1,829,095 $ 872,409 $ 956,686
Reduction (increase) in working capital 2,914,600 172,245 2,742,355
----------------------------------------------------------------------------------------------
Provided by operating activities
4,743,695 1,044,654 3,699,041
Used in investing activities (10,504,830) (10,373,832) (130,998)
Provided by financing activities 1,636,513 8,442,091 (6,805,578)
----------------------------------------------------------------------------------------------
Net change in cash $ (4,124,622) $ (887,087) $ (3,237,535)
----------------------------------------------------------------------------------------------
Cash flow from operations
Cash flow from operations for the nine months ended September 30, 2004, after
adjustment for non-cash items and before changes in working capital, increased
by $956,686 to $1,829,095. The contribution to cash flows from an increase of
$2,526,125 in revenues from oil and gas activities in 2004 was more than offset
by higher general and administrative expenses and depletion and depreciation.
Cash flow from operations, after a reduction of $2,914,600 in working capital,
increased by $3,699,041 from $1,044,654 experienced for the same period in 2003.
Cash flow provided by financing activities
During the nine months ended September 30, 2004, the Company issued 482,000
common shares at US $3.60 per share under a private placement for proceeds of US
$1,735,200 (Cdn $2,376,493).
27
In addition, the Company issued the following common shares in payment of
dividends on Series A and B Preferred Shares:
- 36,974 common shares in payment of dividends of US $113,750 (Cdn
$147,478) due on Series A and B Preferred Shares at December 31,
2003.
- 21,135 common shares in payment of dividends of US $87,500 (Cdn
$118,794) due on the Series A Preferred Shares at May 31, 2004.
- 10,254 common shares in payment of dividends of US $26,250 (Cdn
$34,433) on Series B Preferred Shares.
100,000 common shares were issued on the exercise of 100,000 warrants in
connection with the payment of interest of US $310,000 (Cdn $406,503) due on
long-term debt. A value of $100,000 was assigned to the warrants. In addition,
191,387 shares valued at $795,594 were issued in payment of interest of $217,030
and principal of $578,564 due on long-term debt.
143,500 common shares were issued 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.
Other sources of financing were US $325,000 (Cdn $410,020) advances from
shareholders, which are unsecured, non-interest bearing and have no fixed terms
of repayment.
The Company reduced its demand bank loan by $1,150,000.
Cash flow used in investing activities
Cash flow of $10,504,830 used in investing activities is comprised entirely of
expenditures for the Company's capital expenditure program.
During the nine month period ended September 30, 2004, Assure and its
subsidiaries participated in drilling 10 wells, as follows:
- five (4.5 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;
- 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, Quarry completed six 100% working interest oil wells in the
Ribstone area of Alberta that had been drilled in 2003.
Assure has no commitments for capital expenditures other than exploration,
drilling, completion and equipping expenditures to be incurred in the normal
course of business. The Company anticipates that these expenditures will be
funded out of existing capital resources.
Long term debt
The Company's long-term debt consists of a six-year note payable (the "Note
Payable") issued by its wholly owned subsidiary Oil & Gas in the principal
amount of $850,000 (December 31, 2003 - $1,000,000) and a six-year Subordinated
Promissory Note Payable (the "Subordinated Note") in the principal amount of US
$2,916,000, equivalent to Canadian $3,678,826 (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 September 28, December 28, March 28, and June
28. The note is subordinated to all present and future bank debt of Oil & Gas
and its subsidiaries.
28
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 Citibank's US
prime rate of 4.25% plus 3.5% per annum. Quarterly payments of principal and
interest are due and payable in US dollars on September 15, December 15, March
15 and June 15. The note is unsecured and is subordinated to all present and
future bank debt of the Company and its subsidiaries.
Working Capital
The Company had a working capital deficiency of $13,355,139 at September 30,
2004, including the demand bank loan of $6,650,000, debenture payable of
$1,250,000, current portion of long-term debt of $1,017,517, due to shareholders
of $410,020 and interest payable of $11,716. Assure anticipates that it will be
able to fund this deficiency out of cash flows from operations, bank borrowings
and new equity.
Demand Loan - Quarry
As at September 30, 2004, the Company had available, through its partially-owned
subsidiary Quarry, an $8,350,000 revolving, operating demand loan facility with
a Canadian chartered bank. The facility reduces by $450,000 per month commencing
July 31, 2004. The loan bears interest at the bank's prime rate, which was 4.00%
at September 30, 2004, plus 1.5% interest subject to a standby fee of 0.125% per
annum. The Company also had available through Quarry, 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 4.00% at September 30, 2004, plus
1.75% 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 Quarry.
As at September 30, 2004, Quarry had drawn down $6,650,000 against the
facilities and this amount has been classified as a current liability.
Under the credit facility agreement with the bank, Quarry is subject to certain
covenants. As at September 30, 2004, Quarry was not in compliance with the
covenant requiring it to maintain an adjusted working capital ratio of not less
than 1:0 to 1:0. 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 September 30, 2004.
On November 15, 2004, Quarry accepted and signed an indicative financing
proposal to replace the existing bank loan. Commencing November 15, 2004, Quarry
will have available an $6,550,000 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 November
15, 2004, plus 1.5% interest subject to a standby fee of 0.125% per annum.
Quarry will also have 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 November 15, 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 Quarry. These facilities will be reviewed upon Quarry's fiscal year end
December 31, 2004, and not later than April 30, 2005.
Demand Loan - Assure
As at September 30, 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 4.00% at September 30, 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 4.00% at
September 30, 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. The bank will review Oil & Gas'
credit facilities on or before April 30, 2005.
29
Assure has not drawn down any funds against this credit facility.
On November 15, 2004, Oil & Gas accepted and signed an indicative financing
proposal. This proposal includes the amalgamation of Assure with Quarry (See
Note 16a of the September 30, 2004 consolidated financial statements). Upon
completion of a definitive agreement, Oil & Gas will have available, subject to
certain credit approval conditions, a $10,000,000 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 November 15, 2004, plus 1% interest
subject to a standby fee of 0.125% per annum. Oil & Gas will also have a
$10,000,000 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 November 15, 2004, plus 1.5% subject to a drawdown fee of 0.25% (acquisition)
or 0.50% (development) and a standby fee of 0.125% per annum. This facility will
be in place once the Company has met the bank's required credit approval
process. In addition, Oil & Gas will also have a $1,300,000 treasury risk
facility at the same bank with a maximum term of 26 months. 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, a $40 million supplemental debenture
over the major producing petroleum and natural gas reserves of Oil & Gas, and a
$40 million guarantee from Assure, Westerra and Quarry. These facilities will be
reviewed upon the Company's fiscal year end December 31, 2004, and not later
than April 30, 2005.
COMMITMENTS AND CONTINGENCIES
Litigation
The Company through its partially-owned subsidiary Quarry is currently involved
in litigation with a former officer of Quarry who is claiming $240,000 in
respect of termination and severance pay. Quarry is contesting this claim.
Examinations for discovery have occurred and the matter is currently in abeyance
as of September 30, 2004 as the plaintiff has not moved the litigation forward.
On February 4, 2004 Quarry filed an Originating Notice in the Court of Queen's
Bench of Alberta regarding a share certificate dated March 27, 2001 for 450,000
shares in Quarry Capital Corp. registered in the name of Thomas John Loch, the
prior President and CEO of Quarry. It was Quarry's contention that the share
certificate was issued in contravention of the provisions of section 27 of the
Alberta Business Corporations Act for no consideration. Quarry had requested
that the Court order the share certificate cancelled effective December 31,
2003. An Affidavit in Opposition was filed by Thomas John Loch on March 11,
2004. On April 29, 2004 the share issuance was declared valid by the Court.
Production Bonus Pool
Certain employees of the Company have the right to participate in the Company's
production bonus pool. The production bonus pool is a cash pool to be funded by
the Company based on the sustained barrel of oil per day or its natural gas
equivalent production of all oil and gas properties in which the Company or its
subsidiaries have a working interest. Initial funding of the pool will commence
on reaching 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
the Company's reaching additional production milestones. Maximum funding in the
aggregate amount of Canadian $1,075,000, payable in stock or cash, is required
if the Company reaches 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 the Company's board of
directors which shall also determine the other employees of the Company and its
subsidiaries eligible for participation in the pool.
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Lease
Effective August 1, 2004, the Company, through its partially-owned subsidiary
Quarry, entered into a new lease for the rental of office space for the period
to January 31, 2007. Quarry is committed to payments of rent and operating costs
under the lease amounting to $75,500 in 2004, $181,000 in 2005, $181,000 in 2006
and $15,000 in 2007.
Environmental Regulations
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.
As at September 30, 2004, there has been no material change in the remaining
commitments and contingencies disclosed in Note 14 to the financial statements
for the year ended December 31, 2003.
TRANSACTIONS WITH RELATED PARTIES
Effective December 1, 2003, Oil & Gas entered into an agreement with Quarry
whereby it agreed to pay Quarry a $450,000 prospect fee and drill two wells at
its sole expense on or before January 31, 2004 on certain farm-out lands of
Quarry located in northeast British Columbia. The prospect fee was paid in
December 2003 and the two wells were drilled in January 2004. Oil & Gas earned a
working interest in four sections of land as a result of drilling the wells and
Quarry retained a gross overriding royalty in these wells. In addition, Quarry
farmed out and retains a convertible gross overriding royalty in two additional
gas wells in British Columbia drilled by Oil & Gas during the first quarter of
2004.
Assure Oil & Gas Corp. ("Oil & Gas") is a wholly-owned subsidiary of Assure.
During 2003, Oil & Gas entered into a management services agreement with Quarry
whereby it supplies Quarry with the services of certain of its employees that
have management or operational expertise. During the nine months ended September
30, 2004, Oil & Gas charged Quarry $330,223 for such services. Quarry charged
Oil & Gas $90,844 for rent and office overheads in the nine months ending
September 30, 2004.
The transactions between the Company and Quarry have been recorded at the agreed
to exchange amounts which reflect fair value.
Two officers of the Company purchased 6,000 units as part of a private placement
by the Company of 482,000 units consisting of 482,000 common shares at US $3.60
(Cdn $4.93) per share and 482,000 warrants to purchase common shares at US $4.00
(Cdn $5.05) per share.
BUSINESS RISKS
The Company's operating risks, commodity pricing risks, and insurance coverage
have not changed substantially since December 31, 2003, the Company's last
fiscal year end.
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