UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
(Mark
One)
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[ X
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
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For the fiscal year ended March 31,
2008
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[
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
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For the
transition period from [ ] to [ ]
Commission
file number 000 19949
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Torrent
Energy Corporation
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(Exact
name of registrant as specified in its charter)
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Colorado
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84-1153522
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(State
or other jurisdiction of incorporation or organization)
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(I.R.S.
Employer Identification No.)
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11918
SE Division, Suite 197
Portland,
Oregon
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97266
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(Address
of principal executive offices)
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(Zip
Code)
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Issuer’s
telephone number: 503.224.0072
Securities
registered pursuant to Section 12(b) of the Act:
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Title
of each class
Nil
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Name
of each exchange on which registered
Nil
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Securities
registered pursuant to Section 12(g) of the Act:
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Shares
of Common Stock, $0.001 par value
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(Title
of class)
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Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes [ ] No [ X ]
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes
[ ] No [ X ]
Indicate
by check mark whether the issuer (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the preceding
12 months (or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes [ X ] No
[ ]
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained in this form, and will not be
contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of “large accelerated filer”, accelerated filer”
and “smaller reporting company” in Rule 12b-2 of the Exchange
Act. (Check one):
| Large accelerated filer [ ] | Accelerated filer [ ] | Non-accelerated filer [ ] | Smaller reporting company [ X ] |
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b
2 of the Exchange Act) Yes [ ] No [ X
]
State the
aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was
sold, or the average bid and asked prices of such common equity, as of a
specified date within 60 days. (See definition of affiliate in
Rule 12b 2 of the Exchange Act.)
41,012,047 shares of common
stock at $0.04 per share =
$1,640,482
(1)
Closing price on July 11, 2008.
State the
number of shares outstanding of each of the issuer’s classes of equity stock, as
of the latest practicable date.
41,732,547 shares of
common stock issued and
outstanding as of July 11, 2008
DOCUMENTS INCORPORATED BY
REFERENCE
The
information required by Part III (Items 10, 11, 12,13 and 14) of this Form 10-K
is incorporated by reference from our definitive proxy statement to be filed
pursuant to Regulation 14A with the Commission not later than 120 days after the
end of the fiscal year covered by the Form 10-K.
2
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ITEM
1.
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BUSINESS
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Torrent
Energy Corporation is an exploration stage energy company committed to the
pursuit of unconventional natural gas niche opportunities located primarily in
North America. As used in this annual report, the terms “our
Company”, “we”, “us” and “our” mean Torrent Energy Corporation, and our wholly
owned subsidiaries, Methane Energy Corp. and Cascadia Energy Corp., unless
otherwise indicated. A brief history of our Company is provided in
the section entitled “Corporate History” below.
This
annual report contains forward-looking statements as that term is defined in the
Private Securities Litigation Reform Act of 1995. These statements
relate to future events or our future financial performance. In some
cases, you can identify forward-looking statements by terminology such as “may”,
“should”, “expects”, “plans”, “anticipates”, “believes ”, “estimates”,
“predicts”, “potential” or “continue” or the negative of these terms or other
comparable terminology. These statements are only predictions and
involve known and unknown risks, uncertainties and other factors, including the
risks in the section entitled “Risk Factors”, that may cause our Company or our
industry’s actual results, levels of activity, performance or achievements to be
materially different from any future results, levels of activity, performance or
achievements expressed or implied by these forward-looking
statements.
Although
we believe that the expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, levels of activity, performance
or achievements. Except as required by applicable law, including the
securities laws of the United States, we do not intend to update any of the
forward-looking statements to conform these statements to actual
results.
Our
audited consolidated financial statements are stated in United States dollars
and are prepared in accordance with United States Generally Accepted Accounting
Principles. All references to “CDN$” refer to Canadian
dollars.
Proceedings
Under Chapter 11 of the Bankruptcy Code
The
following discussion provides general background information regarding our
bankruptcy cases, and is not intended to be an exhaustive
description. Access to documents filed with the U.S.
Bankruptcy Court and other general information about the U.S. bankruptcy cases
is available at www.orb.uscourts.gov. The content of the foregoing
website is not a part of this report.
On June
2, 2008, the Company commenced Chapter 11 proceedings (Case No.
08-32638) by filing a voluntary petition for reorganization under the
Bankruptcy Code with the United States Bankruptcy Court for the District of
Oregon (the “Bankruptcy Court”). Each of the Company’s subsidiaries,
Methane Energy Corp. and Cascadia Energy Corp. (which we refer to collectively
with the Company as the "Debtors"), also commenced a case under Chapter 11 of
the Bankruptcy Code on the same day (together with the
Company’s filing, the “Chapter 11 Cases”). The Debtors
continue to operate their businesses and manage their properties as
debtors-in-possession pursuant to Sections 1107(a) and 1108 of the Bankruptcy
Code.
In
connection with the Chapter 11 Cases, on June 6, 2008, we entered into a senior
secured super-priority debtor in possession credit and guaranty agreement (the
“DIP Credit Agreement”) among the Company and its subsidiaries, as Guarantors,
and YA Global Investments, L.P., as lender (" YA Global "). The DIP
Credit Agreement was approved on an interim basis by the Bankruptcy Court the
same day. The Bankruptcy Court entered an order approving the DIP
Credit Agreement on July 11, 2008.
The DIP
Credit Agreement provides for a $4.5 million term loan under which YA
Global may advance funds to us (the "Loan "). The proceeds
of the Loan are expected to be used for working capital purposes, including
payment of professional services fees, wages, salaries, and other operating
expenses, payment of the promissory note issued by the Company to YA Global on
May 15, 2008, in the amount of $207,854 plus accrued interest, payment of
certain subsidiary debt, and other purposes, as approved by YA
Global. Advances under the DIP Credit Agreement bear interest at the
lower of twelve percent (12%) per annum or the highest rate of interest
permissible under law. The Loan will mature on the earliest of (a)
the date which is the one year anniversary of the DIP Credit Agreement, (b) the
date of termination of the Loan in connection with YA Global's rights upon an
Event of Default (as defined in the DIP Credit Agreement), (c) the close of
business on the first business day after the entry of the final order by the
Bankruptcy Court, if the Company has not paid YA Global the fees required under
the DIP Credit Agreement, (d) the date a plan of reorganization confirmed in the
Chapter 11 Cases becomes effective that does not provide for the payment in full
of all amounts owed to YA Global under the DIP Credit Agreement, (e) the date of
the closing of a sale of all or substantially all of our assets pursuant to
Section 363 of the Bankruptcy Code, and (f) the effective date of a
plan of reorganization or arrangement in the Chapter 11
Cases.
3
If the
Loan is repaid prior to the one year anniversary of the date of the DIP Credit
Agreement, we will be required to pay to YA Global a prepayment fee in an amount
equal to one percent (1%) of such prepayment. Upon the occurrence of
an Event of Default, all amounts owing under the DIP Credit Agreement will bear
interest at the rate of the lower of seventeen percent (17%) or the maximum rate
permitted by law per annum, and YA Global may declare all outstanding
obligations immediately due and payable. YA Global has a right of
first refusal to provide exit financing to the Company. As of July
11, 2008, we have borrowed $591,026 under the DIP Credit Agreement.
On June
16, 2008, we filed with the Bankruptcy Court our Joint Plan of Reorganization
for Reorganizing the Debtors (the “Plan”) and a Disclosure Statement Regarding
Joint Plan of Reorganization for Reorganizing the Debtors. In
addition to the DIP Credit Agreement, the Plan also includes a rights offering,
under which current shareholders of the Company will have the opportunity to
purchase additional new equity of the Company (the "Rights Offering"), subject
to Bankruptcy Court approval and other conditions.
The
administrative and reorganization expenses resulting from the Chapter 11 process
will unfavorably affect our results of operations. Future results of
operations may also be adversely affected by other factors related to the
Chapter 11 process. See Item 1A – Description of Business – Risk
Factors of this annual report for a discussion of risks and uncertainties
relating to the Chapter 11 process.
Corporate
History
We were
formed by the merger of Scarab Systems, Inc., a Nevada corporation, with iRV,
Inc., a Colorado corporation, on July 17, 2002. We were
initially involved in the business of providing services to the e commerce
industry. However, we ceased all activities in the e-commerce
industry by the end of the fiscal year ended March 31,
2003. Scarab Systems, Inc. was a privately owned corporation
incorporated on October 8, 2001. Subsequent to completion of the
reorganization, Scarab Systems, Inc. transferred all its assets and liabilities
to iRV, Inc. The directors and executive officers of iRV, Inc. were
subsequently reconstituted. iRV, Inc. changed its name to Scarab
Systems, Inc. on March 24, 2003.
We were
given two options in fiscal year 2002 to acquire all the issued and outstanding
shares of 485017 B.C. Ltd., a British Columbia company doing business as
MarketEdge Direct. These options were given to us as security against
a subscription receivable of $337,500 for 675,000 shares of our common stock
from the shareholders of MarketEdge Direct. MarketEdge Direct was in
the business of providing a wide range of marketing products and
services. Effective August 7, 2002, we exercised both of the
options and acquired all the issued and outstanding shares of MarketEdge
Direct. Due to disappointing financial results of MarketEdge Direct,
on March 28, 2003, we entered into an agreement with the former
shareholders of MarketEdge Direct to sell MarketEdge Direct back to
them. As a result, all the issued and outstanding shares of
MarketEdge Direct that we acquired were sold back to the former MarketEdge
Direct shareholders for the return to treasury of 540,000 shares of our common
stock.
On
March 28, 2003, we acquired all the issued and outstanding shares of
Catalyst Technologies, Inc., a British Columbia corporation. Catalyst
was a Vancouver-based, web design and Internet application
developer. Catalyst specialized in the development of web-sites and
Internet software design, primarily for the health and nutraceutical
industry. The acquisition of Catalyst was treated as a non-material
business combination in fiscal year 2003, and we discontinued Catalyst’s
operations during the fiscal year ended March 31, 2004 due to a lack of
working capital and disappointing financial results.
On
April 30, 2004, we incorporated an Oregon subsidiary company named Methane
Energy Corp. in anticipation of acquiring oil and gas properties in the State of
Oregon. On May 11, 2004, Methane Energy Corp. entered into a
lease purchase and sale agreement with GeoTrends-Hampton International, LLC to
purchase GeoTrends-Hampton International’s undivided working interest in certain
oil and gas leases for the Coos Bay Basin prospect located onshore in
the Coos Bay Basin of Oregon.
4
To
acquire this oil and gas leases, we paid a total of $300,000 in cash, issued
1,800,000 restricted shares of our common stock in three performance-based
tranches, and granted a 4% overriding royalty interest upon production from
lands and leases in the Coos Bay project area. The lease
purchase and sale agreement closed on June 22, 2004. Upon
closing, we paid $100,000 in cash and issued 600,000 shares of our common
stock. We subsequently paid the remaining $200,000 cash consideration
and have issued an additional 1,200,000 shares of our common stock to satisfy
the remaining components of the purchase obligation.
Pursuant
to the lease purchase and sale agreement with GeoTrends-Hampton International,
LLC, we acquired leases of certain properties in the Coos Bay area of
Oregon that are believed to be prospective for oil and gas
exploration. Additional leases were subsequently acquired from the
State of Oregon and from private property owners. We have
amassed approximately 118,000 acres under lease with annual lease rental
payments totaling approximately $93,000. We continue to seek
additional lease properties in the Coos Bay area.
As a
result of the change in our business focus, we received shareholder approval on
July 13, 2004 to change our name from Scarab System, Inc. to Torrent Energy
Corporation.
On
June 29, 2005, we incorporated a Washington subsidiary company named
Cascadia Energy Corp. in anticipation of acquiring oil and gas properties in the
State of Washington. Cascadia Energy Corp. executed a lease option
agreement dated August 9, 2005 with Weyerhaeuser Company to lease 100,000
acres that it could select from an overall 365,000 acre block in the
Chehalis Basin located in Lewis, Cowlitz and Skamania Counties of
Washington. We have commenced an exploratory work program on certain
acreage, searching for possible hydrocarbon deposits. Cascadia Energy
Corp. was also granted a two year first right of refusal on the balance of the
Weyerhaeuser acreage. Initial cash consideration for this option was
$100,000 and we paid $60,000 and our joint venture partner, St. Helens Energy,
LLC paid $40,000. On or before the end of the initial first year,
Cascadia Energy Corp. was to elect either to undertake a work commitment of
$285,715 pertaining to the full 100,000 acres (proportionately reduced if
Cascadia Energy Corp. elects to evaluate less than the entire acreage) or pay
Weyerhaeuser $285,715 in lieu of the work commitment or such lesser amount if
less than the full 100,000 acres is chosen to be evaluated, but in no event less
than 50,000 acres. On July 25, 2007 Weyerhaeuser agreed to extend the option for
an additional 120 days and waive the $285,715 work commitment for a payment of
$100,000 of which we paid $60,000 and St. Helen’s Energy LLC paid $40,000. We
did not fulfill our commitment within that time frame and the option is now
terminated.
Cascadia
Energy Corp. has maintained the joint venture agreement dated August 12,
2005 with St. Helens Energy, LLC, a 100 percent owned subsidiary of Comet Ridge
Limited, an Australian coal seam gas explorer listed on the Australian Stock
Exchange, and headquartered in Perth, Western Australia. Under this
agreement, St. Helens Energy, LLC holds a 40 percent interest in the Company’s
Washington exploration project. Cascadia Energy Corp. serves as
operator of the joint venture and St. Helens Energy, LLC actively assists
in evaluating the area and developing exploratory leads and
prospects.
The joint
venture provides for Cascadia Energy Corp. and St. Helens Energy,
LLC, to share the costs of exploring, developing and operating any economic
natural gas resources discovered in the Chehalis Basin area. Capital
and operating costs, as well as any resulting revenues associated with the
project area, are to be allocated 60 percent to Cascadia Energy Corp. and 40
percent to St. Helens Energy, LLC. Cascadia Energy Corp. acts as the
operator of the venture and submits authorizations for expenditures to its joint
venture partner for approval on a periodic basis. At any time, St.
Helens Energy, LLC may decline to participate; i.e. non-consent, in which case
Cascadia Energy Corp. will absorb 100 percent of the cost of a specific
authorization for expenditure and receive 100 percent of any net revenues
derived from the specific expenditure. Alternatively, Cascadia Energy
Corp. might also choose not to undertake the expenditure absent joint venture
partner participation. St Helen’s Energy, LLC has subsequently sold a
portion of their working interest percentage to Citrus Energy
Corporation.
On April
10, 2008, Cascadia granted a one -year option to Citrus Energy Corporation and
Oklaco Holding, LLP, (the “Citrus Group”) which gives the Citrus Group the right
to drill two potential wells on Cascadia’s Chehalis leases and earn a working
interest in potential production from certain acreage currently held by
Cascadia. In the event the Citrus Group elects to drill these
potential wells, then Cascadia would receive a cash equalization payment of
$80,000 per well and would retain a royalty interest on any future production
from the acreage earned by the Citrus Group.
5
Cascadia
Energy Corp continues to hold lease agreements with Weyerhaeuser totaling 36,991
acres, two that required payment of upfront lease bonuses of $428,610 and one
which requires annual lease payments of $1,275. Certain of these
agreements include a provision requiring Cascadia Energy Corp. to commence a
well within the first two years of the lease, or the lease will terminate and we
would be required to make a payment of $75,000 to Weyerhaeuser in May of
2009.
On
May 9, 2006, Cascadia Energy Corp., entered into an option to acquire
oil & gas leases located in the Chehalis Basis from Pope Resources
LP. This option provides Cascadia Energy Corp. with the right to earn
oil and gas leases covering 15,280 acres of mineral rights interests held by
Pope Resources LP. for a purchase price of $1 per net mineral acre or
$15,280. The initial term of this option was for a period of
18 months ending on November 9, 2007. If Cascadia Energy
Corp. expended $200,000 on operations and activities during the initial term,
and on September 12, 2007 Pope Resources signed a letter agreement extending the
option until November 9, 2008.
As of
July 11, 2008, the total acreage under lease from the State of Washington was
23,735 acres with lease terms of four years. This acreage was
acquired in lease auctions for aggregate consideration of $37,719.
Other
than as set out herein, we have not been involved in any bankruptcy,
receivership or similar proceedings, nor have we been a party to any material
reclassification, merger, consolidation or purchase or sale of a significant
amount of assets not in the ordinary course of our business.
Current
Business
We are an
exploration stage company engaged in the exploration for coalbed methane in the
Coos Bay region of Oregon and in the Chehalis Basin region of
Washington State. Through one of our wholly owned subsidiaries,
Methane Energy Corp., we now hold leases to approximately 107,000 acres of
prospective coalbed methane lands in the
Coos Bay Basin. Methane Energy Corp. operates the
exploration project in the Coos Bay Basin. Through our
other wholly-owned subsidiary, Cascadia Energy Corp., we are evaluating
approximately 91,200 acres under private and state leases located in the
Chehalis Basis.
Coos
Bay Basin Exploration Prospect
The Coos
Bay Basin is located along the Pacific coast in southwest Oregon, approximately
200 miles south of the Columbia River and 80 miles north of the Oregon /
California border. The onshore portion of the
Coos Bay Basin is elliptical in outline, elongated in a north-south
direction and covers over 250 square miles. More than 150,000 acres
in the Coos Bay Basin are underlain by the Coos Bay coal field and appears
prospective for coalbed methane gas production. The current leasehold
position owned by Methane Energy Corp. covers most of the lands believed to be
prospective for coalbed methane production in the
Coos Bay Basin. Additional leasing, title and curative work
continues. Most areas in Coos County are accessible year-round via
logging and fire control roads maintained by the county or by timber
companies. In addition, numerous timber recovery staging areas are
present and in many cases can be modified for drill-site locations.
The
Coos Bay Basin is basically a structural basin formed by folding and
faulting and contains a thick section of coal-bearing
sediments. Coal-bearing rocks contained within the
Coos Bay Basin form the Coos Bay Coal field. Coal mining
from the Coos Bay field began in 1854 and continued through the mid
1950’s. Much of the coal was shipped to San
Francisco. Since mining activity ended several companies such as
Sumitomo, Shell and American Coal Company have done exploratory work and
feasibility studies on the Coos Bay Coal Field but no mining operations were
conducted. In addition, approximately 20 exploratory oil and/or gas
wells have been drilled in the Coos Bay basin during the years1914 to
1993. Many of these wells encountered gas shows in the coal seams
that were penetrated during drilling.
6
Coalbeds
are contained in both the Lower and Upper Member of the Middle Eocene Coaledo
Formation. The coal-bearing sandstones and siltstones of the Middle
Eocene Coaledo formation are estimated to form a section up to 6,400 feet
thick. Total net coal thickness for the Lower Coaledo Member can
range up to 70 feet and over 30 feet for the Upper Coaledo
Member. Coos Bay coal rank ranges from sub bituminous to
high-volatile bituminous, with a heating value of 8,300 to 14,000 British
Thermal Units per pound (“BTU/LB.”), low sulphur content, and a moderate
percentage of ash.
On
October 6, 2004, a multi-hole coring program was commenced on the Methane
Energy Corp. leases. Coring was needed to collect coal samples so
that accurate gas content data could be measured. Cores were
collected, desorption work was done on the coals and evaluation completed by mid
2005. This data, as well as other geologic information, was provided
to Sproule Associates, Inc., an international reservoir engineering firm, for an
independent evaluation. To date, natural gas analyses performed on
samples from Methane Energy Corp. coal samples and wells indicate that the gas
is pipeline quality and that the coals are fully saturated with
gas. It is important to note that technically recoverable gas volumes
do not necessarily qualify as proved reserves, and we have not recorded any
proven reserves at any of our projects at this time.
Drilling
and testing programs were then initiated at three pilot sites—Beaver Hill, Radio
Hill and Westport. A total of twelve exploratory wells have been
drilled. Five exploratory wells were drilled and completed at Beaver
Hill; two exploratory wells were drilled at Radio Hill with one completion; and
five exploratory wells were drilled at Westport with four of the wells
completed. Production and flow testing at the pilot well sites
have been completed and development work is planned in the next
fiscal year, subject to availability of sufficient working capital.
Natural
Gas Market
Until
2005, the Port of Coos Bay was one of the largest population centers on the west
coast not served by natural gas. A project to bring natural gas into
the region via a 52-mile, 12-inch pipeline was approved, funded by Coos County
and the State of Oregon, and completed in late 2004 with gas sales beginning in
early 2005. While the line is owned by Coos County, the local
gas distribution company, Northwest Natural Gas, operates the line. Northwest
Natural Gas serves Coos County and most of western Oregon. The
pipeline and its associated distribution system represent the most likely market
option for delivery of gas, if produced by Methane Energy Corp. in the
future. Estimates of current local Coos County market requirements
are less than 1 million cubic feet of gas per day initially, which represents
less than 1% of ultimate pipeline capacity. Excess capacity is
available for additional gas input.
Coos County
is also likely to benefit from new industrial, commercial and residential
development as natural gas is now available. Expansion of the market is likely
to bring greater demand for and value to natural gas. Because of its west coast
location, Coos Bay market prices would be subject to pricing standards of
the New York Mercantile Exchange for most of the year. Regional gas pricing hubs
are located at Malin and Stanfield, Oregon. The closest pricing
point, however, would be the Coos Bay City Gate, where Northwest Natural Gas’s
retail rates are set and regulated by Oregon’s Public Utilities Commission.
Seasonal or critical gas demand fluctuations could cause prices to exceed or
fall below posted prices on a regular basis.
Exploration
Objectives
The
Coos Bay Basin is the southernmost of a series of sedimentary basins
that are present in western Oregon and Washington west of the Cascade
Range. The region containing this series of basins is generally
referred to as the Puget-Willamette Trough. These basins contain
thick sequences of predominantly non-marine, coal-bearing sedimentary rock
sequences that are correlative in age, closely related in genesis, and very
similar in many other characteristics. Methane Energy Corp. is
primarily targeting natural gas from coal seams of the Coaledo Formation in the
Coos Bay Basin. Secondary objectives are natural gas, and
possibly oil, trapped in conventional sandstone reservoirs.
Indications
of the hydrocarbon potential in the Puget-Willamette Trough are shown by natural
gas production at the Mist Field in northwest Oregon, the presence of excellent
quality sand reservoir development at the Jackson Prairie Gas Storage Field in
southwest Washington, and numerous oil and/or gas shows from historic oil and
gas exploration drilling activity.
7
Chehalis
Basin Exploration Prospect
The
Chehalis Basin is located about midway between Portland and Seattle in
southwest Washington State, approximately 90 miles north of the Columbia
River. The Chehalis Basin lies between the western foothills of
the Cascade Range and the eastern border of the Coast Ranges and is a
structurally-formed basin that contains and is flanked by a thick section of
coal-bearing sediments. The coals are hosted by Lower-Middle-Upper
Eocene continental sedimentary rocks. The coal-bearing Eocene
sandstone and siltstone section is estimated to be approximately 6,600 feet
thick.
The
Chehalis Basin is more or less centered within the sub bituminous and
lignite coal fields of southwestern Washington. Sub bituminous and
lignite are various types of coal. The Centralia-Chehalis coal
district lies to the north and portions of the Morton and Toledo coal fields lie
to the east and south, respectively. The Centralia-Chehalis coal
district is the largest of the sub bituminous and lignite fields of southwestern
Washington. At least 13 separate coal seams have been mined or are
being mined from the district. Most coal suitable for mining has a
sub bituminous C rank, contains 14% to 35% moisture, 5% to 25% ash, and has a
heating value ranging from 8,300 to 9,500 BTU/LB.
TransAlta
currently operates a coal-fired power plant and a gas-fired power plant at their
Centralia complex. The coal-fired plant produces 1,404 megawatts,
enough electricity to supply a city the size of Seattle. In
November 2006, the Centralia coal mine adjacent to the power plant closed
due to the high cost of operations. Currently, coal to supply the
gas-fired power plant is purchased from the states of Wyoming and
Montana.
Coals in
the Chehalis Basin are relatively thick and continuous. These
coals contain a methane gas resource. Limited core and desorption
work showed gas content ranging from 6 to 86 standard cubic feet per ton in the
coal seams. Two seams, the “ Blue” and the “Brown”, each attain
thicknesses of about 40 feet. Total net coal typically approaches 75
feet and in some areas, exceeds 100 feet in thickness. More than
250,000 acres in the Chehalis Basin appears prospective for methane
production from the coals. In addition, conventional gas potential is
present.
During
the 1980’s Kerr-McGee conducted a shallow coal exploration drilling program
along the southwest flank of the Chehalis Basin. They
encountered a number of gas shows associated with both coals and
sandstones. One of the show wells was offset by Duncan Oil in 2001
and it flow tested 714 thousand cubic feet per day from a sand
zone.
Our
subsidiary, Cascadia Energy Corp., currently controls, through lease options and
oil and gas leases, approximately 91,200 acres in the
Chehalis Basin. Access to virtually all areas in our
Chehalis Basin project area is excellent year-round via logging and fire
control roads maintained by the forest service or the timber
industry. Likewise, numerous potential drill-site locations have
been constructed as timber recovery staging areas and may be
available to be utilized in the initial testing phase of the drilling
program. In April 2007, we commenced drilling a
stratigraphic/information hole exploration project. One
well and two surface holes were drilled before financial
constraints caused suspension of operation activities.
Natural
Gas Market
Our
Chehalis Basin project area is located within close proximity to the Interstate
5 corridor that parallels the route of the principal interstate pipeline
providing natural gas to utility, commercial and industrial customers in
Washington and Oregon. With anticipated declines in Canadian-sourced
natural gas, we believe that robust markets will exist for gas produced from the
Chehalis Basin. Because of its west coast location and ready
connection to a major interstate pipeline, Chehalis Basin market prices
would be subject to pricing standards of the New York Mercantile Exchange for
most of the year. Regional gas pricing hubs are located at Malin and
Stanfield, Oregon. However, seasonal or critical gas demand
fluctuations could cause prices to exceed or fall below posted prices on a
regular basis.
8
Exploration
Objectives
The
Chehalis Basin is located towards the northern end of a series of
sedimentary basins that are present in Oregon and Washington west of the Cascade
Range. The region containing this series of basins is generally
referred to as the Puget-Willamette Trough. These basins contain
thick sequences of predominantly non-marine, coal-bearing sedimentary rock
sequences that are correlative in age, closely related in genesis, and very
similar in many characteristics. Cascadia Energy Corp. is primarily
targeting natural gas from coal seams of the Cowlitz Formation in the
Chehalis Basin. Secondary objectives are natural gas, and
possibly oil, trapped in conventional sandstone reservoirs.
Indications
of the hydrocarbon potential in the Puget-Willamette Trough are shown by natural
gas production at the Mist Field in northwest Oregon, the presence of excellent
quality sand reservoir development at the Jackson Prairie Gas Storage Field in
southwest Washington, and numerous oil and/or gas shows from historic oil and
gas exploration drilling activity.
The
Coalbed Methane Industry
During
the past two decades, coalbed methane has emerged as a viable source of natural
gas compared to the late 1980s when no significant production outside of the
still dominant San Juan Basin in New Mexico, and the Black Warrior Basin in
Alabama. According to data from the U.S. Department of Energy’s
Energy Information Administration, coalbed methane production totaled 1.72
trillion cubic feet in 2004, an increase of 7.5% over 2003. This
production accounted for nearly 9% of the country’s total dry-gas output of 19.7
trillion cubic feet. Coalbed methane production currently comes from
fifteen basins located in the Rocky Mountain, Mid-Continent and Appalachian
regions. Various evaluation, exploration and development
projects are underway in at least four other basins, including Coos Bay and
Chehalis basins. One of the coalbed methane industry’s leading
information specialists estimates that the number of producing wells nationwide
(including those close to achieving production) is approaching
35,000. By comparison, more than 405,000 wells produce natural gas
nationwide. However, none of this production of natural gas currently
comes from Oregon or Washington. All of the natural gas presently
consumed in the Pacific Northwest must be delivered by interstate pipelines from
Western Canada and Wyoming.
We
believe the success of coalbed methane developments has largely been the result
of improved drilling and completion techniques (including horizontal/lateral
completions), better hydraulic fracture designs and significant cost reductions
as a result of highly dependable gas content and coalbed reservoir performance
analysis. Also aiding this sector’s growth is the apparent shortage
of quality domestic conventional exploration and development
projects.
We also
believe that a major factor driving the growth in coalbed methane production is
its relatively low finding and development costs. Coalbed methane
fields are often found where deeper conventional oil and gas reservoirs have
already been developed. Therefore, considerable exploration-cost
reducing geologic information is often readily available. This
available geological information, combined with comparatively shallow depths of
prospective coalbed reservoirs, reduces finding and development
costs.
A number
of government agencies and industry organizations use various statistical
methodologies to estimate the volume of potentially recoverable coalbed methane
using currently available technology and specific economic
conditions. The Potential Gas Committee, which provides the most
frequent assessments of the country’s natural gas resource base, estimates
technically recoverable coalbed methane resources of 106.5 trillion cubic feet
for the Lower 48 States as of year end 2004. This represents
approximately 15% of the total estimated in-place coalbed methane resource of
700 trillion cubic feet. It is important to note that technically
recoverable gas volumes do not necessarily qualify as proved reserves, and we
have not recorded any proved reserves at our projects in Oregon or Washington at
this time.
Coalbed
Methane
Natural
gas normally consists of 80% or more methane with the balance comprising such
hydrocarbons as butane, ethane and propane. In some cases it may contain minute
quantities of hydrogen sulfide, referred to as sour
gas.
9
Coalbed
methane is, generally, a sweet gas consisting of 95% methane which would
normally be considered pipeline quality. Coalbed methane is
considered an unconventional natural gas resource because it does not rely on
conventional trapping mechanisms, such as a fault or anticline, or stratigraphic
traps. Instead coalbed methane is absorbed or attached to the molecular
structure of the coals which is an efficient storage mechanism as coalbed
methane coals can contain as much as seven times the amount of gas typically
stored in a conventional natural gas reservoir such as sandstone or
shale. The absorbed coalbed methane is kept in place as a result of
pressure equilibrium often from the presence of water. Thus the
production of coalbed methane in many cases requires the dewatering of the coals
to be exploited. This process usually requires the drilling of
adjacent wells and sometimes takes 6 to 36 months to
complete. Coalbed methane production typically has a low rate of
production decline and an economic life a typical well can be 10 to
20 years and the economic life of a typical field can be 30 to
50 years,
The
principal sources of coalbed methane are either biogenic, producing a dry gas
which is generated from bacteria in organic matter, typically at depths less
than 1,000 feet, or thermogenic, which is a deeper wet gas formed when organic
matter is broken down by temperature and pressure.
The three
main factors that determine whether or not gas can be economically recovered
from coalbeds are: (1) the gas content of the coals; (2) the
permeability or flow characteristics of the coals; and (3) the thickness of
the coalbeds. Gas content is measured in terms of standard cubic feet
per ton and varies widely from 430 standard cubic feet per ton in the deep
(2,000 to 3,500 feet) San Juan, New Mexico thermogenic coals, and only 60
standard cubic feet per ton for the shallow (300 to 700 feet deep) Powder River,
Wyoming biogenic coals. The San Juan coals are considered to have the
industry’s highest permeability. Relatively high permeability, which
can affect the ability of gas to easily travel to the borehole, is an important
factor for the success of coalbed methane wells, but is not absolutely
required. The thickness of coalbeds from which coalbed methane is
economically produced varies from as little as a few feet in some areas of the
gas-rich (300 standard cubic feet) Raton Basin to as much as 75 net feet of
coalbed thickness at the relatively gas-poor Powder River Basin.
Competition
Coalbed
methane in the United States is produced by several major exploration and
production companies and by numerous independents. The majors include
BP American and ConocoPhillips in the San Juan Basin and, to a lesser
extent, Chevron USA in the Black Warrior Basin. A number of
large and mid-size independents, including Anadarko Petroleum Corporation, CMS
Energy Corporation, CNX Gas Corporation, Devon Energy Corporation, Dominion
Resources, Inc., El Paso Corporation, EnCana Corporation, Energen Corporation,
Equitable Resources, Inc., Fidelity Exploration & Production Company,
GeoMet Inc., J.M. Huber Corporation, Lance Oil & Gas Corporation, Penn
Virginia Corporation, Pennaco Energy Inc., Pioneer Natural Resources Company,
The Williams Companies, Inc., XTO Energy Inc. and Yates Petroleum Corporation,
have established production in one or more basins. Dozens of smaller
independents, many of whom originally began with conventional oil and gas
production and operating a small number of wells, have found profitable niches
in coalbed methane. Other new entrants to coalbed methane continue to
acquire prospective acreage and to conduct test drilling. By virtue
of their strategic property holdings, affiliates of several of the country’s
largest coal mining companies also have become active in coalbed methane, such
as Consol Energy Inc., Jim Walter Resources, Inc., Peabody Energy Corporation,
USX Corporation and Westmoreland Coal Company. In the Cascadia
prospect area, Citrus Energy, LLC. and Venaco Energy, Inc. represent competitors
to Cascadia Energy Corp.
Government
Regulation
Our oil
and gas operations are subject to various United States federal, state and local
governmental regulations. Matters subject to regulation include
drilling and discharge permits for drilling operations, drilling and
abandonment bonds, reports concerning operations, the spacing of
wells, pooling of properties and taxation. From time to time,
regulatory agencies have imposed price controls and limitations on production by
restricting the rate of flow of oil and gas wells below actual production
capacity in order to conserve supplies of oil and gas. The
production, handling, storage, transportation and disposal of oil and gas,
by-products thereof, and other substances and materials produced or used in
connection with oil and gas operations are also subject to regulation under
federal, state, and local laws and regulations relating primarily to
conservation and the protection of human health and the
environment. To date, expenditures related to complying with these
laws, and for remediation of existing environmental contamination, have not been
significant in relation to the results of operations of our
Company. The requirements imposed by such laws and regulations are
frequently changed and subject to interpretation, and we are unable to predict
the ultimate cost of compliance with these requirements or their effect on our
operations.
10
Employees
As of
July 11, 2008, we had four non-union, full time employees, of which two are
executives. We consider our relations with our employees to be
good.
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ITEM
1A.
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RISK
FACTORS
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Much of
the information included in this annual report includes or is based upon
estimates, projections or other “forward-looking statements.” Such
forward-looking statements include any projections or estimates made by us and
our management in connection with our business operations. These
include (i) continued availability of funds pursuant to the DIP Credit Agreement
, (ii) the potential prospective for coalbed methane and conventional natural
gas production in the Coos Bay Basin and the Chehalis Basin, (iii) the potential
pipeline capacity in the port of Coos Bay area, and (iv) greater market for
natural gas in Coos County and the Pacific Northwest region in
general. Although these forward-looking statements, and any
assumptions upon which they are based, are made in good faith and reflect our
current judgment regarding the direction of our business, actual results will
almost always vary, sometimes materially, from any estimates, predictions,
projections, assumptions, or other future performance suggested herein. We
undertake no obligation to update forward-looking statements to reflect events
or circumstances occurring after the date of such statements.
Such
estimates, projections or other “forward-looking statements” involve various
risks and uncertainties as outlined below. We caution readers of this annual
report that important factors in some cases have affected and, in the future,
could materially affect actual results and cause actual results to differ
materially from the results expressed in any such estimates, projections or
other “forward-looking statements.” In evaluating us, our business and any
investment in our business, readers should carefully consider the following
factors.
We
face significant challenges in connection with our bankruptcy
reorganization.
On June
2, 2008, the Company and its subsidiaries filed voluntary petitions for
reorganization under Chapter 11 of the U.S. Bankruptcy
Code. We are currently operating our businesses as
debtors-in-possession pursuant to the Bankruptcy Code.
On June
16, 2008, we filed the Plan with the Bankruptcy Court, which will consider
whether to confirm the Plan. The Plan may not receive the requisite acceptance
by creditors, equity holders and other parties in interest, and the Bankruptcy
Court may not confirm the Plan. Moreover, even if the Plan receives the
requisite acceptance by creditors, equity holders and parties in interest and is
approved by the Bankruptcy Court, the Plan may not be viable.
In
addition, due to the nature of the reorganization process, creditors and other
parties in interest may take actions that may have the effect of preventing or
unduly delaying confirmation of the Plan. Accordingly, we provide no assurance
as to whether or when the Plan may be confirmed in the Chapter 11
process.
We
face uncertainty regarding the adequacy of our capital resources and have
limited access to additional financing.
We are
currently operating under a $4.5 million debtors-in-possession financing
facility. The DIP Credit Agreement contains certain highly
restrictive covenants which require us, among other things, to maintain our
corporate existence, make certain payments, perform our obligations under
existing agreements, purchase insurance and provide financial records, and which
limit or prohibit our ability to incur indebtedness, make prepayments on or
purchase indebtedness in whole or in part, pay dividends, make investments,
lease properties, create liens, consolidate or merge with another entity or
allow one of our subsidiaries to do so, sell assets, and acquire facilities or
other businesses.
11
We do not
assure you that we will be able to consistently comply with these and other
restrictive covenants in our DIP Credit Agreement. Furthermore, any
advances under the DIP Credit Agreement are at the discretion of the DIP lender,
and we have no control over its decision to provide any additional
financing.
In
addition to the cash requirements necessary to fund ongoing operations, we
anticipate that we will incur significant professional fees and other
restructuring costs in connection with the Chapter 11 process and the
restructuring of our business operations. We do not assure you that
the amounts of cash available from our DIP Credit Agreement will be sufficient
to fund operations until the Plan receives the requisite acceptance by
creditors, equity holders and parties in interest and is confirmed by the
Bankruptcy Court. If available borrowings under the DIP Credit
Agreement are not sufficient to meet our cash requirements, we may be required
to seek additional financing. We can provide no assurance that
additional financing would be available or, if available, offered on acceptable
terms.
As a
result of the Chapter 11 process and the circumstances leading to the Chapter 11
Cases, our access to additional financing is, and for the foreseeable future
will likely continue to be, very limited. Our long-term liquidity
requirements and the adequacy of our capital resources are difficult to predict
at this time, and ultimately cannot be determined until a plan of reorganization
has been developed and is confirmed by the Bankruptcy Court in the Chapter 11
process.
We
are subject to restrictions on the conduct of our business.
We are
operating our businesses as debtors-in-possession pursuant to the Bankruptcy
Code. Under applicable bankruptcy law, during the pendency of the
Chapter 11 process, we will be required to obtain the approval of the Bankruptcy
Court prior to engaging in any transaction outside the ordinary course of
business. In connection with any such approval, creditors
and parties in interest may raise objections to approval of the
action and may appear and be heard at any hearing with respect to the
action. Accordingly, although we may sell assets and settle
liabilities (including for amounts other than those reflected on our financial
statements) with the approval of the Bankruptcy Court, we
cannot assure you that the Bankruptcy Court will approve any sales or
settlements proposed by us. The Bankruptcy Court also has the authority to
oversee and exert control over our ordinary course operations.
In
addition, the DIP Credit Agreement imposes on us numerous financial requirements
and covenants. Failure to satisfy these requirements and covenants
could result in an event of default that could cause, absent the receipt of
appropriate waivers, an interruption in cash availability, which could cause an
interruption of our normal operations.
As a
result of the restrictions described above, our ability to respond to changing
business and economic conditions may be significantly restricted and we may be
prevented from engaging in transactions that might otherwise be considered
beneficial to us.
Our
financial statements assume we can continue as a “going concern” but our
independent auditors have expressed substantial doubt about our ability to
continue as a going concern, which may hinder our ability to obtain future
financing.
In their
report dated July 14, 2008, our independent auditors stated that our
consolidated financial statements for the fiscal year ended March 31, 2008 were
prepared assuming that we would continue as a going concern.
Our
ability to continue as a going concern is an issue raised as a result of our
Chapter 11 filings, recurring losses from operations and periodic working
capital deficiencies. Our ability to continue as a going concern is subject to
obtaining approval of our Plan and our ability to obtain necessary funding from
outside sources, including obtaining additional funding from the sale of our
securities. Our continued net operating losses increase the difficulty in
meeting such goals and there can be no assurances that such funding methods will
prove successful.
12
In
addition, because of the Chapter 11 proceedings and the circumstances leading to
the Chapter 11 filings, it is possible that we may not be able to continue as a
“going concern.” Our continuation as a “going concern” is dependent
upon, among other things, confirmation of the Plan, our ability to comply with
the terms of the DIP Credit Agreement, our ability to obtain financing upon exit
from bankruptcy and our ability to generate sufficient cash from operations to
meet our obligations.
Should we
fail to be a going concern, then significant adjustments would be necessary in
the carrying value of assets and liabilities, the revenues and expenses reported
and the balance sheet classifications used.
In
addition, the amounts reported in the consolidated financial statements included
in this annual report do not reflect adjustments to the carrying value of assets
or the amount and classification of liabilities that ultimately may be necessary
as the result of our reorganization under Chapter 11. Adjustments
necessitated by the Plan could materially change the amounts reported in the
consolidated financial statements included in this Annual Report.
Our
successful reorganization will depend on our ability to retain key
employees and successfully implement new strategies.
Our
success depends to a significant extent upon the continued service of Mr. John
Carlson, who is our President and Chief Executive officer, and sole
director. Loss of the services of Mr. Carlson could have a material
adverse effect on our growth, revenues, and prospective business. We do not
maintain key-man insurance on the life of Mr. Carlson. In addition
the successful implementation of our business plan and our ability to
successfully consummate a plan of reorganization will be highly dependent upon
our senior management. Our ability to attract, motivate and retain
key employees is restricted by provisions of the Bankruptcy Code, which limit or
prevent our ability to implement a retention program or take other measures
intended to motivate key employees to remain with us during the pendency of the
bankruptcy cases. The loss of the services of key personnel could
have a material adverse effect upon the implementation of our business plan,
including our restructuring program, and on our ability to successfully
reorganize and emerge from bankruptcy.
We
have a history of losses that may continue, which may negatively impact our
ability to achieve our business objectives.
We have
accumulated a deficit of $26,132,279 to March 31, 2008 and incurred net losses
applicable to common shareholders of $9,486,503 for the fiscal year ended March
31, 2008; and $7,765,427 for the fiscal year ended March 31, 2007. We do not
assure you that we can achieve or sustain profitability on a quarterly or annual
basis in the future. Our operations are subject to the risks and competition
inherent in the establishment of a business enterprise. There is no assurance
that future operations will be profitable. We may not achieve our business
objectives and the failure to achieve such goals would have an adverse impact on
us.
If
we are unable to obtain additional funding, our business operations will be
harmed; and if we do obtain additional financing, our then existing shareholders
may suffer substantial dilution.
We will
require additional funds to sustain and expand our oil and gas exploration
activities. We anticipate that we will require up to approximately
$7,000,000 to fund our continued operations for the fiscal year ending March 31,
2009. Additional capital will be required to effectively support our
operations and to implement our business strategy. There can be no assurance
that financing will be available in amounts or on terms acceptable to us, if at
all. The inability to obtain additional capital will restrict our ability to
grow and inhibit our ability to continue to conduct business
operations. If we are unable to obtain additional financing, we will
likely be required to curtail our exploration plans and possibly cease our
operations. Any additional equity financing may result in substantial dilution
to our then existing shareholders.
We
have a limited operating history and if we are not successful in continuing to
grow our business, then we may have to scale back or even cease our ongoing
business operations.
We have a
limited operating history in the business of oil and gas exploration and must be
considered to be an exploration stage company. We have no history of revenues
from operations and have no significant tangible assets.
13
We have
yet to generate any earnings and there is no assurance that we will ever operate
profitably. Our success is significantly dependent on successful lease
acquisition, drilling, completion and production programs. Our operations will
be subject to all the risks inherent in the establishment of a developing
enterprise and the uncertainties arising from the absence of a significant
operating history.
As
our properties are in the exploration and development stage, there is no
assurance that we will establish commercially exploitable discoveries on our
properties.
Exploration
for economic reserves of oil and gas is subject to a number of risk factors. Few
properties that are explored are ultimately developed into producing oil and/or
gas wells. Our properties are in the exploration stage only and are without
proven reserves of oil and gas. We may not establish commercially exploitable
discoveries on any of our properties; and we may never have profitable
operations.
We
are unsure about the likelihood that we will discover and establish a profitable
production of gas from coal seams in the Coos Bay or Chehalis Basin
regions.
Currently,
there is no commercial production of coal in the state of Oregon or Washington.
Additionally, no coalbed methane gas production exists either in Washington or
Oregon. Coalbed methane gas only accounts for a small percentage of all natural
gas production in the United States. The closest coalbed methane production to
the Coos Bay and Chehalis Basin occurs in the state of Wyoming. As a result, it
is unlikely that we will discover any significant amount of coalbed methane in
the Coos Bay or Chehalis Basins or be able to establish wells that will produce
a profitable amount of coalbed methane gas.
Even
if we are able to discover commercially exploitable resources on any of the
properties on which we hold an interest, we may never achieve profitability or
may not receive an adequate return on invested capital because the potential
profitability of oil and gas ventures depends upon factors beyond the control of
our Company.
The
potential profitability of oil and gas properties is dependent upon many factors
beyond our control. For instance, world prices and markets for oil and gas are
unpredictable, highly volatile, potentially subject to governmental fixing,
pegging, controls or any combination of these and other factors, and respond to
changes in domestic, international, political, social and economic
environments.
Additionally,
due to worldwide economic uncertainty, the availability and cost of funds for
production and other expenses have become increasingly difficult, if not
impossible, to project. In addition, adverse weather conditions can also hinder
drilling operations. These changes and events may materially affect our future
financial performance. These factors cannot be accurately predicted and the
combination of these factors may result in our Company not receiving an adequate
return on invested capital.
Even
if we are able to discover and complete a gas well, there can be no assurance
the well will become profitable.
We have
not yet established a commercially viable coalbed methane gas resource. Even if
we are able to do so, a productive well may become uneconomic in the event water
or other deleterious substances are encountered which impair or prevent the
production of oil and/or gas from the well. In addition, production from any
well may be unmarketable if it is impregnated with water or other deleterious
substances. In addition, the marketability of oil and gas which may be acquired
or discovered will be affected by numerous factors, including the proximity and
capacity of oil and gas pipelines and processing equipment, market fluctuations
of prices, taxes, royalties, land tenure, allowable production and environmental
protection, all of which could result in greater expenses than revenue generated
by the well.
14
The
oil and gas industry is highly competitive and there is no assurance that we
will be successful in acquiring more leases.
The oil
and gas industry is intensely competitive. We compete with numerous individuals
and companies, including many major oil and gas companies that have
substantially greater technical, financial and operational resources.
Accordingly, there is a high degree of competition for desirable oil and gas
leases, for suitable properties for drilling operations, for necessary drilling
equipment, as well as for access to funds. We cannot predict if the necessary
funds can be raised or that any projected work will be completed. Our budget
anticipates our acquiring additional leases for acreage in both the Coos Bay and
Chehalis Basins. This acreage may not become available or, if it is available
for leasing, we may not be successful in acquiring clear title to the leases. If
we do not acquire the leases, we will not be able to completely fulfill our
current business plan. Failure to carry out our business plan may reduce the
likelihood of achieving profitable operations and may discourage investors from
investing in our Company. If these things happen, we may not be able to raise
additional funds when we need them and we may have to cease
operations.
The
marketability of natural resources will be affected by numerous factors beyond
our control that may result in us not receiving an adequate return on invested
capital to be profitable or viable.
The
marketability of natural resources that may be acquired or discovered by us will
be affected by numerous factors beyond our control. These factors include market
fluctuations in oil and gas pricing and demand, the proximity and capacity of
natural resource markets and processing equipment, governmental regulations,
land lease tenure, land use, regulation concerning the importing and exporting
of oil and gas, and environmental protection regulations.
Oil
and gas operations are subject to comprehensive regulations that may cause
substantial delays or require capital outlays in excess of those anticipated
causing an adverse effect on our Company.
Oil and
gas operations are subject to federal, state, and local laws relating to the
protection of the environment, including laws regulating removal of natural
resources from the ground and the discharge of materials into the environment.
Oil and gas operations are also subject to federal, state, and local laws and
regulations that seek to maintain health and safety standards by regulating the
design and use of drilling methods and equipment. Various permits from
government bodies are required for drilling operations to be conducted; no
assurance can be given that such permits will be granted. Environmental
standards imposed by federal, state, or local authorities may be changed, and
any such changes may have material adverse effects on our activities. Moreover,
compliance with such laws may cause substantial delays or require capital
outlays in excess of those anticipated, thus causing an adverse effect on our
business operations. Additionally, we may be subject to liabilities for
pollution or other environmental damages. We believe that our operations comply,
in all material respects, with all applicable environmental and health and
safety regulations. To date, we have not been required to spend any material
amounts on compliance with environmental and health and safety regulations.
However, we may be required to do so in the future and this may affect our
ability to expand or maintain our operations. Our operating partners maintain
insurance coverage customary to the industry; however, we are not fully insured
against all possible environmental and health and safety risks.
Oil
and gas exploration and production activities are subject to certain
environmental regulations that may prevent or delay the commencement or
continuation of our operations.
In
general, our oil and gas exploration and production activities are subject to
certain federal, state and local laws and regulations relating to environmental
quality and pollution control. Such laws and regulations increase the costs of
these activities and may prevent or delay the commencement or continuation of a
given operation. Compliance with these laws and regulations has not had a
material effect on our operations or financial condition to date. Specifically,
we are subject to legislation regarding emissions into the environment, water
discharges and storage and disposition of hazardous wastes. In addition,
legislation has been enacted which requires well and facility sites to be
abandoned and reclaimed to the satisfaction of state authorities. However, such
laws and regulations are frequently changed and we are unable to predict the
ultimate cost of compliance.
15
Generally,
environmental requirements do not appear to affect us any differently or to any
greater or lesser extent than other companies in the industry. We believe that
our operations comply, in all material respects, with all applicable
environmental regulations. Our operating partners maintain insurance coverage
customary to the industry; however, we are not fully insured against all
possible environmental risks.
Exploratory
drilling involves many risks and we may become liable for pollution or other
liabilities that may have an adverse effect on our financial
position.
Drilling
operations generally involve a high degree of risk. Hazards such as unusual or
unexpected geological formations, power outages, labor disruptions, blow-outs,
sour gas leakage, fire, inability to obtain suitable or adequate machinery,
equipment or labor, and other risks are involved. We may become subject to
liability for pollution or hazards against which we cannot adequately insure or
against which we may elect not to insure. Incurring any such liability may have
a material adverse effect on our financial position and operations.
If
we fail to remain current in our reporting requirements, we could be removed
from the OTC Bulletin Board which would limit the ability of broker-dealers to
sell our securities and the ability of stockholders to sell their securities in
the secondary market.
Companies
trading on the OTC Bulletin Board, such as us, must be reporting issuers under
Section 12 of the Securities Exchange Act of 1934, as amended, and must be
current in their reports under Section 13, in order to maintain price quotation
privileges on the OTC Bulletin Board. If we fail to remain current on our
reporting requirements, we could be removed from the OTC Bulletin Board. As a
result, the market liquidity for our securities could be severely adversely
affected by limiting the ability of broker-dealers to sell our securities and
the ability of stockholders to sell their securities in the secondary
market.
Our
shares of common stock are subject to the “penny stock” rules of the Securities
and Exchange Commission and the trading market in our securities is limited,
which makes transactions in our shares of common stock cumbersome and may reduce
the value of an investment in our shares of common stock.
The
Securities and Exchange Commission has adopted Rule 15g-9 which establishes the
definition of a “penny stock,” for the purposes relevant to us, as any equity
security that has a market price of less than $5.00 per share or with an
exercise price of less than $5.00 per share, subject to certain exceptions. For
any transaction involving a penny stock, unless exempt, the rules require, among
other things:
-
that a broker or dealer approve a person’s account for transactions in penny stocks; and
-
the broker or dealer receives from the investor a written agreement to the transaction, setting forth the identity and quantity of the penny stock to be purchased.
In order
to approve a person’s account for transactions in penny stocks, the broker or
dealer must:
-
obtain financial information and investment experience and investment objectives of the person; and
-
make a reasonable determination that the transactions in penny stocks are suitable for that person and the person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks.
The
broker or dealer must, prior to any transaction in a penny stock, deliver a
written statement prescribed by the Securities and Exchange Commission relating
to the penny stock market, which sets
forth the basis on which the broker or dealer made the suitability determination
and obtain a
signed, written agreement from the investor acknowledging receipt of this
written statement.
16
Generally,
brokers may be less willing to execute transactions in securities subject to the
“penny stock” rules. This may make it more difficult for investors to dispose of
our shares of common stock and cause a decline in the market value of our shares
of common stock.
Disclosure
also has to be made about the risks of investing in penny stocks in both public
offerings and in secondary trading and about the commissions payable to both the
broker-dealer and the registered representative, current quotations for the
securities and the rights and remedies available to an investor in cases of
fraud in penny stock transactions. Finally, monthly statements have to be sent
disclosing recent price information for the penny stock held in the account and
information on the limited market in penny stocks.
The
Financial Industry Regulatory Authority sales practice requirements may also
limit a stockholder’s ability to buy and sell our shares of common
stock.
In
addition to the “penny stock” rules described above, the Financial Industry
Regulatory Authority has adopted rules that require that in
recommending an investment to a customer, a broker-dealer must have reasonable
grounds for believing that the investment is suitable for that customer. Prior
to recommending speculative low priced securities to their non-institutional
customers, broker-dealers must make reasonable efforts to obtain information
about the customer’s financial status, tax status, investment objectives and
other information. Under interpretations of these rules, the financial Industry
Regulatory Authority believes that there is a high probability that
speculative low priced securities will not be suitable for at least some
customers. The Financial Industry Regulatory Authority requirements
make it more difficult for broker-dealers to recommend that their customers buy
our shares of common stock, which may limit your ability to buy and sell our
shares of common stock and have an adverse effect on the market for its
shares.
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ITEM
2.
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PROPERTIES
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Our
principal mailing address is 11918 SE Division, Suite 197 Portland,
OR 97266. We have lease office space at 1420 NW 17th,
Portland, Oregon 97209 for a term beginning July 1, 2008 at a cost of $1,000 per
month. The office space consists of two offices totaling
approximately 1,000 square feet.
Methane
Energy Corp. has reached terms on a new office lease located at 201 Gould,
Coquille, OR 97423, and expects to move into this location on August
1, 2008 at a cost of $900 per month. The new Coquille office is
consists of approximately 1,250 square feet. Through our subsidiary,
Methane Energy Corp., we have under lease approximately 107,000 of undeveloped
acreage in the Coos Bay Basin as of March 2008. In March 2008, we
elected to drop the lease with Oregon Department of State Lands which consisted
of approximately 11,000 acres under the water ways in the Coos Bay
Basin.
Of
the acreage Methane Energy Corp. has under lease, approximately 16,000 acres are
leased from Menasha Development Corporation, 29,000 acres from Coos County,
3,000 acres from the State of Oregon Department of Transportation, and
approximately 59,000 acres from various companies and individual
landowners. The total annual lease payments related to the 107,000
acres are approximately $81,000. These leases typically have a
five-year term with an option for an additional five years with renewal
conditioned on continued payment of annual lease rentals. In
addition, we have granted the landowners royalties, typically averaging 12.5% on
gross sales resulting from the leases in addition to the 4% overriding royalty
interest to be paid to the project originators. The first of our lease renewal
payments will begin September 6, 2008 with International Paper Company and the
majority of our Coos Bay Basin leases will need to be renewed in 2009 and 2010
at $2 per net acre.
Our lease
with The Port of Bandon of approximately 120 net acres is subject to a delay
rental clause of $10 per net acre per year if a well is not drilled by October
2008.
We have
recently completed the initial phases of a pilot well program designed to assess
the coalbed methane production capability of the wells in the Coos Bay
Basin. The test results will assist our management in determining
exploration potential and economic viability of further development plans in the
area. We contract for drilling rigs and related services from outside
sources.
17
Our coal
and water samples are analyzed by independent testing labs, then interpreted by
analysts such as Sproule Associates Inc. and MHA Petroleum Consultants for
resource assessment.
Through
our subsidiary, Cascadia Energy Corp., we have acquired mineral leasehold rights
to 91,200 acres in the Chehalis Basin area of Washington State as of June
2008. During the period October 2006 through May 2007, Cascadia
Energy Corp. entered into three lease agreements with Weyerhaeuser totaling
36,991 acres, two that required payment of upfront lease bonuses of $428,610 and
one that requires annual lease payments of $1,275. Certain of these
agreements include a provision requiring Cascadia Energy Corp. to commence a
well within the first two years of the lease, or the lease will terminate and we
would be required to make a payment of $75,000 to Weyerhaeuser in May of
2009.
On
May 9, 2006, Cascadia Energy Corp. entered into an option to acquire
oil & gas lease with Pope Resources LP. This option provides
Cascadia Energy Corp. with the right to earn oil and gas leases covering 15,280
acres of mineral rights interests held by Pope Resources LP in Cowlitz and Lewis
Counties, Washington, for an option price of $1 per net mineral acre or
$15,280. The initial term of this option was for a period of
18 months ending on November 9, 2007. The option was
extended by Pope Resourses LP until November 9, 2008.
Cascadia
Energy Corp. acquired through lease auctions an additional 23,735 acres from the
State of Washington Land Trust for initial lease terms of five-years, which
acreage is adjacent or contiguous to other of our acreage in the Chehalis
Basin. This acreage was acquired for aggregate lease consideration of
$37,719 and has been included in the Chehalis Basin project area.
We have
completed considerable geological and geophysical analysis on our Chehalis Basin
project acreage and plan to continue exploratory activities. There is
no assurance that we will raise sufficient capital to take advantage of our
opportunity in Washington State.
|
ITEM
3.
|
LEGAL
PROCEEDINGS
|
On June
2, 2008, the Company and its subsidiaries Methane Energy Corp. and Cascadia
Energy Corp. commenced the Chapter 11 Cases by filing a voluntary petition for
reorganization under the Bankruptcy Code with the United States Bankruptcy Court
for the District of Oregon. We are currently operating our businesses
as debtors-in-possession pursuant to the Bankruptcy Code. As a result
of the filings, pre-petition obligations of the Company, including obligations
under debt instruments, generally may not be enforced against us, and any
actions to collect pre-petition indebtedness are automatically stayed, unless
the stay is lifted by the Bankruptcy Court. For more information
about the filing, see "Item 1. Business —Proceedings Under Chapter 11 of the
Bankruptcy Code".
PART
II
|
ITEM
5.
|
MARKET
FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASE OF
EQUITY SECURITIES
|
In the
United States, our shares of common stock are traded on the National Association
of Securities Dealers Inc. OTC Bulletin Board under the symbol
“TRENQ.” The following quotations obtained from Stockwatch reflect
the high and low bids for our shares of common stock based on inter-dealer
prices, without retail mark-up, mark-down or commission and may not represent
actual transactions.
18
The high
and low bid prices of our shares of common stock for the periods indicated below
are as follows:
|
Quarter
Ended
|
High
|
Low
|
|
March 31,
2005
|
$ 1.36
|
$ 0.93
|
|
June 30,
2005
|
$ 3.56
|
$ 0.95
|
|
September 30,
2005
|
$ 2.58
|
$ 1.56
|
|
December 31,
2005
|
$ 2.43
|
$ 1.68
|
|
March 31,
2006
|
$ 3.07
|
$ 1.94
|
|
June 30,
2006
|
$ 3.93
|
$ 1.62
|
|
September 30,
2006
|
$ 2.58
|
$ 1.40
|
|
December 31,
2006
|
$ 2.00
|
$ 0.99
|
|
March 31,
2007
|
$ 1.35
|
$ 0.97
|
|
June
30, 2007
|
$
1.50
|
$
1.02
|
|
September
30, 2007
|
$
1.13
|
$
0.50
|
|
December
31, 2007
|
$
0.75
|
$
0.25
|
|
March
31, 2008
|
$
0.48
|
$
0.12
|
|
|
(1)
|
On
June 2, 2008, the Company commenced Chapter 11 Case No. 08-32638 by filing
a voluntary petition for reorganization under the Bankruptcy Code, with
the United States Bankruptcy Court for the District of
Oregon. With this filing our trading symbol changed from “TREN”
to “TRENQ”.
|
Our
shares of common stock are issued in registered form. Computershare
Trust Company, N.A., 250 Royall Street, Canton, MA 02021
(Telephone: 303.262.0600; Facsimile: 303.262.0700) is the
registrar and transfer agent for our shares of common stock.
On July
11, 2008, the shareholders’ list of our shares of common stock showed 122
registered holders of our shares of common stock and 41,732,547 shares of common
stock outstanding. The number of record holders was determined from
the records of our transfer agent and does not include beneficial owners of
shares of common stock whose shares are held in the names of various security
brokers, dealers, and registered clearing agencies.
Dividends
During
the fiscal year ended March 31, 2008, we accrued or paid preferred stock
dividends of $1,105,014 related to our Series E preferred stock, of which
$791,689 has been classified as dividend expense and $313,325 has been
classified as interest expense in accordance with generally accepted accounting
principles. See Note 10 to our audited consolidated financial
statements.
19
Equity
Compensation Plan Information
The
following table provides a summary of the number of options granted under our
compensation plans, as well as options granted outside of our compensation
plans, the weighted average exercise price and the number of options remaining
available for issuance all as at March 31, 2008.
|
Number
of securities to be issued upon exercise of outstanding
options
|
Weighted-Average
exercise price of outstanding options, warrants and rights
|
Number
of securities remaining available for future issuance under equity
compensation plans
|
|
|
Equity
compensation plans not approved by security holders(1)
|
155,000
|
$ 0.50
|
Nil
|
|
Equity
compensation plans approved by security holders(2)
|
1,650,000
|
$1.50
|
650,000
|
|
Equity
compensation plans approved by security holders(3)
|
1,725,000
|
$1.85
|
75,000
|
|
Total
|
3,530,000
|
$ 1.63
|
725,000
|
|
(1)
|
Referring
to our 2004 non-qualified stock option
plan.
|
|
(2)
|
Referring
to our 2005 equity incentive plan.
|
|
(3)
|
Referring
to our 2006 equity incentive plan.
|
For a
discussion of our equity compensation plans, see Note 7 to our Consolidated
Financial Statements included in Part II, Item 8 of this Annual Report on Form
10-K.
Purchases
of Equity Securities by the Issuer and Affiliated Purchasers
We did
not purchase any of our shares of common stock or other securities during the
fiscal year ended March 31, 2008.
|
ITEM
6.
|
SELECTED
FINANCIAL DATA
|
The
following selected financial data as of and for the dates indicated have been
derived from our consolidated financial statements audited by Peterson Sullivan,
PLLC. You should read the following selected financial data together
with our consolidated financial statements and related footnotes and
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations.” The
historical results are not necessarily indicative of the operating results to be
expected in the future.
20
|
Year
Ended March 31,
|
||||||||||||||||||||
|
Consolidated
Statement of Operations Data
(Dollars
in Thousands)
|
2008
|
2007
|
2006(2)
|
2005
|
2004(1)
|
|||||||||||||||
|
Sales
or Operating Revenue
|
Nil
|
Nil
|
Nil
|
Nil
|
Nil
|
|||||||||||||||
|
Loss
from Continuing Operations
|
$ | (8,695 | ) | $ | (6,360 | ) | $ | (4,036 | ) | $ | (2,419 | ) | $ | (375 | ) | |||||
|
General
and Administrative Expenses(3)
|
$ | 3,974 | $ | 6,654 | $ | 4,193 | $ | 2,412 | $ | 403 | ||||||||||
|
Exploration
Costs
|
$ | 3,821 | $ | 14,857 | $ | 13,602 | $ | 2,775 | $ | - | ||||||||||
|
Other
Income (Expense)(3)
|
$ | (4,721 | ) | $ | 294 | $ | 157 | $ | (7 | ) | $ | 28 | ||||||||
|
Net
Loss Applicable to Common Shareholders
|
$ | (9,487 | ) | $ | (7,765 | ) | $ | (5,296 | ) | $ | (2,701 | ) | $ | (375 | ) | |||||
|
Basic
and Diluted Net Loss per Avg. Shares Outstanding
|
$ | (0.24 | ) | $ | (0.24 | ) | $ | (0.22 | ) | $ | (0.17 | ) | $ | (0.04 | ) | |||||
|
Consolidated
Balance Sheet Data
(Dollars
in Thousands)
|
Year
Ended March 31
|
|||||||||||||||||||
|
2008
|
2007
|
2006
|
2005(2)
|
2004
|
||||||||||||||||
|
Working
capital
|
$ | (23,494 | ) | $ | 3,072 | $ | 1,152 | $ | 1,969 | $ | (15 | ) | ||||||||
|
Total
assets
|
$ | 35,450 | $ | 38,957 | $ | 19,927 | $ | 5,648 | $ | 13 | ||||||||||
|
Long-term
obligations
|
$ | 76 | $ | 9 | $ | - | $ | - | $ | - | ||||||||||
|
Cash
dividends per common Share
|
$ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||
|
|
(1)
|
We
changed our name from iRV to Scarab Systems, Inc. on March 24, 2003
and acquired all the issued and outstanding shares of Catalyst
Technologies, Inc., which was in the web design and Internet application
development business.
|
|
|
(2)
|
We
changed our business to oil and gas exploration when we first incorporated
our subsidiary, Methane Energy Corp. on April 30,
2004. Since that time, we have focused our business operations
on exploration of oil and gas.
|
|
|
(3)
|
General
and Administrative Expenses and Other Income (Expense) for fiscal years
2005 and 2004 have been reclassified to have the presentation of interest
expense to conform to the current
year.
|
|
ITEM
7.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
You
should read the following discussion of our financial condition and results of
operations together with our audited consolidated financial statements and the
related notes for the years ended March 31, 2008, 2007 and 2006 which
appear elsewhere in this annual report. The following discussion
contains forward-looking statements that reflect our plans, estimates and
beliefs. Our actual results could differ materially from those
discussed in the forward looking statements. Factors that could cause
or contribute to such differences include, but are not limited to, those
discussed below and elsewhere in this annual report, particularly in Item 1A
– Risk Factors of this annual report.
Recent
Developments
As more
fully described in “Item I. Business – Proceedings Under Chapter 11
of the Bankruptcy Code,” on June 2, 2008, the Company and its subsidiaries filed
voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy
Code in the U.S. Bankruptcy Court for the District of Oregon. We are
currently operating our businesses as debtors-in-possession pursuant to the
Bankruptcy Code and are currently seeking the requisite acceptance of the Plan
by creditors, equity holders and third parties and confirmation of the plan by
the Bankruptcy Court, all in accordance with the applicable provisions of the
Bankruptcy Code.
As a
result of the filing, our creditors were automatically stayed from taking
certain enforcement actions under their respective agreements with us unless the
stay is lifted by the Bankruptcy Court. In addition, the Debtors have
entered into the DIP Credit Agreement, which is more fully described
below.
During
the Chapter 11 process, we may, with the Bankruptcy Court’s approval, sell
assets and settle liabilities, including for amounts other than those reflected
in our financial statements. We are in the process of reviewing the Debtors’
executory contracts and unexpired leases to determine which, if any, we will
reject as permitted by the Bankruptcy Code. We cannot presently estimate the
ultimate liability that may result from rejecting contracts or leases or from
the filing of claims for any rejected contracts or leases, and no provisions
have yet been made for these items. The administrative and reorganization
expenses resulting from the Chapter 11 process will unfavorably affect our
results of operations. Future results of operations may also be affected by
other factors related to the Chapter 11 process.
21
Overview
Until
June 22, 2004, when we completed our acquisition of certain oil and gas
leases in the Coos Bay region, our business was to provide services to the
e-commerce industry. Historically, these services have been comprised
of marketing, e-commerce development and the sale and distribution of
transaction processing and payment services. Since none of these
services were sufficient to provide us with a sustainable foundation, we
commenced reviewing opportunities in the resource sector in late fiscal
2004. Accordingly, the accumulated losses of $883,317 to
March 31, 2004 reflect our past activities that have been either
discontinued or abandoned.
Our
restructuring accelerated from January 1, 2004 to March 31, 2004
(final quarter of fiscal 2004) and was finalized from April 1, 2004 to
June 30, 2004 (first quarter of fiscal 2005). We decided to
investigate and pursue a number of conventional oil and gas opportunities as
well as a number of unconventional (coalbed methane) acquisition
candidates. Due diligence on a coalbed methane opportunity was
completed in April and May of 2004, resulting in the announcement on
May 20, 2004 of the purchase of certain Oregon-based oil and gas lease
assets from an independent company. Two private placements from
April 1, 2004 to June 30, 2004 (first quarter of fiscal 2005) allowed
us to complete the lease acquisitions and to commence leasing additional mineral
rights under the land surrounding the existing oil and gas leases. We
now have a coalbed methane exploration project in Oregon on which to
focus.
Additional
private placements from July 1, 2004 to September 30, 2004 (second
quarter of fiscal 2005) and from January 1, 2005 to March 31, 2005
(fourth quarter of fiscal 2005) allowed us to complete additional lease
acquisitions, core hole drilling, marketing and public relations, and pay legal
and professional fees related to the Oregon properties. Private
placements completed between April 1, 2005 and June 30, 2006 provided
sufficient funding to complete a pilot well program on the Oregon prospect from
which we plan to obtain production evaluation data, and to acquire option rights
and lease rights on prospective acreage in the State of Washington, and to begin
core holes drilling on prospective acreage in the State of
Washington. Additional financings will be required to support further
leasing activities and related exploratory drilling and testing programs on both
our Oregon and Washington prospects.
We are
operating as debtors-in-possession under the jurisdiction of the Bankruptcy
Courts in accordance with Chapter 11 of the Bankruptcy
Code. Accordingly, we are devoting a substantial amount of our
resources to our bankruptcy restructuring, which includes developing a plan of
reorganization, and resolving claims disputes and contingencies. In addition to
financial restructuring activities, we are preparing to operate after our
emergence from Chapter 11 protection, however, we cannot predict whether the
Bankruptcy Court will approve our Plan.
Land
Acquisition
We
currently lease approximately 107,000 acres in the Coos Bay Basin of Oregon and
91,200 acres in the Chehalis Basin of Washington. Our objective is to
increase our land lease position through additional acquisitions;
however, this is contingent upon our emergence from Chapter 11 and obtaining
additional funding of our operations.
Exploration
Activities
We are
planning to complete a well stimulation program in the Coos Bay Basis on
our Westport project area wells during the next fiscal year. This
program will consist of fracture stimulating the five existing Westport wells in
August 2008 and will include a follow-up period of production testing and data
acquisition and evaluation. In order to complete this program we will also need
to install produced water treatment and handling facilities and initiate our
produced water disposal program under the terms of our National Pollutant
Discharge Elimination System (NPDES) water discharge permit which we obtained in
November 2007.
22
If upon
completion of the production testing period, the evaluation of the
testing results indicates we achieved a successful frac program, then the next
anticipated steps will include production facilities installation and connection
to the Coos County pipeline system and completing the required gas marketing and
transportation arrangements. Once we
have established a successful pilot production operation at the Westport project
area, additional wells will be drilled to expand our production
base.
At our
Chehalis Basis project, the Company plans to continue exploration work in early
2009 after the Westport project area work has been evaluated.
We will
require additional funds to sustain and expand our oil and gas exploration
activities. We anticipate that we will require up to approximately $7,000,000 to
fund our continued operations for the fiscal year ending March 31, 2009.
Additional capital will be required to effectively support our operations and to
implement our overall business strategy.
Major
expenditures expected for the next 12 months include the following:
| Well drilling, completion and testing | $ | 3,200,000 | ||
| Land and lease expenditures | $ | 120,000 | ||
| Gathering facilities | $ | 1,000,000 | ||
| Operating expenses | $ | 250,000 | ||
| General and administrative & bankruptcy related fees | $ | 2,430,000 | ||
| Total | $ | 7,000,000 |
The
continuation of our business is dependent on completing our plan of
reorganization, obtaining further financing, positive results from exploratory
activities, and achieving a profitable level of business. In the
event that our properties continue to show promise but we do not have the
resources to develop them, we would likely seek partners to assist in that
development which would dilute our interest in the property, or we may sell our
interest outright. Alternatively, we could seek additional financing
which could dilute our existing shareholders’ interests. Furthermore,
if at any stage we determine that it is not expected that our properties can be
commercially developed, we may abandon further development work and our
interests in the properties.
There are
no assurances that we will be able to obtain further funds required for our
continued operations. As noted herein, we are pursuing various
financing alternatives to meet our immediate and long-term financial
requirements. There can be no assurance that additional financing
will be available when needed or, if available, that it can be obtained on
commercially reasonable terms. If we are not able to obtain the
additional financing on a timely basis, we will be unable to conduct our
operations as planned, and we will not be able to meet our other obligations as
they become due. In such event, we will be forced to scale down or
perhaps even cease our operations. Further, there is no assurance that our
exploration will result in any commercial findings of oil and gas.
Liquidity
and Capital Resources
Our cash
on hand was $120,388 as of March 31, 2008 compared to $5,941,577 at
March 31, 2007. Our working capital position was a deficit of
$23,493,936 as of March 31, 2008 as compared to a surplus of $3,071,530 at
March 31, 2007. The working capital deficit position at March
31, 2008 is primarily due to the Series E preferred stock liability, which is
classified as a current liability due to the events of default as described
further below.
23
During
the fiscal year ended March 31, 2008, we did not receive any proceeds from
the issuance of shares of either our common or preferred stock. This
compares to net proceeds of $23,115,000 from preferred stock issues during the
fiscal year ended March 31, 2007.
During
the fiscal year ended March 31, 2008, we expended cash of $3,013,811 on our
Coos Bay and Chehalis Basin projects compared to $13,463,412 during the fiscal
year ended March 31, 2007. Expenditures on the Coos Bay project
for the year ending March 31, 2008 were $2,027,585 and included $73,592 in
seismic and lease costs, $1,858,166 in drilling costs for the pilot well program
and $95,827 for geological and geophysical consulting fees. During
the comparative period in the prior year, our expenditures for Coos Bay were
$13,056,712 and included $385,434 for seismic and lease costs, $12,250,086 in
drilling costs and $421,192 for geological and geophysical consulting
fees.
During
the fiscal year ended March 31, 2008, cash expenditures for our Chehalis
Basin project totaled $986,226 and included $342,766 for seismic and lease
costs, $583,533 in drilling costs and $59,927 for geological and geophysical
consulting. During the same period in the prior year, our
expenditures for the Chehalis Basin project area were $406,700 and included
$319,344 for seismic and lease costs, $25,843 in drilling costs and $61,513 for
geological and geophysical consulting. The Chehalis Basin
expenditures are net of the 40% participation by our joint venture
partner.
Series C
Convertible Preferred Shares
We are
authorized to issue up to 25,000 shares of Series C preferred stock, par
value $0.01. On July 19, 2005, we closed a private placement of
Series C Convertible Preferred Stock (“Series C Stock”) at $1,000 per
share for 12,500 shares for gross proceeds of $12,000,000. Our
Series C Stock is non-voting, carries a cumulative dividend rate of 5% per
year, and is convertible into shares of common stock at any time by dividing the
dollar amount being converted by the lower of $3.00 or 85% of the lowest volume
weighted average trading price per share of our common stock for 5 trading
days. As a condition of the private placement, we agreed to file a
registration statement registering up to 12,500,000 shares of common stock in
order to receive all of the proceeds of the private placement. Please see
Note 9 to our audited consolidated financial statements.
The
Series C Stock was converted to 7,651,648 shares of our common stock,
2,083,614 of which were issued in fiscal 2006 and 5,568,034 of which were issued
in fiscal 2007. The Series C Stock has now been converted in
full.
Series E
Convertible Preferred Shares
We are
authorized to issue up to 25,000 shares of Series E preferred stock, par
value $0.01. On June 28, 2006, the Company closed a private placement
agreement with YA Global Investments, L.P. (formerly Cornell Capital Partners,
L.P.) ("YA Global") under which it sold 25,000 shares of its Series E
Convertible Preferred Stock at $1,000 per share (the “Series E
Stock). The Series E Stock is senior to the common stock with respect
to the payment of dividends and other distributions on the capital stock of the
Company, including distribution of the assets of the Company upon
liquidation. No cash dividends or distributions shall be declared or
paid or set apart for payment on the common stock in any year unless cash
dividends or distributions on the Series E Stock for such year are likewise
declared and paid or set apart for payment. No declared and unpaid
dividends shall bear or accrue interest. Upon any liquidation,
dissolution, or winding up of the Company, whether voluntary or involuntary
before any distribution or payment shall be made to any of the holders of common
stock or any series of preferred stock, the holders of Series E Stock shall be
entitled to receive out of the assets of the Company an amount equal to $1,000
per share of the Series E Stock plus all declared and unpaid dividends thereon,
for each share of Series E Stock held by them. Net proceeds from the
Series E Stock received during the fiscal year ended March 31, 2007 was
$23,115,000, after the payment of issuance costs of $1,885,000.
The
Series E Stock are non-voting, carry a cumulative dividend rate of 5% per year,
when and if declared by the Board of Directors of the Company, and are
convertible into common stock at any time by dividing the dollar amount being
converted (included accrued but unpaid dividends) by $2.50 per share if the
Company’s common shares are trading at an average price of $2.50 per share or
higher for the five trading days preceding a conversion
date.
24
If the
Company’s common shares are trading at an average price greater than $1.67 but
less than $2.50 per share the Company may, at its exclusive option, force
conversion at a price of $1.67 per share or may redeem the Series E Stock for
cash at the original investment amount plus a 20% redemption
premium.
As a
condition of the Series E Stock, the Company filed a registration statement (the
“Registration Agreement”) registering 15,000,000 shares of
common stock into which the Series E Stock would be converted. This
Registration Statement was declared effective on February 9,
2007. Subsequently, the Series E Stock investor agreed to an initial
registration of 10,000,000 shares to facilitate our compliance with a revision
of SEC guidelines related to the form of our registration. On
November 9, 2007, this Registration Statement became ineffective since the
Company did not filed a post effective amendment as the information contained
therein did not include the latest available certified financial statements as
of a date not more than 16 months old.
Beginning
December 1, 2006, the Company has mandatory redemption requirements equal to the
pro rata amortization of the remaining outstanding Series E Stock over the
period that ends August 2008. If the Company’s common shares are
trading at an average price less than $1.67 per share on a mandatory redemption
date, the Company will pay the redemption amount in cash equal to the original
investment amount per share plus a 20% redemption premium. The Series
E Stock investor chose to waive the monthly conditional mandatory redemption
payments otherwise due on December 1, 2006 through March 31,
2007. Subsequent to March 31, 2007 and continuing through August 31,
2007, and for the month of October 2007, the Series E Stock investor elected, in
lieu of a cash payment, to accept a limited monthly redemption plus accrued
dividends, which has been converted into shares of the Company’s common
stock.
During
the fiscal year ended March 31, 2008, certain Series E shares that met the
conditions of being mandatorily redeemable based on the trailing five day stock
price preceding the assessment date. In accordance with SFAS No. 150,
“Accounting for Certain Instruments with Characteristics of Both Liabilities and
Equity”, the Company has determined that the limited redemption that during the
current fiscal year met the characteristics of a liability. The
difference between the $0.50 per common share conversion price and the market
price of the common shares on the Series E Stock conversion dates has been
recorded as loss on conversion of Series E Stock in the amount of $4,464,329 for
fiscal year ended March 31, 2008.
On
February 12, 2008, YA Global delivered to the Company a Notice of Default under
the Series E Stock agreement, alleging that one or more defaults occurred under
the Investment Agreement and related transaction documents,
including: (i) the Company's failure to make mandatory redemption
payments on each of November 1, 2007, December 1, 2007, January 1, 2008 and
February 1, 2008; (ii) the Company's and its subsidiaries' inability to pay
their debts generally as they become due; and (iii) the Company's failure to
maintain the effectiveness of the registration statement filed pursuant to the
Investor Registration Rights Agreement to which the Company and YA Global are
parties. Based on the alleged defaults, and pursuant to the terms of
the Investment Agreement and related transaction documents, YA Global demanded
that the Company redeem all of YA Global's shares of Series E Convertible
Preferred Stock for the full liquidation amount, plus accumulated and unpaid
dividends thereon. From November 1, 2007 through the June 2, 2008, the date
at which the Company filed Chapter 11, the Company was in negotiations with YA
Global to amend the terms of the Series E Stock agreements.
As a
result of the event of default, the Series E Stock has been classified as a
current liability as of March 31, 2008 and dividends earned related to the
Series E Stock for the fourth quarter 2008 totalling $261,157 were classified as
interest expense. Additionally, for the fiscal year ended March
31, 2008, those shares that met the characteristics of a liability in accordance
with SFAS 150, the Company has reported $52,168 (2006 – Nil) of dividends earned
as interest expense. Please see Note 10 to our audited consolidated financial
statements.
The
DIP Credit Agreement
In
connection with the Chapter 11 Cases, on June 6, 2008, we entered into the DIP
Credit Agreement, a senior secured super-priority debtor in possession credit
and guaranty agreement among the Company and its Subsidiaries, as Guarantors,
and YA Global, as lender. For more details
please refer to "Item 1. Business —Proceedings Under Chapter 11 of
the Bankruptcy Code" and review our Form 8-K dated June 9, 2008.
25
Additional
Financing
We will
require additional financing in order to complete our stated plan of operations
for the next twelve months. There can be no assurance, however, that
such financing will be available or, if it is available, that we will be able to
structure such financing on terms acceptable to us and that it will be
sufficient to fund our cash requirements until we can reach a level of
profitable operations and positive cash flows. If we are unable to
obtain the financing necessary to support our operations, we may be unable to
continue as a going concern. We currently have no firm commitments
for any additional capital.
The
trading price of our shares of common stock and a downturn in the United States
stock and debt markets could make it more difficult to obtain financing through
the issuance of equity or debt securities. Even if we are able to
raise the funds required, it is possible that we could incur unexpected costs
and expenses, fail to collect significant amounts owed to us, or experience
unexpected cash requirements that would force us to seek alternative
financing. Further, if we issue additional equity or debt securities,
stockholders may experience additional dilution or the new equity securities may
have rights, preferences or privileges senior to those of existing holders of
our shares of common stock. If additional financing is not available
or is not available on acceptable terms, we will have to curtail our
operations.
Results
of Operations
As we
have remained in the early stages of development, we have not yet generated any
revenues from our operations.
The
results of operations include the results of our Company and its wholly owned
subsidiaries, Methane Energy Corp. and Cascadia Energy Corp., for the years
ended March 31, 2008, 2007 and 2006. During these years, our
Company performed all of the administrative operations while the subsidiaries,
Methane Energy Corp. and Cascadia Energy Corp., held the interests in the leases
and operated the Coos Bay project and Chehalis Basin project,
respectively.
Year
ended March 31, 2008 compared to year ended March 31,
2007
Operating
expenses during the year ended March 31, 2008 decreased significantly
compared with the year ended March 31, 2007 due to our decision to scale
back operations in the current fiscal year as a result of our limited working
capital. During the prior year, we had completed drilling on pilot
production wells in the Westport area of the Coos Bay Basin of Oregon and
commenced pre-drilling activities in the Chehalis Basin of
Washington. Operating expenses were $3,973,852 for the year ended
March 31, 2008, compared with $6,654,031 for the year ended March 31,
2007. The most significant operating expense decreases were
stock-based compensation, consulting fees, investor relations and travel,
partially offset by increased costs associated with inventory
shrinkage.
Stock-based
compensation expenses of $606,458 during fiscal 2008 decreased by $1,859,338
from fiscal 2007 of $2,465,796. This decrease resulted from a
combination of factors, including a decrease in the number of options granted to
employees in the current year and a decrease in the fair value per option, both
due largely to our financial position, and the impact in the prior year of
several non-recurring grants for three new independent directors.
The
expense for consulting and directors’ fees decreased by $844,207 from $1,159,317
in fiscal 2007 to $315,110 in fiscal 2008 primarily due to more functions
previously performed by outside consultants being assumed by the Company’s
full-time employees.
Investor
relations expenses were $337,618 for the year ended March 31, 2008,
compared with $592,371 for the year ended March 31, 2007. This
decrease of $254,753 was primarily a result of non-reoccurring expenditures in
the prior year on a program intended to stimulate investor awareness of our
Company.
26
Travel
costs for the year ended March 31, 2008 were $162,132 as compared with
$383,779 for the same period last year. The reduction in travel costs
totaling $221,647 related to our holding additional office space at the sites,
necessitating less travel and to our reduced activities in securing additional
financing.
Costs
associated with write off of supplies inventory increased from $26,821 for the
year ended March 31, 2007 to $668,848 for the year ended March 31,
2008. The increase of $642,027 resulted primarily from the write-down
of nonessential tubular pipe and chemical inventory holdings and subsequent
partial liquidation of this inventory in an effort to generate additional
working capital.
During
the twelve months ended March 31, 2008, we had no expense associated with
our land lease rentals as we did not enter into new leases as a result of our
financial position. During the preceding twelve-month period, we
expensed a total of $105,442 associated with lease rentals for our then
increasing portfolio of oil and gas leases.
We
incurred a loss on the conversion of Series E preferred stock of $4,464,329 for
the year ended March 31, 2008 reflecting the difference between the $0.50 per
common share conversion price and the market price of the common shares on the
Series E Stock conversion dates. No such loss was incurred during the
prior fiscal year.
We
invested excess cash in term deposits during the year ended March 31, 2008
resulting in interest revenue of $80,872. Similar investments during
the twelve months ended March 31, 2007 resulted in $294,053 of interest
revenue. The decrease in interest revenue of $213,181 was due to the
Company utilizing its excess cash holdings to fund operations and project
expenditures for the two sites.
We
recorded $791,689 in dividend expense related to our Series E Stock during the
fiscal year ended March 31, 2008 as compared with $695,339 in dividend expense
for our Series C and Series E preferred stock issued during the same period in
the prior year. In addition, we also accrued during the fiscal year ended March
31, 2008 $313,325 for dividend interest expense on the conditional mandatory
redemption requirements recorded for our Series E Stock. The prior
year’s period also reflected $710,110 in dividend accretion of the Series C
Stock beneficial conversion feature with an offsetting amount recorded as
additional paid-in capital.
Year
ended March 31, 2007 compared to year ended March 31, 2006
Operating
expenses during the year ended March 31, 2007 increased significantly over
the twelve months ended March 31, 2006 due to expansion of our activities
in both the Coos Bay project and the Chehalis Basin project. During
the year ended March 31, 2007, we completed drilling on pilot production
wells in the Westport area of the Coos Bay Basin of Oregon and commenced
pre-drilling activities in the Chehalis Basin of Washington. The most
significant operating expense increases were consulting fees, payroll expense,
stock-based compensation, investor relations and travel.
Operating
expenses were $6,654,031 for the year ended March 31, 2007, compared with
$4,193,346 for the year ended March 31, 2006. The full-year
impact of a growing internal staff dealing with all functions of a two-basin
land-acquisition and exploration program led to payroll expenses of $968,830 in
fiscal 2007, a $876,833 increase over the $91,997 incurred during the previous
fiscal year.
The
expense for consulting and directors’ fees increased by $528,397 from $630,920
in fiscal 2006 to $1,159,317 in fiscal 2007 primarily due to two factors, an
increase in consulting services related to defining financing alternatives to
fund our activities during fiscal 2007 and an increase in directors’ fees as we
increased our compensation to outside directors from $10,000 per year to $30,000
per year and were successful in recruiting three new outside directors to our
board.
Stock-based
compensation expenses of $2,465,796 during fiscal 2007 rose by $390,374 from
fiscal 2006 of $2,075,422. This occurred as we granted stock options
to the three new outside directors, our new president and chief executive, and
other new employees during the most recent fiscal year.
27
Investor
relations expenses were $592,371 for the year ended March 31, 2007,
compared with $163,435 for the year ended March 31, 2006. This
increase of $428,936 was primarily a result of expenditures on a program
intended to stimulate investor awareness during the period when our
Series C Stock was being converted to common shares, which were being sold
on the open market by the investors.
During
the twelve months ended March 31, 2007, we paid $105,442 for lease rentals
related to our increasing portfolio of oil and gas leases. During the
preceding twelve-month period we had paid a total of $73,254 in lease
rentals.
Office
rental costs increased from $59,472 in fiscal 2006 to $132,273 in fiscal 2007,
an increase of $72,801. The increase came as a result of our moving
into new office locations with additional space in both Coquille, Oregon, our
operational office for Methane Energy Corp., and Portland, Oregon, our
administrative office.
Travel
costs for the year ended March 31, 2007 were $383,779 as compared to
$287,563 for the same period last year. The additional travel costs
totaling $96,216 related to efforts to secure financing and to increased
activity in both the Coos Bay Basin and the Chehalis Basin.
We
invested excess cash in term deposits during the year ended March 31, 2007
resulting in interest revenue of $294,053. Similar investments during
the twelve months ended March 31, 2006 resulted in $156,799 of interest
revenue.
We
recorded the remaining $710,110 in value and a like amount in accretion related
to the beneficial conversion feature on the Series C Stock during the year
ended March 31, 2007 as compared with $845,763 recorded during the year
ended March 31, 2006. During the fiscal year ended March 31, 2007, we
also accrued $35,270 and $660,069 for dividends on our Series C Stock and
Series E Stock, respectively.
Contractual
Obligations
As of
March 31, 2008, the following table provides details of certain contractual
obligations of the Company. For more information regarding
these obligations, see the Company’s audited consolidated financial statements
and footnotes referenced below.
|
Total
|
Less than 1 year
|
1-3 years
|
3-5 years
|
5 or more years
|
||||||||||||||||
|
Convertible
Series E Preferred Stock (see Note 10)
|
$ | 20,950,000 | $ | 20,950,000 | $ | - | $ | - | $ | - | ||||||||||
|
Land
Lease Obligations (see
Note 4)
|
479,381 | 120,087 | 176,159 | 106,344 | 76,791 | |||||||||||||||
|
Equipment
and office space operating leases (see Note 13)
|
97,683 | 69,669 | 28,014 | - | - | |||||||||||||||
|
Related
party notes (see Note 3)
|
100,318 | 100,318 | - | - | - | |||||||||||||||
|
Note
for leasehold improvements (see Note 2)
|
15,625 | 15,625 | - | - | - | |||||||||||||||
|
Total
|
$ | 21,643,007 | $ | 21,255,699 | $ | 204,173 | $ | 106,344 | $ | 76,791 | ||||||||||
Off-Balance
Sheet Arrangements
None
28
New
Accounting Pronouncements
In
September 2006, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 157, “Fair Value Measurements”
(SFAS 157). SFAS 157 addresses differences in the definition of fair
value and guidance in applying the definition of fair value to the many
accounting pronouncements that require fair value measurements. SFAS
157 emphasizes that (1) fair value is a market-based measurement that should be
determined based on assumptions that market participants would use in pricing
the asset or liability for sale or transfer and (2) fair value is not
entity-specific but based on assumptions that market participants would use in
pricing the asset or liability. Finally, SFAS 157 establishes a
hierarchy of fair value assumptions that distinguishes between independent
market participant assumptions and the reporting entity’s own assumptions about
market participant assumptions. The provisions of SFAS 157 were
scheduled to be effective for fiscal years beginning after November 15, 2007 and
interim periods within those fiscal years. In February 2008, the FASB
issued FASB Staff Position (FSP) FAS 157-2, “Effective Dates of FASB Statement
No. 157,” which defers the effective date of SFAS 157 for all
nonrecurring fair value measurements of nonfinancial assets and liabilities for
one year. We do not expect that adoption of SFAS 157 will have a
material impact on our consolidated financial position, results of operations or
cash flows.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities” (SFAS 159). This statement permits
entities to choose to measure many financial instruments and certain other items
at fair value. This statement expands the use of fair value measurement and
applies to entities that elect the fair value option. The fair value option
established by this Statement permits all entities to choose to measure eligible
items at fair value at specified election dates. SFAS 159 is effective for
fiscal years beginning after November 15, 2007. We do not expect that
adoption of SFAS 159 will have a material impact on our consolidated financial
position, results of operations or cash flows.
In June
2007, the Emerging Issues Task Force (EITF) issued EITF Issue No. 07-3, “Accounting for
Nonrefundable Advance Payments for Goods or Services Received for Use in Future
Research and Development Activities” (EITF 07-3). Per EITF
07-3, a consensus was reached that nonrefundable advance payments for future
research and development activities should be deferred and
capitalized. EITF 07-3 is to be effective for financial statements
issued for fiscal years beginning after December 15, 2007, and interim periods
within those fiscal years, with early application permitted. We do
not expect that adoption of EITF 07-3 will have a material impact on
our consolidated financial position, results of operations or cash
flows.
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS
No. 141R”), which replaces SFAS 141. SFAS No. 141R applies to all
transactions in which an entity obtains control of one or more businesses,
including those without the transfer of consideration. SFAS No. 141R
defines the acquirer as the entity that obtains control on the acquisition
date. It also requires the measurement at fair value the acquired
assets, assumed liabilities and noncontrolling interest. In addition,
SFAS No. 141R requires that the acquisition and restructuring related cost be
recognized separately from the business combinations. SFAS No. 141R
requires that goodwill be recognized as of the acquisition date, measured as
residual, which in most cases will result in the excess of consideration plus
acquisition-date fair value of noncontrolling interest over the fair values of
identifiable net assets. Under SFAS No. 141R, “negative goodwill” in
which consideration given is less than the acquisition-date fair value of
identifiable net assets, will be recognized as a gain to the
acquirer. SFAS No. 141R is applied prospectively to business
combinations for which the acquisition date is on or after the first annual
reporting period beginning on or after December 15, 2008. We do not
expect that adoption of SFAS 141R will have a material impact on our
consolidated financial position, results of operations or cash
flows. We will adopt SFAS No. 141R for future business combinations
that occur on or after April 1, 2009.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51” (SFAS
160). SFAS 160 will change the accounting and reporting for minority
interests, which will be recharacterized as noncontrolling interests and
classified as a component of equity. This new consolidation method will
significantly change the accounting for transactions with minority interest
holders. SFAS 160 is effective for fiscal years, and interim periods
within those fiscal years, beginning on or after December 15, 2008 and we will
be required to adopt this statement effective at the beginning of our 2010
fiscal year. We are currently evaluating the impact of the
provisions of SFAS 160 on our consolidated financial position, results of
operations or cash flows.
In
May 2008, the FASB issued FSP No. APB 14-1, “Accounting for Convertible Debt
Instruments that may be Settled in Cash upon Conversion (including Partial Cash
Settlement)” (FSP APB 14-1). FSP APB 14-1 clarifies that
convertible debt instruments that may be settled in cash upon conversion
(including partial cash settlement) are not addressed by paragraph 12 of
Accounting Principles Board Opinion No. 14, “Accounting for Convertible Debt and
Debt Issued with Stock Purchase Warrants.” Additionally, FSP
APB 14-1 specifies that issuers of such instruments should separately account
for the liability and equity components in a manner that will reflect the
entity’s nonconvertible debt borrowing rate when interest cost is recognized in
subsequent periods. This FSP is effective for fiscal years beginning
after December 15, 2008, and interim periods within those fiscal
years. We are currently evaluating the impact that this FSP will have
on our consolidated financial position, results of operations or cash
flows.
29
Critical
Accounting Policies and Estimates
Our
consolidated financial statements have been prepared on a going concern
basis. We have accumulated a deficit of $26,132,279 from inception to
March 31, 2008. Our ability to continue as a going concern is
dependent upon our ability to generate profitable operations in the future
and/or to obtain the necessary financing to meet our obligations and repay our
liabilities arising from normal business operations when they come
due. The outcome of these matters cannot be predicted with any
certainty at this time. We have historically satisfied our working
capital needs primarily by issuing equity securities; however at March 31,
2008 we had a working capital deficit of $23,493,936, largely as a result of the
Series E preferred stock liability, which is classified as a current liability
due to the events of default. Management plans to continue to provide for
our capital needs by issuing equity securities; however its ability to do this
may be limited by the current bankruptcy filing. These consolidated
financial statements do not include any adjustments to the amount and
classification of assets and liabilities that may be necessary should we be
unable to continue as a going concern.
Accounting
Estimates
The
preparation of the consolidated financial statements in conformity with
U.S. generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting
period. Management makes its best estimate of the ultimate outcome
for these items based on the historical trends and other information available
when the consolidated financial statements are prepared. Changes in
the estimates are recognized in accordance with the accounting rules for the
estimate, which is typically in the period when new information becomes
available to management. Actual results could differ from those
estimates and assumptions.
Income
Taxes
We have
adopted SFAS No. 109, “Accounting for Income Taxes”,
which requires us to recognize deferred tax liabilities and assets for the
expected future tax consequences of events that have been recognized in our
consolidated financial statements or tax returns using the liability
method. Under this method, deferred tax liabilities and assets are
determined based on the temporary differences between the consolidated financial
statements and tax bases of assets and liabilities using enacted tax rates in
effect in the years in which the differences are expected to
reverse.
Stock-based
Compensation
Effective
April 1, 2004, we adopted SFAS No. 123 “Accounting for Stock Based
Compensation” as amended by SFAS No. 148 "Accounting for Stock-based
Compensation - Transition and Disclosure”. Effective April 1,
2006, we adopted FAS 123(R), “Share-Based Payment,” using
the modified prospective approach. We recognize stock-based
compensation expense using a fair value based method.
Prior to
the adoption of these standards, we applied the disclosure provision of SFAS No.
123 for stock options granted to directors, officers and
employees. As permitted by SFAS No. 123, we followed the intrinsic
value approach of APB No. 25 “Accounting for Stock Issued to
Employees” and the related interpretations. We have a stock
option plan that is described more fully in Note 7 to our audited consolidated
financial statements
Long-Lived
Assets Impairment
Our
long-term assets are reviewed when changes in circumstances require as to
whether their carrying value has become impaired, pursuant to guidance
established in SFAS No. 144, “Accounting for the Impairment or
Disposal of Long-Lived Assets.” Management considers assets to
be impaired if the carrying value exceeds the future projected cash flows from
the related operations, undiscounted and without interest charges. If
impairment is deemed to exist, the assets will be written down to fair value,
and a loss is recorded as the difference between the carrying value and the fair
value. Fair values are determined based on the quoted market values,
discounted cash flows or internal and external appraisal, as
applicable. Assets to be disposed of are carried at the lower of
carrying value or estimated net realizable value.
30
Asset
Retirement Obligations
We
recognize a liability for future retirement obligations associated with our oil
and gas properties. The estimated fair value of the asset retirement
obligation is based on the current cost escalated at an inflation rate and
discounted at a credit adjusted risk-free rate. This liability is
capitalized as part of the cost pool of the related asset and amortized using
the units of production method. The liability accretes until we
settle the obligation.
Oil
and Gas Properties
We
utilize the full cost method to account for our investment in oil and gas
properties. Accordingly, all costs associated with acquisition,
exploration and development of oil and gas reserves, including such costs as
leasehold acquisition costs, interest costs relating to unproved properties,
geological expenditures and direct internal costs are capitalized into the full
cost pool. When we obtain proven oil and gas reserves,
capitalized costs, including estimated future costs to develop the reserves and
estimated abandonment costs, net of salvage, will be depleted on the
units-of-production method using estimates of proved
reserves. Investments in unproved properties and major development
projects including capitalized interest, if any, are not amortized until proved
reserves associated with the projects can be determined. If the
future costs of exploration of unproved properties are determined uneconomical,
the amounts of such properties are added to the capitalized cost to be
amortized. As of March 31, 2008, all of our oil and gas
properties were unproved and were excluded from amortization.
The
capitalized costs included in the full cost pool are subject to a “ceiling
test”, which limits such costs to the aggregate of the estimated present value,
using an estimated discount rate, of the future net revenues from proved
reserves, based on current economic and operating conditions and the estimated
value of unproven properties. As of March 31, 2008, none of our
unproved oil and gas properties was considered impaired.
|
ITEM
7A.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
|
Interest
Rate and Credit Rating Risk
As of
March 31, 2008, we had $120,388 in cash, cash equivalents and short term
investments, of which $68,124 was held in our operating accounts and $52,264 was
invested in time deposits with 30-day maturities. Based on
sensitivity analyses performed on the financial instruments held as of
March 31, 2008, an immediate 10% change in interest rates is not expected
to have a material effect on our near term financial condition or
results.
Commodity
Price Risk
As of
March 31, 2008, we have no coalbed methane gas production. At
such time as we do record commercial production volumes of coalbed methane gas,
we will be subject to commodity price risk related to the sale of such
production. Prospectively, commodity prices received for our
production will be based on spot prices applicable to natural gas, which are
volatile, unpredictable, and beyond our control. Accordingly until
such time as we establish measurable production volumes, our vulnerability to
fluctuations in the price of natural gas is negligible.
Exchange
Rate Sensitivity
As of
March 31, 2008, our suppliers bill us for drilling and other operating
costs almost exclusively in U.S. dollars. Accordingly, a 10%
change in the U.S./Canadian exchange rate is not expected to have a material
effect on our near term financial condition or results.
31
|
ITEM
8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTAL DATA
|
Our
audited consolidated financial statements are stated in United States dollars
and are prepared in accordance with United States Generally Accepted Accounting
Principles.
The
following consolidated financial statements are filed as part of this annual
report:
Report of
Independent Registered Public Accounting Firm dated July14, 2008.
Audited
Consolidated Balance Sheets as of March 31, 2008 and 2007.
Audited
Consolidated Statements of Stockholders’ Equity (Deficit) from October 8,
2001 (Inception) to March 31, 2008.
Audited
Consolidated Statements of Operations for the years ended March 31, 2008, 2007,
and 2006 and the cumulative period from October 8, 2001 (Inception)
to March 31, 2008.
Audited
Consolidated Statements of Cash Flows for the years ended March 31, 2008, 2007,
and 2006 and the cumulative period from October 8, 2001 (Inception) to
March 31, 2008.
Notes to
Consolidated Financial Statements
32
FINANCIAL
STATEMENTS
TORRENT
ENERGY CORPORATION
(formerly
Scarab Systems, Inc.)
(An
exploration stage enterprise)
Consolidated
Financial Statements
March 31,
2008, 2007 and 2006
Index
33
To The
Audit Committee
Torrent
Energy Corporation
Portland,
Oregon
We have
audited the accompanying consolidated balance sheets of Torrent Energy
Corporation and Subsidiaries (an exploration stage company) ("the Company") as
of March 31, 2008 and 2007, and the related consolidated statements of
operations, stockholders' equity (deficit), and cash flows for each of the three
years in the period ended March 31, 2008, and for the period from
October 8, 2001 (inception) to March 31, 2008. These
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. The
Company has determined that it is not required to have, nor were we engaged to
perform, an audit of its internal control over financial
reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Torrent Energy Corporation
and Subsidiaries as of March 31, 2008 and 2007, and the results of their
operations and their cash flows for each of the three years in the period ended
March 31, 2008, and for the cumulative period from October 8, 2001
(inception) to March 31, 2008, in conformity with accounting principles
generally accepted in the United States.
The
accompanying consolidated financial statements have been prepared assuming the
Company will continue as a going concern. As discussed in Note 1
to the consolidated financial statements, the Company has experienced recurring
losses from operations since inception, and has a substantial accumulated
deficit. Further, subsequent to year end, the Company filed for
reorganization under Chapter 11 of the U.S. Bankruptcy
Code. These conditions raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans regarding
these matters are also described in Note 1. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/S/
PETERSON SULLIVAN PLLC
Seattle,
Washington
July 14,
2008
34
(formerly
Scarab Systems, Inc.)
(An
exploration stage enterprise)
Consolidated
Balance Sheets
|
March
31,
|
March
31,
|
|||||||
|
ASSETS
|
2008
|
2007
|
||||||
|
Current
Assets
|
||||||||
|
Cash
and cash equivalents
|
$ | 120,388 | $ | 5,941,577 | ||||
|
Joint
venture receivables
|
- | 147,928 | ||||||
|
Supplies
inventory
|
75,790 | 906,208 | ||||||
|
Prepaid
expenses and deposits
|
82,796 | 511,135 | ||||||
|
Total
Current Assets
|
278,974 | 7,506,848 | ||||||
|
Oil
and gas properties, unproven (Note 4)
|
35,055,328 | 31,234,262 | ||||||
|
Other
assets, net of depreciation of $103,074 and $43,762
|
115,445 | 215,999 | ||||||
|
Total
Assets
|
$ | 35,449,747 | $ | 38,957,109 | ||||
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY (DEFICIT)
|
||||||||
|
Current
Liabilities
|
||||||||
|
Accounts
payable
|
$ | 869,866 | $ | 1,379,204 | ||||
|
Accounts
payable – related parties (Note 3)
|
153,324 | 8,545 | ||||||
|
Convertible
Series E preferred stock subject to mandatory redemption, 20,950 shares
outstanding (2007 – 25,000) (Note 10)
|
20,950, 000 | 2,350,000 | ||||||
|
Preferred
stock dividends payable
|
1,683,777 | 660,069 | ||||||
|
Notes
payable – related parties (Note 3)
|
100,318 | - | ||||||
|
Current
portion of long-term note
|
15,625 | 37,500 | ||||||
|
Total
Current Liabilities
|
23,772,910 | 4,435,318 | ||||||
|
Long-term
Liabilities
|
||||||||
|
Asset
retirement obligations
|
76,332 | - | ||||||
|
Long-term
note
|
- | 9,375 | ||||||
|
Total
Liabilities
|
23,849,242 | 4,444,693 | ||||||
|
Commitment and Contingencies
(Notes 4, 13 and 14)
|
||||||||
|
STOCKHOLDERS’
EQUITY (DEFICIT)
|
||||||||
|
Share
Capital
|
||||||||
|
Convertible
Series E preferred stock, $0.01 par value, 25,000 shares authorized,
25,000 shares issued and 20,950 outstanding (2007 – 25,000) - see
liability above
|
- | 226 | ||||||
|
Common
stock, $0.001 par value, 100,000,000 shares authorized, 41,732,547 shares
issued and outstanding (2007 – 33,424,941)
|
41,733 | 33,425 | ||||||
|
Additional
paid in capital
|
37,691,051 | 51,124,541 | ||||||
|
Deficit
accumulated during the exploration stage
|
(26,132,279 | ) | (16,645,776 | ) | ||||
|
Total
stockholders’ equity (deficit)
|
11,600,505 | 34,512,416 | ||||||
|
Total
liabilities and stockholders’ equity (deficit)
|
$ | 35,449,747 | $ | 38,957,109 | ||||
The
accompanying notes are an integral part of these consolidated financial
statements.
35
(Formerly
Scarab Systems, Inc.)
(An
Exploration Stage Enterprise)
Consolidated
Statements of Stockholders’ Equity (Deficit)
For
the Period from October 8, 2001 (Inception) to March 31,
2008
|
Deficit
|
||||||||||||||||||||||||
|
Share
|
accumulated
|
|||||||||||||||||||||||
|
subscriptions
|
during
|
Total
|
||||||||||||||||||||||
|
Common
Stock
|
Additional
paid-
|
received/
|
exploration
|
Stockholders’
|
||||||||||||||||||||
|
Shares
|
Amount
|
in
capital
|
(receivable)
|
stage
|
equity
(deficit)
|
|||||||||||||||||||
|
Stock
issued for cash at $0.001 per share in October 2001
|
5,425,000 | $ | 5,425 | $ | - | $ | - | $ | - | $ | 5,425 | |||||||||||||
|
Stock
issued for intangible asset acquisition at $0.001 per share in October
2001
|
200,000 | 200 | - | - | - | 200 | ||||||||||||||||||
|
Issued
1,440,000 common stock at $0.001 per share in October 2001
|
1,440,000 | 1,440 | - | (1,440 | ) | - | - | |||||||||||||||||
|
Stock
issued at $0.50 per share in November 2001
|
675,000 | 675 | 336,825 | (337,500 | ) | - | - | |||||||||||||||||
|
Stock
issued for cash at $0.50 per share in January 2002
|
390,000 | 390 | 194,610 | - | - | 195,000 | ||||||||||||||||||
|
Net
(loss) for the period
|
- | - | - | - | (112,434 | ) | (112,434 | ) | ||||||||||||||||
|
Balance, March 31,
2002
|
8,130,000 | $ | 8,130 | $ | 531,435 | $ | (338,940 | ) | $ | (112,434 | ) | $ | 88,191 | |||||||||||
|
Stock
issued for cash at $0.25 to $0.50 per share in April 2002
|
130,000 | 130 | 39,870 | - | - | 40,000 | ||||||||||||||||||
|
Recapitalization
to effect the acquisition of iRV, Inc.
|
1,446,299 | 1,446 | (1,446 | ) | - | - | - | |||||||||||||||||
|
Acquisition
of MarketEdge Direct
|
- | - | - | 337,500 | - | 337,500 | ||||||||||||||||||
|
Proceeds
of share subscription
|
- | - | - | 1,440 | - | 1,440 | ||||||||||||||||||
|
Return
of stocks in connection with disposal of MarketEdge Direct
|
(540,000 | ) | (540 | ) | (358,042 | ) | - | - | (358,582 | ) | ||||||||||||||
|
Proceeds
of 96,000 share subscription at $0.40 to $0.50 per share
|
- | - | - | 40,500 | - | 40,500 | ||||||||||||||||||
|
Allocation
of 241,020 shares services rendered at $0.10 to $0.40 per
share
|
- | - | 33,306 | - | - | 33,306 | ||||||||||||||||||
|
Net
(loss) for the year
|
- | - | - | - | (396,277 | ) | (396,277 | ) | ||||||||||||||||
|
Balance, March 31,
2003
|
9,166,299 | $ | 9,166 | $ | 245,123 | $ | 40,500 | $ | (508,711 | ) | $ | (213,922 | ) | |||||||||||
|
Stock
issued for services rendered
|
241,020 | 241 | (241 | ) | - | - | - | |||||||||||||||||
|
Stock
issued at $0.40 to $0.50 per share
|
96,000 | 96 | 40,404 | (40,500 | ) | - | - | |||||||||||||||||
|
Stock
issued for conversion of debt at $0.10 per share in February
2004
|
510,000 | 510 | 50,490 | - | - | 51,000 | ||||||||||||||||||
|
Stock
issued for cash at $0.10 per share in February and March
2004
|
1,200,000 | 1,200 | 118,800 | - | - | 120,000 | ||||||||||||||||||
|
Stock
issued for exercise of stock options at $0.10 per share in February and
March 2004
|
960,000 | 960 | 95,040 | - | - | 96,000 | ||||||||||||||||||
|
Issuance
of stock options as compensation
|
- | - | 195,740 | - | - | 195,740 | ||||||||||||||||||
|
Forgiveness
of debt – related party
|
- | - | 110,527 | - | - | 110,527 | ||||||||||||||||||
|
Net
(loss) for the year
|
- | - | - | - | (374,606 | ) | (374,606 | ) | ||||||||||||||||
|
Balance, March 31,
2004
|
12,173,319 | $ | 12,173 | $ | 855,883 | $ | - | $ | (883,317 | ) | $ | (15,261 | ) | |||||||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
36
TORRENT
ENERGY CORPORATION
(Formerly
Scarab Systems, Inc.)
(An
Exploration Stage Enterprise)
Consolidated
Statements of Stockholders’ Equity (Deficit)
For
the Period from October 8, 2001 (Inception) to March 31,
2008
|
Deficit
|
||||||||||||||||||||||||||||||||
|
Share
|
accumulated
|
Total
|
||||||||||||||||||||||||||||||
|
Series
B
|
Additional
|
Subscriptions
|
during
|
Stockholders’
|
||||||||||||||||||||||||||||
|
Preferred
Stock
|
Common
Stock
|
Paid-in
|
received/
|
exploration
|
equity
|
|||||||||||||||||||||||||||
|
Shares
|
Amount
|
Shares
|
Amount
|
capital
|
(receivable)
|
stage
|
(deficit)
|
|||||||||||||||||||||||||
|
Stock
issued for exercise of stock options at $0.10 per share in May, June and
July 2004
|
- | $ | - | 640,000 | $ | 640 | $ | 63,360 | $ | - | $ | - | $ | 64,000 | ||||||||||||||||||
|
Stock
and warrants issued under a private placement at $0.35 per share in May
2004
|
- | - | 1,442,930 | 1,443 | 503,582 | - | - | 505,025 | ||||||||||||||||||||||||
|
Stock
issued for investor relations services at $0.54 per share in June
2004
|
300,000 | 300 | 161,700 | - | - | 162,000 | ||||||||||||||||||||||||||
|
Stock
issued for acquisition of oil and gas properties at $0.38 per share in
June 2004 and January 2005 (Note 4)
|
1,200,000 | 1,200 | 454,800 | - | - | 456,000 | ||||||||||||||||||||||||||
|
Stock
and warrants issued under a private placement at $0.40 per share in July
2004
|
500,000 | 500 | 199,500 | - | - | 200,000 | ||||||||||||||||||||||||||
|
Stock
issued under a private placement at $1.00 per share in 2005, net of share
issue costs of $100,000
|
2,500,000 | 2,500 | 2,397,500 | - | - | 2,400,000 | ||||||||||||||||||||||||||
|
Stock
issued for exercise of warrants at $0.50 and $0.55 per
share
|
1,614,359 | 1,614 | 825,565 | - | - | 827,179 | ||||||||||||||||||||||||||
|
Convertible
Series B preferred stock issued under a private placement at $1,000 per
Series B share in August 2004, net of issuance costs (Note
8)
|
2,200 | 22 | - | - | 1,934,978 | - | - | 1,935,000 | ||||||||||||||||||||||||
|
Stock
issued for conversion of Series B preferred stock at prices
ranging from $0.76 to $0.89 per share
|
(500 | ) | (5 | ) | 614,358 | 615 | (610 | ) | - | - | - | |||||||||||||||||||||
|
Beneficial
conversion feature on convertible
Series
B preferred stock (Note 8)
|
- | - | - | - | 315,245 | - | - | 315,245 | ||||||||||||||||||||||||
|
Accretion
of Series B preferred stock beneficial conversion feature
|
- | - | - | - | - | - | (210,163 | ) | (210,163 | ) | ||||||||||||||||||||||
|
Series
B preferred stock dividend
|
- | - | - | - | - | - | (72,672 | ) | (72,672 | ) | ||||||||||||||||||||||
|
Issuance
of stock options as compensation
|
- | - | - | - | 701,740 | - | - | 701,740 | ||||||||||||||||||||||||
|
Net
(loss) for the year
|
- | - | - | - | - | - | (2,418,625 | ) | (2,418,625 | ) | ||||||||||||||||||||||
|
Balance, March
31, 2005
|
1,700 | $ | 17 | 20,984,966 | $ | 20,985 | $ | 8,413,243 | - | $ | (3,584,777 | ) | $ | 4,849,468 | ||||||||||||||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
37
TORRENT
ENERGY CORPORATION
(Formerly
Scarab Systems, Inc.)
(An
Exploration Stage Enterprise)
Consolidated
Statements of Stockholders’ Equity (Deficit)
For
the Period from October 8, 2001 (Inception) to March 31,
2008
|
Deficit
|
||||||||||||||||||||||||||||||||||||||||
|
Share
|
Accumulated
|
Total
|
||||||||||||||||||||||||||||||||||||||
|
Series
B
|
Series
C
|
Additional
|
subscriptions
|
During
|
Stockholders’
|
|||||||||||||||||||||||||||||||||||
|
Preferred
Stock
|
Preferred
Stock
|
Common
Stock
|
paid-in
|
received/
|
Exploration
|
equity
|
||||||||||||||||||||||||||||||||||
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
capital
|
(receivable)
|
Stage
|
(deficit)
|
|||||||||||||||||||||||||||||||
|
Stock
issued for conversion of Series B preferred stock at prices ranging from
$0.77 to $1.20 per share
|
(1,700 | ) | $ | (17 | ) | - | $ | - | 1,795,254 | $ | 1,795 | $ | (1,778 | ) | $ | - | $ | - | $ | - | ||||||||||||||||||||
|
Accretion
of Series B preferred stock beneficial conversion feature
|
- | - | - | - | - | - | - | - | (105,081 | ) | (105,081 | ) | ||||||||||||||||||||||||||||
|
Common
stock issued for cashless exercise of stock options
|
- | - | - | - | 89,502 | 89 | (89 | ) | - | - | - | |||||||||||||||||||||||||||||
|
Cancellation
of stock options as compensation
|
- | - | - | - | - | - | (99,641 | ) | - | - | (99,641 | ) | ||||||||||||||||||||||||||||
|
Common
stock issued for exercise of warrants ranging from $0.50 to $0.55 per
share
|
- | - | - | - | 328,571 | 329 | 168,956 | - | - | 169,285 | ||||||||||||||||||||||||||||||
|
Common
stock issued at $2 per share under a private placement in July 2005, net
of issuance cost (Note 11)
|
- | - | - | - | 1,650,000 | 1,650 | 3,273,350 | - | - | 3,275,000 | ||||||||||||||||||||||||||||||
|
Convertible
Series C preferred stock issued under a private placement in July 2005,
net of issuance costs (Note 9)
|
- | - | 12,500 | 125 | - | - | 11,551,875 | - | - | 11,552,000 | ||||||||||||||||||||||||||||||
|
Beneficial
conversion feature on convertible Series C preferred stock (Note
9)
|
- | - | - | - | - | - | 845,763 | - | - | 845,763 | ||||||||||||||||||||||||||||||
|
Accretion
of Series C beneficial conversion feature (Note 9)
|
- | - | - | - | - | - | - | - | (845,763 | ) | (845,763 | ) | ||||||||||||||||||||||||||||
|
Series
C stock dividend
|
- | - | - | - | - | - | - | - | (308,442 | ) | (308,442 | ) | ||||||||||||||||||||||||||||
|
Common
stock issued for conversion of Series C preferred stock ranging from $1.64
to $2.27 per share
|
- | - | (4,125 | ) | (41 | ) | 2,083,614 | 2,084 | (2,043 | ) | - | - | - | |||||||||||||||||||||||||||
|
Common
stock issued for acquisition of oil and gas properties at $0.38 per share
in February 2006 (Note 4)
|
- | - | - | - | 600,000 | 600 | 227,400 | - | - | 228,000 | ||||||||||||||||||||||||||||||
|
Stock
based compensation for the period
|
- | - | - | - | - | - | 2,075,422 | - | - | 2,075,422 | ||||||||||||||||||||||||||||||
|
Net
(loss) for the period
|
- | - | - | - | - | - | - | - | (4,036,286 | ) | (4,036,286 | ) | ||||||||||||||||||||||||||||
|
Balance, March 31,
2006
|
- | $ | - | 8,375 | $ | 84 | 27,531,907 | $ | 27,532 | $ | 26,452,458 | $ | - | $ | (8,880,349 | ) | $ | 17,599,725 | ||||||||||||||||||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
38
TORRENT
ENERGY CORPORATION
(Formerly
Scarab Systems, Inc.)
(An
Exploration Stage Enterprise)
Consolidated
Statements of Stockholders’ Equity (Deficit)
For
the Period from October 8, 2001 (Inception) to March 31,
2008
|
Series
B
Preferred
Stock
|
Series
C
Preferred
Stock
|
Series
E
Preferred
Stock
|
Common
Stock
|
Additional
Paid-In
|
Share
subscriptions Received/
|
Deficit
accumulated during exploration
|
Total
Stockholders' Equity
|
|||||||||||||||||||||||||||||||||||||||||
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Capital
|
(Receivable)
|
stage
|
(Deficit)
|
|||||||||||||||||||||||||||||||||||||
|
Beneficial
conversion feature on convertible Series C Preferred Stock (Note
9)
|
- | $ | - | - | $ | - | - | $ | - | - | $ | - | $ | 710,110 | $ | - | $ | - | $ | 710,110 | ||||||||||||||||||||||||||||
|
Accretion
of Series C beneficial conversion feature (Note 9)
|
- | - | - | - | - | - | - | - | - | - | (710,110 | ) | (710,110 | ) | ||||||||||||||||||||||||||||||||||
|
Series
C Stock Dividend
|
- | - | - | - | - | - | - | - | - | - | (35,270 | ) | (35,270 | ) | ||||||||||||||||||||||||||||||||||
|
Common
Stock Issued for Conversion of Series C Preferred Stock ranging from $1.64
to $2.27 per share
|
- | - | (8,375 | ) | (84 | ) | - | - | 5,339,320 | 5,339 | (5,255 | ) | - | - | - | |||||||||||||||||||||||||||||||||
|
Common
Stock Issued in Lieu of Cash Dividend on Series C Preferred Stock at a
price of $1.50 per share (Note 9)
|
- | - | - | - | - | - | 228,714 | 229 | 343,483 | - | - | 343,712 | ||||||||||||||||||||||||||||||||||||
|
Convertible
Series E Preferred Stock Issued under Private Placement at $1,000 per
Series E share, net of issuance costs (Note 10)
|
- | - | - | - | 25,000 | 250 | - | - | 23,114,750 | - | - | 23,115,000 | ||||||||||||||||||||||||||||||||||||
|
Convertible
Series E Preferred reclassed to
Liability
per SFAS No. 150
|
- | - | - | - | (2,350 | ) | (24 | ) | - | - | (2,349,976 | ) | - | - | (2,350,000 | ) | ||||||||||||||||||||||||||||||||
|
Series
E Stock Dividend
|
- | - | - | - | - | - | - | - | - | - | (660,069 | ) | (660,069 | ) | ||||||||||||||||||||||||||||||||||
|
Stock
based Compensation for the period
|
- | - | - | - | - | - | - | - | 2,465,796 | 2,465,796 | ||||||||||||||||||||||||||||||||||||||
|
Common
Stock issued for Services
|
- | - | - | - | - | - | 125,000 | 125 | 227,375 | - | - | 227,500 | ||||||||||||||||||||||||||||||||||||
|
Exercise
of stock options ( Note 7)
|
- | - | - | - | - | - | 200,000 | 200 | 165,800 | - | - | 166,000 | ||||||||||||||||||||||||||||||||||||
|
Net
(Loss) for the Period
|
- | - | - | - | - | - | - | - | - | - | (6,359,978 | ) | (6,359,978 | ) | ||||||||||||||||||||||||||||||||||
|
Balance, March 31,
2007
|
- | $ | - | - | $ | - | 22,650 | $ | 226 | 33,424,941 | $ | 33,425 | $ | 51,124,541 | $ | - | $ | (16,645,776 | ) | $ | 34,512,416 | |||||||||||||||||||||||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
39
TORRENT
ENERGY CORPORATION
(Formerly
Scarab Systems, Inc.)
(An
Exploration Stage Enterprise)
Consolidated
Statements of Stockholders’ Equity (Deficit)
For
the Period from October 8, 2001 (Inception) to March 31, 2008
|
Series
B
Preferred
Stock
|
Series
C
Preferred
Stock
|
Series
E
Preferred
Stock
|
Common
Stock
|
Additional
Paid-In
|
Share
subscriptions Received/
|
Deficit
accumulated during exploration
|
Total
Stockholders' Equity
|
|||||||||||||||||||||||||||||||||||||||||
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Capital
|
(Receivable)
|
stage
|
(Deficit)
|
|||||||||||||||||||||||||||||||||||||
|
Common
Stock issued for settlement of Series E Preferred Stock liability at $0.50
per share
(Note
10)
|
- | - | - | - | - | - | 8,100,000 | $ | 8,100 | $ | 8,433,900 | $ | - | $ | - | $ | 8,442,000 | |||||||||||||||||||||||||||||||
|
Common
Stock issued in lieu of cash dividend on Series E Preferred Stock at a
price of $0.50 per share (Note 10)
|
- | - | - | - | - | - | 162,606 | 163 | 153,471 | - | - | 153,634 | ||||||||||||||||||||||||||||||||||||
|
Convertible
Series E Preferred Stock reclassified to current liability per SFAS No.
150
|
- | - | - | - | (22,650 | ) | (226 | ) | - | - | (22,649,774 | ) | - | - | (22,650,000 | ) | ||||||||||||||||||||||||||||||||
|
Series
E Preferred Stock Dividend
|
- | - | - | - | - | - | - | - | - | - | (791,689 | ) | (791,689 | ) | ||||||||||||||||||||||||||||||||||
|
Stock
based compensation for the period
|
- | - | - | - | - | - | - | - | 606,458 | - | - | 606,458 | ||||||||||||||||||||||||||||||||||||
|
Exercise
of stock options in December 2007 (Note 7)
|
45,000 | 45 | 22,455 | - | - | 22,500 | ||||||||||||||||||||||||||||||||||||||||||
|
Net
(Loss) for the Period
|
- | - | - | - | - | - | - | - | - | - | (8,694,814 | ) | (8,694,814 | ) | ||||||||||||||||||||||||||||||||||
|
Balance, March 31,
2008
|
- | $ | - | - | $ | - | - | $ | - | 41,732,547 | $ | 41,733 | $ | 37,691,051 | $ | - | $ | (26,132,279 | ) | $ | 11,600,505 | |||||||||||||||||||||||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
40
(formerly
Scarab Systems, Inc.)
(An
exploration stage enterprise)
Consolidated
Statements of Operations
|
Cumulative
|
||||||||||||||||
|
October
8, 2001
|
||||||||||||||||
|
(inception)
to
|
Year
Ended
|
Year
Ended
|
Year
Ended
|
|||||||||||||
|
March
31, 2008
|
March
31, 2008
|
March
31, 2007
|
March
31, 2006
|
|||||||||||||
|
Expenses
|
||||||||||||||||
|
Consulting
and directors fees (Note 3)
|
$ | 2,802,312 | $ | 315,110 | $ | 1,159,317 | $ | 630,920 | ||||||||
|
Payroll
expense
|
2,074,494 | 1,013,667 | 968,830 | 91,997 | ||||||||||||
|
Depreciation
and amortization
|
114,151 | 64,616 | 41,229 | 6,111 | ||||||||||||
|
Insurance
|
461,614 | 181,790 | 116,776 | 114,229 | ||||||||||||
|
Investor
relations
|
1,956,607 | 337,618 | 592,371 | 163,435 | ||||||||||||
|
Legal
and accounting
|
1,342,641 | 302,104 | 388,433 | 402,127 | ||||||||||||
|
Lease
rental expense
|
193,713 | - | 105,442 | 73,254 | ||||||||||||
|
Office
and Miscellaneous
|
499,757 | 80,074 | 183,433 | 127,291 | ||||||||||||
|
Purchase
investigation costs
|
103,310 | - | - | - | ||||||||||||
|
Rent
|
420,492 | 165,844 | 132,273 | 59,472 | ||||||||||||
|
Shareholder
relations
|
219,034 | 4,553 | 18,634 | 105,126 | ||||||||||||
|
Stock-based
compensation (Note 7)
|
6,045,156 | 606,458 | 2,465,796 | 2,075,422 | ||||||||||||
|
Write
down of supplies inventory
|
721,321 | 668,848 | 26,821 | 25,652 | ||||||||||||
|
Telephone
|
191,359 | 65,577 | 70,897 | 30,747 | ||||||||||||
|
Travel
|
936,520 | 162,132 | 383,779 | 287,563 | ||||||||||||
|
Accretion
expense
|
5,461 | 5,461 | - | - | ||||||||||||
|
Operating
(loss)
|
(18,087,942 | ) | (3,973,852 | ) | (6,654,031 | ) | (4,193,346 | ) | ||||||||
|
Other
income (expense)
|
||||||||||||||||
|
Loss
on conversion of Preferred Stock
|
(4,464,329 | ) | (4,464,329 | ) | - | - | ||||||||||
|
Interest
income
|
532,751 | 80,872 | 294,053 | 156,799 | ||||||||||||
|
Interest
expense
|
(338,333 | ) | (314,264 | ) | - | - | ||||||||||
|
Gain
(loss) on sale of equipment
|
(22,980 | ) | (23,241 | ) | - | 261 | ||||||||||
|
Gain
on settlement of debt
|
37,045 | - | - | - | ||||||||||||
|
Write-off
of goodwill
|
(70,314 | ) | - | - | - | |||||||||||
|
Loss
from continued operations
|
(22,414,102 | ) | (8,694,814 | ) | (6,359,978 | ) | (4,036,286 | ) | ||||||||
|
Net
income from discontinued operations
|
21,082 | - | - | - | ||||||||||||
|
Net
loss and comprehensive loss for the period
|
(22,393,020 | ) | (8,694,814 | ) | (6,359,978 | ) | (4,036,286 | ) | ||||||||
|
Series
B preferred stock dividend
|
(72,672 | ) | - | - | - | |||||||||||
|
Series
C preferred stock dividend
|
(343,712 | ) | - | (35,270 | ) | (308,442 | ) | |||||||||
|
Series
E preferred stock dividend
|
(1,451,758 | ) | (791,689 | ) | (660,069 | ) | - | |||||||||
|
Dividend
accretion of Series B preferred stock beneficial conversion
feature (Note 8)
|
(315,244 | ) | - | - | (105,081 | ) | ||||||||||
|
Dividend
accretion of Series C preferred stock beneficial conversion feature (Note
9)
|
(1,555,873 | ) | - | (710,110 | ) | (845,763 | ) | |||||||||
|
Net
loss for the period applicable to common stockholders
|
$ | (26,132,279 | ) | $ | (9,486,503 | ) | $ | (7,765,427 | ) | $ | (5,295,572 | ) | ||||
|
Basic
and diluted (loss) per share
|
- | $ | (0.24 | ) | $ | (0.24 | ) | $ | (0.22 | ) | ||||||
|
Weighted
average number of common shares
outstanding
|
- | 39,315,276 | 32,677,984 | 24,407,133 | ||||||||||||
The
accompanying notes are an integral part of these consolidated financial
statements
41
(formerly
Scarab Systems, Inc.)
(An
exploration stage enterprise)
Consolidated
Statements of Cash Flows
|
Cumulative
October 8, 2001 (inception) to March 31, 2008
|
Year
Ended
March
31, 2008
|
Year
Ended
March
31, 2007
|
Year
Ended
March
31, 2006
|
|||||||||||||
|
Cash
flows from operating
activities
|
||||||||||||||||
|
Net
(loss) for the period
|
$ | (22,393,020 | ) | $ | (8,694,814 | ) | $ | (6,359,978 | ) | $ | (4,036,286 | ) | ||||
|
Adjustments
to reconcile net loss to
|
||||||||||||||||
|
Net
cash used in operating activities:
|
||||||||||||||||
|
-
depreciation and amortization
|
114,151 | 64,616 | 41,229 | 6,111 | ||||||||||||
|
-
stock-based compensation
|
6,045,156 | 606,458 | 2,465,796 | 2,075,422 | ||||||||||||
|
-
loss on conversion of Preferred Stock
|
4,464,329 | 4,464,329 | - | - | ||||||||||||
|
-
accretion on well site restoration
|
5,461 | 5,461 | - | - | ||||||||||||
|
-
interest expense on Series E Preferred Stock
subject to redemption
|
313,325 | 313,325 | - | - | ||||||||||||
|
-
unpaid interest on related party notes
|
939 | 939 | - | - | ||||||||||||
|
-
write down on supplies inventory
|
390,550 | 338,077 | 26,821 | 25,652 | ||||||||||||
|
-
foreign exchange
|
1,398 | - | - | - | ||||||||||||
|
-
write-off of goodwill
|
70,314 | - | - | - | ||||||||||||
|
-
debt forgiven
|
37,045 | - | - | - | ||||||||||||
|
-
loss (gain) on sale of equipment
|
22,980 | 23,241 | (261 | ) | ||||||||||||
|
-
net income from the discontinued operations
|
(21,082 | ) | - | - | - | |||||||||||
|
-
common shares issued for service rendered
|
195,306 | - | - | - | ||||||||||||
|
-
reversal of option expense charged for services
|
(99,641 | ) | - | - | (99,641 | ) | ||||||||||
|
Changes
in non-cash working capital items:
|
||||||||||||||||
|
Joint
venture receivables
|
- | 147,928 | (101,183 | ) | (46,745 | ) | ||||||||||
|
Inventory
|
(466,340 | ) | 492,341 | (557,674 | ) | (401,007 | ) | |||||||||
|
Prepaid
expenses
|
(82,796 | ) | 368,157 | (219,086 | ) | (231,867 | ) | |||||||||
|
Accounts
payable and accrued expenses
|
(2,904,676 | ) | (1,185,541 | ) | (1,612,475 | ) | (489,180 | ) | ||||||||
|
Accrued
expenses – related parties
|
153,324 | 144,779 | (78,586 | ) | (155,805 | ) | ||||||||||
|
Net
cash used in operating activities
|
(14,153,277 | ) | (2,910,704 | ) | (6,395,136 | ) | (3,353,607 | ) | ||||||||
|
Cash
flows from investing activities
|
||||||||||||||||
|
Oil
and gas properties
|
(30,232,321 | ) | (3,013,811 | ) | (13,463,412 | ) | (11,435,664 | ) | ||||||||
|
Loan
|
(62,684 | ) | - | - | - | |||||||||||
|
Proceeds
from sale of equipment
|
26,215 | 18,800 | - | 7,415 | ||||||||||||
|
Acquisition
of other assets
|
(203,791 | ) | (6,103 | ) | (111,469 | ) | (84,024 | ) | ||||||||
|
Net
cash used in investing activities
|
$ | (30,472,581 | ) | $ | (3,001,114 | ) | $ | (13,574,881 | ) | $ | (11,512,273 | ) | ||||
The
accompanying notes are an integral part of these consolidated financial
statements
42
TORRENT
ENERGY CORPORATION
(formerly
Scarab Systems, Inc.)
(An
exploration stage enterprise)
Consolidated
Statements of Cash Flows (continued)
|
Cumulative
October 8, 2001 (inception) to March 31, 2008
|
Year
Ended
March
31, 2008
|
Year
Ended
March
31, 2007
|
Year
Ended
March
31, 2006
|
|||||||||||||
|
Cash
flows from financing activities
|
||||||||||||||||
|
Proceeds
from issuance of common stock
|
$ | 7,988,414 | $ | - | $ | - | $ | 3,444,285 | ||||||||
|
Net
proceeds from issuance of Series B preferred stock
|
1,935,000 | - | - | - | ||||||||||||
|
Net
proceeds from issuance of Series C preferred stock
|
11,552,000 | - | - | 11,552,000 | ||||||||||||
|
Net
proceeds from issuance of Series E preferred stock
|
23,115,000 | - | 23,115,000 | - | ||||||||||||
|
Payment
of Series B preferred stock dividend
|
(72,672 | ) | - | - | (72,672 | ) | ||||||||||
|
Proceeds
from promissory notes
|
30,000 | - | - | - | ||||||||||||
|
Repayment
of promissory notes
|
(89,375 | ) | (31,250 | ) | (28,125 | ) | - | |||||||||
|
Proceeds
from shareholder loan
|
80,000 | - | - | - | ||||||||||||
|
Repayment
of shareholder loan
|
(80,000 | ) | - | - | - | |||||||||||
|
Proceeds
from issuance of related party notes
|
99,379 | 99,379 | - | - | ||||||||||||
|
Proceeds
from exercise of stock options
|
188,500 | 22,500 | 166,000 | - | ||||||||||||
|
Net
cash provided by financing activities
|
44,746,246
|
90,629
|
23,252,875 | 14,923,613 | ||||||||||||
|
Increase
(decrease) in cash and cash equivalents
|
120,388 | (5,821,189 | ) | 3,282,858 | 57,733 | |||||||||||
|
Cash and cash equivalents,
beginning
of period
|
- | 5,941,577 | 2,658,719 | 2,600,986 | ||||||||||||
|
Cash and cash
equivalents, end of
period
|
$ | 120,388 | $ | 120,388 | $ | 5,941,577 | $ | 2,658,719 | ||||||||
|
Supplemental
cash flow information:
|
||||||||||||||||
|
Interest
paid
|
$ | 13,013 | $ | - | $ | - | $ | - | ||||||||
|
Non-cash
transactions:
|
||||||||||||||||
|
Common
stock issued pursuant to conversion of promissory note
|
$ | 55,000 | $ | - | $ | - | $ | - | ||||||||
|
Common
stock issued for investor relations services
|
$ | 162,000 | $ | - | $ | - | $ | - | ||||||||
|
Common
stock issued for prepaid technical services
|
$ | 227,500 | $ | 227,500 | $ | - | ||||||||||
|
Forgiveness
of accrued consulting fees payable to directors and
officers
|
$ | 110,527 | $ | - | $ | - | $ | - | ||||||||
|
Common
stock issued for oil and gas properties
|
$ | 684,000 | $ | - | $ | - | $ | 228,000 | ||||||||
|
Property
acquired through issuance of note
|
$ | 75,000 | $ | - | $ | 75,000 | $ | - | ||||||||
|
Settlement
of Series B earned dividends with issuance of common stock
|
$ | 343,712 | $ | - | $ | 343,712 | $ | - | ||||||||
|
Payment
of Series C dividends with issuance of common stock
|
$ | 35,270 | $ | - | $ | 35,270 | $ | - | ||||||||
|
Payment
of Series E dividends with issuance of common stock
|
$ | 153,634 | $ | 153,634 | $ | - | $ | - | ||||||||
|
Settlement
of Series E preferred stock liability with issuance of common
stock
|
$ | 8,442,000 | $ | 8,442,000 | $ | - | $ | - | ||||||||
The
accompanying notes are an integral part of these consolidated financial
statements
43
(formerly
SCARAB SYSTEMS INC.)
(An
exploration stage enterprise)
Notes to
Consolidated Financial Statements
|
Note
1.
|
Incorporation
and Continuance of Operations
|
Torrent
Energy Corporation (the “Company” or “Torrent”) is an exploration stage company
that, pursuant to shareholder approval on July 13, 2004, changed its name from
Scarab Systems, Inc.
On June
2, 2008, the Company commenced Chapter 11 proceedings (Case No. 08-32638) by
filing a voluntary petition for reorganization under the Bankruptcy Code with
the United States Bankruptcy Court for the District of Oregon. Each
of Methane Energy Corp. and Cascadia Energy Corp., the Company's subsidiaries,
commenced a case under Chapter 11 of the Bankruptcy Code on the same
day. The Company continues to operate their businesses and manage
their properties as debtors-in-possession pursuant to Sections 1107(a) and 1108
of the Bankruptcy Code. See Note 14 for additional
information.
Corporate
History
Torrent
was formed by the merger of Scarab Systems, Inc., a Nevada corporation into iRV,
Inc., a Colorado corporation. Scarab Systems, Inc. (Nevada) was a privately
owned Nevada corporation incorporated on October 8, 2001. The effective date of
the merger transaction between Scarab Systems, Inc. (Nevada) and iRV, Inc. was
July 17, 2002. Subsequent to the completion of the reorganization, Scarab
Systems, Inc. (Nevada) transferred all its assets and liabilities to iRV, Inc.
and ceased operations. The directors and executive officers of iRV, Inc. were
subsequently reconstituted. iRV, Inc. changed its name to Scarab
Systems, Inc. on March 24, 2003. The corporate charter of Scarab Systems Inc.
(Nevada) was revoked in 2002. The Company was initially providing services to
the e-commerce industry but ceased all activity in the e-commerce industry by
the end of the fiscal year 2003.
On March
28, 2003, the Company acquired all the issued and outstanding shares of Catalyst
Technologies, Inc., a British Columbia corporation
(“Catalyst”). Catalyst was a Vancouver, British
Columbia based, web design and Internet application developer. The
acquisition of Catalyst was treated as a non-material business combination in
the fiscal year 2003 and the Company abandoned Catalyst during the fiscal year
2004 due to a lack of working capital and disappointing financial
results.
In fiscal
year 2005, the Company changed its business to focus on the exploration and
development of oil and gas properties. On April 30, 2004, the Company
incorporated a wholly-owned Oregon subsidiary company named Methane Energy Corp.
to acquire oil and gas properties in the State of Oregon. On June 29, 2005, the
Company incorporated a wholly-owned Washington subsidiary company named Cascadia
Energy Corp. to acquire oil and gas properties in the State of
Washington.
|
March
31, 2008
|
March
31, 2007
|
|||||||
|
Deficit
accumulated during the exploration stage
|
$ | (26,132,279 | ) | $ | (16,645,776 | ) | ||
|
Working
capital surplus (deficit)
|
$ | (23,493,936 | ) | $ | 3,071,530 | |||
The
consolidated financial statements for the fiscal years ended March 31, 2008,
2007 and 2006 were prepared assuming that we would continue as a going concern.
The Company's ability to continue as a going concern is an issue raised as a
result of recurring losses from operations and working capital deficiency. The
Company's ability to continue as a going concern is also subject to the
Company's ability to complete a Plan of Reorganization, and to obtain necessary
funding from outside sources, including obtaining additional funding from the
sale of the Company's securities. The Plan of Reorganization presents
significant potential for dilution that impacts the Company's ability to obtain
funding from the sale of the Company's securities on terms that the Company
considers acceptable.
The
Company's future exploration activities will require significant capital
expenditures, which funding must be raised from outside
sources. There can be no assurance that financing will be available
in amounts or on terms acceptable to the Company, if at all. The inability to
obtain additional capital will restrict the Company's ability to grow and
inhibit the Company's ability to continue to conduct business operations.
44
TORRENT
ENERGY CORPORATION
(formerly
SCARAB SYSTEMS INC.)
(An
exploration stage enterprise)
Notes to
Consolidated Financial Statements
If the
Company is unable to complete the Plan, or obtain additional financing in the
future, the Company will likely be required to further curtail the Company's
exploration plans and possibly cease the Company's operations. Any additional
equity financing may result in substantial dilution to the Company's then
existing shareholders.
|
Note
2.
|
Summary
of Significant Accounting Policies
|
These
consolidated financial statements have been prepared in conformity with U.S.
generally accepted accounting principles applicable to a going concern which
contemplates the realization of assets and the satisfaction of liabilities and
commitments in the normal course of business. The general business
strategy of the Company is to explore its newly-acquired oil and gas properties.
The Company has not generated any revenue to date and has incurred operating
losses and requires additional funds to meet its obligations and maintain its
operations. Management’s plan in this regard is to complete its raise equity
and/or debt financing as required. These conditions raise substantial doubt
about the Company’s ability to continue as a going concern. These financial
statements do not include any adjustments that might result from this
uncertainty. Significant accounting policies of the Company
include:
a) Principles
of Consolidation
The
accompanying consolidated financial statements presented are those of the
Company and its wholly-owned subsidiaries, Methane Energy Corp. and Cascadia
Energy Corp. All significant intercompany balances and transactions have been
eliminated.
b) Principles
of Accounting
These
consolidated financial statements are stated in U.S. dollars and have been
prepared in accordance with the U.S. generally accepted accounting
principles.
c) Cash
and Cash Equivalents
Cash
equivalents are comprised of certain highly liquid instruments with original
maturities of three months or less. As of March 31, 2008, the
cash balance was $68,124 (2007: $941,577) and cash equivalents consisting of
short-term deposits of $52,264 (2007: $5,000,000).
d) Joint
Venture Receivables
The
accompanying financial statements as of March 31, 2008, 2007 and 2006 include
the wholly-owned accounts of the Company and its proportionate share of assets,
liabilities and results of operations in the joint venture in which it
participates. The Company has maintained a 60 percent majority ownership
interest in properties in which joint venture participation exists and acts as
the operator for the joint venture. The Company incurs 100 percent of
the expenses related to the Joint Venture Partner and bills its Joint Partner
for 40 percent of applicable costs.
The
Company provides for uncollectible receivables using the allowance method of
accounting for bad debts. Under this method of accounting, a
provision for uncollectible accounts is charged to earnings. The
allowance account is increased or decreased based on past collection history and
management’s evaluation of the receivables. All amounts considered
uncollectible are charged against the allowance account and recoveries of
previously charged off accounts are added to the allowance.
At March
31, 2008 and 2007, net joint venture receivables were $0 and $147,928,
respectively. At March 31, 2008 and 2007, the Company had
established no allowance for bad debt, deeming its receivables as likely to be
collected.
.
45
TORRENT
ENERGY CORPORATION
(formerly
SCARAB SYSTEMS INC.)
(An
exploration stage enterprise)
Notes to
Consolidated Financial Statements
e) Supplies
inventory
Supplies
inventory is comprised primarily of pipe, tubular materials and chemicals used
in drilling operations. Inventory accounting is based on the
first-in, first-out cost method and is stated at the lower of cost or
market.
f) Oil
and Gas Properties
The
Company utilizes the full cost method to account for its investment in oil and
gas properties. Accordingly, all costs associated with acquisition, exploration
and development of oil and gas reserves, including such costs as leasehold
acquisition costs, interest costs relating to unproved properties, geological
expenditures and direct internal costs are capitalized into the full cost pool.
As of March 31, 2008, the Company has no properties with proven reserves. When
the Company obtains proven oil and gas reserves, capitalized costs, including
estimated future costs to develop the reserves and estimated abandonment costs,
net of salvage, will be depleted on the units-of-production method using
estimates of proved reserves. Investments in unproved properties and major
development projects including capitalized interest, if any, are not amortized
until proved reserves associated with the projects can be determined. If the
future exploration of unproved properties is determined uneconomical, the amount
of such properties will be added to the capitalized cost to be amortized. As of
March 31, 2008, all of the Company’s oil and gas properties were unproved and
were excluded from amortization.
The
capitalized costs included in the full cost pool are subject to a “ceiling
test”, which limits such costs to the aggregate of the estimated present value,
using an estimated discount rate, of the future net revenues from proved
reserves, based on current economic and operating conditions and the estimated
value of unproven properties. This ceiling test is performed by the Company on
an annual basis. Based on the status of the Company’s exploration
activities, as of March 31, 2008, none of the Company’s unproved oil and gas
properties were considered impaired.
g) Other
Assets
Equipment
and fixtures are stated at cost and depreciated over the estimated useful lives
of the assets, which range from three to fifteen years, using the straight-line
method. Repairs and maintenance are charged to expense as
incurred. When assets are sold or retired, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is included in income. The Company amortizes leasehold improvements over
the life of the lease. As of March 31, 2008, the total liability for
repayment of leasehold improvements was $15,625. For the fiscal year
ended March 31, 2008, the Company incurred $38,451 (2007 -
$25,000; 2006 – Nil) in amortization of leasehold
improvements. Depreciation expense of the fiscal year ended March 31,
2008 was $26,165 (2007: $16,229; 2006: $6,111).
h) Stock
Subject to Mandatory Redemption
In May
2003, FASB issued SFAS No. 150. “Accounting for Certain Instruments with
Characteristics of Both Liabilities and Equity. ” This statement
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and
equity. In applying SFAS No. 150, the Company has determined that all
of the Series E Convertible Preferred Stock (“Series E Stock”) met the
characteristics of a liability and, therefore, has been classified as a current
liability on the Company’s balance sheet as of March 31, 2008. (See Note
10).
.
46
TORRENT
ENERGY CORPORATION
(formerly
SCARAB SYSTEMS INC.)
(An
exploration stage enterprise)
Notes to
Consolidated Financial Statements
i) Accounting
Estimates
The
preparation of the consolidated financial statements in conformity with U.S.
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Management makes its best
estimate of the ultimate outcome for these items based on the historical trends
and other information available when the financial statements are
prepared. Changes in the estimates are recognized in accordance with
the accounting rules for the estimate, which is typically in the period when new
information becomes available to management. Actual results could
differ from those estimates and assumptions.
j) Concentration
of Credit Risk
The
Company maintains its cash and cash equivalents with high credit quality
financial institutions that are guaranteed by either the Federal Deposit
Insurance Corporation (“FDIC”), up to $100,000, or by the Canadian Deposit
Insurance Corporation (“CDIC”), up to CDN$60,000. At March 31, 2008
and 2007, cash in banks exceeded aggregate deposit insurance limits by $0 and
$5,589,611, respectively. The Company has not experienced any losses
on deposits.
k) Foreign
Currency Transactions
The
Company and its wholly owned subsidiaries maintain their accounting records in
U.S. dollars, their functional currency. The Company translates
foreign currency transactions into its functional currency in the following
manner:
At the
transaction date, each asset, liability, revenue and expense is translated into
U.S. dollars by the use of the exchange rate in effect at that
date. At the period end, monetary assets and liabilities are
remeasured by using the exchange rate in effect at that date. Differences in the
values of monetary assets and liabilities resulting from changes in exchange
rates are recorded as foreign exchange gains and losses and are included in
results of operations.
l) Fair
Value of Financial Instruments
The fair
values of financial instruments are estimated at a specific point-in-time, based
on relevant information about financial markets and specific financial
instruments. As these estimates are subjective in nature, involving
uncertainties and matters of significant judgment, they cannot be determined
with precision. Changes in assumptions can significantly affect estimated fair
values. The carrying value of cash and cash equivalents, joint
venture receivables, accounts payable, accounts payable - related parties, notes
payable – related parties and notes payable approximate their fair value because
of the short term nature of these instruments. The Company is not
exposed to significant currency or interest risks arising from these financial
instruments.
m) Income
Taxes
The
Company has adopted Statement of Financial Accounting Standards (“SFAS”) No.
109, “Accounting for Income
Taxes”, which requires the Company to recognize deferred tax liabilities
and assets for the expected future tax consequences of events that have been
recognized in the Company’s financial statements or tax returns using the
liability method. Under this method, deferred tax liabilities and
assets are determined based on the temporary differences between the financial
statements and tax bases of assets and liabilities using enacted tax rates in
effect in the years in which the differences are expected to
reverse.
The
difference between taxes computed by applying the U.S. tax rate in affect and
the actual tax benefit recorded is due to the valuation allowance on the
Company’s deferred tax assets. The Company evaluates its valuation allowance
requirements on an annual basis based on projected future operations. When
circumstances change and this causes a change in management’s judgment about the
realization of deferred tax assets, the impact of the change on the valuation
allowance is reflected in current income.
.
47
TORRENT
ENERGY CORPORATION
(formerly
SCARAB SYSTEMS INC.)
(An
exploration stage enterprise)
Notes to
Consolidated Financial Statements
Effective as of April 1, 2007, the
Company adopted Financial Accounting Standards Board (“FASB”) Interpretation (“FIN”) No. 48, “Accounting for
Uncertainty in Income Taxes - An Interpretation of FASB Statement No.
109”, which prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on
de-recognition, classification, interest and penalties, accounting in interim
periods, disclosure, and transition. Adoption of FIN 48
did not have a material impact on the Company’s consolidated balance
sheets, results of operations or cash flows.
n) Comprehensive
Income
The
Company has adopted SFAS No. 130, "Reporting Comprehensive
Income", which for instance requires inclusion of foreign currency
translation adjustments, reported separately in its Statement of Stockholders'
Equity (Deficit), in other comprehensive income. The Company has no other
comprehensive income for the years ended March 31, 2008, 2007 and
2006.
o) Stock-Based
Compensation
The
Company has three stock-based compensation plans, which are described more fully
in Note 7. Effective April 1, 2006, the Company adopted SFAS No. 123R
“Share-based Payments”
(“SFAS No. 123R”) using the modified prospective method. Prior to
April 1, 2006, the Company accounted for those plans under the recognition and
measurement provision of SFAS No. 123 "Accounting for Stock-based
Compensation” (as amended by SFAS No. 148 “ Accounting for Stock-based
Compensation - Transition and Disclosure”) using a fair value based
method to recognize stock-based compensation expense. Accordingly,
the adoption of SFAS No. 123R did not have a material effect on the Company’s
income from operations, cash flows or basic and diluted loss per share, as
compared to results that would have resulted from a continuation of the
accounting the Company used under SFAS No. 123.
p) Loss
Per Share
Loss per
share is computed using the weighted average number of shares outstanding during
the year. The Company has adopted SFAS No. 128, “Earnings Per
Share”. Diluted loss per share is equivalent to basic loss per
share as the stock options, warrants and convertible preferred stock to acquire
common shares as disclosed in the notes are anti-dilutive.
|
Fiscal
Year Ended March 31,
|
2008
|
2007
|
2006
|
|||||||||
|
Net
Loss
|
$ | (8,694,814 | ) | $ | (6,359,978 | ) | $ | (4,036,286 | ) | |||
|
Less
Preferred stock dividends
|
(791,689 | ) | (695,339 | ) | (308,442 | ) | ||||||
|
Less
Dividend accretion on preferred stock beneficial
conversion
|
- | (710,110 | ) | (950,844 | ) | |||||||
|
Net
loss applicable to common stockholders
|
$ | (9,486,503 | ) | $ | (7,765,427 | ) | $ | (5,295,572 | ) | |||
|
Weighted
Average Shares Outstanding
|
39,315,276 | 32,677,984 | 24,407,133 | |||||||||
|
Basic
and Diluted Earnings per Share
|
$ | (0.24 | ) | $ | (0.24 | ) | $ | (0.22 | ) | |||
q) Long-Lived
Assets Impairment
Long-term
assets of the Company are reviewed when changes in circumstances require as to
whether their carrying value has become impaired, pursuant to guidance
established in SFAS No. 144 , “Accounting for the Impairment or
Disposal of Long-Lived Assets”. Management considers assets to be
impaired if the carrying value exceeds the future projected cash flows from the
related operations (undiscounted and without interest charges). If impairment is
deemed to exist, the assets will be written down to fair value, and a loss is
recorded as the difference between the carrying value and the fair
value. Fair values are determined based on the quoted market values,
discounted cash flows or internal and external appraisal, as
applicable. Assets to be disposed of are carried at the lower of
carrying value or estimated net realizable value.
.
48
TORRENT
ENERGY CORPORATION
(formerly
SCARAB SYSTEMS INC.)
(An
exploration stage enterprise)
Notes to
Consolidated Financial Statements
r) Asset
Retirement Obligations
It is the
Company’s policy to recognize a liability for future retirement obligations
associated with the Company’s oil and gas properties. The estimated
fair value of the asset retirement obligation is based on the current cost
escalated at an inflation rate and discounted at a credit adjusted risk-free
rate. This liability is capitalized as part of the cost pool of the
related asset and amortized using the units of production method. The
liability accretes until the Company settles the obligation. As of
March 31, 2008, the Company’s expected future cost of retirement obligations of
its oil and gas properties was $1,603,523 and the Company has recognized a
long-term liability of $76,134. The accretion expense for the fiscal
year ended March 31, 2008 was $5,461 (2007 –Nil; 2006 – Nil).
s) Reclassification
Certain amounts reported in prior years have been reclassified to
conform to the disclosures in the current fiscal year.
t) Recent
Accounting Pronouncements
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”
(“SFAS 157”). SFAS 157 addresses differences in the definition of
fair value and guidance in applying the definition of fair value to the many
accounting pronouncements that require fair value measurements. SFAS
157 emphasizes that (1) fair value is a market-based measurement that should be
determined based on assumptions that market participants would use in pricing
the asset or liability for sale or transfer and (2) fair value is not
entity-specific but based on assumptions that market participants would use in
pricing the asset or liability. Finally, SFAS 157 establishes a
hierarchy of fair value assumptions that distinguishes between independent
market participant assumptions and the reporting entity’s own assumptions about
market participant assumptions. The provisions of SFAS 157 were
scheduled to be effective for fiscal years beginning after November 15, 2007 and
interim periods within those fiscal years. In February 2008, the FASB
issued FASB Staff Position (“FSP”) FAS 157-2, “Effective Dates of FASB Statement
No. 157,” which defers the effective date of SFAS 157 for all
nonrecurring fair value measurements of nonfinancial assets and liabilities for
one year. The Company does not expect that adoption of SFAS 157 will
have a material impact on our consolidated balance sheets, results of operations
or cash flows.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities” (“SFAS 159”). This statement
permits entities to choose to measure many financial instruments and certain
other items at fair value. This statement expands the use of fair value
measurement and applies to entities that elect the fair value option. The fair
value option established by this Statement permits all entities to choose to
measure eligible items at fair value at specified election dates. SFAS 159
is effective for fiscal years beginning after November 15,
2007. The Company does not expect that adoption of SFAS 159 will have
a material impact on its consolidated balance sheets, results of operations or
cash flows.
In June
2007, the Emerging Issues Task Force (“EITF”) issued EITF Issue No. 07-3, “Accounting for Nonrefundable
Advance Payments for Goods or Services Received for Use in Future Research and
Development Activities” (EITF 07-3). Per EITF 07-3, a
consensus was reached that nonrefundable advance payments for future research
and development activities should be deferred and capitalized. EITF
07-3 is to be effective for financial statements issued for fiscal years
beginning after December 15, 2007, and interim periods within those fiscal
years, with early application permitted. The Company does not expect
that adoption of EITF 07-3 will have a material impact on our
consolidated financial position, results of operations or cash
flows.
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS
No. 141R”), which replaces SFAS 141. SFAS No. 141R applies to all
transactions in which an entity obtains control of one or more businesses,
including those without the transfer of consideration. SFAS No. 141R
defines the acquirer as the entity that obtains control on the acquisition
date. It also requires the measurement at fair value the acquired
assets, assumed liabilities and noncontrolling interest. In addition,
SFAS No. 141R requires the acquisition and restructuring related cost be
recognized separately from the business combinations.
.
49
TORRENT
ENERGY CORPORATION
(formerly
SCARAB SYSTEMS INC.)
(An
exploration stage enterprise)
Notes to
Consolidated Financial Statements
SFAS No.
141R requires that goodwill be recognized as of the acquisition date, measured
as residual, which in most cases will result in the excess of consideration plus
acquisition-date fair value of noncontrolling interest over the fair values of
identifiable net assets. Under SFAS No. 141R, “negative goodwill” in
which consideration given is less than the acquisition-date fair value of
identifiable net assets, will be recognized as a gain to the
acquirer. SFAS No. 141R is applied prospectively to business
combinations for which the acquisition date is on or after the first annual
reporting period beginning on or after December 15, 2008. The Company
does not expect that adoption of SFAS 141R will have a material impact on its
consolidated balance sheets, results of operations or cash flows. The
Company will adopt SFAS No. 141R for future business combinations that occur on
or after April 1, 2009.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51”
(“SFAS 160”). SFAS 160 will change the accounting and reporting for
minority interests, which will be recharacterized as noncontrolling interests
and classified as a component of equity. This new consolidation method will
significantly change the accounting for transactions with minority interest
holders. SFAS 160 is effective for fiscal years, and interim periods
within those fiscal years, beginning on or after December 15,
2008. The Company will be required to adopt this statement effective
at the beginning of its 2010 fiscal year. The Company is currently
evaluating the impact of the provisions of SFAS 160 on its consolidated balance
sheets, results of operations or cash flows.
In
May 2008, the FASB issued FSP No. APB 14-1, “Accounting for Convertible Debt
Instruments that may be Settled in Cash upon Conversion (including Partial Cash
Settlement)”, (FSP APB 14-1). FSP APB 14-1 clarifies that
convertible debt instruments that may be settled in cash upon conversion
(including partial cash settlement) are not addressed by paragraph 12 of
Accounting Principles Board Opinion No. 14, “Accounting for Convertible Debt and
Debt Issued with Stock Purchase Warrants.” Additionally, FSP
APB 14-1 specifies that issuers of such instruments should separately account
for the liability and equity components in a manner that will reflect the
entity’s nonconvertible debt borrowing rate when interest cost is recognized in
subsequent periods. This FSP is effective for fiscal years beginning
after December 15, 2008, and interim periods within those fiscal
years. The Company is currently evaluating the impact that this FSP
will have on its consolidated financial position, results of operations or cash
flows.
|
Note
3.
|
Related
Party Transactions
|
During
the year ended March 31, 2008, the Company paid or accrued $539,130 (2007:
$857,766; 2006: $447,661) in consulting fees and salaries to officers and
directors of the Company. In addition, the Company paid officers and
directors of the Company $750 (2007: $46,558; 2006: $169,767) in compensation
for activities relating to the Company’s oil and gas leases and $nil (2007:
$56,823; 2006: $261,785) for geological and geophysical activities both of which
are included in the costs of the oil and gas properties.
On
February 1, 2008, John D. Carlson, President, Chief Executive Officer and
Director of the Company, loaned $50,000 to the Company and the Company issued a
short-term promissory note to Mr. Carlson. On March 1, 2008, Mr.
Carlson loaned the Company an additional $25,000 in exchange for cancellation of
the previous short-term note and issuance of a new short-term promissory note
with a principal balance of $75,000. On March 12, 2008, William A.
Lansing, then chairman of the Company’s board of director, loaned $25,000 to the
Company and the Company issued a short-term promissory note to Mr.
Lansing. Interest on the promissory notes (collectively, the “Notes”)
accrues from the date of issuance at the rate of eight percent (8%) per annum.
Repayment of principal, together with accrued interest, may be made at any time
without penalty. In the event that any amount payable under the Notes is not
paid in full when due, the Company shall pay, on demand, interest on such amount
at the rate of twelve percent (12%) per annum. Upon any "Event of Default," as
defined in the Notes, the entire unpaid balance of the applicable promissory
note may be declared immediately due and payable by the
noteholder. As of March 31, 2008, there was $75,318 and $25,000
payable outstanding under the Notes to Messrs. Carlson and Lansing,
respectively, excluding accrued interest payable. See Note 14 for
discussion of the subsequent events impacting the Notes.
As of
March 31, 2008, there were unpaid expense reimbursements owing to directors and
officers of $13,179 (2007: $8,545) and unpaid liabilities for salaries
and consulting services totaling $73,417 (2007: Nil). At
March 31, 2008, the Company owed Mr. Carlson $60,000 for payments he made
directly to the Company’s law firm on its behalf for services rendered relating
to the Chapter 11 Cases.
.
50
TORRENT
ENERGY CORPORATION
(formerly
SCARAB SYSTEMS INC.)
(An
exploration stage enterprise)
Notes to
Consolidated Financial Statements
|
Note
4.
|
Oil
and Gas Properties, Unproven
|
The
Company’s oil and gas properties are currently unproven and ongoing exploration
activities are planned and will require additional significant
expenditures for the fiscal year ending March 31, 2009, which funding must be
raised from outside sources. These exploration activities include
formation stimulation and production testing of existing wells drilled in our
Coos Bay project and formation coring and gas desorption testing of wells
still to be drilled in our Chehalis project. There can be no
assurance that financing will be available in amounts or on terms acceptable to
the Company, if at all. Assuming that additional funding from outside sources is
obtained, management estimates that it will take approximately six to twelve
months to complete the first phase of exploration activities on certain of its
unproved properties and at that time an assessment will be made for
reclassification of a portion of the unproved reserves to proved
reserves. Once properties have been classified as proven, then
certain of the costs incurred would be included in the amortization
computation.
Coos Bay Basin Property. On May
11, 2004, Methane Energy Corp. entered into a Lease Purchase and Sale Agreement
(the “Agreement”) with GeoTrends-Hampton International LLC (“GHI”) to purchase
GHI’s undivided working interest in certain oil and gas leases in the Coos Bay
Basin of Oregon. As consideration for the acquisition of these oil and gas
leases, the Company paid a total of $300,000 in cash and issued 1,800,000
restricted common shares in three performance based tranches. The shares were valued
at $0.38 per share, which was the fair value at the time that the agreement was
negotiated. GHI also maintains an undivided overriding royalty
interest of 4% upon production in the Coos Bay project area. The
agreement closed on June 22, 2004. Subsequent to the completion of
the Agreement, the principals of GHI were appointed as officers and directors of
the Company and its subsidiaries.
Pursuant
to the GHI Agreement, the Company acquired certain mineral leases located in the
Coos Bay area of Oregon, which are prospective properties for oil and gas
exploration and total approximately 50,000 acres. On July 1, 2004, the Company
completed the negotiations with the State of Oregon on an additional leasing of
10,400 acres of land within the Coos Bay Basin in Oregon. The 10,400
acres of land are subject to annual lease payments of $1 per acre.
Related
to its exploration program, Methane Energy Corp. had escrowed $1,000,000 through
an attorney to provide assurance of payment to the company from which it
obtained the drilling rig being used to complete a Pilot Exploration Program in
the Coos Bay Basin. On March 13, 2005 the escrow was
reduced by $749,650 by mutual agreement to satisfy a portion of the amounts then
owing. On September 24, 2007, the escrow balance of $200,503 was
returned to Methane Energy Corp. On March 31, 2007, the escrow
balance was $282,848.
51
TORRENT
ENERGY CORPORATION
(formerly
SCARAB SYSTEMS INC.)
(An
exploration stage enterprise)
Notes to
Consolidated Financial Statements
Chehalis Basin Property. Cascadia
Energy Corp., the Company’s wholly-owned
subsidiary, entered into a joint venture agreement (“Joint Venture”)
dated August 12, 2005 with St. Helens Energy LLC (“St. Helens”), a 100% owned
subsidiary of Comet Ridge Limited, an Australian coal seam gas exploration
company which is listed on the Australian Stock Exchange. Pursuant to
this agreement, Cascadia Energy Corp. will serve as operator of the Joint
Venture with a 60% interest in the Joint Venture; while St. Helens
will actively assist in evaluating the area, developing exploratory leads and
prospects, and providing 40% of the funding to pursue exploration and
development of the prospect. Cascadia Energy Corp. records its
investment and related expenses associated with the Chehalis Basin project
net of St. Helens contribution. During the period commencing with the
inception of the Chehalis Basin project and ending March 31, 2008,
the Joint Venture had expended a total of $580,246 of which St. Helens’ unpaid
share as of March 31, 2008 was Nil (2007: $147,928).
In
October 2006 through May 2007, Cascadia Energy Corpentered into
three lease agreements with Weyerhaeuser totaling 36,991 acres, two
of which required payment of upfront lease bonuses of $428,610 and one which
requires annual lease payments of $1,275. Certain provisions of these agreements
require Cascadia Energy Corp. to commence a well within the first two years of
the lease, or the lease will terminate and the Company would be required to make
a payment of $75,000 to Weyerhaeuser in May of 2009.
Since
January 2006, Cascadia Energy Corp. has also acquired 23,735 acres from the
State of Washington Trust. This acreage was acquired in lease auctions for
aggregate lease consideration of $37,719, and has been included in the
Chehalis Basin project.
On May 9,
2006, Cascadia Energy Corp. entered into an option to acquire oil & gas
lease with Pope Resources LP. This option provides Cascadia Energy
Corp. with the right to earn oil and gas leases covering 15,280 acres of mineral
rights interests held by Pope Resources LP in Cowlitz and Lewis Counties,
Washington, for a purchase price of $1 per net mineral acre or
$15,280. The initial term of this option was for a period of 18
months ending on November 9, 2007. The option was extended for an
additional year ending November 9, 2008.
The
total costs incurred and currently excluded from amortization for the Company’s
oil and gas properties are summarized as follows:
.
52
TORRENT
ENERGY CORPORATION
(formerly
SCARAB SYSTEMS INC.)
(An
exploration stage enterprise)
Notes to
Consolidated Financial Statements
|
Acquisition
Costs
|
Exploration
Costs
|
Development
Costs
|
|||||||||||||||||||||
|
Seismic
and
land
|
Drilling
and
gathering
|
Geological
and geophysical
|
Total
|
||||||||||||||||||||
|
Coos Bay Basin
Property
|
|||||||||||||||||||||||
|
Year
ended March
31, 2008
|
$ | - | $ | 73,592 | $ | 2,598,064 | $ | 95,827 | $ | Nil | $ | 2,767,483 | |||||||||||
|
Year
ended March
31, 2007
|
- | 414,067 | 13,343,032 | 588,510 |
Nil
|
14,345,609 | |||||||||||||||||
|
Year
ended March
31, 2006
|
228,000 | 524,396 | 11,828,139 | 733,378 |
Nil
|
13,313,913 | |||||||||||||||||
|
Inception
through March 31, 2005
|
756,000 | 499,847 | 1,262,564 | 257,023 |
Nil
|
2,775,434 | |||||||||||||||||
|
Total
|
$ | 984,000 | $ | 1,511,902 | $ | 29,031,799 | $ | 1,674,738 | $ | Nil | $ | 33,202,439 | |||||||||||
|
Chehalis Basin
Property
|
|||||||||||||||||||||||
|
Year
ended March 31, 2008
|
$ | - | $ | 342,766 | $ | 650,889 | $ | 59,928 | $ | Nil | $ | 1,053,583 | |||||||||||
|
Year
ended March
31, 2007
|
- | 354,756 | 93,899 | 62,913 |
Nil
|
511,568 | |||||||||||||||||
|
Year
ended March
31, 2006
|
- | 224,588 | - | 63,150 |
Nil
|
287,738 | |||||||||||||||||
|
Inception
through March 31, 2005
|
- | - | - | - |
Nil
|
- | |||||||||||||||||
|
Total
|
$ | - | $ | 922,110 | $ | 744,788 | $ | 185,991 | $ | Nil | $ | 1,852,889 | |||||||||||
|
Total
Oil and Gas Properties
|
$ | 984,000 | $ | 2,434,012 | $ | 29,776,587 | $ | 1,860,729 | $ | Nil | $ | 35,055,328 | |||||||||||
53
TORRENT
ENERGY CORPORATION
(formerly
SCARAB SYSTEMS INC.)
(An
exploration stage enterprise)
Notes to
Consolidated Financial Statements
As of
March 31, 2008, the Company has commitments for future land lease payments for
the next five years as follows:
For
Fiscal Year Ended March 31,
|
2009
|
$ | 120,087 | ||
|
2010
|
87,232 | |||
|
2011
|
88,927 | |||
|
2012
|
55,412 | |||
|
2013
|
50,932 | |||
|
Thereafter
|
76,791 | |||
|
Total
|
$ | 479,381 |
If
production occurs on these leases, then the Company is obligated to pay the a
royalty to landowners equal to an average 12.5% on gross sales of methane gas,
in addition to the Coos Bay Basin Property 4% overriding royalty discussed
above.
As of
March 31, 2008, all of the Company’s oil and gas properties are considered
unproven. Based on the status of the Company’s exploration activities,
management has determined that no impairment has occurred.
|
Note
5.
|
Environmental
Matters
|
The
Company has established procedures for continuing evaluation of its operations
to identify potential environmental exposures and to assure compliance with
regulatory policies and procedures. Management monitors these laws
and regulations and periodically assesses the propriety of its operational and
accounting policies related to environmental issues. The nature of
the Company’s business requires routine day-to-day compliance with environmental
laws and regulations. The Company incurred no material environmental
investigation, compliance and remediation costs in the year ended March 31,
2008. The Company is unable to predict whether its future operations
will be materially affected by these laws and regulations. It is
believed that legislation and regulations relating to environmental protection
will not materially affect the results of operations of the
Company.
|
Note
6.
|
Income
Tax
|
There was no income tax benefit
recognized for the net losses generated in fiscal years 2008, 2007 and
2006. The income tax benefit was different from the amount computed
by applying the U.S. statutory federal income tax rate as set forth in the
following reconciliation:
|
2008
|
2007
|
2006
|
||||||||||
|
Benefit
at US statutory rates (34%)
|
$ | (2,956,000 | ) | $ | (2,162,000 | ) | $ | (1,372,000 | ) | |||
|
Increase
in valuation allowance
|
1,319,000 | 2,134,000 | 1,512,000 | |||||||||
|
Non-deductible
expenses:
|
||||||||||||
|
Loss
on conversion of Series E preferred stock
|
1,518,000 | - | - | |||||||||
|
Interest
on Series E preferred stock
|
107,000 | - | - | |||||||||
|
Excess
of value over proceeds on issuance of
|
||||||||||||
|
warrants
|
- | - | (156,000 | ) | ||||||||
|
Other
|
12,000 | 28,000 | 16,000 | |||||||||
|
Income
tax benefit
|
$ | - | $ | - | $ | - | ||||||
The
significant deferred tax assets and (liabilities) are comprised of the following
at March 31:
|
Amounts
cumulative through March 31,
|
2008
|
2007
|
2006
|
|||||||||
|
Net
operating loss carry-forwards
|
$ | 5,819,000 | $ | 3,861,000 | $ | 1,873,000 | ||||||
|
Stock-based
compensation and warrant expense
|
2,055,000 | 1,849,000 | 1,011,000 | |||||||||
|
Intangible
drilling costs
|
(1,897,000 | ) | (919,000 | ) | (227,000 | ) | ||||||
|
Write-downs
on supplies inventory and other
|
133,000 | - | - | |||||||||
|
Valuation
allowance
|
(6,110,000 | ) | (4,791,000 | ) | (2,657,000 | ) | ||||||
|
Net
deferred tax assets
|
$ | - | $ | - | $ | - | ||||||
54
TORRENT
ENERGY CORPORATION
(formerly
SCARAB SYSTEMS INC.)
(An
exploration stage enterprise)
Notes to
Consolidated Financial Statements
The
valuation allowance increased by $1,319,000 for the fiscal year ended March 31,
2008 (2007: $2,134,000; 2006: $1,512,000). As of March 31, 2008, the
Company has an estimated cumulative net operating loss carry-forward for tax
purposes of $17,116,000 (2007: $11,357,100; 2006:
$5,509,200). This amount may be applied against future federal
taxable income, which if not used, will expire commencing 2024 to
2028. Due to stock ownership changes, the Company’s ability to
utilize these losses to offset future taxable income may be
limited.
In filing
its fiscal year 2006 federal income tax return, the Company changed its method
of accounting for Intangible Drilling Costs (“IDC”) from expensing in the year
incurred to amortizing over a ten year period. The effect of this change was to
decrease the net operating loss carry-forwards available to offset future income
and to decrease deferred tax liabilities as of March 31, 2006. The change in net
deferred tax assets was offset by a corresponding change in the valuation
allowance of $254,000. This change in accounting for IDC did not affect the
financial statements for the year ended March 31, 2006. The table above reflects
the new method of accounting of IDC for the fiscal years
presented.
|
Note
7.
|
Stock
Options
|
On March
31, 2008, the Company had three stock-based compensation plans as described
below. On February 10, 2004, the Company adopted the 2004
Non-Qualified Stock Option Plan (the “2004 Plan”). The 2004 Plan
terminates upon the earlier of February 10, 2014 or the issuance of all shares
authorized under the 2004 Plan. The option exercise prices per share are
determined by the Board of Directors when the stock option is granted. Each
option entitled the holder to acquire one common share at exercise prices
ranging from $0.10 to $0.50 per share. Vesting of these options ranged from 100%
immediately to 25% immediately and 25% every six months afterward until fully
vested. These options expire five years from the date of
grant.
In
addition to the 2004 Plan, the Company issued 600,000 options outside the 2004
Plan. Of the 600,000 stock options granted outside the 2004 Plan,
200,000 stock options with an exercise price of $1.00 per share and another
200,000 with an exercise price of $2.00 per share were granted pursuant to a
Mail Distribution Agreement with a third party (“Optionee”). These options
vested immediately and were exercisable until November 1, 2005. In 2005, 200,000
options with an exercise price of $1.00 were exercised. The 200,000
options with an exercise price of $2.00 per share were cancelled due to the
early cancellation of the service agreement for which the options were
granted. Since the services were not provided, the compensation
expense was reversed and is included in the Statement of Stockholders’ Equity
(Deficit). The other 200,000 stock options granted outside the 2004
Plan were to a consultant of the Company for public and investor relations
services. These options were exercised in fiscal year 2007 at the
exercise price of $0.83 per share.
On March
17, 2005, the Company adopted the 2005 equity incentive plan (the “2005 Plan”)
for executives, employees and outside consultants and advisors. A
maximum of 2,000,000 shares of the Company’s common stock were initially subject
to the 2005 Plan. The 2005 Plan was later amended to increase the number of
shares under the plan by 500,000 to a total of 2,500,000 shares. On
August 31, 2005, a Form S-8 registration statement was filed to register the
2005 Plan.
During
the year ended March 31, 2006, the Company granted 2,300,000 stock options to
various directors and consultants of the Company under the 2005
Plan. Each option entitles the holder to acquire one common share at
exercise prices ranging from $1.25 to $2.11 per share. These options vest 25%
immediately and 25% every six months afterward until fully vested 18 months from
the date of grant. These options expire five years from the date of
grant. During the fiscal year 2008, former executives of the Company
forfeited 650,000 stock options under the 2005 Plan. All compensation expense
related to these stock options totaling $772,900 had been recognized in prior
periods. As of March 31, 2008, there were 650,000 options available for grant
under the 2005 Plan.
On May
10, 2006, the Company adopted the 2006 Equity Incentive Plan (the “2006 Plan”)
for executives, employees and outside consultants and advisors with 1,800,000
options available for grant. The purpose of the equity incentive plan is to
provide long-term performance incentives to those key employees and consultants
of our Company and our subsidiaries who are largely responsible for the
management, growth and protection of the business of our Company and our
subsidiaries. Under the 2006 Plan, options vest 25%
immediately and 25% every six months afterward until fully vested 18 months from
the date of grant and these options expire five years from the date of
grant. As of March 31, 2008, there were 75,000 options remaining
available for grant under the 2006 Plan. These options expire five
years from the date of grant.
55
TORRENT
ENERGY CORPORATION
(formerly
SCARAB SYSTEMS INC.)
(An
exploration stage enterprise)
Notes to
Consolidated Financial Statements
For all
the above stock-based compensation plans, the Company charged compensation
expense $606,458 in fiscal year 2008 (2007: $2,465,796;
2006: $2,075,422). Since the Company is currently in the
exploration stage and has not yet recognized income, no income tax benefits have
be realized. No costs related to the stock-based compensation plans
have been capitalized as part of the Company’s assets.
A summary
of stock option activity for the years ended March 31, 2008 and March 31, 2007
and changes during the years then ended is presented below:
|
Fiscal
2008
|
Fiscal
2007
|
|||||||||||||||
|
Shares
|
Weighted
Average Exercise Price
|
Shares
|
Weighted
Average
Exercise
Price
|
|||||||||||||
|
Options
outstanding at beginning of period
|
3,965,000 | $ | 1.68 | 2,700,000 | $ | 1.40 | ||||||||||
|
Granted
|
260,000 | 0.53 | 1,465,000 | 2.09 | ||||||||||||
|
Exercised
|
(45,000 | ) | 0.50 | (200,000 | ) | 0.83 | ||||||||||
|
Forfeited
or canceled
|
(650,000 | ) | 1.58 | - | - | |||||||||||
|
Options
outstanding at end of period
|
3,530,000 | $ | 1.63 | 3,965,000 | $ | 1.68 | ||||||||||
|
Option
exercisable at end of period
|
3,152,500 | $ | 1.71 | 2,897,500 | $ | 1.58 | ||||||||||
|
Options
Outstanding at March 31, 2008
|
Options
Exercisable at March 31, 2008
|
||||||||||||||
|
Range
of Exercise Prices
|
Number
Outstanding
|
Weighted
Average
Remaining
Contractual Life
(yrs.)
|
Number
Exercisable
|
Weighted
Average
Remaining
Contractual
Life
(yrs.)
|
|||||||||||
|
$
0.50
|
405,000 |
3.41
|
217,500 | ||||||||||||
|
$
1.25
|
1,100,000 |
2.03
|
1,100,000 | ||||||||||||
| $ 1.27 | 75,000 |
3.88
|
56,250 | ||||||||||||
| $ 1.35 | 10,000 |
4.23
|
5,000 | ||||||||||||
| $ 1.43 | 665,000 |
3.62
|
498,750 | ||||||||||||
| $ 2.00 | 490,000 |
2.40
|
490,000 | ||||||||||||
| $ 2.11 | 60,000 |
2.80
|
60,000 | ||||||||||||
| $ 2.18 | 175,000 |
3.36
|
175,000 | ||||||||||||
| $ 2.97 | 550,000 |
3.11
|
550,000 | ||||||||||||
| 3,530,000 |
2.78
|
3,152,500 |
2.66
|
||||||||||||
The fair
value of each option granted has been estimated as of the date of the grant
using the Black-Scholes option pricing model and uses the assumption noted in
the following table. No dividends were assumed due to the nature of
the Company’s current business strategy.
56
TORRENT
ENERGY CORPORATION
(formerly
SCARAB SYSTEMS INC.)
(An
exploration stage enterprise)
Notes to
Consolidated Financial Statements
|
Amounts
for Fiscal Year Ended,
|
2008
|
2007
|
2006
|
|
Expected
volatility
|
103%
- 108%
|
106%
- 115%
|
121%
- 137%
|
|
Weighted-average
volatility
|
107%
|
112%
|
133%
|
|
Expected
Term
|
4
years
|
4
years
|
4
years
|
|
Risk-free
return
|
3.10%
- 5.04%
|
4.56%
- 5.02%
|
3.55%
- 4.33%
|
The
weighted average grant date fair value of options granted during the year ended
March 31, 2008 was $0.39 (2007: $1.59; 2006: $1.15). The total
intrinsic value of options exercised during the fiscal year ended March 31, 2008
was Nil (2007: $94,000; 2006: $313,750). As of March 31, 2008, there
was no aggregate intrinsic value for either the outstanding options or the
exercisable options.
The
table below summarizes the changes in the Company’s nonvested stock
options that occurred during the fiscal year ended March 31,
2008:
|
Nonvested Shares
|
Shares
|
Weighted
Average
Grant-
Date Fair
Value
|
||||||
|
Nonvested
at March 31, 2007
|
1,067,500 | $ | 1.50 | |||||
|
Granted
|
260,000 | 0.39 | ||||||
|
Vested
|
(950,000 | ) | 1.51 | |||||
|
Forfeited
or canceled
|
- | - | ||||||
|
Nonvested
at March 31, 2008
|
377,500 | $ | 0.71 | |||||
As of
March 31, 2008, the Company had $51,513 of unrecognized compensation expense
related to nonvested stock-based compensation arrangements. This
unrecognized compensation expense is expected to be recognized over a weighted
average period of 0.69 years. The total fair value of the shares
vested during the fiscal year ended March 31, 2008 was $1,437,150 (2007:
$2,334,229; 2006: $1,251,250), with a remaining weighted average contractual
term of 3.1 years.
|
Note
8.
|
Series
B Convertible Preferred Stock (“Series B
Stock”)
|
On August
27, 2004, the Company entered into a private placement for its Series B
Convertible Preferred Stock at $1,000 per share for $2,200,000 in gross proceeds
(the “Series B Stock”). The Series B Stock are senior to the common stock with
respect to the payment of dividends and other distribution on the capital stock
of the Company, including distribution of the assets of the Company upon
liquidation. No cash dividends or distributions shall be declared or
paid or set apart for payment on the common stock in any year unless cash
dividends or distributions on the Series B Stock for such year are likewise
declared and paid or set apart for payment. No declared and unpaid
dividends shall bear or accrue interest. Upon any liquidation,
dissolution, or winding up of the Company, whether voluntary or involuntary
before any distribution or payment shall be made to any of the holders of common
stock or any series of preferred stock, the holders of Series B Stock shall be
entitled to receive out of the assets of the Company, whether such assets are
capital, surplus or earnings, an amount equal to $1,000 per share of the Series
B Stock plus all declared and unpaid dividends thereon, for each shares of
Series B Stock held by them.
The
Series B Stock are non-voting, carry a cumulative dividend rate of 5% per year,
when and if declared by the Board of Directors of the Company, and are
convertible into common stock at any time by dividing the dollar amount being
converted (included accrued but unpaid dividends) by the lower of $1.20 or 80%
of the lowest volume weighted average trading price per common share of our
Company for 10 trading days.
57
TORRENT
ENERGY CORPORATION
(formerly
SCARAB SYSTEMS INC.)
(An
exploration stage enterprise)
Notes to
Consolidated Financial Statements
The
holder of the Series B Stock may only convert up to $250,000 of Series B Stock
into common shares in any 30 day period. The Company may redeem the Series B
Stock by paying 120% of the invested amount together with any unpaid
dividends. In the event that the volume weighted average price of the
Company’s common stock is equal to or greater than two dollars for twenty
consecutive trading days, the Company must redeem in an amount of Series B Stock
equal to 20% of the dollar volume of the common stock traded during the previous
20 days.
As a
condition of the Series B Stock private placement agreement, the Company to
filed a registration statement (the “Registration Agreement”)
registering 5,000,000 shares of common stock into which the Series B
Stock would be converted. This Registration Statement became effective on May 5,
2005.
Each
share of Series B Stock was to be automatically converted into common stock
immediately upon the consummation of the occurrence of a stock acquisition,
merger, consolidation, or reorganization of the Company.
Net
proceeds received totaled $1,935,000 after payment of $220,000 in finders’ fees
(10% of gross proceeds) and $45,000 in legal fees. The transaction resulted in a
beneficial conversion feature calculation in accordance with EITF Issue 98-5
“Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios” (“EITF 98-5”), of $315,244 which was accreted over
nine months commencing October 1, 2004 (the minimum period that the preferred
stockholder can convert all of their Series B Stock). The Company recorded
accretion of $210,163 as a dividend for the year ended March 31,
2005. As of March 31, 2005, the Company accrued preferred stock
dividends of $72,672, payment of which occurred during the three months ended
September 30, 2005.
The
Company issued the following common shares pursuant to conversion of the Series
B stock:
|
Conversion
Date
|
Shares
of
Series
B Stock
|
Conversion
Price
|
Shares
of Common
Stock
|
|||||||||
|
January
21, 2005
|
100
|
$
0.7824
|
127,812
|
|||||||||
|
February
8, 2005
|
100
|
0.7625
|
131,148
|
|||||||||
|
February
14, 2005
|
150
|
0.8000
|
187,500
|
|||||||||
|
February
28, 2005
|
100
|
0.8934
|
111,932
|
|||||||||
|
March
8, 2005
|
50
|
0.8934
|
55,966
|
|||||||||
|
April
1, 2005
|
100
|
0.8386
|
119,252
|
|||||||||
|
April
6, 2005
|
5
|
0.7735
|
6,464
|
|||||||||
|
April
7, 2005
|
100
|
0.7735
|
129,282
|
|||||||||
|
April
28, 2005
|
125
|
0.7860
|
159,033
|
|||||||||
|
April
29, 2005
|
125
|
0.7860
|
159,033
|
|||||||||
|
May
2, 2005
|
395
|
0.7860
|
502,544
|
|||||||||
|
May
18, 2005
|
125
|
1.0887
|
114,816
|
|||||||||
|
May
25, 2005
|
125
|
1.1962
|
104,498
|
|||||||||
|
June
1, 2005
|
125
|
1.1962
|
104,498
|
|||||||||
|
June
8, 2005
|
475
|
1.2000
|
395,834
|
|||||||||
|
Total
|
2,200
|
$
0.9130
|
2,409,612
|
|||||||||
|
Note
9.
|
Series
C Convertible Preferred Stock (“Series C
Stock”)
|
On July
19, 2005, the Company also closed a private placement in its Series C
Convertible Preferred Stock at $1,000 per share for 12,500 shares (the “Series C
Stock). The Series C Stock was senior to the common stock with respect to the
payment of dividends and other distributions on the capital stock of the
Company, including distribution of the assets of the Company upon
liquidation. No cash dividends or distributions shall be declared or
paid or set apart for payment on the common stock in any year unless cash
dividends or distributions on the Series C Stock for such year are likewise
declared and paid or set apart for payment.
58
TORRENT
ENERGY CORPORATION
(formerly
SCARAB SYSTEMS INC.)
(An
exploration stage enterprise)
Notes to
Consolidated Financial Statements
No
declared and unpaid dividends shall bear or accrue interest. Upon any
liquidation, dissolution, or winding up of the Company, whether voluntary or
involuntary before any distribution or payment shall be made to any of the
holders of common stock or any series of preferred stock, the holders of Series
C Stock shall be entitled to receive out of the assets of the Company, whether
such assets are capital, surplus or earnings, an amount equal to $1,000 per
share of the Series C Stock plus all declared and unpaid dividends thereon, for
each shares of Series C Stock held by them.
The
Series C Stock are non-voting, carry a cumulative dividend rate of 5% per year,
when and if declared by the Board of Directors of the Company, and are
convertible into common stock at any time by dividing the dollar amount being
converted (included accrued but unpaid dividends) by the lower of $3.00 or 85%
of the volume weighted average trading price per common stock of the Company for
5 trading days. The holder of the Series C Stock may only convert up to a
maximum of $950,000 of Series C Stock into common stock in any 30 day period.
The Company may redeem the Series C Stock by paying 120% of the invested amount
together with any unpaid dividends. Each share of Series C Stock will
automatically convert into common stock at the conversion price then in effect
two years from the date of issuance of each share.
As a
condition of the Series C stock private placement agreement the Company filed a
registration statement (the “Registration Agreement”)
registering 12,500,000 shares of common stock into which the Series C
Stock would be converted. This Registration Statement was declared
effective on January 12, 2006. Each share of Series C Stock will be
automatically converted into common stock immediately upon the consummation of
the occurrence of a stock acquisition, merger, consolidation, or reorganization
of the Company.
Net
proceeds received as of March 31, 2006 totaled $11,552,000 after payment of
finders’ fees and legal costs of $937,500 and $10,500
respectively. The transaction resulted in a beneficial conversion
feature calculation in accordance with EITF 98-5 and EITF Issue 00-27
“Application of Issue No. 98-5
to Certain Convertible Instruments”, of $1,555,873 which was accreted
over twenty-four months commencing July 15, 2005. Accretion of
$710,110 and $845,763 was recorded for the fiscal year ended March 31, 2007 and
2006 respectively. No accretion was recorded for the fiscal year
ended March 31, 2008. The Company issued the following common shares pursuant to
conversion of the Series C Stock:
|
Conversion
Date
|
Shares
of
Series
C Stock
|
Conversion
Price
|
Shares
of
Common
Stock
|
|||||||||
|
December
6, 2005
|
375
|
$
1.6443
|
228,061
|
|||||||||
|
January
23,2006
|
375
|
1.8464
|
203,098
|
|||||||||
|
January
31, 2006
|
375
|
1.7447
|
214,937
|
|||||||||
|
February
2, 2006
|
375
|
1.8664
|
200,922
|
|||||||||
|
February
3, 2006
|
375
|
1.9684
|
190,510
|
|||||||||
|
February
7, 2006
|
375
|
2.2064
|
169,960
|
|||||||||
|
February
15, 2006
|
375
|
2.2599
|
165,937
|
|||||||||
|
February
16, 2006
|
375
|
2.1978
|
170,625
|
|||||||||
|
February
21, 2006
|
375
|
2.2747
|
164,857
|
|||||||||
|
March
9, 2006
|
375
|
2.0182
|
185,809
|
|||||||||
|
March
20, 2006
|
|
375
|
1.9852
|
188,898
|
||||||||
|
April
5, 2006
|
750
|
1.9243
|
389,752
|
|||||||||
|
April
19, 2006
|
1,100
|
1.7255
|
637,496
|
|||||||||
|
May
5, 2006
|
1,750
|
1.5423
|
1,134,669
|
|||||||||
|
May
8, 2006
|
4,775
|
1.5028
|
3,177,403
|
|||||||||
|
Total
|
12,500
|
$
1.6840
|
7,422,934
|
|||||||||
59
TORRENT
ENERGY CORPORATION
(formerly
SCARAB SYSTEMS INC.)
(An
exploration stage enterprise)
Notes to
Consolidated Financial Statements
During
the fiscal years 2007 and 2006, the Company accrued dividends on the Series C
Stock of $35,270, and $308,442, respectively. No dividends were accrued or paid
on the Series C Stock during the fiscal year 2008. On May 10, 2006,
the Company reached agreement with the purchaser of the Series C Stock to accept
shares of common stock in lieu of cash in payment of the aggregate accrued
dividend due of $343,712. A total of 228,714 shares of our common
stock were issued on May 10, 2006 in satisfaction of the accrued dividend
obligation.
|
Note
10.
|
Series
E Convertible Preferred Stock (“Series E
Stock”)
|
On June
28, 2006, the Company closed a private placement agreement with YA Global
Investments, L.P. (formerly Cornell Capital Partners, L.P.) ("YA Global") under
which it sold 25,000 shares of its Series E Convertible Preferred Stock at
$1,000 per share (the “Series E Stock). The Series E Stock is senior
to the common stock with respect to the payment of dividends and other
distributions on the capital stock of the Company, including distribution of the
assets of the Company upon liquidation. No cash dividends or
distributions shall be declared or paid or set apart for payment on the common
stock in any year unless cash dividends or distributions on the Series E Stock
for such year are likewise declared and paid or set apart for
payment. No declared and unpaid dividends shall bear or accrue
interest. Upon any liquidation, dissolution, or winding up of the
Company, whether voluntary or involuntary before any distribution or payment
shall be made to any of the holders of common stock or any series of preferred
stock, the holders of Series E Stock shall be entitled to receive out of the
assets of the Company an amount equal to $1,000 per share of the Series E Stock
plus all declared and unpaid dividends thereon, for each share of Series E Stock
held by them.
The
Series E Stock are non-voting, carry a cumulative dividend rate of 5% per year,
when and if declared by the Board of Directors of the Company, and are
convertible into common stock at any time by dividing the dollar amount being
converted (included accrued but unpaid dividends) by $2.50 per share if the
Company’s common shares are trading at an average price of $2.50 per share or
higher for the five trading days preceding a conversion date. If the
Company’s common shares are trading at an average price greater than $1.67 but
less than $2.50 per share the Company may, at its exclusive option, force
conversion at a price of $1.67 per share or may redeem the Series E Stock for
cash at the original investment amount plus a 20% redemption
premium.
As a
condition of the Series E Stock, the Company filed a registration statement (the
“Registration Agreement”) registering 15,000,000 shares of
common stock into which the Series E Stock would be converted. This
Registration Statement was declared effective on February 9,
2007. Subsequently, the Series E Stock investor agreed to an initial
registration of 10,000,000 shares to facilitate our compliance with a revision
of SEC guidelines related to the form of our registration. On
November 9, 2007, this Registration Statement became ineffective since the
Company did not filed a post effective amendment as the information contained
therein did not include the latest available certified financial statements as
of a date not more than 16 months old. Net proceeds from the
Series E Stock received during the fiscal year ended March 31, 2007 was
$23,115,000, after the payment of issuance costs of $1,885,000.
Beginning
December 1, 2006, the Company has mandatory redemption requirement equal to the
pro rata amortization of the remaining outstanding Series E Stock over the
period that ends August 2008. If the Company’s common shares are
trading at an average price less than $1.67 per share on a mandatory redemption
date, the Company will pay cash at the original investment amount per share plus
a 20% redemption premium. The holder of the Series E Stock may only convert up
to a maximum of $1,250,000 of Series E Stock into common stock in any 30 day
period. Each share of Series E Stock will be automatically converted
into common stock immediately upon the consummation of the occurrence of a stock
acquisition, merger, consolidation, or reorganization of the
Company.
On
February 12, 2008, YA Global delivered to the Company a Notice of Default under
the Series E Stock agreement, alleging that one or more defaults occurred under
the Investment Agreement and related transaction documents,
including: (i) the Company's failure to make mandatory redemption
payments on each of November 1, 2007, December 1, 2007, January 1, 2008 and
February 1, 2008; (ii) the Company's and its subsidiaries' inability to pay
their debts generally as they become due; and (iii) the Company's failure to
maintain the effectiveness of the registration statement filed pursuant to the
Investor Registration Rights Agreement to which the Company and YA Global are
parties.
60
TORRENT
ENERGY CORPORATION
(formerly
SCARAB SYSTEMS INC.)
(An
exploration stage enterprise)
Notes to
Consolidated Financial Statements
Based on
the alleged defaults, and pursuant to the terms of the Investment Agreement and
related transaction documents, YA Global demanded that the Company redeem all of
YA Global's shares of Series E Convertible Preferred Stock for the full
liquidation amount, plus accumulated and unpaid dividends thereon. From
November 1, 2007 through June 2, 2008, the date at which the Company filed
Chapter 11, the Company was in negotiations with YA Global to amend the terms of
the Series E Stock Agreement.
Beginning
December 1, 2006 and prior to the events of default, the Company incurred
conditional mandatory redemption requirement equal to the pro rata amortization
of the remaining outstanding Series E Stock. The Series E Stock
investor chose to waive the monthly conditional mandatory redemption payments
otherwise due on December 1, 2006 through March 31, 2007, as well as the month
of September 2007. Subsequent to March 31, 2007 and continuing
through August 31, 2007, and for the month of October 2007, the
Series E Stock investor elected, in lieu of a cash payment, to accept a limited
monthly redemption plus accrued dividends, which has been converted into shares
of the Company’s common stock.
Below are
the details of the conditional mandatory conversions that have occurred during
the fiscal year ended March 31, 2008.
|
Conversion
Date
|
Shares
of
Series
E Stock
|
Conversion
Price
|
Shares
of
Common
Stock
|
|||||||||
|
April
1, 2007 redemption
|
250
|
$
0.50
|
500,000
|
|||||||||
|
Related
dividends
|
0.50
|
3,150
|
||||||||||
|
May
1, 2007 redemption
|
500
|
0.50
|
1,000,000
|
|||||||||
|
Related
dividends
|
0.50
|
10,410
|
||||||||||
|
June
1, 2007 redemption
|
|
800
|
0.50
|
1,600,000
|
||||||||
|
Related
dividends
|
0.50
|
23,452
|
||||||||||
|
July
1, 2007 redemption
|
800
|
0.50
|
1,600,000
|
|||||||||
|
Related
dividends
|
0.50
|
30,026
|
||||||||||
|
August
1, 2007 redemption
|
800
|
0.50
|
1,600,000
|
|||||||||
|
Related
dividends
|
0.50
|
36,822
|
||||||||||
|
October
11, 2007 redemption
|
900
|
0.50
|
1,800,000
|
|||||||||
|
Related
dividends
|
|
0.50
|
58,746
|
|||||||||
|
Total
|
4,050
|
8,262,606
|
||||||||||
At March
31, 2008, as a result of the event of default that occurred on February 12, 2008
as noted above, the Company has classified all of the Series E outstanding
balance as a current liability and all dividends accrued for the fourth quarter
have been classified as interest expense. For the year ended March
31, 2008, the interest expense related to Series E Stock subject to conditional
mandatory redemption was $313,325 (2007: Nil; 2006: Nil)
At March
31, 2007 and during the first three quarters of the fiscal year ended March 31,
2008, certain shares met the conditions of being mandatorily redeemable based on
the event of default and the trailing five day stock price proceeding the
assessment date. In accordance with SFAS No. 150, “Accounting for
Certain Instruments with Characteristics of Both Liabilities and Equity”, the
Company determined that the limited redemptions that occurred during the current
fiscal year met the characteristics of a liability and, therefore, were
classified as a current liability in the Company’s financial
statements.
61
TORRENT
ENERGY CORPORATION
(formerly
SCARAB SYSTEMS INC.)
(An
exploration stage enterprise)
Notes to
Consolidated Financial Statements
As of
March 31, 2007, $2,350,000 had met the characteristics of a liability and,
therefore, was classified as a current liability in the Company’s financial
statements. The difference between the $0.50 per common
share conversion price and the market price of the common shares on the Series E
Stock conversion dates has been recorded as loss on conversion of Series E Stock
in the amount of $4,464,329 for the fiscal year ended March 31,
2008.
|
Note
11.
|
Common
Stock
|
On July
21, 2006, the Company entered into an agreement with GeoMechanics International,
Inc. (“GMI”) pursuant to which GMI shall provide certain technical services to
the Coos Bay project during the 2006/2007 drilling season in return for 125,000
shares of the common stock of the Company. These technical services
were valued at $227,500 and include geomechanical evaluation, modeling and
advisory services. The Company recorded the related services as
prepaid expense, subject to amortization as the services are
provided. During the fiscal year ended March 31, 2008, a total of
$60,182 (2007: $167,382; 2006: Nil) in related services was amortized from the
prepaid expense account and recorded in oil and gas properties.
On July
19, 2005, the Company received gross proceeds of $3,300,000 pursuant to a
private placement of 1,650,000 shares of common stock at $2.00 per
share. Finders’ fees paid on this transaction totalled
$25,000.
|
Note
12.
|
Shareholder
Loan
|
During
the year ended March 31, 2005, the Company received proceeds of $80,000 from a
shareholder. On January 17, 2005, the shareholder loan was repaid in
full with no interest. No imputed interest was recorded as it is deemed
insignificant.
|
Note
13.
|
Commitments
and Contingencies
|
The
Company has entered into various operating lease agreements involving office
spaces and equipment. These leases are non-cancellable and expire in
various dates through fiscal year 2010. Future minimum lease payments
under these non-cancellable operating leases as of March 31, 2008 were $69,669
for fiscal year 2009 and $28,014 for fiscal year 2010. Rent expense
incurred by the Company for the fiscal year ended March 31, 2008 was $165,844
(2007: $132,273; 2006: $59,472). On April 15, 2008, the Company entered into a
sublease for one of its office spaces at 100% of the remaining lease commitment
through September 2009; however, the Company still remains primarily
liable for this obligation if the sublessee does not perform.
On
February 15, 2008, the Company entered into an
engagement letter (the "Engagement Letter")
with Gordian Group, LLC ("Gordian"), pursuant
to which Gordian was hired to act as the Company's exclusive investment banker
in providing financial advisory services and presenting and evaluating potential
financial transactions for the Company. As compensation for the
services provided by Gordian under the Engagement Letter, the Company agreed to,
upon the completion of any financial transaction, pay to Gordian specified fees.
In addition to the transaction fee to be paid upon the completion of a financial
transaction, if any, the Company agreed to issue 1,250,000 shares of common
stock of the Company to Gordian, subject to certain conditions. As of
March 31, 2008, no transaction fee has been earned or paid and no common shares
of the Company have been issued to Gordian.
As a
result of its decision to file the Chapter 11 cases the Company
exercised its right to terminate the Engagement Letter between the
Company and Gordian on May 30, 2008. In the Company's bankruptcy
schedules, as amended, Gordian has been listed as an unsecured creditor with a
disputed, contingent unliquidated claim.
62
TORRENT
ENERGY CORPORATION
(formerly
SCARAB SYSTEMS INC.)
(An
exploration stage enterprise)
Notes to
Consolidated Financial Statements
|
Note
14.
|
Subsequent
Events
|
On April
10, 2008, the Company granted a one year option to Citrus Energy Corporation and
Oklaco Holding, LLP, (the “Citrus Group”) which allows the Citrus Group to drill
two wells on leases owned by Cascadia Energy Corp. and earn a working
interest in any production from these wells. In the event the
Citrus Group elects to drill these potential wells, then the Company would
receive a cash equalization payment of $80,000 per well and would retain a
royalty interest on any future production from the acreage earned by the Citrus
Group.
On June
2, 2008, the Company and its subsidiaries commenced Chapter 11 proceedings by
filing a voluntary petition for reorganization under the Bankruptcy Code, with
the United States Bankruptcy Court for the District of Oregon (the “Bankruptcy
Court”). Since that date, the Debtors have continued to operate their
businesses and manage their properties as debtors-in-possession pursuant to
Sections 1107(a) and 1108 of the Bankruptcy Code. Debtors filed with
the Bankruptcy Court the requisite schedules of assets and liabilities and
statements required pursuant to section 521 of the Bankruptcy Code and
Bankruptcy Rule 1007. A meeting of creditors was held on July 8,
2008.
In
connection with the Chapter 11 Cases, on June 6, 2008, we entered into a senior
secured super-priority debtor in possession credit and guaranty agreement (the
“DIP Credit Agreement”) among the Company and its subsidiaries, as Guarantors,
and YA Global. The DIP Credit Agreement was approved on an interim
basis by the Bankruptcy Court the same day. The Bankruptcy Court
entered an order approving the DIP Credit Agreement on July 11,
2008. The DIP Credit Agreement provides for a $4.5 million term
loan under which YA Global may advance funds to the Company (the "Loan
"). The proceeds of the Loan are expected to be used for working
capital purposes, including payment of professional services fees, wages,
salaries, and other operating expenses, payment of the promissory note issued by
the Company to YA Global on May 15, 2008, in the amount of $207,854 plus accrued
interest, payment of certain subsidiary debt, and other purposes, as approved by
YA Global. Advances under the DIP Credit Agreement bear interest at
the lower of twelve percent (12%) per annum or the highest rate of interest
permissible under law. The Loan will mature on the earliest of (a)
the date which is the one year anniversary of the DIP Credit Agreement, (b) the
date of termination of the Loan in connection with YA Global's rights upon an
Event of Default (as defined in the DIP Credit Agreement), (c) the close of
business on the first business day after the entry of the final order by the
Bankruptcy Court, if the Company has not paid YA Global the fees required under
the DIP Credit Agreement, (d) the date a plan of reorganization confirmed in the
Chapter 11 Cases becomes effective that does not provide for the payment in full
of all amounts owed to YA Global under the DIP Credit Agreement, (e) the date of
the closing of a sale of all or substantially all of our assets pursuant to
Section 363 of the Bankruptcy Code, and (f) the effective date of a
plan of reorganization or arrangement in the Chapter 11 Cases. If the
Loan is repaid prior to the one year anniversary of the date of the DIP Credit
Agreement, the Company will be required to pay to YA Global a prepayment fee in
an amount equal to one percent (1%) of such prepayment. Upon the
occurrence of an Event of Default, all amounts owing under the DIP Credit
Agreement will bear interest at the rate of the lower of seventeen percent (17%)
or the maximum rate permitted by law per annum, and YA Global may declare all
outstanding obligations immediately due and payable. YA Global has a
right of first refusal to provide exit financing to the Company. As
of July 11, 2008, the Company has borrowed $550,068 under the DIP Credit
Agreement.
Chapter
11 is the principal business reorganization chapter of the Bankruptcy Code.
Under Chapter 11, a debtor is authorized to continue to operate its business in
the ordinary course and to reorganize its business for the benefit of its
creditors. A debtor-in-possession under Chapter 11 may not engage in
transactions outside of the ordinary course of business without the approval of
the Bankruptcy Court, after notice and an opportunity for a
hearing.
63
TORRENT
ENERGY CORPORATION
(formerly
SCARAB SYSTEMS INC.)
(An
exploration stage enterprise)
Notes to
Consolidated Financial Statements
Pursuant
to the Bankruptcy Code, pre-petition obligations of the Debtors, including
obligations under debt instruments, generally may not be enforced against the
Debtors. In addition, any actions to collect pre-petition indebtedness are
automatically stayed unless the stay is lifted by the Bankruptcy
Court. Pursuant to the Bankruptcy Court's Order entered on June 6,
2008, all creditors holding claims which arose prior to the petition date and
which was unlisted by the Debtors or listed as disputed, contingent, or in an
unliquidated amount on Debtors' schedules were required to file a proof of claim
with the Bankruptcy Court on or before August 15, 2008. Notice of
this bar date was timely mailed to all parties on the Court’s master mailing
matrix. Persons required to file a proof of claim by that date, but
who did not do so, will not receive any distribution under the
Plan.
As
debtors-in-possession, the Debtors have the right, subject to Bankruptcy Court
approval and certain other limitations, to assume or reject executory contracts
and unexpired leases. In this context, “assumption” means that the Debtors agree
to perform their obligations and cure all existing defaults under the contract
or lease, and “rejection” means that the Debtors are relieved from their
obligations to perform further under the contract or lease, but are subject to a
claim for damages for the breach thereof. Any damages resulting from rejection
of executory contracts and unexpired leases will be treated as general unsecured
claims in the Chapter 11 process unless such claims had been secured on a
pre-petition basis. The Debtors are in the process of reviewing their executory
contracts and unexpired leases to determine which, if any, they will reject. The
Debtors cannot presently determine or reasonably estimate the ultimate liability
that may result from rejecting contracts or leases or from the filing of claims
for any rejected contracts or leases, and no provisions have yet been made for
these items.
The
Debtors are seeking the requisite acceptance of the Plan by impaired creditors
and equity holders and confirmation of the Plan by the Bankruptcy Court, all in
accordance with the applicable provisions of the Bankruptcy Code.
The
consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States applicable to a
going concern. Except as otherwise disclosed, these principles assume
that assets will be realized and liabilities will be discharged in the ordinary
course of business. The Debtors are operating as debtors-in-possession under
Chapter 11 of the Bankruptcy Code, and their continuation as a going concern is
contingent upon, among other things, their ability to gain approval of the plan
of reorganization by the requisite parties under the Bankruptcy Code and have
the Plan confirmed by the Bankruptcy Court, comply with the DIP Credit Agreement
and obtain financing sources to meet future obligations. There is no
assurance that the Debtors will be able to achieve any of these
results. The consolidated financial statements do not include any
adjustments relating to the recoverability and classification of recorded asset
amounts or the amounts and classification of liabilities that might result from
the outcome of these uncertainties.
64
Supplemental
Information – Quarterly Financial Data (Unaudited)
|
Financial
Information by Quarter (Unaudited)
|
||||||||||||||||
|
June
30
|
September
30
|
December
31
|
March
31
|
|||||||||||||
|
For
the fiscal year ended March 31, 2008
|
||||||||||||||||
|
Net
Loss applicable to common stockholders
|
$ | (4,006, 551 | ) | $ | (2,895,992 | ) | $ | (1,236,348 | ) | $ | (1,347,612 | ) | ||||
|
Basic
and diluted (loss) per share
|
$ | (0.11 | ) | $ | (0.07 | ) | $ | (0.03 | ) | $ | (0.03 | ) | ||||
|
For
the fiscal year ended March 31, 2007
|
||||||||||||||||
|
Net
Loss applicable to common stockholders
|
$ | (2,405,440 | ) | $ | (2,023,157 | ) | $ | (1,717,966 | ) | $ | (1,618,864 | ) | ||||
|
Basic
and diluted (loss) per share
|
$ | (0.08 | ) | $ | (0.06 | ) | $ | (0.05 | ) | $ | (0.05 | ) | ||||
|
For
the fiscal year ended March 31, 2006
|
||||||||||||||||
|
Net
Loss applicable to common stockholders
|
$ | (1,345,998 | ) | $ | (1,172,269 | ) | $ | (1,118,433 | ) | $ | (1,658,872 | ) | ||||
|
Basic
and diluted (loss) per share
|
$ | (0.06 | ) | $ | (0.05 | ) | $ | (0.04 | ) | $ | (0.07 | ) | ||||
65
|
ITEM
9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURES
|
Ernst
& Young LLP was dismissed on March 28, 2006 as our independent
auditors. Ernst & Young LLP’s report dated June 3, 2005, on our
consolidated balance sheet as of March 31, 2005, and the related consolidated
statement of stockholders’ equity (deficit) from October 8, 2001 (inception) to
March 31, 2005, consolidated statement of operations for the year ended March
31, 2005 and for October 8, 2001 (inception) to March 31, 2005 and consolidated
statement of cash flows for the years ended March 31, 2005 and for October 8,
2001 (inception) to March 31, 2005, did not contain an adverse opinion or
disclaimer of opinion, or qualification or modification as to uncertainty, audit
scope, or accounting principles. However Ernst & Young LLP
included an explanatory paragraph in their report with respect to uncertainty as
to our ability to continue as a going concern.
In
connection with the audit of our consolidated financial statements, and in the
subsequent interim periods, there were no disagreements with Ernst & Young
LLP on any matters of accounting principles or practices, financial statement
disclosure, or auditing scope and procedures which, if not resolved to the
satisfaction of Ernst & Young LLP would have caused Ernst & Young LLP to
make reference to the matter in their report. Ernst & Young LLP
furnished us with a letter addressed to the Commission stating that they agree
with the above statements. A copy of that letter, dated April 26,
2006, is filed as Exhibit 16 to our Form 8-K filed on April 27,
2006. We engaged Peterson Sullivan PLLC on March 28, 2006 as our
principal accountant to audit our consolidated financial
statements. The decision to change accountants was approved by our
board of directors.
During
the years ended March 31, 2005 and 2004, neither we nor anyone on our behalf
consulted with Peterson Sullivan PLLC regarding either the application of
accounting principles to a specified transaction, either completed or proposed,
or the type of audit opinion that might be rendered on our consolidated
financial statements, nor has Peterson Sullivan PLLC provided to us a
written report or oral advice regarding such principles or audit opinion or any
matter that was the subject of a disagreement or reportable events set forth in
Item 304(a)(iv) and (v), respectively, of Regulation S-K with our former
accountant.
|
ITEM
9A.
|
CONTROLS
AND PROCEDURES
|
Disclosure
controls and other procedures are designed to ensure that information required
to be disclosed in our reports filed or submitted under the Securities Exchange
Act of 1934 is recorded, processed, summarized and reported, within the time
period specified in the Securities and Exchange Commission’s rules and
forms. Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that information required
to be disclosed in our reports filed under the Securities Exchange Act of 1934
is accumulated and communicated to management, including our president and chief
executive officer and our chief financial officer as appropriate, to allow
timely decisions regarding required disclosure.
Evaluation
of disclosure controls and procedures
As
required under the Securities Exchange Act of 1934 (Rules 13a-15(e)
and 15d-15(e)), as of March 31, 2008, we have carried out an evaluation of the
effectiveness of our “ disclosure controls and procedures” . This
evaluation was carried out under the supervision and with the participation of
our Company’s management, including our Company’s president and chief executive
officer and our chief financial officer. Based upon that evaluation,
the Company’s management concluded that as of March 31, 2008, our disclosure
controls and procedures were not effective due to the existence of several
material weaknesses in our internal control over financial reporting, as
discussed below.
66
Management’s
annual report on internal control over financial reporting
Management
is responsible for establishing and maintaining internal control over financial
reporting, as such term is defined in Exchange Act Rule 13a-15(f). Our
management evaluated, under the supervision and with the participation of our
President and Chief Executive Officer and our Chief Financial Officer, the
effectiveness of our internal control over financial reporting as of March 31.
2008. Based on its evaluation under the framework in Internal
Control—Integrated Framework, issued by the Committee of Sponsoring
Organizations of the Treadway Commission, our management concluded that our
internal control over financial reporting was not effective as of March 31,
2008, due to the existence of significant deficiencies constituting material
weaknesses, as described in greater detail below. A material weakness
is a control deficiency, or combination of control deficiencies, such that there
is a reasonable possibility that a material misstatement of the annual or
interim financial statements will not be prevented or detected on a timely
basis.
This
annual report does not include an attestation report of the Company’s
independent registered public accounting firm regarding internal control over
financial reporting. Management’s report was not subject to attestation by the
Company’s independent registered public accounting firm pursuant to temporary
rules of the SEC that permit the Company to provide only management’s report in
this annual report.
Limitations
on Effectiveness of Controls
Our
management, including our President and Chief Executive Officer
and Chief Financial Officer, does not expect that our disclosure
controls or our internal control over financial reporting will prevent all
errors and all fraud. A control system, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Further, the design of a control
system must reflect the fact that there are resource constraints, and the
benefits of controls must be considered relative to their costs. Because of the
inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within the Company have been detected. These inherent limitations include
the realities that judgments in decision-making can be faulty, and because a
simple error or mistake may occur. Additional controls can be circumvented by
the individual acts of some persons, by collusion of two or more people, or by
management override of the controls. The design of any system of controls also
is based in part upon certain assumptions about the likelihood of future events,
and there can be no assurance that any design will succeed in achieving its
stated goals under all potential future conditions; over time, controls may
become inadequate because of changes in conditions, or the degree of compliance
with the policies or procedures may deteriorate. Because of the inherent
limitations in a cost-effective control system, misstatements due to error or
fraud may occur and not be detected.
Material
Weaknesses Identified
In
connection with the preparation of our financial statements for the year ended
March 31, 2008, certain significant deficiencies in internal control became
evident to management that, in the aggregate, represent material weaknesses,
including,
(i)
Lack of a sufficient number of independent directors for our board and audit
committee. In February and March of 2008, all our independent
directors resigned due to personal reasons. We currently only
have one director on our board and this individual also serves as the Company’s
President and Chief Executive Office. We intend to
add independent board members once the Company emerges from Chapter 11
Reorganization.
(ii)
Lack of an independent audit committee. We currently do not have an
independent audit committee or a financial expert on our board of directors as
defined by the SEC. Pursuant to Section 407, we are required to
disclose whether we have at least one "audit committee financial expert" on our
audit committee in addition to whether the expert is independent of
management. It is the Company’s intension to establish an audit
committee of the board and obtain a financial expert on our audit committee once
we emerge from Chapter 11 Reorganization.
67
(iii) Insufficient
segregation of duties in our finance and accounting functions due to limited
personnel. During the a portion of the fiscal year ended March 31,
2008, we had only one person on staff that performed nearly all aspects of our
financial reporting process, including, but not limited to, access to the
underlying accounting records and systems, the ability to post and record
journal entries and responsibility for the preparation of the financial
statements. This creates certain incompatible duties and a lack of
review over the financial reporting process that would likely result in a
failure to detect errors in spreadsheets, calculations, or assumptions used to
compile the financial statements and related disclosures as filed with the
SEC. These control deficiencies could result in a material
misstatement to our interim or annual consolidated financial statements that
would not be prevented or detected.
(iv) Insufficient
corporate governance policies. Although we have a code of ethics
which provides broad guidelines for corporate governance, our corporate
governance activities and processes are have not always been formally
documented. Specifically, decisions made by the board to be carried
out by management should be documented and communicated on a timely basis to
reduce the likelihood of any misunderstandings regarding key decisions affecting
our operations and management.
As part
of the communications by Peterson Sullivan, PLLC, (“Peterson Sullivan” ) with
our management and Board of Directors for fiscal year ended March 31, 2008,
Peterson Sullivan informed the Board of Directors that these deficiencies
constituted material weaknesses, as defined by Auditing Standard No. 5, “An
Audit of Internal Control Over Financial Reporting that is Integrated with an
Audit of Financial Statements and Related Independence Rule and Conforming
Amendments,” established by the Public Company Accounting Oversight Board
(“PCAOB”).
Plan
for Remediation of Material Weaknesses
We intend
to take appropriate and reasonable steps to make the necessary improvements to
remediate these deficiencies during our next fiscal year. We intend to consider
the results of our remediation efforts and related testing as part of our fiscal
year-end March 31, 2009 assessment of the effectiveness of our internal control
over financial reporting.
We have
implemented certain remediation measures and are in the process of designing and
implementing additional remediation measures for the material weaknesses
described in this Annual Report on Form 10-K. Such remediation activities
include the following:
-
We will search for independent board members to join our board of directors including at least one financial expert to join as an audit committee member.
-
We are planning to expand the financial reporting and accounting department as well as more rigorous review procedures.
-
We are planning a formal commitment review process to establish and document the accounting events and methodology at the time the transactions are entered into, which will be reviewed and approved by both finance personnel and the appropriate project managers, so that there is a clear understanding of what events will trigger an accounting event and establish the amounts to be recognized for each event.
In
addition to the foregoing remediation efforts, we will continue to update the
documentation of our internal control processes, including formal risk
assessment of our financial reporting processes.
This
annual report does not include an attestation report of the Company's
independent registered public accounting firm regarding internal control over
financial reporting. Management's report was not subject to attestation by the
Company's independent registered public accounting firm pursuant to temporary
rules of the SEC that permit the Company to provide only management's report in
this annual report.
68
Changes
in Internal Controls over Financial Reporting
There
were no significant changes in internal control over financial
reporting during the fiscal year ended March 31, 2008 that materially
affected, or are reasonably likely to materially affect, our internal control
over financing reporting.
|
ITEM
9B.
|
OTHER
INFORMATION
|
None.
69
PART
III
The
information required by Part III (Items 10, 11, 12,13 and 14) of this Form 10-K
is incorporated by reference from our definitive proxy statement to be filed
pursuant to Regulation 14A with the Commission not later than 120 days after the
end of the fiscal year covered by the Form 10-K.
PART
IV
|
ITEM
15.
|
EXHIBITS
AND FINANCIAL STATEMENT SCHEDULES
|
Exhibit Number and Exhibit
Title
(3) Articles
of Incorporation and Bylaws
3.1 Restated
Articles of Incorporation (incorporated by reference from our Annual Report on
Form 10-KSB/A filed on February 11, 2004).
3.2 Articles
of Amendment to the Restated Articles of Incorporation, changing the name to
Torrent Energy Corporation (incorporated by reference from our Registration
Statement on Form SB-2 filed on March 30, 2005).
3.3 Articles
of Amendment to the Restated Articles of Incorporation, creating Series B
convertible preferred stock (incorporated by reference from our Current Report
on Form 8-K filed on September 1, 2004).
3.4 Bylaws
of our Company (incorporated by reference from our Annual Report on Form
10-KSB/A filed on February 11, 2004).
3.5 Articles
of Amendment dated July 13, 2005 creating Series C convertible preferred stock
(incorporated by reference from our Current Report on Form 8-K filed on July 20,
2005).
3.6 Articles
of Amendment dated June 16, 2006 creating Series D convertible preferred stock
(incorporated by reference from our Current Report on Form 8-K filed on June 30,
2006).
3.7 Articles
of Amendment dated June 28, 2006 creating Series E convertible preferred stock
(incorporated by reference from our Current Report on Form 8-K filed on June 30,
2006).
(4) Instruments
Defining the Rights of Security Holders, including Indentures
4.1 Scarab
Systems, Inc. 2004 Non-Qualified Stock Option Plan (incorporated by reference
from our Registration Statement on Form S-8 filed on February 19,
2004).
4.2 Amended
2005 Equity Incentive Plan, effective March 17, 2005 (incorporated by reference
from our Registration Statement on Form S-8 filed on August 31,
2005).
4.3 Form
of Stock Option Agreement for Amended 2005 Equity Incentive Plan (incorporated
by reference from our Registration Statement on Form S-8 filed on August 31,
2005).
(10) Material
Contracts
10.1 Lease
Purchase and Sale Agreement between our Company, Methane Energy Corp. and
Geo-Trends-Hampton International, LLC dated May 11, 2004 (incorporated by
reference from our Current Report on Form 8-K filed on May 20,
2004).
70
10.2 Amending
Agreement to Lease Purchase and Sale Agreement dated May 19, 2004 (incorporated
by reference from our Current Report on Form 8-K filed on June 23,
2004).
10.3 Second
Amending Agreement to Lease Purchase and Sale Agreement dated June 11, 2004
(incorporated by reference from our Current Report on Form 8-K filed on June 23,
2004).
10.4 Investment
Rights Agreement dated August 27, 2004 between our Company and Cornell Capital
Partners, L.P. (incorporated by reference from our Current Report on Form 8-K
filed on September 1, 2004).
10.5 Registration
Rights Agreement dated August 27, 2004 between our Company and Cornell Capital
Partners, L.P. (incorporated by reference from our Current Report on Form 8-K
filed on September 1, 2004).
10.6 Consulting
Agreement dated January 1, 2005 between our Company and MGG Consulting
(incorporated by reference from our Registration Statement on Form SB-2 filed on
March 30, 2005).
10.7 Securities
Purchase Agreement dated February 11, 2005 between our Company and Placer Creek
Investors (Bermuda) L.P. (incorporated by reference from our Registration
Statement on Form SB-2 filed on March 30, 2005).
10.8 Securities
Purchase Agreement dated February 11, 2005 between our Company and Placer Creek
Partners, L.P. (incorporated by reference from our Registration Statement on
Form SB-2 filed on March 30, 2005).
10.9 Securities
Purchase Agreement dated July 11, 2005 between our Company and Placer Creek
Partners, L.P. (incorporated by reference from our Current Report on Form 8-K
filed on July 20, 2005).
10.10 Securities
Purchase Agreement dated July 11, 2005 between our Company and Placer Creek
Investors (Bermuda) L.P. (incorporated by reference from our Current Report on
Form 8-K filed on July 20, 2005).
10.11 Securities
Purchase Agreement dated July 11, 2005 between our Company and SDS Capital Group
SPC, Ltd. (incorporated by reference from our Current Report on Form 8-K filed
on July 20, 2005).
10.12 Investment
Agreement dated July 12, 2005 between our Company and Cornell Capital Partners,
L.P. (incorporated by reference from our Current Report on Form 8-K filed on
July 20, 2005).
10.13 Investor
Registration Rights Agreement dated July 12, 2005 between our Company and
Cornell Capital Partners, L.P. (incorporated by reference from our Current
Report on Form 8-K filed on July 20, 2005).
10.14 Lease
Option Agreement dated August 9, 2005 between Torrent’s wholly-owned subsidiary,
Cascadia Energy Corp. and Weyerhaeuser Company (incorporated by reference from
our Current Report on Form 8-K filed on August 18, 2005).
10.15 Joint
Venture Agreement dated August 12, 2005 between Torrent’s wholly-owned
subsidiary, Cascadia Energy Corp. and St. Helens Energy, LLC (incorporated by
reference from our Current Report on Form 8-K filed on August 18,
2005).
10.16 Option
to Acquire Oil & Gas Lease with Pope Resources LP dated May 9, 2006
(incorporated by reference from our Current Report on Form 8-K filed on May 19,
2006).
10.17 Investment
Agreement dated June 28, 2006 between our Company and Cornell Capital Partners,
L.P. (incorporated by reference from our Current Report on Form 8-K filed on
June 30, 2006).
10.18 Registration
Rights Agreement dated June 28, 2006 between our Company and Cornell Capital
Partners, L.P. (incorporated by reference from our Current Report on Form 8-K
filed on June 30, 2006).
71
(11) Statements
regarding computation of per share earnings (See Note 2 to the consolidated
financial statements included in Item 8).
(14) Code
of Ethics
14.1 Code
of Business Conduct and Ethics (incorporated by reference from our Annual Report
on Form 10-KSB filed on June 30, 2005).
(16) Letter
on change in certifying accountant
16.1 Letter
from Moore Stephens Ellis Foster Ltd. dated August 25, 2005 regarding change in
independent accountant (incorporated by reference from our Current Report on
Form 8-K/A filed on September 13, 2005).
16.2 Letters
from Ernst & Young LLP dated March 30, 2006 and April 26, 2006 regarding
change in independent accountant (incorporated by reference from our Current
Reports on Forms 8-K/A filed on April 7, 2006 and April 27, 2006).
(21) Subsidiaries
Methane
Energy Corp., an Oregon company
Cascadia
Energy Corp., a Washington company
(31) Section
302 Certifications
(32) Section
906 Certifications
72
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) 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.
TORRENT
ENERGY CORPORATION
By: /s/ John
D. Carlson
John D.
Carlson
President,
Chief Executive Officer and Director
(Principal
Executive Officer)
By: /s/
Peter Craven
Peter
Craven
Chief
Financial Officer and Secretary
(Principal
Financial Officer and Principal Accounting Officer)
Date: July
14, 2008
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