SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
x | | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended August 31, 2008 |
OR |
o | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from �� to
Commission file number: 000-51563
(Exact Name of Registrant as Specified in its Charter)
NEVADA | | 98-0431245 |
(State of other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| | |
11616 East Montgomery Drive, No. 54 | | |
Spokane Valley, Washington | | 99206 |
(Address of Principal Executive Offices) | | (Zip Code) |
(Registrant’s Telephone Number, including Area Code)
(Former name, former address and former fiscal year, if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 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. [X] Yes [ ] No
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) [ ] Yes [X] No
Number of shares of issuer’s common stock outstanding as of October 15, 2008: 60,733,335
Transitional Small Business format (check one): [ ] Yes [X] No
TABLE OF CONTENTS
Page
| PART I - FINANCIAL INFORMATION | |
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Item 1: | Financial Statements | |
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| Balance Sheets, August 31, 2008 and November 30, 2007 | 3 |
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| Statements of Operations for the three and nine month periods ended August 31, 2008 and 2007 and from the date of inception on October 17, 2001 through August 31, 2008 | 4 |
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| Statements of Cash Flows for the nine months ended August 31, 2008 and 2007 and from the date of inception on October 17, 2001 through August 31, 2008 | 5 |
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| Notes to Financial Statements | 6 |
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Item 2: | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 15 |
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Item 3: | Controls and Procedures | 23 |
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| PART II – OTHER INFORMATION | |
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Item 1: | Legal Proceedings | 23 |
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Item 2: | Unregistered Sales of Equity Securities and Use of Proceeds | 23 |
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Item 3: | Defaults Upon Senior Securities | 23 |
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Item 4: | Submission of Matters to a Vote of Security Holders | 23 |
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Item 5: | Other Information | 23 |
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Item 6: | Exhibits | 24 |
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Signatures | 25 |
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
The accompanying unaudited financial statements have been prepared in accordance with the instructions to Form 10-QSB and Item 310 (b) of Regulation S-B, and, therefore, do not include all information and notes necessary for a complete presentation of financial position, results of operations, cash flows, and stockholders' equity in conformity with generally accepted accounting principles. In the opinion of management, all adjustments considered necessary for a fair presentation of the results of operations and financial position have been included and all such adjustments are of a normal recurring nature. Operating results for the nine months and the three months ended August 31, 2008 are not necessarily indicative of the results that can be expected for the year ending November 30, 2008.
As used in this Quarterly Report, the terms "we", "us", "our", “the Company” and “Texada” mean Texada Ventures Inc., unless otherwise indicated. All dollar amounts in this Quarterly Report are in U.S. dollars unless otherwise stated.
Texada Ventures Inc.
(An Exploration Stage Company)
Balance Sheets
(Expressed in US dollars)
| | August 31, 2008 $ | | | November 30, 2007 $ | |
| | (unaudited) | | | | |
ASSETS | | | | | | |
| | | | | | |
Current assets | | | | | | |
| | | | | | |
Cash | | | 3,855 | | | | 20,665 | |
Prepaid expenses | | | 141 | | | | 152 | |
| | | | | | | | |
Total current assets | | | 3,996 | | | | 20,817 | |
| | | | | | | | |
Oil and gas interest (Note 4) | | | – | | | | 110,000 | |
| | | | | | | | |
Total assets | | | 3,996 | | | | 130,817 | |
| | | | | | | | |
LIABILITIES AND STOCKHOLDERS’ DEFICIT | | | | | | | | |
| | | | | | | | |
Current liabilities | | | | | | | | |
| | | | | | | | |
Accounts payable (Note 5(b)) | | | 54,255 | | | | 52,505 | |
Accrued liabilities | | | 66,214 | | | | 30,952 | |
Due to related parties (Note 5(a) and (c)) | | | 12,000 | | | | 56,707 | |
Promissory notes payable (Note 6) | | | 150,000 | | | | 150,000 | |
Convertible debentures, less unamortized discount of $63,454 (Note 7) | | | 521,546 | | | | – | |
| | | | | | | | |
Total current liabilities | | | 804,015 | | | | 290,164 | |
| | | | | | | | |
Convertible debentures, less unamortized discount of $nil and $125,741, respectively (Note 7) | | | – | | | | 309,259 | |
| | | | | | | | |
Total liabilities | | | 804,015 | | | | 599,423 | |
| | | | | | | | |
Nature of operations and continuance of business (Note 1) | | | | | | | | |
| | | | | | | | |
Stockholders’ Deficit | | | | | | | | |
| | | | | | | | |
Preferred shares, 100,000,000 shares authorized, $0.001 par value; None issued and outstanding | | | – | | | | – | |
| | | | | | | | |
Common shares, 500,000,000 shares authorized, $0.001 par value; 60,733,335 shares issued and outstanding | | | 60,733 | | | | 60,733 | |
| | | | | | | | |
Additional paid-in capital | | | 303,667 | | | | 243,667 | |
| | | | | | | | |
Deficit accumulated during the exploration stage | | | (1,164,419 | ) | | | (773,006 | ) |
| | | | | | | | |
Total Stockholders’ Deficit | | | (800,019 | ) | | | (468,606 | ) |
| | | | | | | | |
Total Liabilities and Stockholders’ Deficit | | | 3,996 | | | | 130,817 | |
(The accompanying notes are an integral part of these financial statements)
(An Exploration Stage Company) |
(Expressed in US dollars, except shares) |
| | Accumulated from | | | | | | | | | | | | | |
| | October 17, 2001 (Date of Inception) | | | For the Nine Months Ended | | | For the Nine Months Ended | | | For the Three Months Ended | | | For the Three Months Ended | |
| | to August 31, | | | August 31, | | | August 31, | | | August 31, | | | August 31, | |
| | 2008 | | | 2008 | | | 2007 | | | 2008 | | | 2007 | |
| | $ | | | $ | | | $ | | | $ | | | $ | |
| | | | | | | | | | | | | | | | | | | | |
Revenue | | | – | | | | – | | | | – | | | | – | | | | – | |
| | | �� | | | | | | | | | | | | | | | | | |
Operating expenses | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Amortization | | | 798 | | | | – | | | | – | | | | – | | | | – | |
Consulting (Note 5(a)) | | | 92,027 | | | | 38,027 | | | | 36,000 | | | | 14,027 | | | | 12,000 | |
Exploration costs | | | 20,091 | | | | – | | | | – | | | | – | | | | – | |
General and administrative | | | 354,002 | | | | 73,070 | | | | 101,249 | | | | 7,129 | | | | 14,730 | |
Gain on foreign exchange | | | (194 | ) | | | (591 | ) | | | (2,711 | ) | | | (3,817 | ) | | | (213 | ) |
Mineral property costs | | | 3,350 | | | | – | | | | – | | | | – | | | | – | |
| | | | | | | | | | | | | | | | | | | | |
Total operating expenses | | | 470,074 | | | | 110,506 | | | | 134,538 | | | | 17,339 | | | | 26,517 | |
| | | | | | | | | | | | | | | | | | | | |
Loss from operations | | | (470,074 | ) | | | (110,506 | ) | | | (134,538 | ) | | | (17,339 | ) | | | (26,517 | ) |
| | | | | | | | | | | | | | | | | | | | |
Other income (expense) | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Accretion of discount on convertible debentures (Note 7) | | | (170,546 | ) | | | (122,287 | ) | | | (70,161 | ) | | | (47,851 | ) | | | (48,044 | ) |
Interest income | | | 4,022 | | | | – | | | | 6,155 | | | | – | | | | 2,133 | |
Interest on convertible debentures | | | (45,034 | ) | | | (32,786 | ) | | | (7,187 | ) | | | (11,764 | ) | | | (4,914 | ) |
Interest on promissory notes | | | (20,415 | ) | | | (9,041 | ) | | | (8,164 | ) | | | (3,024 | ) | | | (3,024 | ) |
Interest on related party loans | | | (8,500 | ) | | | (1,793 | ) | | | (4,568 | ) | | | – | | | | (1,523 | ) |
Loss on disposal of equipment | | | (2,075 | ) | | | – | | | | – | | | | – | | | | – | |
Loss on write down of note receivable | | | (86,797 | ) | | | – | | | | (88,930 | ) | | | – | | | | (2,133 | ) |
Loss on write down of oil and gas deposit | | | (365,000 | ) | | | (115,000 | ) | | | (250,000 | ) | | | (115,000 | ) | | | (250,000 | ) |
| | | | | | | | | | | | | | | | | | | | |
Total other income (expense) | | | (694,345 | ) | | | (280,907 | ) | | | (422,855 | ) | | | (177,639 | ) | | | (307,505 | ) |
| | | | | | | | | | | | | | | | | | | | |
Net loss | | | (1,164,419 | ) | | | (391,413 | ) | | | (557,393 | ) | | | (194,978 | ) | | | (334,022 | ) |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Net loss per share – basic and diluted | | | | | | | (0.01 | ) | | | (0.01 | ) | | | – | | | | (0.01 | ) |
| | | | | | | | | | | | | | | | | | | | |
Weighted average common shares outstanding | | | | | | | 60,733,335 | | | | 60,733,335 | | | | 60,733,335 | | | | 60,733,335 | |
(The accompanying notes are an integral part of these financial statements)
Texada Ventures Inc.
(An Exploration Stage Company)
Statements of Cash Flows
(Expressed in US dollars)
(unaudited)
| | Accumulated from October 17, 2001 (Date of Inception) to August 31, 2008 $ | | | For the Nine Months Ended August 31, 2008 $ | | | For the Nine Months Ended August 31, 2007 $ | |
Cash flows from operating activities | | | | | | | | | |
| | | | | | | | | |
Net loss | | | (1,164,419 | ) | | | (391,413 | ) | | | (557,393 | ) |
| | | | | | | | | | | | |
Adjustments to reconcile net loss to net cash used in operating activities: | | | | | | | | | | | | |
Accretion of convertible debt discount | | | 170,546 | | | | 122,287 | | | | 70,161 | |
Amortization | | | 798 | | | | – | | | | – | |
Loss on disposal of equipment | | | 2,075 | | | | – | | | | – | |
Loss on write down of note receivable | | | 86,797 | | | | – | | | | 86,797 | |
Write-off of oil and gas deposit | | | 365,000 | | | | 115,000 | | | | 250,000 | |
| | | | | | | | | | | | |
Changes in operating assets and liabilities: | | | | | | | | | | | | |
Prepaid expenses | | | (141 | ) | | | 11 | | | | – | |
Notes receivable | | | (8,457 | ) | | | – | | | | (8,457 | ) |
Accounts payable and accrued liabilities | | | 120,469 | | | | 37,012 | | | | 23,745 | |
Due to related parties | | | 12,000 | | | | 5,293 | | | | 4,568 | |
| | | | | | | | | | | | |
Net cash used in operating activities | | | (415,332 | ) | | | (111,810 | ) | | | (130,579 | ) |
| | | | | | | | | | | | |
Cash flows from investing activities | | | | | | | | | | | | |
| | | | | | | | | | | | |
Acquisition of oil and gas interests | | | (365,000 | ) | | | (5,000 | ) | | | (250,000 | ) |
Advance of note receivable | | | (78,340 | ) | | | – | | | | – | |
Purchase of equipment | | | (2,873 | ) | | | – | | | | – | |
| | | | | | | | | | | | |
Net cash used in investing activities | | | (446,213 | ) | | | (5,000 | ) | | | (250,000 | ) |
| | | | | | | | | | | | |
Cash flows from financing activities | | | | | | | | | | | | |
| | | | | | | | | | | | |
Advances from related party loan | | | 50,000 | | | | – | | | | – | |
Repayment of related party loan | | | (50,000 | ) | | | (50,000 | ) | | | – | |
Proceeds from convertible debentures | | | 585,000 | | | | 150,000 | | | | 325,000 | |
Proceeds from promissory notes payable | | | 150,000 | | | | – | | | | 50,000 | |
Proceeds from issuance of common shares | | | 130,400 | | | | – | | | | – | |
| | | | | | | | | | | | |
Net cash provided by financing activities | | | 865,400 | | | | 100,000 | | | | 375,000 | |
| | | | | | | | | | | | |
Increase (decrease) in cash | | | 3,855 | | | | (16,810 | ) | | | (5,579 | ) |
| | | | | | | | | | | | |
Cash - beginning of period | | | – | | | | 20,665 | | | | 60,877 | |
| | | | | | | | | | | | |
Cash - end of period | | | 3,855 | | | | 3,855 | | | | 55,298 | |
| | | | | | | | | | | | |
Supplemental disclosures of cash flow information: | | | | | | | | | | | | |
Interest paid in cash | | | 8,500 | | | | 8,500 | | | | – | |
Income taxes paid in cash | | | – | | | | – | | | | – | |
(The accompanying notes are an integral part of these financial statements)
Texada Ventures Inc.
(An Exploration Stage Company)
Notes to the Financial Statements
August 31, 2008
(Expressed in US dollars)
(unaudited)
1. | Nature of Operations and Continuance of Business |
Texada Ventures Inc. (the “Company”) was incorporated in the State of Nevada on October 17, 2001. The Company is an Exploration Stage Company, as defined by Statement of Financial Accounting Standard (“SFAS”) No. 7, “Accounting and Reporting for Development Stage Enterprises”. The Company’s principal business is the acquisition and exploration of oil and gas and mineral resources. The Company has not presently determined whether its properties contain mineral or petroleum reserves that are economically recoverable.
These financial statements have been prepared on a going concern basis, which implies the Company will continue to realize its assets and discharge its liabilities in the normal course of business. The Company has never generated revenues since inception and has never paid any dividends and is unlikely to pay dividends or generate earnings in the immediate or foreseeable future. The continuation of the Company as a going concern is dependent upon the continued financial support from its shareholders, the ability of the Company to obtain necessary equity financing to continue operations, confirmation of the Company’s interests in the underlying properties, and the attainment of profitable operations. As at August 31, 2008, the Company has a working capital deficit of $800,019, and has accumulated losses of $1,164,419 since inception. These factors raise substantial doubt regarding the Company’s ability to continue as a going concern. These financial statements do not include any adjustments to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
As at August 31, 2008, the Company had cash of $3,855 on hand, and for the next twelve months, management anticipates that the minimum cash requirements to fund its proposed exploration program and continued operations will be $500,000. Accordingly, the Company does not have sufficient funds to meet planned expenditures over the next twelve months, and will need to seek additional debt or equity financing to meet its planned expenditures. There is no assurance that the Company will be able to raise sufficient cash to fund its future exploration programs and operational expenditures.
2. Summary of Significant Accounting Policies
These financial statements and related notes are presented in accordance with accounting principles generally accepted in the United States, and are expressed in US dollars. The Company’s fiscal year-end is November 30.
b) | Interim Financial Statements |
The interim unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Securities and Exchange Commission (“SEC”) Form 10-QSB. They do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. Therefore, these financial statements should be read in conjunction with the Company’s audited financial statements and notes thereto for the year ended November 30, 2007, included in the Company’s Annual Report on Form 10-KSB filed on March 14, 2008 with the SEC.
The financial statements included herein are unaudited; however, they contain all normal recurring accruals and adjustments that, in the opinion of management, are necessary to present fairly the Company’s financial position at August 31, 2008, and the results of its operations and consolidated cash flows for the nine months ended August 31, 2008 and 2007. The results of operations for the nine months ended August 31, 2008 are not necessarily indicative of the results to be expected for future quarters or the full year.
Certain reclassifications have been made to prior period financial statements to conform to the current period presentation
(An Exploration Stage Company)
Notes to the Financial Statements
August 31, 2008
(Expressed in US dollars)
(unaudited)
2. | Summary of Significant Accounting Policies (continued) |
The preparation of financial statements in conformity with US generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Company regularly evaluates estimates and assumptions related to its investment in oil and gas properties and deferred income tax asset valuations. The Company bases its estimates and assumptions on current facts, historical experience and various other factors that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. The actual results experienced by the Company may differ materially and adversely from the Company’s estimates. To the extent there are material differences between the estimates and the actual results, future results of operations will be affected.
e) | Earnings (Loss) Per Share |
The Company computes earnings (loss) per share in accordance with SFAS No. 128, "Earnings per Share". SFAS No. 128 requires presentation of both basic and diluted earnings per share (“EPS”) on the face of the income statement. Basic EPS is computed by dividing earnings (loss) available to common shareholders (numerator) by the weighted average number of shares outstanding (denominator) during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period using the treasury stock method and convertible preferred stock using the if-converted method. In computing Diluted EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock options or warrants. Diluted EPS excludes all dilutive potential shares if their effect is anti dilutive. As at August 31, 2008, the Company has no dilutive securities outstanding.
f) | Mineral Property Costs |
The Company is primarily engaged in the acquisition, exploration and development of mineral properties. Mineral property acquisition costs are capitalized in accordance with EITF 04-2, “Whether Mineral Rights Are Tangible or Intangible Assets” when management has determined that probable future benefits consisting of a contribution to future cash inflows have been identified and adequate financial resources are available or are expected to be available as required to meet the terms of property acquisition and budgeted exploration and development expenditures. Mineral property acquisition costs are expensed as incurred if the criteria for capitalization are not met. In the event that a mineral property is acquired through the issuance of the Company’s shares, the mineral property will be recorded at the fair value of the respective property or the fair value of common shares, whichever is more readily determinable.
When mineral properties are acquired under option agreements with future acquisition payments to be made at the sole discretion of the Company, those future payments, whether in cash or shares, are recorded only when the Company has made or is obliged to make the payment or issue the shares. When it has been determined that a mineral property can be economically developed as a result of establishing proven and probable reserves and feasibility, the costs incurred to develop such property are capitalized.
g) | Stock-based Compensation |
The Company records stock-based compensation in accordance with SFAS No. 123R, “Share Based Payments”, using the fair value method. All transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable.
(An Exploration Stage Company)
Notes to the Financial Statements
August 31, 2008
(Expressed in US dollars)
(unaudited)
2. | Summary of Significant Accounting Policies (continued) |
h) | Oil and Gas Properties |
The Company utilizes the full-cost method of accounting for petroleum and natural gas properties. Under this method, the Company capitalizes all costs associated with acquisition, exploration and development of oil and natural gas reserves, including leasehold acquisition costs, geological and geophysical expenditures, lease rentals on undeveloped properties and costs of drilling of productive and non-productive wells into the full cost pool on a country by country basis. As of August 31, 2008, the Company had no properties with proven reserves. When the Company obtains proven oil and gas reserves, capitalized costs, including estimated future costs to develop the reserves proved and estimated abandonment costs, net of salvage, will be depleted on the units-of-production method using estimates of proved reserves. The costs of unproved properties are not amortized until it is determined whether or not proved reserves can be assigned to the properties. Until such determination is made the Company assesses annually whether impairment has occurred, and includes in the amortization base drilling exploratory dry holes associated with unproved properties.
The Company applies a ceiling test to the capitalized cost in the full cost pool. The ceiling test limits such cost to the estimated present value, using a ten percent discount rate, of the future net revenue from proved reserves, based on current economic and operating conditions. Specifically, the Company computes the ceiling test so that capitalized cost, less accumulated depletion and related deferred income tax, do not exceed an amount (the ceiling) equal to the sum of: (A) The present value of estimated future net revenue computed by applying current prices of oil and gas reserves (with consideration of price changes only to the extent provided by contractual arrangements) to estimated future production of proved oil and gas reserves as of the date of the latest balance sheet presented, less estimated future expenditures (based on current cost) to be incurred in developing and producing the proved reserves computed using a discount factor of ten percent and assuming continuation of existing economic conditions; plus (B) the cost of property not being amortized; plus (C) the lower of cost or estimated fair value of unproven properties included in the costs being amortized; less (D) income tax effects related to differences between the book and tax basis of the property.
For unproven properties, the Company excludes from capitalized costs subject to depletion, all costs directly associated with the acquisition and evaluation of the unproved property until it is determined whether or not proved reserves can be assigned to the property. Until such a determination is made, the Company assesses the property at least annually to ascertain whether impairment has occurred. In assessing impairment the Company considers factors such as historical experience and other data such as primary lease terms of the property, average holding periods of unproved property, and geographic and geologic data. The Company adds the amount of impairment assessed to the cost to be amortized subject to the ceiling test. As of August 31, 2008, all of the Company’s oil and gas properties were unproved and were excluded from amortization.
In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, the Company tests long-lived assets or asset groups for recoverability when events or changes in circumstances indicate that their carrying amount may not be recoverable. Circumstances which could trigger a review include, but are not limited to: significant decreases in the market price of the asset; significant adverse changes in the business climate or legal factors; accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of the asset; current period cash flow or operating losses combined with a history of losses or a forecast of continuing losses associated with the use of the asset; and current expectation that the asset will more likely than not be sold or disposed significantly before the end of its estimated useful life. Recoverability is assessed based on the carrying amount of the asset and its fair value which is generally determined based on the sum of the undiscounted cash flows expected to result from the use and the eventual disposal of the asset, as well as specific appraisal in certain instances. An impairment loss is recognized when the carrying amount is not recoverable and exceeds fair value.
SFAS No. 130, “Reporting Comprehensive Income,” establishes standards for the reporting and display of comprehensive loss and its components in the financial statements. As at August 31, 2008 and 2007, the Company has no items that represent a comprehensive loss and, therefore, has not included a schedule of comprehensive loss in the financial statements.
k) | Cash and Cash Equivalents |
The Company considers all highly liquid instruments with maturity of three months or less at the time of issuance to be cash equivalents.
(An Exploration Stage Company)
Notes to the Financial Statements
August 31, 2008
(Expressed in US dollars)
(unaudited)
2. | Summary of Significant Accounting Policies (continued) |
The fair values of financial instruments, which include cash, accounts payable, accrued liabilities, amounts due to a related parties, promissory notes payable, and convertible debentures were estimated to approximate their carrying values due to the immediate or short-term maturity of these financial instruments. The Company’s operations are in Canada and Peru, which results in exposure to market risks from changes in foreign currency rates. The financial risk is the risk to the Company’s operations that arise from fluctuations in foreign exchange rates and the degree of volatility of these rates. Currently, the Company does not use derivative instruments to reduce its exposure to foreign currency risk.
The Company accounts for income taxes using the asset and liability method in accordance with SFAS No. 109, “Accounting for Income Taxes”. The asset and liability method provides that deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using the currently enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company records a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not to be realized.
n) | Foreign Currency Translation |
The Company’s functional and reporting currency is the United States dollar. Occasional transactions may occur in a foreign currency and management has adopted SFAS No. 52 “Foreign Currency Translation”. Monetary assets and liabilities denominated in foreign currencies are translated using the exchange rate prevailing at the balance sheet date. Non-monetary assets and liabilities denominated in foreign currencies are translated at rates of exchange in effect at the date of the transaction. Average monthly rates are used to translate revenues and expenses. Gains and losses arising on translation or settlement of foreign currency denominated transactions or balances are included in the determination of income.
The Company will recognize revenue in accordance with the criteria outlined in Securities Exchange Commission Staff Accounting Bulletin No. 104, “Revenue Recognition”. Revenues will be recognized once they are earned; specifically when: (a) services are provided or products are delivered to customers, (b) clear proof that an arrangement exists, (c) amounts are fixed or can be determined, and (d) the Company’s ability to collect is reasonably assured.
Environmental expenditures that relate to current operations are charged to operations or capitalized as appropriate. Expenditures that relate to an existing condition caused by past operations, and which do not contribute to current or future revenue generation, are charged to operations. Liabilities are recorded when environmental assessments and/or remedial efforts are probable, and the cost can be reasonably estimated. Generally, the timing of these accruals coincides with the earlier of completion of a feasibility study or the Company’s commitments to plan of action based on the then known facts.
q) | Asset Retirement Obligations |
The Company has adopted SFAS No. 143, “Accounting for Asset Retirement Obligations”, which requires that an asset retirement obligation (“ARO”) associated with the retirement of a tangible long-lived asset be recognized as a liability in the period which it is incurred and becomes determinable, with an offsetting increase in the carrying amount of the associated asset.
The cost of the tangible asset, including the initially recognized ARO, is depleted, such that the cost of the ARO is recognized over the useful life of the asset. The ARO is recorded at fair value, and accretion expense is recognized over time as the discounted liability is accreted to its expected settlement value. The fair value of the ARO is measured using expected future cash flow, discounted at the Company’s credit-adjusted risk-free interest rate. To date, no significant asset retirement obligation exists due to the early stage of exploration. Accordingly, no liability has been recorded.
(An Exploration Stage Company)
Notes to the Financial Statements
August 31, 2008
(Expressed in US dollars)
(unaudited)
2. | Summary of Significant Accounting Policies (continued) |
r) | Recent Accounting Pronouncements |
In May 2008, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 163, “Accounting for Financial Guarantee Insurance Contracts – An interpretation of FASB Statement No. 60”. SFAS No. 163 requires that an insurance enterprise recognize a claim liability prior to an event of default when there is evidence that credit deterioration has occurred in an insured financial obligation. It also clarifies how Statement 60 applies to financial guarantee insurance contracts, including the recognition and measurement to be used to account for premium revenue and claim liabilities, and requires expanded disclosures about financial guarantee insurance contracts. It is effective for financial statements issued for fiscal years beginning after December 15, 2008, except for some disclosures about the insurance enterprise’s risk-management activities. SFAS No. 163 requires that disclosures about the risk-management activities of the insurance enterprise be effective for the first period beginning after issuance. Except for those disclosures, earlier application is not permitted. The adoption of this statement is not expected to have a material effect on the Company’s financial statements.
In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles”. SFAS No. 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles in the United States. It is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles”. The adoption of this statement is not expected to have a material effect on the Company’s financial statements.
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities – an amendment to FASB Statement No. 133”. SFAS No. 161 is intended to improve financial standards for derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity's financial position, financial performance, and cash flows. Entities are required to provide enhanced disclosures about: (a) how and why an entity uses derivative instruments; (b) how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations; and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. It is effective for financial statements issued for fiscal years beginning after November 15, 2008, with early adoption encouraged. The adoption of this statement is not expected to have a material effect on the Company’s financial statements.
In December 2007, FASB issued SFAS No. 141 (revised 2007), “Business Combinations”. This statement replaces SFAS No. 141 and defines the acquirer in a business combination as the entity that obtains control of one or more businesses in a business combination and establishes the acquisition date as the date that the acquirer achieves control. SFAS No. 141 (revised 2007) requires an acquirer to recognize the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date. SFAS No. 141 (revised 2007) also requires the acquirer to recognize contingent consideration at the acquisition date, measured at its fair value at that date. This statement is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008 and earlier adoption is prohibited. The adoption of this statement is not expected to have a material effect on the Company's financial statements.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements Liabilities –an Amendment of ARB No. 51”. This statement amends ARB 51 to establish accounting and reporting standards for the Noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. This statement is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008 and earlier adoption is prohibited. The adoption of this statement is not expected to have a material effect on the Company's financial statements.
(An Exploration Stage Company)
Notes to the Financial Statements
August 31, 2008
(Expressed in US dollars)
(unaudited)
2. | Summary of Significant Accounting Policies (continued) |
r) | Recent Accounting Pronouncements |
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—Including an Amendment of FASB Statement No. 115”. This pronouncement permits entities to use the fair value method to measure certain financial assets and liabilities by electing an irrevocable option to use the fair value method at specified election dates. After election of the option, subsequent changes in fair value would result in the recognition of unrealized gains or losses as period costs during the period the change occurred. SFAS No. 159 becomes effective as of the beginning of the first fiscal year that begins after November 15, 2007, with early adoption permitted. However, entities may not retroactively apply the provisions of SFAS No. 159 to fiscal years preceding the date of adoption. The adoption of this statement did not have a material effect on the Company's financial statements
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”. The objective of SFAS No. 157 is to increase consistency and comparability in fair value measurements and to expand disclosures about fair value measurements. SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS No. 157 applies under other accounting pronouncements that require or permit fair value measurements and does not require any new fair value measurements. The provisions of SFAS No. 157 are effective for fair value measurements made in fiscal years beginning after November 15, 2007. The adoption of this statement did not have a material effect on the Company's financial statements.
Pursuant to an agreement dated November 2, 2001, the Company acquired a 100% interest in eight mineral claims located in the Whitehorse Mining District, Yukon Territory, Canada known as the Peek claims for $2,500. The property is being held in trust for the Company by a third party.
On November 12, 2007, the Company entered into an Assignment Agreement with Anglo Energy Refining Corp. (“Anglo”), a Panamanian corporation, to acquire all of Anglo's rights and interests in a Production Agreement (the "PA") to be entered into between Anglo and Barrett Resources LLC ("Barrett"). The PA relates to rights to develop and produce crude oil, gas and proven reserves at Block 67 located in Peru and is subject to negotiation with Barrett and receipt of various governmental and regulatory approvals.
For consideration of the assignment by Anglo to the Company of Anglo's rights under the PA, the parties agreed as follows:
i. | the Company agreed to pay to Anglo an aggregate amount equal to $115,000 (paid), equivalent to 50% of the expenses incurred by Anglo up to and including the Effective Date in connection with the negotiation of the PA, upon the receipt by the Company of documentation from Anglo supporting such expenses; |
ii. | on the closing date, the Company agreed to pay to Anglo 100% of the reasonable, documented expenses incurred by Anglo from the Effective Date to the closing date in connection with the negotiation and execution of the PA; and |
iii. | on the closing date, the Company agreed to issue to Anglo (or its designee) that number of common shares such that Anglo (or its designee) shall own 50% of the issued and outstanding shares of the common stock of the Company on the closing date. |
As of August 31, 2008, the Company recognized an impairment of $115,000 as the property had been abandoned by both parties. No further expenditures will be incurred.
(An Exploration Stage Company)
Notes to the Financial Statements
August 31, 2008
(Expressed in US dollars)
(unaudited)
5. | Related Party Transactions |
a) | During the nine month period ended August 31, 2008, the Company incurred $36,000 (August 31, 2007 - $36,000) in consulting fees to the former President of the Company. As of August 31, 2008, $12,000 (November 30, 2007 - $4,000) in consulting fees are owed to the former President of the Company. |
b) | As at August 31, 2008, accounts payable includes $3,125 (November 30, 2007 - $3,125) owing to a former director for expenses incurred on the Company’s behalf. |
c) | During the year ended November 30, 2006, the Company received an advance of $50,000 from a director. The amount is supported by a promissory note, bears interest at 12% per annum and matured October 18, 2007. On November 8, 2007, the Company entered into an agreement to extend the loan to October 18, 2008. On March 18, 2008, the Company repaid the director $58,500, representing the total principal and accrued interest as of the repayment date. |
6. | Promissory Notes Payable |
a) | On February 15, 2007, the Company entered into a demand promissory note with a third party for $50,000, which is due on demand and bears interest at 8% per annum. Interest is payable annually due on or before February 14 of each year. |
b) | On November 20, 2008, the Company entered into a demand promissory note with a third party for $100,000, which is due on demand and bears interest at 8% per annum. |
a) | On April 10, 2007, the Company issued a 6% convertible debenture with a principal amount of $200,000 which is due and payable on December 31, 2008. Interest is payable semi-annually beginning on September 30, 2007, and thereafter on March 31st and September 30th of each year, payable at the option of the Company in cash or shares. As at August 31, 2008, the Company had not made any interest payments and pursuant to the debenture has accrued default interest of 8% since September 30, 2007. The principal and accrued interest on the debenture may be converted at any time into shares of the Company’s common stock at a price of $0.25 per share, at the option of the holder. If the Company had closed the Anglo agreement, as described in Note 4, the debenture was to automatically convert into common shares of the Company at a price of $0.25 per share. |
| |
| In accordance with EITF 98-5 “Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios”, the Company recognized the intrinsic value of the embedded beneficial conversion feature of $80,000 as additional paid-in capital and an equivalent discount which will be charged to operations over the term of the convertible debenture. The Company will record accretion expense over the term of the convertible debenture up to its face value of $200,000. As at August 31, 2008, $64,532 has been accreted increasing the carrying value of the convertible debenture to $184,532. |
b) | On May 2, 2007, the Company issued a 6% convertible debenture with a principal amount of $125,000 which is due and payable on December 31, 2008. Interest is payable semi-annually beginning on September 30, 2007, and thereafter on March 31st and September 30th of each year, payable at the option of the Company in cash or shares. As at August 31, 2008, the Company had not made any interest payments and pursuant to the debenture has accrued default interest of 8% since September 30, 2007. The principal and accrued interest on the debenture may be converted at any time into shares of the Company’s common stock at a price of $0.25 per share, at the option of the holder. If the Company had closed the Anglo agreement, as described in Note 4, the debenture was to automatically convert into common shares of the Company at a price of $0.25 per share. |
(An Exploration Stage Company)
Notes to the Financial Statements
August 31, 2008
(Expressed in US dollars)
(unaudited)
7. | Convertible Debentures (continued) |
| In accordance with EITF 98-5 “Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios”, the Company recognized the intrinsic value of the embedded beneficial conversion feature of $50,000 as additional paid-in capital and an equivalent discount which will be charged to operations over the term of the convertible debentures. The Company will record accretion expense over the term of the convertible debenture up to its face value of $125,000. As at August 31, 2008, $39,983 has been accreted increasing the carrying value of the convertible debenture to $114,983. |
| |
c) | On November 19, 2007, the Company issued a 6% convertible debenture with a principal amount of $110,000 which is due and payable on December 31, 2008. Interest is payable semi-annually beginning on May 31, 2008, and thereafter on May 31st and November 30th of each year, payable at the option of the Company in cash or shares. As at August 31, 2008, the Company had not made any interest payments and pursuant to the debenture has accrued default interest of 8% since May 30, 2008. The principal and accrued interest on the debenture may be converted at any time into shares of the Company’s common stock at a price of $0.25 per share, at the option of the holder. If the Company had closed the Anglo agreement, as described in Note 4, the debenture was to automatically convert into common shares of the Company at a price of $0.25 per share. |
| |
| In accordance with EITF 98-5 “Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios”, the Company recognized the intrinsic value of the embedded beneficial conversion feature of $44,000 as additional paid-in capital and an equivalent discount which will be charged to operations over the term of the convertible debenture. The Company will record accretion expense over the term of the convertible debenture up to its face value of $110,000. As at August 31, 2008, $30,844 has been accreted increasing the carrying value of the convertible debentures to $96,844. |
d) | On March 11, 2008, the Company issued a 6% convertible debenture with a principal amount of $150,000 which is due and payable on December 31, 2008. Interest is payable semi-annually beginning on May 31, 2008, and thereafter on May 31st and November 30th of each year, payable at the option of the Company in cash or shares. As at August 31, 2008, the Company had not made any interest payments and pursuant to the debenture has accrued default interest of 8% since May 30, 2008. The principal and accrued interest on the debenture may be converted at any time into shares of the Company’s common stock at a price of $0.25 per share, at the option of the holder. If the Company had closed the Anglo agreement, as described in Note 4, the debenture was to automatically convert into common shares of the Company at a price of $0.25 per share. |
| |
| In accordance with EITF 98-5 “Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios”, the Company recognized the intrinsic value of the embedded beneficial conversion feature of $60,000 as additional paid-in capital and an equivalent discount which will be charged to operations over the term of the convertible debenture. The Company will record accretion expense over the term of the convertible debenture up to its face value of $150,000. As at August 31, 2008, interest expense of $35,187 has been accreted increasing the carrying value of the convertible debentures to $125,187. |
The Company operates in one operating segment, which is the acquisition and exploration of oil and gas resources and mineral resources. The Chief Executive Officer is the Company’s Chief Operating Decision Maker (“CODM”) as defined by SFAS 131, “Disclosure about Segments of an Enterprise and Related Information.” The CODM allocates resources and assesses the performance of the Company based on the results of operations.
On September 16, 2008, the Company signed a Term Sheet (the “Term Sheet”) that sets forth the principal terms upon which the Company proposes to enter into a definitive agreement (the “Definitive Agreement”) to acquire Royalty Exploration (the “Business Combination”) and commence a concurrent financing of $40 million. Royalty Exploration (REX) has entered into an agreement to acquire substantially all of the assets of a business unit of a large research and development and manufacturing company engaged in the business of providing exploration and environmental surveys to resource companies for a purchase price of $40 million, of which $30 million is due at closing and the balance is payable by issuing a promissory note. The Term Sheet is non-binding, except for customary binding provisions.
(An Exploration Stage Company)
Notes to the Financial Statements
August 31, 2008
(Expressed in US dollars)
(unaudited)
9. | Subsequent Event (continued) |
The Company intends to use commercially reasonable efforts to commence a financing to raise $40 million by issuing securities (the “Placement”) to fund the REX Acquisition and general working capital requirements of the combined company following the Business Combination. The Company, at its option, may raise such financing through mezzanine debt financing, which may be satisfied by a subsequent placement of issuing the Company’s securities.
The Company proposes to enter into a Definitive Agreement under which the Company will acquire all of the issued and outstanding equity of REX by issuing shares of the Company’s common stock (“Consideration Shares”) to the equity holders of REX (“REX Unitholders”) equal to 50% of the issued and outstanding voting stock of the Company after giving effect to the Placement and the Business Combination.
The Company agreed to fund, for the benefit of REX, the sum of up to $500,000 for the purposes of (i) reimbursing REX for transaction related expenses, (ii) the Company’s transaction related expenses, and (iii) subject to satisfaction of certain conditions, making a cash advance to REX. REX is required to repay the Company for REX’s transaction related expenses and cash advances on the later of (a) March 31, 2009, (b) closing date of the transaction, or (c) termination of the Term Sheet or, if the transaction does not close, in 12 monthly installments.
The Term Sheet may be terminated by either party if the conditions set forth in the Term Sheet have not been satisfied on or before December 31, 2008. The Term Sheet may be terminated by REX if the Company has not provided to REX satisfactory evidence of financial commitments to raise at least $40,000,000 in the Placement by or before October 31, 2008.
Cautionary Statement Regarding Forward-Looking Statements
Certain statements contained in this Quarterly Report constitute “forward-looking statements”. These statements, identified by words such as “plan”, “anticipate”, “believe”, “estimate”, “should”, “expect” and similar expressions include our expectations and objectives regarding our future financial position, operating results and business strategy. These statements reflect the current views of management with respect to future events and are subject to risks, uncertainties and other factors that may cause our actual results, performance or achievements, or industry results, to be materially different from those described in the forward-looking statements. Such risks and uncertainties include those set forth under the caption “Management’s Discussion and Analysis or Plan of Operation” and elsewhere in this Quarterly Report. We advise you to carefully review the reports and documents we file from time to time with the United States Securities and Exchange Commission (the “SEC”), particularly our Annual Reports on Form 10-KSB and our Current Reports on Form 8-K.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
OVERVIEW
We were incorporated on October 17, 2001 under the laws of the State of Nevada. Our principal office is located at 11616 East Montgomery Drive, No. 54, Spokane Valley, Washington 99206. Our phone number is (509) 301-6635. Our facsimile number is (208) 442-1398.
OUR BUSINESS
We are an exploration stage company engaged in the acquisition and exploration of mineral and resource properties. We have acquired a 100% undivided interest in a group of mineral claims located in the Wheaton River District in the Yukon Territory, Canada that we refer to as the Peek Claims. We have not earned any revenues to date. Our plan of operation is to continue to carry out exploration work on these claims in order to ascertain whether they possess commercially exploitable mineral deposits. We are presently in the exploration stage of our business and we can provide no assurance that commercially viable mineral deposits exist on our claims or that we will discover commercially exploitable levels of mineral resources on our properties, or if such deposits are discovered, that we will enter into further substantial exploration programs. We will not be able to determine whether or not our mineral claims contain a commercially exploitable mineral deposit, or reserve, until appropriate exploratory work is done and an economic evaluation based on that work concludes economic viability.
We conduct our business through verbal agreements with consultants and arms-length third parties. Our verbal agreement with our geologist includes his reviewing all of the results from the exploratory work performed upon the site and making recommendations based on those results in exchange for payments equal to the usual and customary rates received by geologists performing similar consulting services.
As a result of our failure to generate substantial revenues since our inception, we have determined to review our initial business plan in order to evaluate the progress of our mining business. We have not attained profitable operations to date and are dependent upon obtaining financing to pursue our plan of operation. Following Dr. John Veltheer’s acquisition of 49% of our issued and outstanding shares and his appointment to the board of Texada, we have determined to continue to develop our current mining business and to seek other business opportunities. In accordance with that determination, we appointed Ted Sharp as our President, Chief Executive Officer, Chief Financial Officer, Treasurer, Secretary and a member of our Board of Directors. We also entered into a Term Sheet with Royalty Explorations, LLC for the purchase of that company.
RECENT CORPORATE DEVELOPMENTS
We have experienced the following significant corporate developments since the completion of our fiscal year ended November 30, 2007:
Corporate Governance:
The Registrant entered into an engagement letter with Sharp Executive Associates, Inc. (“SEA”), dated September 12, 2008 (the “Engagement Letter”), that outlines the services and work to be performed by SEA on behalf of the Registrant, the fees associated with the work, and the responsibilities of both parties to the Engagement Letter, as set forth in the Registrant’s Form 8-K dated September 12, 2008 which is incorporated herein by this reference.
Effective September 12, 2008, Dr. John Veltheer (“Dr. Veltheer”) resigned as the Registrant’s CEO, CFO, president, secretary and treasurer (collectively the “Interim Executive Positions”). Dr. Veltheer’s resignation was not the result of any disputes, claims or issues with the Registrant. The Board accepted Dr. Veltheer’s resignation and appointed Mr. Sharp, 51, to the Registrant’s Board and to fill the Interim Executive Positions as described in the Registrant’s Form 8-K dated September 12, 2008 which is incorporated herein by this reference.
On September 12, 2008, the Registrant moved its offices and principal place of business from its location in Vancouver, British Columbia, Canada to 11616 East Montgomery Drive, No. 54, Spokane Valley, Washington 99206.
Term Sheet:
On September 16, 2008, the Company signed a Term Sheet (the “Term Sheet”) that sets forth the principal terms upon which the Company proposes to enter into a definitive agreement (the “Definitive Agreement”) to acquire Royalty Exploration (the “Business Combination”) and commence a concurrent financing of $40 million. Royalty Exploration, LLC (REX) has entered into an agreement to acquire substantially all of the assets of a business unit of a large research and development and manufacturing company engaged in the business of providing exploration and environmental surveys to resource companies for a purchase price of $40 million, of which $30 million is due at closing and the balance is payable by issuing a promissory note. The Term Sheet is non-binding, except for customary binding provisions.
The Company intends to use commercially reasonable efforts to commence a financing to raise $40 million by issuing securities (the “Placement”) to fund the REX Acquisition and general working capital requirements of the combined company following the Business Combination. The Company, at its option, may raise such financing through mezzanine debt financing, which may be satisfied by a subsequent placement of issuing the Company’s securities.
The Company proposes to enter into a Definitive Agreement under which the Company will acquire all of the issued and outstanding equity of REX by issuing shares of the Company’s common stock (“Consideration Shares”) to the equity holders of REX (“REX Unitholders”) equal to 50% of the issued an outstanding voting stock of the Company after giving effect to the Placement and the Business Combination.
The Company agreed to fund, for the benefit of REX, the sum of up to $500,000 for the purposes of (i) reimbursing REX for transaction related expenses, (ii) the Company’s transaction related expenses, and (iii) subject to satisfaction of certain conditions, making a cash advance to REX. REX is required to repay the Company for REX’s transaction related expenses and cash advances on the later of (a) March 31, 2009, (b) closing date of the transaction, or (c) termination of the Term Sheet or, if the transaction does not close, in 12 monthly installments.
The Term Sheet may be terminated by either party if the conditions set forth in the Term Sheet have not been satisfied on or before December 31, 2008. The Term Sheet may be terminated by REX if the Company has not provided to REX satisfactory evidence of financial commitments to raise at least $40,000,000 in the Placement by or before October 31, 2008.
The significant terms and disclosures of the Term Sheet were reported in a Form 8-K filed with the SEC on September 22, 2008, which is hereby incorporated by reference.
Other Funding and Acquisition Activities:
1. | On March 11, 2008, the Company issued a 6% convertible debenture (the “Debenture”) with a principal |
| amount of $150,000 which is due and payable on December 31, 2008. Interest is payable semi-annually beginning on May 31, 2008, and thereafter on May 31st and November 30th of each year, payable at the option of the company in cash or shares. At August 31, 2008, the Company had not made any interest payments. The principal and accrued interest on the Debenture may be converted at any time into shares of the Company’s common stock at a rate of $0.25 per share, at the option of the holder. If the Company had closed the Anglo agreement, as described below, the Debenture would have automatically been converted into common shares of the Company at the rate of $0.25 per share. However, that purchase agreement was abandoned during the quarter ended August 31, 2008. The Company intends to convert the debenture to common stock as part of the acquisition covered by the recent Term Sheet described in the Recent Corporate Developments section of this filing. The offering of the debenture was conducted by the Company in a non-brokered private placement to a non-U.S. person outside the United States pursuant to an exemption from registration available under Rule 903 of Regulation S of the Securities Act of 1933, as amended. |
2. | On November 12, 2007, the Company entered into an Assignment Agreement (the “Peru Assignment Agreement”) with Anglo Energy Refining Corp. (“Anglo”), a Panamanian corporation, effective as of November 8, 2007, providing for the assignment of Anglo’s interest in a Production Agreement (the “PA”) to be entered into between Anglo and Barrett Resources (Peru) LLC (“Barrett”). The PA related to rights to develop and produce crude oil, gas and proven reserves at Block 67 located in Peru. In consideration for the assignment by Anglo to the Company of Anglo’s rights under the PA, the parties agreed as follows: |
| (a) | the Company agreed to pay to Anglo an aggregate amount equal to $115,000 (paid), equivalent to 50% of the expenses incurred by Anglo up to and including the Effective Date of the Peru Assignment Agreement in connection with the negotiation of the PA, upon the receipt by the Company of documentation from Anglo supporting such expenses; |
| (b) | on the closing date, the Company agreed to pay to Anglo 100% of the reasonable, documented expenses incurred by Anglo from the Effective Date of the Peru Assignment Agreement to the closing date in connection with the negotiation and execution of the PA; and |
| (c) | on the closing date, the Company agreed to issue to Anglo (or its designee) that number of common shares such that Anglo (or its designee) shall own 50% of the issued and outstanding shares of common stock of the Company on the closing date. |
During the quarter ended August 31, 2008, the Company determined that it was not in its best interest to close this transaction and thereby abandoned the purchase agreement. As of August 31, 2008, the Company had paid $115,000 for expenses incurred by Anglo up to and including the effective date of the Peru Assignment Agreement, $nil for expenses from the effective date to the closing date and has not issued any common shares with respect to the Peru Assignment Agreement. In accordance with its abandonment of the purchase agreement, the Company expensed $115,000 of costs paid to Anglo.
3. | On October 18, 2006, the Company entered into a Loan Agreement (the “Loan Agreement”) with John Veltheer, at the time the Company’s President, Secretary, Treasurer and sole Director of the Company, pursuant to which Mr. Veltheer agreed to loan $50,000 (the “Principal Amount”) to the Company at a rate of interest equal to 12% per annum, payable on October 18, 2007 (the “Loan”). The Loan was evidenced by a Promissory Note, dated as of October 18, 2006 (the “Promissory Note”), issued by the Company to Mr. Veltheer. On November 8, 2007, the Company and Mr. Veltheer entered into a Loan Extension Agreement (the “Loan Extension Agreement”, and together with the Loan Agreement and the Promissory Note, the “Loan Documents”) pursuant to which Mr. Veltheer agreed to extend the maturity date of the Loan from October 18, 2007 to October 18, 2008, in consideration for the payment by the Company to Mr. Veltheer of $6,000 constituting the interest due under the Promissory Note as of October 18, 2007. On March 27, 2008, the Company and Mr. Veltheer executed a Payoff Letter which provided for the payment by the Company to Mr. Veltheer of $58,500, constituting the Principal Amount and all accrued interest owing under the Promissory Note as of March 18, 2008 (the “Payoff Date”). Pursuant to the Payoff Letter, the Company and Mr. Veltheer acknowledged and agreed that all of the outstanding obligations of the Registrant under the Loan Documents will have been paid, satisfied and discharged in full as of the Payoff |
| Date, and that on the Payoff Date, all of the terms, covenants and provisions of the Loan Documents will have been terminated and shall be of no further force or effect. |
PLAN OF OPERATION
As a result of our failure to generate any revenues since our inception, we have not been satisfied with our initial business plan to this point. In September, we appointed Ted Sharp as a member of our Board of Directors and as our President, Chief Executive Officer and Chief Financial Officer. We are presently reviewing the current state of our business in detail with consultants in order to evaluate the progress of our mining business. As a result of its change in strategic direction, the Company entered into the Term Sheet with REX described above in Recent Corporate Developments. We are currently evaluating financing options to complete the transaction with REX but there can be no assurance that such financing will be available in acceptable terms, if at all.
Mineral Properties:
As described in previous filings, we have taken a phased approach to our exploration efforts on the Peek Claims, and have received a geological report on the results of Phase III of our program with further recommendations from our geological consultant of additional activities prior to engaging in Phase IV of our plan. In his report, our geologist recommended that, prior to proceeding with Phase IV, further geological engineering should be undertaken to define the exact source areas for the known and new vein float material. Our geologist recommended reserving a total of $10,000 for a two-stage delineation program prior to commencing Phase IV of our exploration program. We proceeded with our geologist’s recommendation and completed the first phase of the delineation program during the summer exploration season of 2006. A detailed, close-spaced, soil geochemical survey over the conductors using a plugger style overburden sampling drill was recommended to locate the bed rock source of the mineralization following completion of phase I of the delineation program.
Our decision to proceed to Phase IV of our initial exploration program will be made based on factors such as other business opportunities, the final assay results and the recommendations of our geologist, the grades of any mineralization found, the size and extent of the mineralized zones, and the strength of metal prices in international markets.
The expenditures made by us in the exploration of our mineral claims may not result in the discovery of mineral deposits. Problems such as unusual or unexpected formations and other conditions are involved in mineral exploration and often result in unsuccessful exploration efforts. If the results of exploration do not reveal viable commercial mineralization, we may decide to abandon our claims and acquire new claims for new exploration. The acquisition of additional claims will be dependent upon our possessing sufficient capital resources at the time in order to purchase such claims. If no funding is available, we may be forced to abandon our operations. This assessment will include an assessment of our cash reserves after the completion of Phase III, the price of minerals and the market for financing of mineral exploration projects at the time of our assessment.
Corporate Acquisition:
Our entrance into the Term Sheet with REX is a strategic change in direction, and is expected to enable us to diversify into a complementary industry and acquire income-producing assets. As part of this acquisition, we will be required to raise approximately $40 million of new investment dollars. As we move through the acquisition process, we will perform appropriate due diligence activities to more fully assure investors of the benefits of this strategic move. We cannot assure you that our capital raising efforts will be successful given the current state of the financial markets or that we can successfully complete the acquisition of REX.
Plan of Operations:
During the exploration stage, Ted Sharp, our President, Secretary, Treasurer, Chief Executive Officer and Chief Financial Officer, and Dr. Veltheer will only be devoting approximately twenty hours per week of their time to our business. We do not foresee this limited involvement as negatively impacting our company over the next twelve months. All exploratory work is being performed by our geological consultant, Mr. Timmins, who contracts with appropriately experienced parties to complete work programs. However, if as a result of our acquisition efforts, the
demands of our business require more business time of Mr. Sharp or Dr. Veltheer, such as raising additional capital or addressing unforeseen issues with regard to our exploration efforts, they are prepared to adjust their timetable to devote more time to our business.
If our acquisition of REX is successful. we anticipate that we will require capital for the following over the next twelve months:
Category | | Planned Expenditures over the Next Twelve Months (US$) | |
Acquisition of survey assets | | $ | 30,000,000 | |
Acquisition Due Diligence | | $ | 250,000 | |
Professional Fees | | $ | 250,000 | |
General and Administrative Expenses | | $ | 800,000 | |
Budgeted Oil and Gas Drilling and Exploration | | $ | 3,750,000 | |
Business Transition and Build Out | | $ | 4,000,000 | |
Funding Working Capital Deficit | | $ | 800,000 | |
Debt Service Expense | | $ | 100,000 | |
Mineral Exploration Expenses | | $ | 50,000 | |
TOTAL 12-MONTH BUDGET | | $ | 40,000,000 | |
Our total expenditures over the next twelve months are anticipated to be approximately $40 million, the majority of which is $30 million in cash required to close the acquisition of REX. The balance of cash required is to fund legal, accounting, administrative and due diligence expenses associated with our acquisition of REX, business transition and build out costs, payment of our current liabilities, oil and gas drilling and exploration expenses, interest expense and normal general and administrative operating expenses. In relation to the REX acquisition, we will be required to raise $40 million to fund the purchase price and working capital for the combined organization. Prior to closing, we will be required to obtain a $500,000 loan to fund the pre-acquisition costs incurred by both us and REX, as well as normal operating costs. The requirement for this loan and its repayment is described above in the discussion of the Term Sheet. The Term Sheet may be terminated by either party if the conditions set forth in the Term Sheet have not been satisfied on or before December 31, 2008. The Term Sheet may be terminated by REX if the Company has not provided to REX satisfactory evidence of financial commitments to raise at least $40,000,000 in the Placement by or before October 31, 2008.
We cannot assure you that we will be successful in obtaining financing sufficient to fund either the $500,000 loan required to pay pre-acquisition costs or the $40 million required to close the REX transaction. Current turmoil in equity and debt markets in the United States and around the world may negatively affect the evaluation risk of potential investors, and therefore may discourage individuals or funds that may otherwise be willing and desirous to invest in the Company.
In the event that we are successful in securing the $40 million of capital required to fund the REX transaction, the combined management of the organization will then be charged with the task of profitably integrate the operations. We cannot assure you that the combined management team will be successful in merging and integrating physical facilities, corporate cultures, management teams, employee groups and other factors into a streamlined profitable and smooth running organization.
The Company has issued four separate 6% convertible debentures with principal amounts totaling $585,000 which are due and payable on December 31, 2008. Interest is payable at the option of the Company in cash or shares. As at
August 31, 2008, the Company had not made any interest payments and pursuant to the debenture has accrued default interest of 8% for the quarter ended August 31, 2008. Interest payable has accumulated to a total of $43,379. The principal and accrued interest on the debentures may be converted at any time into shares of the Company’s common stock at a price of $0.25 per share, at the option of the holder. If the Company had closed the Anglo agreement, the debenture would have automatically converted into common shares of the Company at a price of $0.25 per share. As part of the financing arrangements required to fund and close the REX transaction, the Company will be required to negotiate with holders of the convertible debentures to convert the debentures and accrued interest into common stock. In the event that the Term Sheet is terminated without prior conversion of the debentures and accrued interest, management will negotiate with holders of the debentures to extend the due dates of each debenture or reach satisfactory modification of terms to avoid default under the terms of the debentures.
In the event that we are unsuccessful in our efforts to fund the REX acquisition, we will not have cash sufficient to satisfy the debentures in cash. We estimate that we would require a minimum of $1.5 million to fund payment of our current liabilities and the $500,000 pre-acquisition loan to REX. Absent such financing, we may negotiate with the holders of the debentures to extend the due dates, convert them to common stock or modify terms sufficient to remove or delay the requirement to satisfy the obligations with cash. Should we be unable to reach conversion or modification of the debentures on terms acceptable to us, we may be required to default on the obligations.
We also maintain our position in mining claims in our mineral property referred to as the Peek Claim. In the event we decide to proceed with Phase IV of our exploration program, which is estimated to cost $120,000, we will need to obtain additional financing of nearly $1,000,000 to fund exploration, operating expenses and working capital deficit.
As of August 31, 2008, we had a working capital deficit of $800,019. We do not expect our business to achieve profitability in the near future as we expect to continue to incur substantial acquisition, development and operating expenses. We will require additional funding to fund our working capital requirements. However, we cannot provide investors with any assurance that we will be able to raise sufficient funding from the sale of our common stock or debt to fund our estimated general administration, exploration and other working capital requirements.
Currently, we do not have any financing arrangements in place and there is no assurance that we will be able to obtain sufficient financing to fund our capital requirements. If we do not obtain the necessary financing, then our plan of operation will be scaled back according to the amount of funds available. The inability to raise the necessary financing will severely restrict our ability to continue exploration programs or acquisition activities as planned.
RESULTS OF OPERATIONS
This discussion and analysis should be read in conjunction with the accompanying financial statements and related notes. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors. The discussion and analysis of the financial condition and results of operations are based upon the financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the company to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of any contingent liabilities at the financial statement date and reported amounts of revenue and expenses during the reporting period. On an on-going basis the Company reviews its estimates and assumptions. The estimates were based on historical experience and other assumptions that the Company believes to be reasonable under the circumstances. Actual results are likely to differ from those estimates under different assumptions or conditions, but the Company does not believe such differences will materially affect our financial position or results of operations. Critical accounting policies, the policies the Company believes are most important to the presentation of its financial statements and require the most difficult, subjective and complex judgments, are outlined in "Critical Accounting Policies," as disclosed in the Company's Form 10-KSB as filed with the Securities and Exchange Commission on March 14, 2008, and have not changed significantly.
Revenue and Expenses
Summary | | | | | | |
| | Three Months Ended August 31 | | | Nine Months Ended August 31 | |
| | | | | | |
| | 2008 | | | 2007 | | | 2008 | | | 2007 | |
Revenue | | | -- | | | | -- | | | | -- | | | | -- | |
Operating Expenses | | $ | 17,339 | | | $ | 26,517 | | | $ | 110,596 | | | $ | 134,538 | |
Net Income (Loss) From Operations | | $ | (17,339 | ) | | $ | (26,517 | ) | | $ | (110,596 | ) | | $ | (134,538 | ) |
Summary of Revenue
We have not earned any revenues to date. Our plan of operation, in regards to mineral properties, is to continue to carry out exploration work on our claims in order to ascertain whether they possess commercially exploitable quantities of mineral deposits and to explore acquisition opportunities. We do not anticipate earning revenues until such time as we are able to locate and process commercially exploitable levels of mineral resources on our properties or acquire commercially viable or producing properties.
We are presently in the exploration stage of our business and we can provide no assurance that a commercially viable mineral deposit exists on our claims or that we will discover commercially exploitable levels of mineral resources on our properties, or if such deposits are discovered, that we will enter into further substantial exploration programs. We will not be able to determine whether or not our mineral claims contains a commercially exploitable mineral deposit, or reserve, until appropriate exploratory work is done and an economic evaluation based on that work concludes economic viability. Also, we cannot assure you that we will be able to acquire any commercially viable properties or, if acquired, that we will be able to develop or operate any acquired property in a profitable manner.
The September 22, 2008 Term Sheet for the acquisition of REX represents our strategy to acquire an operation that will provide revenue streams from continuing operations. After completion of our upcoming due diligence activities we will be able to more clearly ascertain the contributions REX will make to our business, and vice versa, before entering into a definitive purchase agreement for the acquisition of REX
Summary of Expenses
Our expenses for the three months ended August 31, 2008 and 2007, consisted of the following:
| | Three Months Ended August 31 | |
| | 2008 | | | 2007 | |
Expenses (Operating Expenses) | | | | | | |
Consulting | | $ | 14,027 | | | $ | 12,000 | |
General and administrative | | $ | 7,129 | | | $ | 14,730 | |
Loss (gain) on foreign exchange | | $ | (3,817 | ) | | $ | (213 | ) |
Other Income (Expense) | | | | | | | | |
Accretion of discount on convertible debentures | | $ | (47,851 | ) | | $ | (48,044 | ) |
Interest income | | | – | | | $ | 2,133 | |
Interest on convertible debentures | | $ | (11,764 | ) | | $ | (4,914 | ) |
Interest on promissory notes | | $ | (3,024 | ) | | $ | (3,024 | ) |
Interest on related party loans | | | – | | | $ | (1,523 | ) |
Loss on write down of note receivable | | | - | | | $ | (2,133 | ) |
Loss on write down of oil and gas deposits | | $ | (115,000 | ) | | $ | (250,000 | ) |
Our operating expenses for the three months ended August 31, 2008 decreased from the same period in 2007. The reduction in operating expenses are primarily due to a reduction in general and administrative expense of $7,600 and an increase in gain on foreign exchange transaction of $3,600, which were offset by a $2,000 increase in consulting fees. Other income and expense for the three months ended August 31, 2008 decreased by $130,000. The Company
recognized a loss of $115,000 on the write down of certain oil and gas properties during the quarter as opposed to a write down of $250,000 recorded in the third quarter of 2007.
| | Nine Months Ended August 31 | |
| | 2008 | | | 2007 | |
Expenses (Operating Expenses) | | | | | | |
Consulting | | $ | 38,027 | | | $ | 36,000 | |
General and administrative | | $ | 73,070 | | | $ | 101,249 | |
Loss (gain) on foreign exchange | | $ | (591 | ) | | $ | (2,711 | ) |
Other Income (Expense) | | | | | | | | |
Accretion of discount on convertible debentures | | $ | (122,287 | ) | | $ | (70,161 | ) |
Interest income | | | – | | | $ | 6,155 | |
Interest on convertible debentures | | $ | (32,786 | ) | | $ | (7,187 | ) |
Interest on promissory notes | | $ | (9,041 | ) | | $ | (8,164 | ) |
Interest on related party loans | | $ | (1,793 | ) | | $ | (4,568 | ) |
Loss on write down of note receivable | | | – | | | $ | (88,930 | ) |
Loss on write down of oil and gas deposits | | $ | (115,000 | ) | | $ | (250,000 | ) |
Liquidity and Capital Resources
Working Capital Summary | | | | | | |
| | At August 31, 2008 | | | At November30, 2007 | |
Current Assets | | $ | 3,996 | | | $ | 20,817 | |
Current Liabilities | | $ | (804,015 | ) | | $ | (290,164 | ) |
Working Capital (Deficit) | | $ | (800,019 | ) | | $ | (269,347 | ) |
| | | | | | | | |
| | | | | | | | |
Summary of Cash Flows | | | | | | | | |
| | Nine Months Ended August 31 | |
| | 2008 | | | 2007 | |
Net Cash Used In Operating Activities | | $ | (111,810 | ) | | $ | (130,579 | ) |
Net Cash Used In Investing Activities | | $ | (5,000 | ) | | $ | (250,000 | ) |
Net Cash Provided By Financing Activities | | $ | 100,000 | | | $ | 375,000 | |
Net Increase (Decrease) In Cash During Period | | $ | (16,810 | ) | | $ | (5,579 | ) |
Our auditors expressed substantial doubt regarding our ability to continue as a going concern related to our financial statements for the year ended November 30, 2007, and these circumstances have not improved. The factors related to the determination of our ability to continue as a going concern include our working capital deficit, lack of foreseeable revenues from operations, need for additional capital to maintain our interest in the Peek Claims, and need for additional capital to fund our general and administrative requirements. Management’s plan to resolve the going concern uncertainty is to raise additional capital of $40 million to acquire REX through debt or equity financing during the next three months. The Company’s ability to continue as a going concern is dependent on its ability to raise additional capital, acquire REX and conduct successful exploration activities on its properties and appreciation in the value of exploration properties and assets, specifically the Peek Claims. If the Company is unable to raise additional capital in a timely manner, sufficient to close the REX acquisition, it may be required to sell its Peek Claims or permit such claims to lapse. The Company may be forced to discontinue operations.
We have not declared or paid dividends on our shares since incorporation and do not anticipate doing so in the foreseeable future.
OFF-BALANCE SHEET ARRANGEMENTS
We have no significant off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to our stockholders.
ITEM 3. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
At the end of the period covered by this report on Form 10-QSB for the quarter ended August 31, 2008, an evaluation was carried out under the supervision of and with the participation of the Company's management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the design and operations of the Company's disclosure controls and procedures (as defined in Rule 13a - 15(e) and Rule 15d - 15(e) under the Exchange Act). Based on that evaluation the CEO and the CFO have concluded that the Company's disclosure controls and procedures were adequately designed and effective in ensuring that: (i) information required to be disclosed by the Company in reports that it files or submits to the Securities and Exchange Commission under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in applicable rules and forms and (ii) material information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow for accurate and timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rule 13(a)-15(f) or 15(d)-15(f)) that occurred during the Company’s the period covered by this quarterly report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS.
Exhibit Number | Description of Exhibits |
| |
31.1 | Certification of Chief Executive Officer and Chief Financial Officer as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| |
32.1 | Certification of Chief Executive Officer and Chief Financial Officer as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | TEXADA VENTURES INC. |
| | |
| | |
| By: | s/ Ted R. Sharp |
| | TED R. SHARP |
| | Chief Executive Officer, Chief Financial Officer |
| | President, Secretary and Treasurer and |
| | Director |
| | (Principal Executive Officer |
| | and Principal Accounting Officer) |
| | |
| Date: | October 20, 2008 |
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