STRASBURGER & PRICE, LLP
600 Congress Avenue, Suite 1600
Austin, Texas 78701
512-499-3600
Fax: 512-536-5719
January 18, 2008
VIA FEDERAL EXPRESS AND EDGAR
Sandy Eisen
Division of Corporation Finance
Securities and Exchange Commission
Mail Stop 7010
100 F Street, NE
Washington, D.C. 20549
RE: | Tri-Valley Corporation |
Form 10-K for the Fiscal Year Ended December 31, 2006
Filed April 2, 2007, Amended August 30, 2007 and November 13, 2007
File No. 001-31852
Dear Ms. Eisen:
On behalf of our client, Tri-Valley Corporation, we are writing to respond to your comment letter dated December 11, 2007. The following numbered responses correspond to the numbered comments in your December 11 letter.
Form 10-K for the Fiscal Year Ended December 31, 2006
1. | We have reviewed your response to prior comment 2 in our letter dated October 23, 2007, and disagree with your conclusion. We believe that your sale of partial interests in GVPS and GVDC in 2006 should have resulted in gains or losses, as appropriate, and that the purchase of interests in 2007 should have been recorded at fair value. US GAAP requires such accounting unless specific accounting literature specifies otherwise. Please restate your historical financial statements accordingly and amend your Form 10-K for the subsequent three quarters. You should also consider whether, given the nature of the restatement, you should modify your disclosures concerning disclosure controls and procedures and internal controls over financial reporting in all of these filings. Your amendments should also incorporate changes for other comments we have issued where you indicate that you would comply in future filings. |
Response:
Following our conference call on December 19, 2007, Tri-Valley’s management reviewed additional accounting literature including SFAS 94 and has tentatively decided to revise the consolidated balance sheets, statements of operations, statements of shareholders’ equity and statements of cash flows to treat the investment in majority owned subsidiaries in 2006 as Minority Interest. Attached as Appendix A are proposed revisions to Item 6, Selected Historical Financial Data, Item 7, MD&A, Item 8, Financial Statements, and Item 9A, Controls and
Procedures, that reflect this change. We will also revise the financial statements and controls and procedures discussions in the Forms 10-Q for 2007 accordingly.
In the second quarter of 2007, Tri-Valley purchased all of the GVDC membership units owned by third party investors. In addition, in 2007 Tri-Valley has purchased a few units from GVPS members who wished to sell their units, as an accommodation to those members, bringing Tri-Valley’s GVPS ownership interest up to 64%. In each case, the purchase price was the same as the issuance price, $1,000 per unit. Tri-Valley has determined that because revenue and expense from the operation of the subsidiaries was attributed to the minority interest repurchased in 2007, the company should record a gain or loss on the repurchase of those interests in each quarter, depending on the timing of the gain or loss attributed to the subsidiaries and the timing of the repurchases. Tri-Valley is analyzing the amount of gain or loss to be recorded in each quarter and will amend its 2007 quarterly reports to reflect those gains and losses on repurchase of the interests.
Form 10-Q for the quarter ended September 30, 2007
Management’s Discussion and Analysis
2. | Expand your discussions to provide greater detail regarding the increases in general and administrative expenses during each quarter. We note that this expense has nearly doubled during the first nine months of 2007 and represents a significant portion of your net losses. |
Response:
Tri-Valley proposes to revise the last paragraph under Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Costs and Expenses, as follows:
General and administrative costs for the third quarter of 2007 were $2.6 million[,] an increase from $1.4 million in the same period of 2006. [For the nine month period, general and administrative costs were $7.8 million in 2007, an increase of $3.8 million from a total of $4.0 million in the first nine months of 2006.] The increase was due to the expenses of our recently formed drilling subsidiaries, increased staff and capital formation expense. [Increased salaries accounted for nearly 40% of this increase in the third quarter and 26% of the increase in the first nine months as we staffed the two drilling rig subsidiaries, hired drilling crew members and increased our general corporate staff. Insurance accounted for 17% of the increased G & A expense in the third quarter and 12% of the increase in the first nine months as we were required to obtain property and casualty insurance for the newly purchased drilling equipment. Increased outside consulting expense also accounted for 14% of the increase in the third quarter and 10% for the nine month period. The remainder of the increase was spread across all aspects of our general and administrative costs, reflecting the increased activity in the drilling sector and a general increase in corporate activity.]
3. | Expand your discussions to explain the business purpose for selling interest of GVPS and GVDC during 2006 but repurchasing portions of those interests during 2007. |
Response:
Tri-Valley proposes to add the following paragraph to the MD&A immediately after the paragraph set forth above.
[In 2006 Tri-Valley’s subsidiaries, GVPS and GVDC sold membership units to private investors for approximately $6 million to raise funds to finance the purchase and refurbishing of drilling rigs operated by those companies. The membership units were issued and sold by the subsidiaries because Tri-Valley wanted to finance the rig purchases with outside equity investments rather than use its own working capital to finance the subsidiaries’ start-up operations. Membership units totaling 49% of the outstanding units of each subsidiary were sold to third parties. GVPS and GVDC were organized as LLCs to allow the pass-through of operating losses to investors during the stage at which they were incurring losses from start-up operations.
The subscription agreements for the sale of membership units by GVPS and GVDC each contained provisions permitting them to repurchase the units at the original purchase price. The subsidiaries incorporated this repurchase right in the subscription agreements with the investors by mutual agreement because Tri-Valley wanted to keep open its option to own and operate the drilling rig subsidiaries as wholly owned subsidiaries at a point where it had sufficient working capital to allow it to do so. In the second quarter of 2007, we exercised the right to repurchase all of the minority interest GVDC, which operates the rig in Nevada. We also agreed to repurchase approximately $200,000 of interests in GVPS at the request of two of the outside investors in GVPS.]
We would appreciate receiving any additional comments you may have on these proposed revisions prior to our filing the amended Form 10-K. Please contact us if you have questions or require additional information.
Very truly yours,
Lee Polson
cc: | Kimberly Calder, Assistant Chief Accountant |
| Audit Committee, Tri-Valley Corporation |
APPENDIX A
FORM 10-K/A-4
PROPOSED CHANGES
ITEM 6 Selected Historical Financial Data
On page 17, insert minority interest into table, as follows:
| Year Ended December 31, | ||||
| 2006 | 2005 | 2004 | 2003 | 2002 |
Income Statement Data: |
|
|
|
|
|
Revenues | $ 4,936,723 | $ 12,526,110 | $ 4,498,670 | $ 6,464,245 | $ 6,284,908 |
Operating Income (Loss) | $ (5,881,276) | $ (4,919,707) | $ (1,097,999) | $ 456,109 | $ 769,130 |
Loss from discontinued | $ (4,774,840) | $ (4,810,364) | $ (73,006) | $ 0 | $ 0 |
Gain on disposal of | $ 9,715,604 | $ 0 | $ 0 | $ 0 | $ 0 |
Income (loss) before | $ (940,512) | $ (9,730,071) | $ (1,171,005) | $ 456,109 | $ 769,130 |
Minority interest | $ (27,341) | $ 0 | $ 0 | $ 0 | $ 0 |
Net loss |
$ (913,171) | $ (9,730,071) | $ (1,171,005) | $ 456,109 | $ 769,130 |
Basic Earnings per share: |
|
|
|
|
|
Income (loss) from | $ (0.25) | $ (0.22) | $ (0.05) | $ 0.02 | $ 0.04 |
Income (loss) from dis- | $ 0.21 | $ (0.21) | $ (0.01) | $ 0.00 | $ 0.00 |
Basic Earnings Per Share | $ (0.04) | $ (0.43) | $ (0.06) | $ 0.02 | $ 0.04 |
|
|
|
|
|
|
Balance Sheet Data: |
|
|
|
|
|
Property and Equipment, net | $ 12,076,043 | $ 13,635,981 | $ 1,778,208 | $ 1,543,121 | $ 1,974,501 |
Total Assets | $ 28,654,125 | $ 19,738,730 | $14,473,326 | $ 8,341,782 | $ 4,634,874 |
Long Term Obligations | $ 2,963,562 | $ 4,528,365 | $ 6,799 | $ 16,805 | $ 26,791 |
Minority Interest | $ 5,410,746 | $ 0 | $ 0 | $ 0 | $ 0 |
Stockholder's Equity |
$ 11,232,872 | $ 7,572,720 | $ 6,796,903 | $ 1,851,783 | $ 1,262,306 |
|
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|
ITEM 7 Management’s Discussion and Analysis of Financial Condition
Financial Condition
On page 26, revise the second paragraph as follows:
Shareholder equity increased from $7.6 million in 2005 to $11.2 $16.6 million for 2006. This increase was due mainly to the net proceeds from issuance of common stock in the amount of $2.4 million and additional . Additional paid in capital from warrants and stock options in the amount of 1.5 million, and . We recorded the sale of minority equity interests in the Great Valley Drilling Company and Great Valley Production Company on the balance sheet as “minority interest” capital contributions (a $5.4 million increase).
ITEM 8 Financial Statements
Balance Sheet – Liabilities and Stockholders’ Equity
On page 32, revise the consolidated balance sheets as follows:
LIABILITIES AND STOCKHOLDERS’ EQUITY |
| |
| December 31, | |
| ___2006___ | ___2005___ |
|
|
|
Current liabilities |
|
|
Notes payable | $ 619,069 | $ 966,649 |
Notes payable – related parties | 501,036 | - |
Accounts payable and accrued expenses | 2,237,116 | 1,190,604 |
Amounts payable to joint venture participants | 280,815 | 161,747 |
Advances from joint venture participants, net | 5,408,909 | 5,318,645 |
|
|
|
Total current liabilities | 9,046,945 | 7,637,645 |
|
|
|
Non-Current Liabilities |
|
|
Due to joint ventures | - | 201,748 |
Asset Retirement Obligation | 216,714 | 92,108 |
Long-term portion of notes payable – related parties | 698,963 | - |
Long-term portion of notes payable | 2,047,885 | 4,234,509 |
|
|
|
Total non-current liabilities | 2,963,562 | 4,528,365 |
|
|
|
Total liabilities | 12,010,507 | 12,166,010 |
|
|
|
Minority Interest – Great Valley Drilling Company, | 5,410,746 | - |
|
|
|
Stockholders’ equity |
|
|
Common stock, $.001 par value; 100,000,000 shares |
|
|
authorized; 23,546,655 and 22,806,176 issued and |
|
|
outstanding at December 31, 2006, and 2005 | 23,407 | 22,806 |
Less: common stock in treasury, at cost, |
|
|
100,025 shares at December 31, 2006 and 2005. | (13,370) | (13,370) |
|
|
|
Capital in excess of par value | 28,692,780 | 25,629,775 |
Additional paid in capital – warrants | 247,313 | - |
Additional paid in capital – stock options | 1,262,404 | - |
|
|
|
Accumulated deficit | (18,979,662)
| (18,066,491) |
|
|
|
Total stockholders’ equity | 11,232,872
| 7,572,720 |
|
|
|
Total liabilities and stockholder’s equity | $ 28,654,125 | $ 19,738,730 |
Consolidated Statements of Operations
Revise Consolidated Statements of Operations on page 33 as follows:
| __For the Years Ended December 31,_ | ||
| ___ 2006 ___ | ___ 2005 ___ | ___ 2004 ___ |
|
|
|
|
Revenues |
|
|
|
Sale of oil and gas | $ 1,029,606 | $ 901,159 | $ 799,474 |
Rig income | 873,368 | - | - |
Royalty income | - | 883 | 674 |
Partnership income | 45,000 | 30,000 | 30,000 |
Interest income | 72,707 | 118,608 | 45,990 |
Drilling and development | 2,497,256 | 11,422,234 | 3,559,500 |
Other income | 418,786 | 53,226 | 63,032 |
|
|
|
|
Total revenues | 4,936,723 | 12,526,110 | 4,498,670 |
|
|
|
|
Costs and expenses |
|
|
|
Mining exploration costs | 510,583 | 4,112,717 | 994,151 |
Production costs | 388,700 | 93,429 | 144,101 |
Drilling and development | 1,799,792 | 9,267,621 | 2,224,793 |
Rig operating expenses | 566,649 | - | - |
General and administrative | 6,110,921 | 3,521,311 | 2,066,198 |
Interest | 396,672 | 118,047 | 33,332 |
Depreciation, depletion and amortization | 585,439 | 242,527 | 21,699 |
Impairment of acquisition costs | 459,243 | 90,165 | 112,395 |
Total costs and expenses | 10,817,999 | 17,445,817 | 5,596,669 |
|
|
|
|
Loss from continuing operations, before income taxes and discontinued operations | (5,881,276) | (4,919,707) | (1,097,999) |
Tax provision | - | - | - |
|
|
|
|
Loss from continuing operations, before discontinued operations | (5,881,276) | (4,919,707) | (1,097,999) |
|
|
|
|
Loss from discontinued operations (Note 12) | (4,774,840) | (4,810,364) | (73,006) |
Gain on disposal of discontinued operations (Note 12) | 9,715,604 | - | - |
|
|
|
|
Loss before minority interest | $ (940,512) | $ (9,730,071) | $ (1,171,005) |
|
|
|
|
Minority interest | (27,341) | - | - |
|
|
|
|
Net loss | $ (913,171)
| $ (9,730,071) | $ (1,171,005) |
|
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|
Basic net loss per share: |
|
|
|
Loss from continuing operations | $ (0.25) | $ (0.22) | $ (0.05) |
Income (loss) from discontinued operations, net | $ 0.21 | $ (0.21) | $ (0.01) |
Basic loss per common share | $ (0.04) | $ (0.43) | $ (0.06) |
|
|
|
|
Weighted average number of shares outstanding | 23,374,205 | 22,426,580 | 20,507,342 |
|
|
|
|
Potentially dilutive shares outstanding | 26,377,537 | 25,030,468 | 23,060,942 |
|
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|
|
No dilution is reported since net income is a loss per SFAS 128 |
|
| |
Consolidated Statements of Stockholders’ Equity
Revise the Consolidated Statements of Stockholders’ Equity on page 34 as follows:
|
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| Additional |
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| Paid in |
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| Total |
|
| Capital in | Warrants & |
| Common | Accumu- |
|
|
| Common | Treasury | Par | Excess of | Stock |
| Stock | lated | Treasury | Stockholders’ |
| Shares | Shares | Value | Par Value | Options |
| Receivable | Déficit | Stock | Equity |
|
|
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|
|
|
|
|
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|
|
Balance at December 31, 2003 | 20,097,627 | 100,025 | $ 20,115 | $ 9,010,453 | - | - | - | $(7,165,415) | $(13,370) | $ 1,851,783 |
Issuance of common stock | 1,738,425 | - | 1,721 | 6,761,354 | - | - | - | - | - | 6,763,075 |
Stock issuance cost | - | - | - | (646,200) | - | - | - | - | - | (646,200) |
Common stock receivable | - | - | - | - | - | - | (750) | - | - | (750) |
Net loss | - | - | - | - | - | - | - | (1,171,005) | - | (1,171,005) |
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Balance at December 31, 2004 | 21,836,052 | 100,025 | 21,836 | 15,125,607 | - | - | (750) | (8,336,420) | (13,370) | 6,796,903 |
|
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|
|
| - |
|
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|
Issuance of common stock | 970,124 | - | 970 | 9,199,610 | - | - | - | - | - | 9,200,580 |
Stock issuance cost | - |
|
| (432,067) | - | - | - | - | - | (432,067) |
Common stock receivable | - |
|
| - | - | - | 750 | - | - | 750 |
Drilling program equity | - |
|
| 1,736,625 | - | - | - | - | - | 1,736,625 |
Net loss | - |
|
| - | - | - | - | (9,730,071) | - | (9,730,071) |
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Balance at |
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December 31, 2005 | 22,806,176 | 100,025 | $ 22,806 | $25,629,775 | - | - | - | $(18,066,491) | $(13,370) | $ 7,572,720 |
|
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|
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|
Issuance of common stock | 740,479 |
| 601 | 3,373,745 | - | - | - | - | - | 3,374,346 |
Stock issuance cost | - | - | - | (310,740) | - | - | - | - | - | (310,740) |
Warrants (see note 10) | - | - | - | - | $ 247,313 | - | - | - | - | 247,313 |
Stock Based Compensation (see note 5) | - | - | - | - | 1,262,404 | - | - |
|
| 1,262,404 |
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Net loss | - | - | - | - | - | - | - | (913,171)
|
| (913,171)
|
Balance at |
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|
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|
|
|
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|
December 31, 2006 | 23,546,655 | 100,025 | $ 23,407 | $28,692,780 | $1,509,717 |
| - | $(19,007,003) | $(13,370) | $11,232,872
|
Consolidated Statements of Cash Flows
Revise the Consolidated Statements of Cash Flows on page 35 as follows:
| For the Years Ended December 31, | ||
| 2006 | 2005 | 2004 |
|
|
|
|
CASH PROVIDED (USED) BY OPERATING ACTIVITIES |
|
|
|
Net loss | $ (913,171)
| $(9,730,071) | $(1,171,005) |
Loss from discontinued operations | 4,774,840 | 4,810,364 | 73,006 |
Gain on disposal of discontinued operations, net | (9,715,604) | - | - |
|
|
|
|
Loss from continuing operations | (5,853,935)
| (4,919,707) | (1,097,999) |
Adjustments to reconcile net (loss) to net cash |
|
|
|
provided (used) by operating activities: |
|
|
|
Depreciation, depletion, and amortization | 585,439 | 242,527 | 21,699 |
Impairment, dry hole and other disposals of property | 459,243 | 90,165 | 112,395 |
Minority interest | (27,341) | - | - |
Stock-based compensation costs, net of taxes | 1,262,404 | - | - |
Warrant costs from issuance of restricted common stock | 247,313 | - | - |
(Gain) or loss on sale of property | - | 131,766 | - |
Property, mining claims & services paid with common stock | - | 5,666,575 | 804,180 |
Changes in operating capital: |
|
|
|
(Increase) decrease in accounts receivable | 85,419 | (89,862) | (28,183) |
(Increase) decrease in prepaids | - | 53,527 | (31,719) |
(Increase) decrease in deposits and other assets | (19,088) | (14,874) | 87,671 |
Increase (decrease) in income taxes payable | - | - | (39,000) |
Increase (decrease) in accounts payable and accrued expenses | 635,880 | (445,454) | 552,064 |
Increase (decrease) in amounts payable to joint venture participants and related parties | (82,680) | 263,380 | 8,840 |
Increase (decrease) in advances from joint venture |
|
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|
Participants | 90,264 | (1,003,031) | 674,526 |
|
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Net cash provided by (used in) continuing operations | (2,617,082) | (24,988) | 1,064,474 |
Net cash provided by (used in) discontinued operations | 543,073 | (4,446,650) | (41,287) |
Net Cash Provided (Used) by Operating Activities | (2,074,009) | (4,471,638) | 1,023,187 |
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| For the Years Ended December 31, | ||
| 2006 | 2005 | 2004 |
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CASH PROVIDED (USED) BY INVESTING ACTIVITIES |
|
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Proceeds from sale of property | 461,752 | - | - |
Proceeds from sale of discontinued operations | 13,838,625 | - | - |
Capital expenditures | (5,760,034) | (6,494,822) | (242109) |
(Investment in) advance to joint project | - | - | (150,000) |
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|
Net cash provided by (used in) continuing operations | 8,540,343 | (6,494,822) | (392,109) |
Net cash provided by (used in) discontinued operations | (225,042) | (4,256,602) | (127,072) |
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Net Cash Provided (Used) by Investing Activities | 8,315,301 | (10,751,424) | (519,181) |
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CASH PROVIDED (USED) BY FINANCING ACTIVITIES |
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Proceeds from long-term debt | 1,017,559 | - | - |
Proceeds from long-term debt – related parties | 1,200,000 | 3,666,765 | - |
Principal payments on long-term debt | (4,909,204) | (311,673) | (10,006) |
Net proceeds from minority interest holders
Great Valley Drilling Company, LLC /Great Valley Production Company, LLC | 5,438,087 | - | - |
Net Proceeds from issuance of common stock | 2,442,890 | 3,101,938 | 5,310,224 |
|
|
|
|
Net cash provided by (used in) continuing operations | 5,189,332 | 6,457,030 | 5,301,939 |
Net cash provided by (used in) discontinued operations | (709,330) | 1,830,033 | - |
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|
|
Net Cash Provided (Used) by Financing Activities | 4,480,002 | 8,287,063 | 5,301,939 |
|
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Net Increase (Decrease) in Cash and Cash Equivalents | $ 10,721,294 | $(6,935,999) | $ 5,805,945 |
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Cash at Beginning of Year | 4,876,921 | 11,812,920 | 6,006,975 |
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Cash at End of Year | $ 15,598,215 | $ 4,876,921 | $11,812,920 |
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Interest paid | $ 352,815 | $ 377,943 | $ 33,332 |
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Income taxes paid | $ - | $ - | $ - |
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Property & services paid with common stocks | $ 620,716 | $ 2,662,075 | $ 92,200 |
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Stock issued to exchange mining claims | $ - | $ 3,004,500 | $ 712,000 |
ITEM 9A Controls and Procedures
Add the following paragraph below the first set of bullet points (ending in “share based arrangements”) on page 67:
In 2006 we sold minority equity interests in our two drilling rig subsidiaries, GVPS and GVDC, for approximately $5.4 million. We originally recorded the proceeds from these interests on our balance sheet as additional paid in capital. In early 2008, management determined that these interests should properly have been recorded as “minority interest” on the balance sheet and not paid in capital. In this amendment to our 2006 Form 10-K/A, we have restated our balance sheet to record the proceeds from selling these interests as “minority interest” and reduced our stockholders’ equity accordingly. Total liabilities and stockholders’ equity remain unchanged. The restatement of our balance sheet is also an indication that a material weakness existed and that our internal control over financial reporting were not effective at December 31, 2006.
