SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
[X] Quarterly report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the quarterly period ended June 30, 2003
[ ] Transition report under Section 13 or 15(d) of the Exchange Act of 1934
For the transition period from ___________ to ______________
Commission file no. 000-27339
BPK RESOURCES, INC.
---------------------------------------------------------
(Exact Name of Small Business Issuer as Specified in
Its Charter)
NEVADA 88-0426887
- ----------------------------------- --------------------------
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
5858 WESTHEIMER STREET, SUITE 709
HOUSTON, TX 77057
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(Address of Principal Executive Offices)
(713) 978-7991
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(Issuer's Telephone Number, including Area Code)
APPLICABLE ONLY TO ISSUERS INVOLVED IN
BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required
to be filed by Section 12, 13 or 15(d) of the Exchange Act after the
distribution of securities under a plan confirmed by a court.
Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: There were 14,617,198
issued and outstanding shares of the registrant's common stock, par value $.001
per share, as of August 13, 2003.
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [ X ]
BPK RESOURCES, INC.
(A DEVELOPMENT STAGE ENTITY)
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets (unaudited) 1
Condensed Statements of Operations - (unaudited) 2
Condensed Statements of Cash Flows - (unaudited) 3
Notes to Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis 16
Item 3. Controls and Procedures 21
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 21
Item 6. Exhibits and Reports on Form 8-K 22
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BPK RESOURCES, INC.
(A DEVELOPMENT STAGE ENTITY)
Condensed Consolidated Balance Sheet
ASSETS
------
June 30, December 31,
2003 2002
----------- -----------
(Unaudited) (Audited)
Current assets
Cash and cash equivalents $ 23,403 $ 26,980
Accounts receivable 146,000 52,840
Notes and interest receivable 57,661 53,340
Prepaid expenses 61,596 119,524
----------- -----------
Total current assets 288,660 252,684
Developed oil and gas interests net, using successful efforts 142,162 505,019
Oil and gas properties, cost not being amortized 2,347,436 -
Investment in limited partnerships 771,577 785,773
Marketable securities 5,631,780 51,761
----------- -----------
$ 9,181,615 $ 1,595,237
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities
Accounts payable and accrued expenses $ 543,112 $ 241,030
Payables for oil and gas interests 280,170 25,010
Dividends payable on Series A preferred 120,731 -
Notes payable 101,000 1,000
Notes payable - related party 2,165,231 305,000
Convertible notes 905,543 281,082
----------- -----------
Total current liabilities 4,115,787 853,122
----------- -----------
Minority interest 3,398 -
----------- -----------
Commitments and contingencies
Mandatorily redeemable preferred stock, Series A, $.001 par value
authorized - 5,538,461 shares; 5,538,461 shares, issued and outstanding
at 2003 and 0 at 2002, $1 liquidation value 4,247,764 -
----------- -----------
Stockholders' equity
Common stock, $.001 par value authorized 100,000,000 shares; 14,517,198
shares, issued and outstanding and 100,000 issuable
at 2003 and 13,817,198 at 2002 14,617 13,817
Additional paid in capital 3,614,361 3,076,661
Deferred compensation (23,444) (44,000)
Less stock subscription receivable - (305,000)
Accumulated other comprehensive loss 1,253,578 (78,677)
Deficit accumulated during development stage (4,044,446) (1,920,686)
----------- -----------
Total stockholders' equity 814,666 742,115
----------- -----------
$ 9,181,615 $ 1,595,237
=========== ===========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
1
BPK RESOURCES, INC.
(A DEVELOPMENT STAGE ENTITY)
Condensed Consolidated Statements of Operations
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30, April 2, 1997
----------------------- ---------- ------------------ (Inception) to
2003 2002 2003 2002 June 30, 2003
---------- ---------- ------------- ----------- -------------
Revenues $ 141,636 $ 10,716 $ 224,515 $ 10,716 $ 385,482
---------- ---------- ------------- ----------- -------------
Operating expenses
Production expenses 84,874 - 108,992 - 190,634
Depletion and amortization 234,569 - 396,287 - 777,666
Dry hole and impaired properties - - - - 146,838
Bad Debt expense (recovery) - (85,600) - 14,400 -
General and administrative 398,258 98,129 710,312 104,249 1,388,384
---------- ---------- ------------- ----------- -------------
Total operating expenses 717,701 12,529 1,215,591 118,649 2,503,522
---------- ---------- ------------- ----------- -------------
Loss from operations (576,065) (1,813) (991,076) (107,933) (2,118,040)
---------- ---------- ------------- ----------- -------------
Other (income) expense
Interest income (1,006) - (2,321) - (38,819)
Interest expense 437,464 44,769 818,347 55,982 1,580,514
Partnership investment loss 199,408 - 196,229 - 264,282
---------- ---------- ------------- ----------- -------------
Total other expenses, net 635,866 44,769 1,012,255 55,982 1,805,977
---------- ---------- ------------- ----------- -------------
Loss before minority interest (1,211,931) (46,582) (2,003,331) (163,915) (3,924,017)
---------- ---------- ------------- ----------- -------------
Minority interest (1,298) - 302 - 302
---------- ---------- ------------- ----------- -------------
Net loss (1,213,229) (46,582) (2,003,029) (163,915) (3,923,715)
---------- ---------- ------------- ----------- -------------
Preferred dividend on series A
preferred stock 90,731 - 120,731 - 120,731
---------- ---------- ------------- ----------- -------------
Net loss to common shareholders $(1,303,960) $ (46,582) $ (2,123,760) $ (163,915) $ (4,044,446)
========== ========== ============= =========== =============
Basic and diluted loss per common
share $ (0.09) $ (0.00) $ (0.15) $ (0.01)
========== ========== ============= ===========
Basic and diluted weighted average
shares outstanding 14,520,495 11,500,000 14,419,396 11,500,000
========== ========== ============= ===========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
2
BPK RESOURCES, INC.
(A DEVELOPMENT STAGE ENTITY)
Condensed Consolidated Statement of Cash Flows
(Unaudited)
Six Months Ended
June 30, April 2, 1997
-------------------------- (Inception) to
2003 2002 June 30, 2003
----------- ----------- --------------
Net cash used in operating activities $ (457,477) $ (149,115) $ (1,285,329)
----------- ----------- --------------
Cash flows from investing activities
Advances - - (242,700)
Repayment from unrelated party - - 140,600
Loan to unrelated party - (195,000) (50,000)
Loan to related party (10,000) - (10,000)
Repayment from related party 20,000 - 20,000
Investment in oil and gas interests - (755,431) (850,627)
Investment in limited partnerships (314,085) - (1,099,858)
Distribution from limited partnerships 37,232 - 37,232
----------- ----------- --------------
Net cash used in investing activities (266,853) (950,431) (2,055,353)
----------- ----------- --------------
Cash flows from financing activities
Issuance of debt 297,000 1,419,854 2,045,854
Issuance of debt - related party 625,053 - 1,270,053
Repayment of debt (177,000) (318,000) (495,000)
Repayment of debt - related party (295,000) - (645,000)
Issuance of common stock, net of offering costs - - 917,478
Offering costs (37,500) - (37,500)
Collection of subscription receivable 308,200 - 308,200
----------- ----------- --------------
Net cash provided by financing activities 720,753 1,101,854 3,364,085
----------- ----------- --------------
Net increase (decrease) in cash and cash equivalents (3,577) 2,308 23,403
Cash and cash equivalents, beginning of period 26,980 47 -
----------- ----------- --------------
Cash and cash equivalents, end of period $ 23,403 $ 2,355 $ 23,403
=========== =========== ==============
The accompanying notes are an integral part of these condensed
consolidated financial statements.
3
BPK RESOURCES, INC.
(A DEVELOPMENT STAGE ENTITY)
Notes to Condensed Consolidated Financial Statements
NOTE 1 - BASIS OF PRESENTATION
The unaudited condensed financial statements included herein have been prepared
by BPK Resources, Inc. (the "Company"), without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. The financial statements
reflect all adjustments that are, in the opinion of management, necessary to
fairly present such information. All such adjustments are of a normal recurring
nature. Although the Company believes that the disclosures are adequate to make
the information presented not misleading, certain information and footnote
disclosures, including a description of significant accounting policies normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America, have been
condensed or omitted pursuant to such rules and regulations.
These financial statements should be read in conjunction with the financial
statements and the notes thereto included in the Company's 2002 Annual Report on
Form 10-KSB filed with the Securities and Exchange Commission. The results of
operations for interim periods are not necessarily indicative of the results for
any subsequent quarter or the entire fiscal year ending December 31, 2003.
The Company is a Development Stage Enterprise, as defined in Statement of
Financial Accounting Standards ("SFAS") No. 7 "Accounting and Reporting for
Development Stage Enterprises." Under SFAS No. 7, certain additional financial
information is required to be included in the financial statements for the
period from inception of the Company to the current balance sheet date.
The Company follows the provisions of SFAS No. 123. As permitted under SFAS No.
123, the Company has continued to utilize APB 25 in accounting for its
stock-based compensation to employees. Had compensation expense for the six
months ended June 30, 2003 and 2002 been determined under the fair value
provisions of SFAS No. 123, as amended by SFAS 148, the Company's net loss and
net loss per share would have been the following:
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------ ----------------------------
2003 2002 2003 2002
-------------- ------------- ------------- ------------
Net loss, to common stockholders as reported $ (1,303,960) $ (46,582) $ (2,123,760) $ (163,915)
Add: Stock-based employee compensation expense included
in reported net income determined under APB No. 25,
net of related tax effects - - - -
Deduct: Total stock-based employee compensation expense
determined under fair-value-based method for all awards,
net of related tax effects - - (99,500) -
-------------- ------------- ------------- ------------
Pro forma net income to common stockholders $ (1,303,960) $ (46,582) $ (2,223,260) $ (163,915)
-------------- ------------- ------------- ------------
Earnings per share:
Basic - as reported $ (0.09) $ (0.00) $ (0.15) $ (0.01)
Basic - pro forma $ (0.09) $ (0.00) $ (0.15) $ (0.01)
4
BPK RESOURCES, INC.
(A DEVELOPMENT STAGE ENTITY)
Notes to Condensed Consolidated Financial Statements
NOTE 2 - DESCRIPTION OF BUSINESS
NATURE OF OPERATIONS
The Company is generally not involved as the operator of the projects in which
it participates. Instead, the Company relies on third parties for drilling,
delivering any gas or oil reserves that are discovered, and assisting in the
negotiation of all sales contracts with such purchasing parties. With the
assistance of such third parties, the Company plans to explore and develop these
prospects and sell on the open market any gas or oil that is discovered. The
Company relies on Touchstone Resources USA, Inc., a related party, to assist and
advise the Company regarding the identification and leasing of properties on
favorable terms. The Company also relies on Touchstone Resources USA, Inc. to
provide additional reserve assessment analysis and engineering services in
connection with the exploration and development of the prospects. Touchstone
Resources USA, Inc. has a significant level of experience in exploring and
developing gas and oil properties in the regions where the prospects are
located. This strategy is intended to reduce the level of overhead and capital
expenditures required to maintain drilling and production operations. The
Company does not own any drilling rigs, and all of the drilling activities are
conducted by independent drilling contractors. The Company's properties are
primarily located in Texas, specifically, Jefferson County. The Company also has
investments in Louisiana and Thailand.
NOTE 3 - NOTES RECEIVABLE - RELATED PARTY
During April and May 2003, the Company had loaned Touchstone Resources, Inc., a
related party, a total of $90,000. The loans bear interest at 10% per annum. On
May 30, 2003, the Company used these loans to purchase a 2% interest in LS Gas,
LLC. Only the interest receivable of $308 remained outstanding as of June 30,
2003.
As of June 30, 2003, affiliate, CSR Waha Partners, L.P. had an unsecured demand
loan, which it had made to Louisiana Shelf Partners, L.P., in the amount of
$2,000. This loan bears interest at 10% per annum.
NOTE 4 - OIL AND GAS INTERESTS AND LIMITED PARTNERSHIP INTERESTS
June 30, December 31,
2003 2002
----------------- ---------------
(Unaudited)
Developed Oil and Gas Interests Net, Using Successful Efforts -
Hackberry Prospects - Melton and Hooks Wells
Leasehold Acquisition and Mineral Interests $ 825,010 $ 825,010
Capitalized Costs 25,617 25,617
Depletion (708,465) (345,608)
----------- -----------
Total $ 142,162 $ 505,019
=========== ===========
Oil and Gas Properties, Cost Not Being Amortized - CSR - Waha
Leasehold Acquisition and Mineral Interests $ 1,605,582 $ -
Capitalized Costs 192,561 -
Drilling in Progress Intangible 502,348 -
Drilling in Progress Tangible 46,945 -
----------- -----------
Total $ 2,347,436 $ -
=========== ===========
5
BPK RESOURCES, INC.
(A DEVELOPMENT STAGE ENTITY)
Notes to Condensed Consolidated Financial Statements
NOTE 4 - OIL AND GAS INTERESTS AND LIMITED PARTNERSHIP INTERESTS (Continued)
The following table represents the Investments in Limited Partnerships at June
30, 2003 (unaudited):
Touchstone
Resources
2001 -
Hackberry Louisiana
Drilling Shelf PHT
PH Gas, LP Fund, LP Partners, LP Partners, LP LS Gas, LLC Total
------------- ------------- -------------- ------------ ------------- ------------
Ownership Percentage 29.06% 10.26% 9.405% 4.1% 2.0%
Original Cost Basis $ 214,600 $ 400,000 $ 270,000 $ 72,665 $ 142,000 $ 1,099,265
Pro-rata share of loss (13,998) (238,608) (11,676) - - (264,282)
Cash Distributions (10,000) (39,906) (13,500) - - (63,406)
------------- ------------- -------------- ----------- ------------- ------------
Total $ 190,602 $ 121,486 $ 244,824 $ 72,665 $ 142,000 $ 771,577
============= ============= ============== =========== ============= ============
The following table represents the Investment in Limited Partnership at December
31, 2002:
Touchstone
Resources
2001 -
Hackberry Louisiana
Drilling Shelf PHT
PH Gas, LP Fund, LP Partners, LP Partners, LP Total
-------------- -------------- --------------- ---------------- --------------
Ownership Percentage 32.5% 10.26% 9.405% 4.1%
Original Cost Basis $ 150,000 $ 400,000 $ 270,000 $ 50,000 $ 870,000
Pro-rata share of loss (1,806) (66,247) - - (68,053)
Cash Distributions - (16,174) - - (16,174)
-------------- -------------- --------------- ---------------- --------------
Total $ 148,194 $ 317,579 $ 270,000 $ 50,000 $ 785,773
============== ============== =============== ================ ==============
CSR-WAHA PARTNERS, L.P.
- -----------------------
On January 15, 2003, the Company purchased a 99% Limited Partnership Interest in
CSR-Waha Partners, LP ("CSR-Waha"), a Delaware Limited Partnership, from
Continental Southern Resources, Inc. ("CSOR"), a related party. The purchase
price of $2,000,000 consisted of $150,000 which was payable upon execution of
the agreement, a $1,500,000 promissory note due on April 30, 2003, and 600,000
shares of common stock of the Company. The note term was subsequently extended
to June 30, 2004 in consideration of 100,000 shares of the Company's common
stock. CSR-Waha owns a working interest of 12-1/2% in the Waha/Lockridge oil and
gas prospect located in Reeves County, Texas. The Company and CSOR have one
common director who is the President of the Company.
6
BPK RESOURCES, INC.
(A DEVELOPMENT STAGE ENTITY)
Notes to Condensed Consolidated Financial Statements
NOTE 4 - OIL AND GAS INTERESTS AND LIMITED PARTNERSHIP INTERESTS (Continued)
At the discretion of CSR, LLC, the general partner, available cash will be
distributed 99% to the limited partner to the extent of its unreturned capital
balance and 1% to CSR, LLC until all unreturned capital balances have been
returned and then 80% to the limited partner in proportion to their percentage
interest and 20% to CSR, LLC. Distributions in liquidation of the partnership
will be made in accordance with the capital accounts subject to the above
distributions. In general, profits will be allocated after giving effect to
certain regulatory allocations and cumulative prior allocations 75% to the
limited partner and 25% to CSR, LLC. Losses in general will be allocated after
giving effect to regulatory allocations and certain proportionate allocations to
all partners with a positive capital account in proportion to the extent of
their balances and then entirely to CSR, LLC.
The Company accounts for its investment in CSR Waha Partners, L.P. using the
consolidation method.
PH GAS, L.P. - SELECTED INFORMATION
- -----------------------------------
On April 26, 2003, the limited partnership agreement of PH Gas, L.P. was amended
to allow two additional partners and reallocate ownership percentages, which
reduced the Company's interest from 32.5% to approximately 30.9%.
On May 19, 2003, the limited partnership agreement of PH Gas, L.P. was amended
to remove two partners and allow one additional partner and reallocate ownership
percentages. The Company's interest remained at approximately 30.9%.
On June 23, 2003, the limited partnership agreement of PH Gas, L.P. was amended
to remove one partner and reallocate ownership percentages, which reduced the
Company's interest from 30.9% to approximately 28.7%.
On July 1, 2003, the limited partnership agreement of PH Gas, L.P. was amended
to reflect additional partner's capital contributions, which increased the
Company's interest from 28.7% to approximately 29.6%.
The Company is not subject to capital calls in connection with its limited
partnership interest in PH Gas, L.P. However, PH Gas, L. P. is subject to cash
calls from its investment in APICO, LLC ("APICO") as explained below. If PH Gas,
L. P. does not meet its cash calls, then the Company's investment in PH Gas,
L.P. may become impaired. The APICO membership agreement provides that PH Gas,
L.P. and the other APICO members will be called upon from time to time for
additional contributions so as to meet the reasonable capital requirements of
APICO. If PH Gas, L.P., or any other member, fails to make required capital
contributions or meet the required cash calls in the amounts and at the times
specified in the membership agreement, then they would be in default. If the
default is not cured within 45 days, then APICO has the right to repurchase the
defaulting members' interests for 1% of their original purchase price.
During April through June 2003, APICO issued capital calls of $2,325,000 to its
members for exploration costs in the PhuHorm Prospect. PH Gas, L.P.'s portion of
this call was $226,920, which was paid prior to June 30, 2003. APICO advised PH
Gas, L.P. that they anticipate additional capital calls of $500,000 due on each
July 25 and August 25, 2003.
The Company accounts for this interest using the equity method.
LOUISIANA SHELF PARTNERS, L.P. - SELECTED INFORMATION
- -----------------------------------------------------
Pursuant to the partnership agreement, the Company and the other partners of
Louisiana Shelf Partners, L.P. ("LSP") will be called upon from time to time for
additional contributions to meet the reasonable capital requirements of LSP. LSP
received an Authorization for Expenditure ("AFE") from the operator for
approximately $4,800,000 related to proposed exploration in the Cameron Parish
prospect. The Company has paid the capital call to LSP related to this AFE.
The Company accounts for this interest using the equity method.
7
BPK RESOURCES, INC.
(A DEVELOPMENT STAGE ENTITY)
Notes to Condensed Consolidated Financial Statements
NOTE 4 - OIL AND GAS INTERESTS AND LIMITED PARTNERSHIP INTERESTS (Continued)
LS GAS, LLC
- -----------
On May 30, 2003, the Company purchased a 2% interest in LS Gas, LLC from
Touchstone Resources, Ltd. The purchase price consisted of $100,000 in cash and
100,000 shares of the common stock of BPK Resources, Inc. The Company used a
$90,000 receivable to offset a portion of the $100,000 cash payment. As of June
30, 2003, the Company had a remaining balance of $10,000, which was paid
subsequent to the balance sheet date.
The Company accounts for this interest using the cost method.
NOTE 5 - MARKETABLE SECURITIES
On February 21, 2003, the Company entered into an investment agreement with
Ocean Resources Capital Holding PLC ("ORCH"). In accordance with the agreement,
the Company issued 5,583,461 shares of its Series A 10% Convertible Preferred
Stock ("Series A") in exchange for 4,390,000 ordinary shares of ORCH, along with
warrants to purchase an additional 1,463,333 shares. ORCH trades on the London
Stock Exchange in the Alternative Investment Market ("AIM"). The Company also
entered into a loan facility agreement with ORCH whereby the Company can borrow
up to $600,000 which is secured by the Company's shares of ORCH. The loan
matured on May 31, 2003 and bears interest at LIBOR plus 2%. As of June 30,
2003, the Company borrowed $587,053 and accrued a 4% arrangement fee of $23,482
in relation to the borrowings.
The Company is not entitled to dispose of any of the ORCH shares prior to or
during a period of at least 2 months from their admission to AIM without the
prior consent of ORCH. The Company agreed to place $720,000 of the net proceeds
from the sale of the ORCH shares in an escrow account until the second
anniversary of the original agreement, on terms satisfactory to ORCH, which
represents an amount which is equal to two years' dividends in respect of the
Company's Series A shares held by ORCH and is to be used solely for payment of
dividends in respect of the Company's shares. The Company agreed that except for
trade creditors and the proposed $600,000 margin account, the Company will not
incur more than $1,000,000 further indebtedness, without the prior written
permission of ORCH. The Company agreed that ORCH shall be entitled to nominate a
director to the Company's board of directors and shall take all such steps that
may be required to appoint such person to serve on the board of directors of the
Company until the next meeting of the stockholders of the Company held for the
purpose of electing directors.
Available-for-sale securities consist of the following at June 30, 2003
(unaudited):
Gross
Cost Unrealized Gain Fair Value
---------------- ------------------ ----------------
Stock - CYTR $ 130,438 $ 258,805 $ 389,243
Stock - ORCH 3,490,050 856,050 4,346,100
Warrants - ORCH 757,714 138,723 896,437
---------------- ------------------ ----------------
Total Current $ 4,378,202 $ 1,253,578 $ 5,631,780
================ ================== ================
On July 24, 2003, the Company sold 4,390,000 shares of ORCH for $1,408,136, and
incurred $77,449 in commissions expenses and $130,687 was deducted as a reserve
for ORCH. The Company recorded a loss of $2,081,914 on this transaction.
8
BPK RESOURCES, INC.
(A DEVELOPMENT STAGE ENTITY)
Notes to Condensed Consolidated Financial Statements
NOTE 5 - MARKETABLE SECURITIES (Continued)
Available-for-sale securities consisted of the following at December 31, 2002:
Gross
Cost Unrealized Loss Fair Value
---------------- ------------------ ----------------
Stock - CYTR $ 130,438 $ 78,677 $ 51,761
NOTE 6 - NOTES PAYABLE
Notes payable and convertible notes consisted of the following at:
June 30, December 31,
2003 2002
---------------- --------------
(Unaudited)
12% Secured convertible note $ 1,500,000 $ 1,500,000
10% Promissory note - related party 1,578,178 305,000
10% Promissory note 101,000 1,000
Approx. 6% Loan Facility - related party 587,053 -
---------------- --------------
3,766,231 1,806,000
Less unamortized discount 594,457 1,218,918
---------------- --------------
$ 3,171,774 $ 587,082
================ ==============
12% SECURED CONVERTIBLE NOTE
- ----------------------------
In April 2002, the Company entered into a loan agreement pursuant to which it
borrowed $1,500,000 from Gemini Growth Fund, LP ("Gemini"), a Delaware limited
partnership. Gemini subsequently changed its name to Trident Growth Fund, L.P.
("Trident"). The Company's obligation to repay the loan is evidenced by a 12%
secured convertible promissory note and is secured by a security interest
granted to the lender covering substantially all of the assets of the Company
including a collateral mortgage and assignment of lease and working interests.
The loan was subsequently amended on July 29, 2003 to extend the maturity date
from October 31, 2003 to June 30, 2004. On July 29, 2003, Trident also amended
the loan to increase the principal to $2,100,000. The first amendment to the
loan agreement requires the Company to maintain an interest average ratio
(earnings before interest, taxes, depreciation and amortization divided by
interest expense) of 2.0 or greater as of December 14, 2003. The $600,000 note
matures on July 31, 2004; however, the Company has the option to repay the note
at 100% of face value prior to the maturity date. Trident has the option to
convert the principal amount of the note plus all accrued interest into common
stock of the Company at a conversion rate of $0.38 per share. Trident was issued
warrants to purchase 300,000 shares of the Company's common stock as additional
incentive to make the original loan. The warrants expire on the earlier of April
30, 2012 or the date on which the entire principal amount of the convertible
notes is converted to common stock. In July 2003, Trident was issued two
additional warrants to purchase 120,000 and 100,000 shares of the Company's
common stock with an exercise price of $0.38 expiring on July 29, 2008 and April
30, 2012, respectively.
9
BPK RESOURCES, INC.
(A DEVELOPMENT STAGE ENTITY)
Notes to Condensed Consolidated Financial Statements
NOTE 6 - NOTES PAYABLE (Continued)
The conversion rate of the note and exercise price of the warrants is $0.38
which is subject to antidilution and price adjustments per the agreements. The
Company paid loan commitment and origination fees of 1% and 4%, respectively,
which were recorded as loan costs. These costs will be amortized over the term
of the loan. Interest is payable in cash unless Trident elects to have the
interest paid in common stock of the Company. As described in the loan
covenants, the Company is required to comply with various financial covenants.
Any failure to comply with such covenants may be deemed a default on the loan by
Trident. As of June 30, 2003, the Company failed to comply with three financial
covenants but received a waiver from the lender.
Under the terms of the loan agreement, the Company was required to register all
shares of its common stock issuable upon conversion of the note or exercise of
the warrants by October 2002. The Company would have been subject to a monthly
penalty of 0.1% shares of its common stock then outstanding computed on a fully
diluted basis per day until the shares are registered; however, Trident waived
the specific covenants for six months.
As of June 30, 2003, the Company granted warrants to purchase 25,000 shares of
common stock at an initial exercise price of $0.38, subject to periodic
adjustments based on market trading price, which expire on April 30, 2012 to
Trident in consideration for the granting of a waiver due to the Company's
failure to meet their loan covenants. These warrants were valued at $15,000 and
expensed.
10% PROMISSORY NOTES
- --------------------
As of June 30, 2003, the Company had borrowed $1,775,000 with interest payable
at 10% per annum from CSOR (a related party). The $1,500,000 note plus accrued
interest was originally due on April 30, 2003, and was subsequently extended to
June 30, 2004 in consideration of 100,000 shares of the Company's common stock.
The remaining $275,000 of notes plus accrued interest are payable on demand. As
of June 30, 2003 the Company has accrued $91,599 of interest related to the
notes and total principal of $1,550,000 remained outstanding of which $730,000
was paid in July 2003. The Company and CSOR have one common director on their
Board of Directors who also serves as president of the Company.
As of June 30, 2003, the Company had borrowed $101,000 with interest payable at
10% per annum from 1025 Investments, Inc. The notes plus accrued interest are
payable on demand. As of June 30, 2003 the Company has accrued $3,974 of
interest related to the notes.
As of June 30, 2003, the Company had borrowed $20,000 with interest payable at
10% per annum from FEQ Investments. The notes plus accrued interest are payable
on demand.
6% LOAN FACILITY
- ----------------
As of June 30, 2003, the Company had borrowed $587,053 from ORCH with interest
payable at LIBOR plus 2% per annum on the last business day of each calendar
month. The note is secured by the shares of ORCH stock (see Note 5). The notes
and accrued interest are payable upon the sale of the ORCH shares the Company
currently owns or May 31, 2003, whichever is earlier. As of June 30, 2003, the
Company has accrued $7,069 of interest related to this note.
NOTE 7 - MANDATORILY REDEEMABLE PREFERRED STOCK
In February 2003, the Company's Board of Directors designated 5,538,461 of the
10,000,000 shares of its preferred stock as mandatorily redeemable preferred
stock to be non-voting Series A 10% Convertible Preferred Stock, all of which
are outstanding. The holders of shares of this stock are entitled to receive
dividends at a rate of 10% per annum which accrue from the date of issuance of
each share payable semi-annually in arrears on June 30 and December 31 of each
year. These dividends have preference over common stock cash dividends. The
total amount of dividends accrued at June 30, 2003 was $120,731.
10
BPK RESOURCES, INC.
(A DEVELOPMENT STAGE ENTITY)
Notes to Condensed Consolidated Financial Statements
NOTE 7 - MANDATORILY REDEEMABLE PREFERRED STOCK (Continued)
Each Series A Share is immediately convertible, at the option of the holder,
into one share of common stock, subject to a cap which prohibits conversion to
the extent that conversion would result in the holder beneficially owning in
excess of 4.99% of the Company's common stock. In the event of a liquidation,
dissolution or winding up of the Company, or a merger or consolidation in which
the Company is not the surviving entity, all Series A Shares automatically
convert into shares of common stock. The Company has the option to redeem all
Series A Shares at any time by payment of an amount per share equal to $0.65
plus all accrued and unpaid dividends and are required to redeem all such shares
by payment of such amount no later than February 28, 2006. The Series A Shares
contain anti-dilution and conversion price adjustment provisions if certain
events occur. Other than as provided by applicable law, holders of the Series A
Shares have no voting rights.
The shares were issued in consideration for 4,390,000 ordinary shares and
warrants to acquire 1,450,000 ordinary shares of ORCH.
NOTE 8 - STOCKHOLDER'S EQUITY
On January 15, 2003, the Company purchased a 99% Limited Partnership Interest in
CSR-WAHA Partners, LP, a Delaware Limited Partnership, from CSOR. The Company
issued 600,000 shares of its common stock as part of the purchase price. These
shares were valued at the fair market value of $0.78 per share.
On January 30, 2003, the Company issued options to purchase 200,000 shares of
common stock at an exercise price of $0.65 per share to the Chief Executive
Officer, also a Director of the Company. The options are immediately exercisable
and terminate on the earlier of three years from the date of grant or three
months after cessation of service to the Company. The fair market value on the
date of the grant was $0.66, which resulted in deferred compensation of $2,000
being recorded which will be amortized over three years.
On January 31, 2003, the Company issued options to purchase 100,000 shares of
common stock at an exercise price of $0.65 per share to each of two directors of
the Company in connection with their appointments to serve as directors. The
options are fully vested and terminate on the earlier of three years from the
date of grant or three months after cessation of service to the Company. The
fair market value on the date of the grant was $0.66, which resulted in deferred
compensation of $2,000 being recorded which will be amortized over three years.
In connection with the ORCH transaction, the Company is obligated to issue
400,000 options to Rhodes Ventures, S.A. at the closing of an equity
transaction.
On April 30, 2003, the Company exercised its option to extend the due date of
its $1,500,000 promissory note to CSOR, a related party, from April 30, 2003 to
June 30, 2004. The company issued CSOR 100,000 shares of common stock of the
Company for extending the note. These shares were recorded as a prepaid item at
the fair market value of $0.47 and will be expensed over the extension period of
the note.
On May 30, 2003, the Company purchased a 2% interest in LS Gas, LLC from
Touchstone Resources, Ltd. The Company issued 100,000 shares of its common stock
as part of the purchase price.
11
BPK RESOURCES, INC.
(A DEVELOPMENT STAGE ENTITY)
Notes to Condensed Consolidated Financial Statements
NOTE 8 - STOCKHOLDER'S EQUITY (Continued)
STOCK WARRANTS
- --------------
The Company had the following warrants to purchase its common stock at June 30,
2003:
Expiration Date Exercise Price Shares
----------------------- ----------------- --------------
April 2004 $ 0.38 310,000
April 2012 $ 0.55 325,000
November 2005 $ 0.60 702,666
--------------
Common Stock 1,337,666
==============
STOCK OPTIONS
- -------------
The Company had the following outstanding common stock options to purchase its
securities:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------------- ---------------------------------
Number of Weighted Weighted Number Weighted
Range of Outstanding Average Average Exercisable at Average
Exercise Shares at Remaining Exercise June 30, Exercise
Prices June 30, 2003 Contract Life Price 2003 Price
-------------- --------------- ---------------- ------------- ---------------- -------------
$ 0.60 200,000 1.0 $ 0.60 200,000 $ 0.65
$ 0.65 400,000 3.0 $ 0.65 400,000 $ 0.60
NOTE 9 - NET LOSS PER SHARE
Loss per common share is calculated in accordance with SFAS No. 128, "Earnings
Per Share". Basic loss per common share is computed based upon the weighted
average number of shares of common stock outstanding for the period and excludes
any potential dilution. Shares associated with stock options, warrants and
convertible debt are not included because their inclusion would be antidilutive
(i.e., reduce the net loss per share). For the three and six months ending June
30, 2003 and 2002, the total number of potentially dilutive shares excluded from
diluted net loss per common share were 10,203,400 and 305,000, respectively.
12
BPK RESOURCES, INC.
(A DEVELOPMENT STAGE ENTITY)
Notes to Condensed Consolidated Financial Statements
NOTE 10 - COMPREHENSIVE LOSS
Excluding net loss, the Company's source of comprehensive loss is from the net
unrealized loss on its marketable debt securities, which are classified as
available-for-sale. The following summarizes the components of comprehensive
loss:
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------- ---------------------------------
2003 2002 2003 2002
--------------- ------------- ---------------- -------------
Net loss to common shareholders $ (1,303,960) $ (46,582) $ (2,123,760) $ (163,915)
Unrealized gain, net 1,275,279 - 1,253,578 -
--------------- ------------- ---------------- -------------
Total comprehensive loss $ (28,681) $ (46,582) $ (870,182) $ (163,915)
=============== ============= ================ =============
NOTE 11 - RELATED PARTY TRANSACTIONS - NOT DECSRIBED ELSEWHERE / CONCENTRATIONS
In April 2003, Mark Bush, president of Touchstone Resources USA, Inc.
("Touchstone"), resigned as director of the Company. Mr. Bush is also the
managing member of LS Gas, LLC, which is the general partner of Louisiana Shelf
Partners, L.P. In addition, he owns a 25% membership interest in PHT Gas, LLC
which is the general partner of PHT Partners, L.P., PH Gas, L.P., BPK South
Valentine Partners, L.P. and CSR-Hackberry Partners, L.P.
Wesley Franklin, who is a director of the Company, is also the Executive Vice
President of Touchstone. The Company relies on Touchstone for assistance
regarding the identification and leasing of properties.
NOTE 12 - LIQUIDITY AND CAPITAL RESOURCES
The accompanying financial statements have been prepared in accordance with U.S.
GAAP, which contemplates continuation of the Company as a going concern. In
2002, the Company hired new management and has implemented its business plan.
The Company is in its development stage and has significant debt obligations to
repay in future years. Additionally, the Company will need significant funds to
meet its cash calls on its various interests in oil and gas prospects to
explore, produce, develop, and eventually sell the underlying natural gas and
oil products under its interests and to acquire additional properties. The
Company believes that its projected revenues from its gas and oil operations and
sale of its marketable securities will provide sufficient funds to fund its
operations through December 2003. In the event that the Company locates
additional prospects for acquisitions, experiences cost overruns at its
prospects, or fails to generate projected revenues, the Company will be required
to raise funds through additional offerings of its securities in order to have
the funds necessary to complete these acquisitions and continue its operations.
If the Company is unable to obtain additional funds when they are required or if
the funds cannot be obtained on terms favorable to the Company, management may
be required to delay, scale back or eliminate its well development program or
license third parties to develop or market products that the Company would
otherwise seek to develop or market itself, or even be required to relinquish
its interest in the properties. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
13
BPK RESOURCES, INC.
(A DEVELOPMENT STAGE ENTITY)
Notes to Condensed Consolidated Financial Statements
NOTE 13 - COMMITMENTS AND CONTINGENCIES
GENERAL
- -------
The oil and gas industry is regulated by federal, state and local authorities.
In particular, gas and oil production operations and economics are affected by
environmental protection statutes, tax statutes and other laws and regulations
relating to the petroleum industry, as well as changes in such laws, changing
administrative regulations and the interpretations and application of such laws,
rules and regulations. The Company believes it is in compliance with all
federal, state and local laws, regulations, and orders applicable to the Company
and its properties and operations, the violation of which would have a material
adverse effect on the Company or its financial condition.
OPERATING HAZARDS AND INSURANCE
- -------------------------------
The gas and oil business involves a variety of operating risks, including the
risk of fire, explosions, blow-outs, pipe failure, abnormally pressured
formation, and environmental hazards such as oil spills, gas leaks, ruptures or
discharges of toxic gases, the occurrence of any of which could result in
substantial losses to the Company due to injury or loss of life, severe damage
to or destruction of property, natural resources and equipment, pollution or
other environmental damage, cleanup responsibilities, regulatory investigation
and penalties and suspension of operations.
There can be no assurance that insurance, if any, will be adequate to cover any
losses or exposure to liability. Although the Company believes certain policies
obtained by operators provide coverage in scope and in amounts customary in the
industry, they do not provide complete coverage against all operating risks. An
uninsured or partially insured claim, if successful and of significant
magnitude, could have a material adverse effect on the Company and its financial
condition via its contractual liability to the Prospect.
POTENTIAL LOSS OF OIL AND GAS INTERESTS/ CASH CALLS
- ---------------------------------------------------
The Company is subject to cash calls related to its various investments in oil
and gas prospects.
NOTE 14 - CONCENTRATIONS
The Company has five investments in Oil and Gas Interests and operates in a
single industry. If these interests prove to be unsuccessful, the concentration
of five investments could have a material adverse effect on the Company.
14
BPK RESOURCES, INC.
(A DEVELOPMENT STAGE ENTITY)
Notes to Condensed Consolidated Financial Statements
NOTE 15 - SUPPLEMENTAL EQUITY INVESTMENT DISCLOSURES - UNAUDITED
The following schedule lists the total assets, liabilities and results of
operations of the limited partnerships which the Company is invested in at June
30, 2003:
Touchstone
Resources-2001
Hackberry Louisiana Shelf
PH Gas, LP Drilling Fund, LP Partners, LP
------------------- --------------------- -------------------
Total Assets $ 709,922 $ 2,223,905 $ 5,865,000
56
=================== ===================== ===================
Total Liabilities $ 67,611 $ 303,668 $ 2,000
=================== ===================== ===================
Results of Operations
Sales - - -
Gross profit - - -
Net income (loss) $ (41,049) $ (1,679,932) $ (107,277)
NOTE 16 - SUBSEQUENT EVENTS
APICO advised PH Gas that they anticipate additional capital calls of $500,000
due on each July 25 and August 25, 2003.
On July 1, 2003, the Company entered into an investor relations consulting
agreement with EchoTech Financial, Inc. The agreement is for a three month
period ending on September, 30, 2003 and will automatically renew for another
term of three months unless two weeks notice to terminate is given by either
party, at a fee of $3,000 per month as well as options to purchase 25,000 common
shares of the Company at an exercise price of $0.40 per common share. The
options are fully vested and expire in two years.
On July 2, 2003, the Company paid the remainder of the purchase price for the
Company's interest in LS Gas, LLC.
On July 29, 2003 the Company granted Trident two warrants to purchase 120,000
and 100,000 shares of common stock with an exercise price of $0.38 expiring on
July 29, 2008 and April 30, 2012, respectively. The warrant to purchase 120,000
shares of common stock was issued in consideration for increasing the principal
of the note and the warrant to purchase 100,000 shares of common stock was
issued in consideration of the renegotiation to extend the maturity date of the
original note and for granting an additional waiver due to the Company's failure
to meet its loan covenants.
15
CAUTIONARY STATEMENT FOR FORWARD-LOOKING STATEMENTS
The information contained in this Report on Form 10-QSB and in other
public statements by the Company and Company officers include or may contain
certain forward-looking statements. The words "may", "intend", "will", "expect",
"anticipate", "believe", "estimate", "project", and similar expressions used in
this Report are intended to identify forward-looking statements within the
meaning of Section 27A of the U.S. Securities Act of 1933 and Sections 21E of
the U.S. Securities Exchange of 1934. You should not place undue reliance on
these forward-looking statements, which speak only as of the date made. We
undertake no obligation to publicly release the result of any revision of these
forward-looking statements to reflect events or circumstances after the date
they are made or to reflect the occurrence of unanticipated events. You should
also know that such statements are not guarantees of future performance and are
subject to risks, uncertainties and assumptions. These factors include, but are
not limited to, those risks described in detail in the Company's Annual Report
on Form 10-KSB under the caption "Risk Factors" and other filings with the
Securities and Exchange Commission. Should any of these risks or uncertainties
materialize, or should any of our assumptions prove incorrect, actual results
may differ materially from those included within the forward-looking statement.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OVERVIEW
Unless the context otherwise requires, references to the "Company",
"BPK", "we", "us" or "our", mean BPK Resources, Inc. or any of our consolidated
subsidiaries or partnership interests. The following discussion should be read
in conjunction with our Condensed Consolidated Financial Statements and related
Notes thereto included elsewhere in this Report.
We are in the oil and gas exploration and development business. We
target high-potential oil and gas assets primarily in the Texas, Louisiana and
other traditional oil producing states in the southwestern United States. Our
operations are focused on exploration activities to find and evaluate
prospective oil and gas properties and providing capital to participate in these
projects. We participate in projects directly, through our consolidated
subsidiaries, and as equity participants in limited partnerships.
We are generally not involved as the operator of the projects in which
we participate. Instead, we rely on third parties for drilling, delivering any
gas or oil reserves that are discovered, and assisting in the negotiation of all
sales contracts with any purchasing parties. With the assistance of such third
parties, we plan to explore and develop these prospects and sell on the open
market any gas or oil that we discover. We rely on Touchstone Resources USA,
Inc., the Executive Vice President of which sits on our board of directors, to
assist and advise us regarding the identification and leasing of properties on
favorable terms. We also rely upon Touchstone Resources USA, Inc. to provide us
with additional reserve assessment analysis and engineering services in
connection with the exploration and development of our prospects. Touchstone
Resources USA, Inc. has a significant level of experience in exploring and
developing gas and oil properties in the regions where our prospects are
located.
We play an active role in evaluating prospects and providing financial
and other management functions with respect to the operations at each of our
properties and rely on third parties for most operational activities. This
16
strategy is intended to reduce the level of overhead and capital expenditures
required to maintain drilling and production operations. As we subcontract the
performance of substantially all of the physical operations at our properties,
we do not anticipate incurring a substantial amount of expenses related to the
purchase of plant, machinery or equipment in connection with the exploration and
development of our properties. Similarly, we do not anticipate any substantial
increase in the number of persons that we employ.
In April 1997, we were granted worldwide patent rights, pursuant to an
Exclusive Worldwide Licensing Agreement, covering electronic multiple
fingerprint recognition system. Since the date of the Exclusive Worldwide
Licensing Agreement, we have unsuccessfully attempted to exploit these patent
rights. While we still hold these patent rights, we are no longer devoting
substantial efforts to the exploitation of these patent rights and are currently
soliciting offers to sell or assign these rights. We plan to use any proceeds
received from the sale or assignment of these rights for working capital
purposes and to purchase additional leasehold interests in natural gas and oil
properties.
BUSINESS STRATEGY
Our strategy is to develop reserves and generate revenue through the
exploration and development of our existing prospects in Louisiana, Texas and
Thailand and the selective acquisition of additional properties both offshore
and onshore in Texas, Louisiana and other traditional oil producing states in
the southwestern United States. Our strategy also includes selling all or part
of our interests in certain of our partnerships or all or part of leasehold
interests we own to realize immediate proceeds and limit or eliminate future
risk associated with such projects. As of the date of this Report, we have not
sold any such interests and all of our revenues have been derived from our share
of sales of oil and gas reserves in our various projects.
We intend to execute our strategy by focusing on the following:
o High potential exploratory drilling
o Opportunistic acquisitions with additional exploratory and/or
development potential
High Potential Exploratory Drilling in Louisiana, Texas and
Thailand. During 2002, operators at our prospects in Jefferson County, Texas
completed drilling two exploratory wells, both of which are currently in
production and generating revenue. Operators at our Jefferson and Reeves County,
Texas, Thailand, and Louisiana prospects are currently drilling one exploratory
well and plan to drill five additional exploratory wells during the remainder of
2003. We believe we have assembled a ten year inventory of exploration and
development drilling opportunities in Texas and Louisiana.
Opportunistic Acquisitions. Although our primary strategy is to grow
our reserves through drilling, in the next twelve months we anticipate making
opportunistic acquisitions in Texas, Louisiana and other southwestern states
with exploratory potential and in core areas of operation with exploitation and
development potential.
17
We may increase or decrease our planned activities for 2003,
depending upon drilling results, product prices, the availability of capital
resources, and other factors affecting the economic viability of such
activities. We do not attempt to forecast our potential success rate on
exploratory drilling.
RESULTS OF OPERATIONS
Three and Six Months Ended Junes 30, 2003 As Compared To Three and Six Months
Ended June 30, 2002.
Revenues
We generated $141,636 and $224,515 of revenue during the three and six
months ended June 30, 2003, respectively, consisting of oil and gas generated
from our net revenue interest in the Hackberry Prospect located in Jefferson
County, Texas ("Hackberry Prospect") and to a much lesser extent, from our net
revenue interest in the West Texas-Waha Project located in Reeves County, Texas
("Waha Project"). We generated $10,716 of revenue during the corresponding
periods in 2002 which consisted of oil and gas revenue generated from the
Hackberry Prospect. We expect to continue to generate revenue form these
interests during 2003.
Production Expenses
Production expenses were $84,874 and $108,992 during the three and six
months ended June 30, 2003, respectively, and depletion and amortization
expenses were $234,569 and $369,287 during the three and six months ended June
30, 2003, respectively. We did not incur operating expenses or depletion and
amortization expenses during the corresponding periods in 2002 as we generated
minimal revenue from operations during those periods. The production expenses
consisted of expenses incurred from our working interest in the Hackberry
Prospect and the Waha Project. The depletion and amortization expenses were due
to the depletion of the Hackberry Prospect based on the units produced.
General and Administrative Expenses
General and administrative expenses increased $300,129 to $398,258
during the three months ended June 30, 2003 as compared to $98,129 for the
corresponding period in 2002. These expenses consisted primarily of consulting
expenses and professional fees. General and administrative expenses increased
$606,063 to $710,312 during the six months ended June 30, 2003 as compared to
$104,429 for the corresponding period in 2002. These expenses consisted
primarily of professional fees and consulting fees.
Other (income) and expense
Other expenses were $635,866 and $1,012,255 during the three and six
months ended June 30, 2003, respectively, as compared to $44,769 and $55,982 for
the corresponding periods in 2002. The increase was primarily due to an increase
in interest expense of $392,695 and $762,365 for the three and six months ended
June 30, 2003, respectively, as a result of the issuance of a $1.5 million
principal amount convertible promissory note and a $1.5 million note issued in
connection with our purchase of a 99% limited partnership interest in CSR-Waha
18
Partners, L.P. and an increase of $199,408 and $196,229 for the three and six
months ended June 30, 2003, respectively, in losses from the Company's equity
investments.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities during the six months ended June
30, 2003 was $457,477 compared to $149,115 during the six months ended June 30,
2002. The primary use of cash during both periods was to fund the net loss. Net
cash used in investing activities during the six months ended June 30, 2003 was
$266,853 and consisted primarily of the purchase of oil and gas interests, as
compared to $950,431 during the six months ended June 30, 2002. Net cash
provided by financing activities during the six months ended June 30, 2003 was
$720,753 compared to $1,101,854 during the six months ended June 30, 2002 and
consisted primarily of the issuances of unsecured promissory notes which were
partially offset by costs relating to such financings, including commitment and
origination fees, and the collection of $308,200 of subscription receivables.
Working capital decreased $3,226,689 during the six months ended June
30, 2003 to a deficit of $3,827,127 as compared to a deficit of $600,438 at
December 31, 2002. This was due primarily to an increase in notes payable to
$2,584,692 from $587,082 at December 31, 2002 resulting from the issuance of a
$1,500,000 note to purchase a 99% limited partnership interest in CSR-Waha
Partners, L.P. and a $600,000 credit facility from Ocean Resources Capital
Holdings Plc.
In April 2002, we issued a $1,500,000 convertible promissory note (the
"Convertible Note") to Trident Growth Fund f/k/a Gemini Growth Fund, LP
("Trident"). The Convertible Note was initially due October 31, 2003, accrues
interest at 12% per annum payable monthly in arrears, is secured by
substantially all of our assets, is convertible at the option of Gemini into
shares of our common stock at an initial conversion price of $2.00 per share
(currently $.38 per share as a result of adjustment pursuant to anti dilution
provisions of the Convertible Note), and is redeemable at our option at 100% of
par prior to maturity. Interest is payable in cash unless Trident elects to have
it paid in shares of common stock. The Convertible Note contains various
financial covenants with which we are required to comply. We failed to comply
with three financial covenants and received a waiver from Trident which expires
July 13, 2003.
On or about July 29, 2003, we extended the maturity date of the
Convertible Note until June 30, 2004 and issued warrants to Trident to purchase
100,000 shares of common stock at an exercise price of $.38 per share. We also
entered into an amendment to our loan agreement with Trident to obtain an
additional $600,000 from Trident pursuant to a second convertible note (the
"July Convertible Note") on terms substantially similar to those set forth in
the Convertible Note except that it is due July 31, 2004. In connection with the
amendment, we issued warrants to Trident to purchase 120,000 shares of common
stock at an exercise price of $.38 per share. We are required to file a
registration statement with the Securities and Exchange Commission to cover the
public resale of all shares issuable upon conversion of the Convertible Note,
July Convertible Note and exercise of warrants issued to Trident.
In August 2002, we received repayment of $140,600 of the principal
amount of our note receivable from Global Genomic Capital ("GGC") and we issued
$470,000 principal amount of 10% demand promissory notes. On October 18, 2002 we
19
issued a $175,000 12% promissory note. We used approximately $1,445,000 of these
funds to acquire our leasehold interests in the Jefferson County Prospects, our
limited partnership interests in PH Gas, L.P., and our units in Touchstone
Resources - 2001 Hackberry Drilling Fund, L.P. We used approximately $310,000 to
repay Series 1 Promissory Notes in the aggregate principal amount of $310,000.
During the fourth quarter of 2002, we raised gross cash proceeds of
$1,309,600 through the issuance and sale of our equity securities. We used the
proceeds of these offerings to purchase our interests in Louisiana Shelf
Partners, L.P. and CSR-WAHA Partners, L.P. In connection with our purchase of an
interest in CSR-WAHA, we issued a $1,500,000 note which is due June 30, 2004.
On March 4, 2003, we issued 5,538,461 shares of our Series A 10%
Convertible Preferred Stock (the "Series A Preferred Shares") to Ocean Resources
Capital Holdings Plc ("ORCH"), a London, England based company whose shares are
traded on the Alternative Investment Market of the London Stock Exchange. The
shares were issued in consideration of our receipt of 4,390,000 ordinary shares
of ORCH together with warrants to purchase up to an additional 1,450,000
ordinary shares of ORCH at an exercise price of 75p per share and an additional
1,430,000 ordinary shares of ORCH at an exercise price of 100p per share. The
Series A Preferred Shares are immediately convertible at the option of the
holder into one share of common stock, subject to a cap which prohibits
conversion to the extent that conversion would result in the holder beneficially
owning in excess of 4.99% of our outstanding shares. We have the option to
redeem all Series A Preferred Shares at any time by payment of an amount per
share equal to $.65 plus all accrued and unpaid dividends due thereon and are
required to redeem all such shares by payment of such amount no later than
February 28, 2006. The agreement under which these shares were purchased
precludes us from incurring in excess of $1,000,000 of additional indebtedness
without the consent of ORCH. The ordinary shares of ORCH are eligible for public
resale on the Alternative Investment Market of the London Stock Exchange. On
March 14, 2003, we entered into a loan agreement with ORCH in which ORCH agreed
to advance $600,000 against the sale of the ORCH shares. During July, 2003, we
sold all 4,390,000 ordinary shares of ORCH for gross proceeds of $1,408,136.
The forgoing constitutes our principal sources of financing during the
past twelve months. We do not currently maintain a line of credit or term loan
with any commercial bank or other financial institution. Our capital needs have
been principally met through proceeds from the sale of our equity and debt
securities.
We are in the development stage, have significant debt obligations to
repay in 2004, and our current liabilities substantially exceed our current
assets. As of the date of this Report, we have limited cash resources. We will
need significant funds to meet cash calls on our various interests in oil and
gas prospects to explore, produce, develop, and eventually sell the underlying
natural gas and oil products. Specifically, PH Gas, L.P. and PHT Partners, L.P.,
limited partnerships in which we have an interest, are subject to capital calls.
We anticipate additional capital calls of approximately $500,000 will be due on
July 25 and August 25, 2003, which if not paid within 45 days after the due
date, could result in such partnerships being forced to sell their interest for
1% of the total purchase price. In addition, we expect to receive capital calls
during the next twelve months from Louisiana Shelf Partners, L.P., another
limited partnership in which we have an interest.
20
We also have funding commitments of approximately $20,000 to the Touchstone
Resources - 2001 Hackberry Drilling Fund, L.P. as a result of problems with sand
production at C.G. Hooks-State well in The Jefferson County Prospects. If one or
more of the other owners of the leasehold interests in the projects fails to pay
their equitable portion of development costs, we may need to pay additional
funds to protect our ownership interests. In addition, the $1,500,000
Convertible Note and the $1,500,000 note payable to Continental Southern
Resources are due and payable June 30, 2004 and the $600,000 July Convertible
Note is due and payable July 31, 2004.
We believe we will need approximately $2,200,000 to sustain operations
at current levels and satisfy any capital calls and other related expenses
during the next twelve months. Based on available cash resources and projected
revenue from our various oil and gas projects, we believe we will have
sufficient funds to continue to meet such capital calls and operate at current
levels through December 2003. However, if we locate additional prospects for
acquisition, experience cost overruns at our existing prospects or fail to
generate projected revenues, we will be required to raise additional funds
through sales of our securities or otherwise. We also have $3.6 million
principal amount of debt which is due and payable within the next 12 months. If
we are unable to obtain additional funds on terms favorable to us, if at all, we
may be required to delay, scale back or eliminate some or all of our exploration
and well development programs, and may be required to relinquish our interest in
certain prospects.
ITEM 3. CONTROLS AND PROCEDURES
An evaluation of the effectiveness of our "disclosure controls and
procedures" (as such term is defined in Rules 13a or 15d of the Securities
Exchange Act of 1934, as amended (the "Exchange Act")) was carried out by us
under the supervision and with the participation of our Chief Executive Officer
("CEO") and Treasurer ("Treasurer"). Based upon that evaluation, our CEO and
Treasurer concluded that, as of the end of the period covered by this quarterly
report, our disclosure controls and procedures were effective to ensure that
information we are required to disclose in reports that we file or submit under
the Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission rules and forms.
There has been no change in our internal control over financial reporting
identified in connection with that evaluation that occurred during the period
covered by this report that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
1. On July 31, 2003, we issued 100,000 shares of common stock to
Touchstone Resources Limited in partial payment for our acquisition of a 2%
membership interest in LS Gas, LLC, which serves as the general partner of
Louisiana Shelf Partners, L.P. The shares were issued in a private placement
transaction exempt from the registration requirements of the Securities Act of
1933, as amended, pursuant to Section 4(2) thereunder, without payment of
underwriting discounts or commissions to any person.
21
2. On July 1, 2003, we issued options to purchase 25,000 shares of
common stock at an exercise price of $.40 per share to EchoTech Financial, Inc.
in consideration of investor relations services. The options are immediately
exercisable and terminate two (2) years from the date of grant. The options were
issued in a private placement transaction exempt from the registration
requirements of the Securities Act of 1933, as amended, pursuant to Section 4(2)
thereunder, without payment of underwriting discounts or commissions to any
person.
3. On July 29, 2003, we issued warrants to purchase an aggregate of
220,000 shares of common stock at an exercise price of $.38 per share and a
convertible promissory note in the principal amount of $600,000 to Trident
Growth Fund, L.P. The note is due July 31, 2004 and immediately convertible into
shares of common stock at a conversion price of $.38 per share. The warrants
were issued in consideration of Trident extending the maturity date of our
outstanding $1.5 million convertible note from October 31, 2003 until June 30,
2004 and amending our loan agreement to provide $600,000 of additional funding.
The warrants are immediately exercisable. The warrants to purchase 120,000
shares terminate July 29, 2008 and the warrants to purchase 100,000 shares
terminate April 12, 2012. The securities were issued in a private placement
transaction exempt from the registration requirements of the Securities Act of
1933, as amended, pursuant to Section 4(2) thereunder, without payment of
underwriting discounts or commissions to any person.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are included herein:
- -------------------- -------------------------------------------- -----------------------------------------------
Exhibit No. Exhibit Method of Filing
- -------------------- -------------------------------------------- -----------------------------------------------
3.1 Articles of Incorporation Incorporated by reference to Exhibit 3.1 to
the Company's Registration Statement on Form
SB-2, Registration Number 333-86435
- -------------------- -------------------------------------------- -----------------------------------------------
3.2 Bylaws Incorporated by reference to Exhibit 3.2 to
the Company's Registration Statement on Form
SB-2 Registration Number 333-86435
- -------------------- -------------------------------------------- -----------------------------------------------
3.3 Certificate of Amendment to Articles of Incorporated by reference to Exhibit 3.3 to
Incorporation the Company's Quarterly Report on Form 10-QSB
for the quarter ended September 30, 2002
- -------------------- -------------------------------------------- -----------------------------------------------
3.4 Certificate of Designation of Series A 10% Incorporated by reference to Exhibit 3.4 to
Convertible Preferred Stock the Company's Annual Report on Form 10-KSB
for the year ended December 31, 2002.
- -------------------- -------------------------------------------- -----------------------------------------------
10.1 Partial Assignment of Oil, Gas and Mineral Incorporated by reference to Exhibit 10.2 to
Lease by and between Touchstone Resources, the Company's Current Report on Form 8-K
Inc. and the Company dated April 25, 2002 dated May 13, 2002
- -------------------- -------------------------------------------- -----------------------------------------------
22
- -------------------- -------------------------------------------- -----------------------------------------------
10.2 Agreement of Limited Partnership of Incorporated by reference to Exhibit 10.3 to
Touchstone Resources - 2001 Hackberry the Company's Current Report on Form 8-K
Drilling Fund, L.P. dated May 13, 2002
- -------------------- -------------------------------------------- -----------------------------------------------
10.3 Loan Agreement dated April 25, 2002 by and Incorporated by reference to Exhibit 10.6 to
between the Company and Gemini Growth the Company's Quarterly Report on Form 10-QSB
Fund, LP dated November 21, 2001 for the quarter ended June 30, 2002
- -------------------- -------------------------------------------- -----------------------------------------------
10.4 12% Secured Convertible Note dated April Incorporated by reference to Exhibit 4.2 to
25, 2002, issued to Gemini Growth Fund, the Company's Quarterly Report on Form 10-QSB
L.P. for the quarter ended June 30, 2002
- -------------------- -------------------------------------------- -----------------------------------------------
10.5 Warrant to purchase 150,000 shares of Incorporated by reference to Exhibit 4.3 to
Common Stock dated April 25, 2002,issued the Company's Quarterly Report on Form 10-QSB
to Gemini Growth Fund, L.P. for the quarter ended June 30, 2002
- -------------------- -------------------------------------------- -----------------------------------------------
10.6 Security Agreement dated April 25, 2002, Incorporated by reference to Exhibit 10.7 to
by and between the Company and Gemini the Company's Quarterly Report on Form 10-QSB
Growth Fund, L.P. for the quarter ended June 30, 2002.
- -------------------- -------------------------------------------- -----------------------------------------------
10.7 Option to Purchase 100,000 Shares of Incorporated by reference to Exhibit 10.6 to
Common Stock issued to Mark A. Bush the Company's Annual Report on Form 10-KSB
for the year ended December 31, 2002.
- -------------------- -------------------------------------------- -----------------------------------------------
10.8 Option to Purchase 100,000 Shares of Incorporated by reference to Exhibit 10.7 to
Common Stock issued to Wes Franklin the Company's Annual Report on Form 10-KSB
for the year ended December 31, 2002.
- -------------------- -------------------------------------------- -----------------------------------------------
10.9 Option to Purchase 200,000 Shares of Incorporated by reference to Exhibit 10.8 to
Common Stock issued to John B. Connally, the Company's Annual Report on Form 10-KSB
III for the year ended December 31, 2002.
- -------------------- -------------------------------------------- -----------------------------------------------
10.10 Form of Investment Agreement by and Incorporated by reference to Exhibit 10.10 to
between the Company and Ocean Resources the Company's Annual Report on Form 10-KSB
Capital Holdings, PLC dated February 21, for the year ended December 31, 2002.
2002
- -------------------- -------------------------------------------- -----------------------------------------------
10.11 Limited Partnership Agreement of PH GAS, Incorporated by reference to Exhibit 10.11 to
LP dated July 16, 2002 the Company's Quarterly Report on Form 10-QSB
for the quarter ended March 31, 2003
- -------------------- -------------------------------------------- -----------------------------------------------
10.12 Amendment to the Limited Partnership Incorporated by reference to Exhibit 10.12 to
Agreement of PH GAS, LP dated April 26, the Company's Quarterly Report on Form 10-QSB
2003 for the quarter ended March 31, 2003
- -------------------- -------------------------------------------- -----------------------------------------------
23
- -------------------- -------------------------------------------- -----------------------------------------------
10.13 Limited Partnership Agreement of Incorporated by reference to Exhibit 10.13 to
CSR-Hackbery Partners, L.P. dated July 31, the Company's Quarterly Report on Form 10-QSB
2002 for the quarter ended March 31, 2003
- -------------------- -------------------------------------------- -----------------------------------------------
10.14 Limited Partnership Agreement of PHT Incorporated by reference to Exhibit 10.14 to
Partners, L.P. dated August 14, 2002 the Company's Quarterly Report on Form 10-QSB
for the quarter ended March 31, 2003
- -------------------- -------------------------------------------- -----------------------------------------------
10.15 Limited Partnership Agreement of CSR-WAHA Incorporated by reference to Exhibit 10.15 to
Partners, LP dated June 27, the Company's Quarterly Report on Form 10-QSB
2002 for the quarter ended March 31, 2003
- -------------------- -------------------------------------------- -----------------------------------------------
10.16 Amendment to The Limited Partnership Incorporated by reference to Exhibit 10.16 to
Agreement of CSR-WAHA Partners, L.P. dated the Company's Quarterly Report on Form 10-QSB
January 15, 2003 for the quarter ended March 31, 2003
- -------------------- -------------------------------------------- -----------------------------------------------
10.17 Limited Partnership Agreement of Louisiana Incorporated by reference to Exhibit 10.17 to
Shelf Partners, L.P. dated December 31, the Company's Quarterly Report on Form 10-QSB
2002 for the quarter ended March 31, 2003
- -------------------- -------------------------------------------- -----------------------------------------------
10.18 10% Promissory Note dated January 15, Incorporated by reference to Exhibit 4.3 to
2003, issued to Continental Southern the Company's Annual Report on Form 10-KSB
Resources, Inc. for the year ended December 31, 2002.
- -------------------- -------------------------------------------- -----------------------------------------------
10.19 First Amendment to Loan Agreement dated Filed herewith
July 29, 2003, by and between the Company
and Trident Growth Fund, L.P.
- -------------------- -------------------------------------------- -----------------------------------------------
10.20 12% Secured Convertible Note dated July Filed herewith
29, 2003, issued to Trident Growth Fund,
L.P.
- -------------------- -------------------------------------------- -----------------------------------------------
10.21 First Amended Security Agreement dated Filed herewith
July 29, 2003, by and between the Company
and Trident Growth Fund, L.P.
- -------------------- -------------------------------------------- -----------------------------------------------
24
- -------------------- -------------------------------------------- -----------------------------------------------
10.22 First Amendment to 12% Secured Convertible Filed herewith
Note (such original note dated April 25,
2002), dated July 29, 2003, issued to
Trident Growth Fund, L.P.
- -------------------- -------------------------------------------- -----------------------------------------------
10.23 Warrants to purchase 120,000 shares of Filed herewith
Common Stock, dated July 29, 2003, issued to
Trident Growth Fund, L.P.
- -------------------- -------------------------------------------- -----------------------------------------------
10.24 Warrants to purchase 100,000 shares of Filed herewith
Common Stock, dated July 29, 2003, issued
to Trident Growth Fund, L.P.
- -------------------- -------------------------------------------- -----------------------------------------------
10.25 First Amendment to Warrants to purchase Filed herewith
150,000 shares of Common Stock, dated
July 29, 2003, issued to Trident Growth
Fund, L.P.
- -------------------- -------------------------------------------- -----------------------------------------------
31.1 Certification of CEO of the Company Filed herewith
required by Rule 13a-14(a) under the
Securities Exchange Act of 1934, as amended
- -------------------- -------------------------------------------- -----------------------------------------------
31.2 Certification of Treasurer of the Company Filed herewith
required by Rule 13a-14(a) under the
Securities Exchange Act of 1934, as amended
- -------------------- -------------------------------------------- -----------------------------------------------
32.1 Certification of CEO of the Company Filed herewith
Pursuant to 18 USC Section 1350, as
adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
- -------------------- -------------------------------------------- -----------------------------------------------
32.2 Certification of Treasurer of the Company Filed herewith
Pursuant to 18 USC Section 1350, as
adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
- -------------------- -------------------------------------------- -----------------------------------------------
(b) Current Reports on Form 8-K filed during the three month period ended June
30, 2003:
None.
25
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, as amended, the registrant caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
BPK RESOURCES, INC.
Date: August 14, 2003 /s/ John B. Connally, III
---------------------------
John B. Connally, III
Chief Executive Officer
Date: August 14, 2003 /s/ Cecile T. Coady
---------------------------
Cecile T. Coady
Treasurer
26
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION
10.19 First Amendment to Loan Agreement dated July 29, 2003, by and between
the Company and Trident Growth Fund, L.P.
10.20 12% Secured Convertible Note dated July 29, 2003, issued to Trident
Growth Fund, L.P.
10.21 First Amended Security Agreement dated July 29, 2003, by and between
the Company and Trident Growth Fund, L.P.
10.22 First Amendment to 12% Secured Convertible Note (such original note dated
April 25, 2002) dated July 29, 2003, issued to Trident Growth Fund,
L.P.
10.23 Warrants to purchase 120,000 shares of Common Stock dated July 29,
2003, issued to Trident Growth Fund, L.P.
10.24 Warrants to purchase 100,000 shares of Common Stock dated July 29,
2003, issued to Trident Growth Fund, L.P.
10.25 First Amendment to Warrants to purchase 150,000 shares of Common
Stock dated July 29, 2003, issued to Trident Growth Fund, L.P.
31.1 Certification of CEO of the Company required by Rule 13a-14(a) under
the Securities Exchange Act of 1934, as amended
31.2 Certification of Treasurer of the Company required by Rule 13a-14(a)
under the Securities Exchange Act of 1934, as amended
32.1 Certification of CEO of the Company Pursuant to 18 USC Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of Treasurer of the Company Pursuant to 18 USC Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
27