True North Energy Corp (Other)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-QSB

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended July 31, 2007

Or

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to ________________

Commission file number 000-51519

 

	TRUE NORTH ENERGY CORPORATION
	(Exact name of small business issuer as specified in its charter)
	Nevada		98-043482
	(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)
	2 Allen Center, 1200 Smith Street, 16 th Floor Houston, Texas 77002
	(Address of principal executive offices)
	[phone]
	(Registrant’s telephone number, including area code)
	(Former address if changed since last report)

Check whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2). Yes o No x

As of September 12, 2007, there were 66,680,973 shares of the issuer’s common stock, par value $0.0001, issued and outstanding.

Transitional Small Business Disclosure Format (check one): Yes o No x

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TRUE NORTH ENERGY CORPORATION

JULY 31, 2007 QUARTERLY REPORT ON FORM 10-QSB

TABLE OF CONTENTS

 

		PAGE
	Special Note Regarding Forward Looking Information	3
	PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements	4
Item 2.	Plan of Operation	11
Item 3.	Controls and Procedures	14
	PART II - OTHER INFORMATION
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	15
Item 4.	Submission of Matters to a Vote of Security Holders	16
Item 5.	Other Information	16
Item 6.	Exhibits	19

 

2

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Except for historical information, this report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such forward-looking statements involve risks and uncertainties, including, among other things, statements regarding our business strategy, future revenues and anticipated costs and expenses. Such forward-looking statements include, among others, those statements including the words “expects,” “anticipates,” “intends,” “believes” and similar language. Our actual results may differ significantly from those projected in the forward-looking statements. Factors that might cause or contribute to such differences include, but are not limited to, those discussed “Plan of Operation” as well as in the “Description of Business – Risk Factors” section in our Annual Report on Form 10-KSB for the year ended April 30, 2007. You should carefully review the risks described in our Annual Report and in other documents we file from time to time with the Securities and Exchange Commission. You are cautioned not to place undue reliance on the forward-looking statements, which speak only as of the date of this report. We undertake no obligation to publicly release any revisions to the forward-looking statements or reflect events or circumstances after the date of this document.

 

Although we believe that the expectations reflected in these forward-looking statements are based on reasonable assumptions, there are a number of risks and uncertainties that could cause actual results to differ materially from such forward-looking statements. These factors include, among others:

 

·

The risks associated with oil and gas exploration;

·

Our ability to raise capital to fund capital expenditures;

·

Our ability to find, acquire, market, develop and produce new properties;

·

Oil and gas price volatility;

·

Uncertainties in the estimation of proved reserves and in the projection of future rates of production and timing of development expenditures;

·

Operating hazards attendant to the natural gas and oil business;

·

Downhole drilling and completion risks that are generally not recoverable from third parties or insurance;

·

Availability and cost of material and equipment;

·

Delays in anticipated start-up dates;

·

Actions or inactions of third-party operators of our properties;

·

Our ability to find and retain skilled personnel;

·

Regulatory developments;

·

Environmental risks; and

·

General economic conditions.

All references in this Form 10-QSB to the “Company,” “True North Energy,” “we,” “us” or “our” are to True North Energy Corporation. All references to share amounts in this Form 10-QSB give retroactive effect to a 5:1 forward stock split that was affected by the Company on April 18, 2006.

 

3

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PART 1 – FINANCIAL INFORMATION

 

ITEM 1.  FINANCIAL STATEMENTS

	PAGE
Balance Sheets as of July 31, 2007 and April 30, 2007 (Unaudited)	5
Statements of Operations for the three month periods ended July 31, 2007 and 2006 and for
the period from February 1, 2006 (inception of exploration stage) to July 31, 2007 (Unaudited)	6
Statements of Cash Flows for the three-month periods ended July 31, 2007 and 2006 and for
the period from February 1, 2006 (inception of exploration stage) to July 31, 2007 (Unaudited)	7
Notes to Financial Statements (Unaudited)	8

 

4

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TRUE NORTH ENERGY CORPORATION

(An Exploration Stage Company)

Balance Sheets

(Unaudited)

 

		July 31, 2007			April 30, 2007
Assets
Current assets:
Cash and cash equivalents		$	31,057		$	267,845
Prepaid expenses and other current assets			276,262			382,642
Note receivable			-			180,000
Interest receivable			-			2,367
Total current assets			307,319			832,854
Website development, net of accumulated amortization of $11,166 and $9,172, respectively			12,760			14,754
Property and equipment (net of accumulated depreciation of $2,559 and $1,875, respectively)			8,665			9,349
Unproven oil and gas properties, using successful efforts accounting method			2,249,293			685,400
Total assets		$	2,578,037		$	1,542,357
Liabilities and Stockholders ’ Equity
Current liabilities:
Accounts payable and accrued liabilities		$	365,763		$	142,458
Stock compensation payable			88,062			161,171
Insurance note payable			85,262			196,656
Total current liabilities			539,087			500,285
Notes payable, net of unamortized discount of $95,783			404,217			250,000
Total liabilities			943,304			750,285
Commitments and contingencies
Stockholders’ Equity:
Preferred Stock, $0.0001 par value; 20,000,000 shares authorized, no shares issued or outstanding			-			-
Common Stock, par value $.0001; 100,000,000 shares authorized; 66,580,973 and 64,662,700 shares issued and outstanding, respectively			6,658			6,466
Additional paid-in capital			20,143,868			10,007,662
Pre-exploration stage accumulated deficit			(72,350	)		(72,350	)
Accumulated deficit during exploration stage			(18,443,443	)		(9,149,706	)
Total stockholders’ equity			1,634,733			792,072
Total liabilities and stockholders’ equity		$	2,578,037		$	1,542,357

See notes to financial statements.

 

5

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TRUE NORTH ENERGY CORPORATON

(An Exploration Stage Company)

Statements of Operations

(Unaudited)

 

		Three Months Ended July 31,						From February 1, 2006 (Inception of Exploration Stage) to July 31,
		2007			2006			2007
Revenues		$	-		$	-		$	-
Costs and expenses:
Exploration costs			19,531			101,605			6,493,139
Lease operating costs			84,309			-			191,925
General and administrative:
Compensation and benefits			9,028,129			313,184			10,698,568
Legal and accounting			54,424			31,839			377,675
Investor relations			18,052			65,739			170,292
Advisory board fees			(10,359	)		-			200,277
Other G&A expenses			80,261			86,291			289,827
Depreciation and amortization			2,678			951			11,918
Total costs and expenses			9,277,025			599,609			18,433,621
Loss from operations			(9,277,025	)		(599,609	)		(18,433,621	)
Other income:
Interest income			764			2,780			11,640
Interest expense			(17,476	)		-			(21,462	)
Loss before i ncome taxes			(9,293,737	)		(596,829	)		(18,443,443	)
Income taxes			-			-			-
Net loss		$	(9,293,737	)	$	(596,829	)	$	(18,443,443	)
Basic and diluted loss per common share		$	(0.14	)	$	(0.01	)
Weighted-average common shares outstanding			65,459,556			61,255,978

See notes to financial statements.

 

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TRUE NORTH ENERGY CORPORATON

(An Exploration Stage Company)

Statements of Cash Flows

(Unaudited)

 

		Three months Ended July 31,						From February 1, 2006 (Inception of Exploration Stage)  to July 31,
		2007			2006			2007
Cash Flows From Operating Activities
Net loss		$	(9,293,737	)	$	(596,829	)	$	(18,443,443	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization			2,678			951			11,918
Stock-based compensation			8,943,250			250,000			10,419,715
Accrued stock-based compensation			(43,277	)		-			88,062
Dry hole costs			-			-			6,196,019
Accretion of debt discount			4,527			-			4,527
Changes in operating assets and liabilities:
Prepaid expenses and other			85,512			-			(41,003	)
Accounts payable and accrued liabilities			115,958			45,659			274,869
Net cash provided by (used in) operating activities			(185,089	)		300,219			(1,489,336	)
Cash Flows From Investing Activities
Additions to oil and gas properties			(135,306	)		(712,486	)		(6,642,950	)
Acquisition of oil and gas leases			(55,000	)		-			(238,132	)
Purchases of property and equipment			-			-			(11,224	)
Website development			-			(12,572	)		(22,119	)
Net cash used in investing activities			(190,306	)		(725,058	)		(6,914,425	)
Cash Flows From Financing Activities
Proceeds from issuance of common stock			-			1,150,000			8,100,000
Proceeds from issuance of notes payable			250,000			-			500,000
Payments on insurance note payable			(111,393	)		-			(166,072	)
Net cash provided by financing activities			138,607			1,150,000			8,433,928
Net increase (decrease) in cash and cash equivalents			(236,788	)		124,723			30,167
Cash and cash equivalents, beginning of period			267,845			37,223			890
Cash and cash equivalents, end of period		$	31,057		$	161,946		$	31,057
Supplemental Disclosure of Cash Flow Information
Cash paid for interest		$	2,483		$	-		$	6,469
Income taxes			-			-			-
Non-Cash Investing and Financing Activities
Common stock issued for oil and gas leases			1,063,006			-			1,436,781
Discount on notes for relative fair value			100,310			-			100,310
Contribution of capital via forgiveness of debt through discontinued operations			-			-			23,945

See notes to financial statements.

 

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TRUE NORTH ENERGY CORPORATON

(An Exploration Stage Company)

Notes to Financial Statements

(Unaudited)

 

NOTE 1 - NATURE OF OPERATIONS  

The accompanying unaudited interim financial statements of True North Energy Corporation (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission. These unaudited interim financial statements should be read in conjunction with the audited financial statements and notes thereto contained in the Company’s Annual Report on Form 10-KSB previously filed with the Securities and Exchange Commission.

In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. Notes to the financial statements that would substantially duplicate the disclosure contained in the Company’s audited financial statements for the year ended April 30, 2007 as reported in Form 10-KSB have been omitted.

Certain reclassifications have been made to the prior year financial statements to conform with the current presentation.

NOTE 2 – GOING CONCERN

The accompanying financial statements have been prepared on a going concern basis, which implies that True North will continue to realize its assets and discharge its liabilities in the normal course of business. The continuation of True North as a going concern is dependent upon many factors including, but not limited to, continued financial support from its shareholders, receipt of additional financing when and as needed to finance its ongoing business, and the attainment of profitable operations.

True North has had no revenues and has accumulated losses since February 1, 2006 (inception of exploration stage). The Company will require additional financing in order to execute its business plan. There can be no assurance that such financing will be available to the Company as and when needed or, if available, the reasonableness of the terms of such financing. These factors raise substantial doubt regarding the Company’s ability to continue as a going concern. The accompanying financial statements do not include any adjustments relative to the recoverability or classification of recorded assets or liabilities that might be necessary should the Company be unable to continue as a going concern.

NOTE 3 – UNPROVEN OIL AND GAS PROPERTIES

The Company is engaged in oil and gas exploration activities in Alaska, Texas and Louisiana. Presently, it has no developed properties or production. In June 2007 the Company acquired certain oil and gas leases covering more than 17,000 acres in Colorado. The purchase price for these leases approximated $1.4 million and was paid with a combination of cash (approximately $345,000) and 1,832,769 shares of the Company’s common stock valued at approximately $1,063,000. The Company advanced the proposed seller $180,000 of the cash consideration during January 2007 in the form of a note receivable. The note bore interest at the rate of 5% per annum and was repaid upon the closing of the Company’s acquisition of the Colorado oil and gas leases.

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TRUE NORTH ENERGY CORPORATON

(An Exploration Stage Company)

Notes to Financial Statements – Continued

(Unaudited)

 

NOTE 4 – NOTES PAYABLE

 

On March 30, 2007 True North signed an agreement with an off-shore investor to issue $500,000 of notes payable. Proceeds of the notes were received in two equal installments during April and May 2007. In August 2007 the Company cancelled the original convertible promissory note dated March 30, 2007 (the “Cancelled Note”) and replaced it with two $250,000 convertible promissory notes, dated April 10, 2007 and May 15, 2007, respectively (the “Replacement Notes”). The holder of the Cancelled Note agreed to the cancellation and replacement as the date of the new notes reflected the actual dates on which funds were received from the holder.

 

Except for timeline changes owing to the dates of the Replacement Notes, the Replacement Notes contain the same material terms as the Cancelled Note. They bear interest at the rate of 8% per annum and subject to prior conversion or acceleration, note principal is due in a single payment on the third anniversary of the date of each note. Interest on the Replacement Notes is payable semi-annually with the first of such interest payments due the first day of the first month following 180 days from the respective dates of the Replacement Notes.

 

The notes had contingencies for conversion and warrants based on the success of a debt or equity offering that the Company would attempt to undertake.  In the event the Company raised $10 million in an offering within 90 days of the issuance of the notes, the notes would be converted to the Company’s common stock on the same terms as the offering.  In the event the Company was not able to raise the $10 million within 90 days of issuance of the notes, the notes would mature three years from the date of issuance and the note holder would be entitled to warrants based on a formula within the agreement.  The Company was unsuccessful in raising the $10 million in the 90 days and both the April and May notes, contingencies for warrant issuances were triggered 90 days after their respective issuance dates.  Pursuant to the terms of the April 10, 2007 Replacement Note, on August 30, 2007 True North issued 182,249 common stock purchase warrants to the holder, each exercisable for the purchase of one share of common stock for a period of three years from issuance at a price of $1.92 per share. Pursuant to the terms of the May 10, 2007 Replacement Note, on August 30, 2007 True North issued 298,330 common stock purchase warrants to the holder, each exercisable for the purchase of one share of common stock for a period of three years from issuance at a price of $1.17 per share.  Both tranches of warrants were fair valued using the Black Scholes option pricing model which resulted in total fair value of $125,706 and a relative fair value of $100,310 resulting in a discount to the notes payable that will be accreted using the effective interest method over the remaining term of the notes.  Interest expense for the three months ended July 31, 2007 totaled $4,527.

 

A summary of the notes payable at July 31, 2007:

 

Proceeds from notes		$	500,000
Less: relative fair value of warrants			(100,310	)
Add: accretion of discount			4,527
Carrying value at July 31, 2007		$	404,217

 

The Company evaluated the conversion option and the warrants under FAS 133 and EITF 00-19 for derivative accounting and determined both the conversion option and the warrants were not liabilities and therefore derivative accounting was not applicable.  The Company evaluated the conversion option under EITFs 98-5 and 00-27 and determined the conversion option was contingent and ultimately did not result in a beneficial conversion feature.

 

NOTE 5 – STOCK-BASED COMPENSATION

During the year ended April 30, 2007 True North entered into an employment agreement with its chief executive officer. Pursuant to the terms of the employment agreement, that individual was granted five million shares of the Company’s restricted stock issuable ratably at the end of each annual service period. The restricted stock grant vested ratably over a period of five years. The employment agreement was amended in May 2007 to, among other things, reflect the voluntary revocation of the restricted stock grant. Contemporaneously therewith, True North’s chief executive officer purchased 15.5 million shares of the Company’s common stock from True North’s principal shareholder. True North recognized stock-based compensation expense of approximately $8.9 million during the three-month period ended July 31, 2007 in connection with this purchase, which was calculated as the difference between the purchase and market prices of the 15.5 million shares less the previously recognized stock-based compensation expense associated with the original restricted stock grant.

The Company issued 25,000 shares of its common stock during the three-month period ended July 31, 2007, in connection with services provided by its advisory board. As of July 31, 2007, $88,062 is reflected as stock compensation payable in the Company’s balance sheet related to services provided to the Company by members of its advisory board. This amount reflects stock compensation expenses associated with 204,795 shares earned through July 31, 2007 that are not issuable by the Company until October 2007.

The company issued 60,504 shares of its common stock during the three months ended July 31, 2007 in connection with two consulting agreements. The stock was valued at $29,832 and was previously expensed as part of the April 30, 2007 stock payable balance.

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TRUE NORTH ENERGY CORPORATON

(An Exploration Stage Company)

Notes to Financial Statements – Continued

(Unaudited)

 

NOTE 6 – SUBSEQUENT EVENTS

On August 23, 2007 True North received an aggregate of $250,000 in loan proceeds from two persons (the “Lenders”) and issued to each of the Lenders a secured promissory note in the principal amount of $125,000 (each a “Note” and collectively the “Notes”). Each Note bears interest at the rate of 12% per annum. Subject to earlier payment, at the Company’s option, interest on the unpaid principal amount of each Note is payable in monthly installments commencing September 1, 2007 and principal is due and payable on the earlier of November 19, 2007 or 15 days following the closing of an asset acquisition the Company has entered into with Prime Natural Resources, Inc., a Texas corporation (see below). If all interest and principal due on the Note is not paid on or before November 19, 2007 the interest rate will be increased to 24% per annum from November 19, 2007 until the Note is repaid in full. The Company also issued 100,000 shares of its restricted common stock to the Lenders in connection with the Notes. Until paid in full, each Note is secured by 1,250,000 shares of restricted common stock (the “Stock”) standing in the name of Massimiliano Pozzoni and/or John Folnovic, both of whom are officers and significant shareholders of the Company. At the loan closings, True North paid each Lender a cash fee of $3,750 to reimburse them for the costs and expenses incurred by them in connection with the loan transaction. True North further agreed to pay the reasonable fees and disbursements of their respective legal counsels in connection with the enforcement of their rights under the Notes.

On August 31, 2007 the Company's newly formed, wholly-owned subsidiary, ICF Energy Corporation (“ICF”) entered into a Purchase and Sale Agreement (the “Agreement”) with Prime Natural Resources, Inc., a Texas corporation (“Prime”) whereby ICF agreed to acquire certain oil and gas properties and related assets (the property and assets are hereinafter collectively referred to as the “Assets”) of Prime located in Brazoria County, Texas for $3.5 million (the “Purchase Price”). The Purchase Price is payable in cash ($2.8 million) and shares ($700,000) of our restricted common stock (the “Shares”). The shares were valued at the average closing trading price of the Company’s common stock for the ten trading days immediately preceding August 31, 2007 (1,928,375 shares). According to the terms of the Agreement, closing must occur no later than September 21, 2007 but may be extended in certain circumstances. Notwithstanding the foregoing, either party may terminate the agreement at any time after September 30, 2007 if the closing has not occurred by such date. True North is currently negotiating funding that will allow it to close the Asset acquisition although no assurance can be given that it will be successful in this endeavor.

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ITEM 2. PLAN OF OPERATION

We commenced operation as an oil and gas exploration and development company in February 2006. We are in the exploration stage as an oil and gas exploration company and are presently engaged in oil and gas activities in Alaska, Louisiana, Texas and Colorado. During the year ended April 30, 2007 we also participated in oil and gas exploration activities in Louisiana and Texas.

 

We have not generated any revenues to date. Our ability to develop and maintain a meaningful level of revenues from operations is dependent on our ability to successfully drill exploration and production wells and complete producing property acquisitions. At the present time, we have no developed properties and no production.

In January 2006 and May 2006, we entered into agreements to acquire oil and gas leases representing approximately 25,000 acres in the Cook Inlet basin and approximately 10,000 acres in the North Slope basin areas of Alaska. These acquisitions have been completed although we are presently in the process of having the Cook Inlet leases re-registered in our name. We presently have a 100% working interest ownership in the Alaska leases, but may elect to sell parts of our interests at some point in the future.

 

In November 2006 we executed a letter agreement with Savant Alaska LLC (“Savant”). Savant holds leases for the exploration and production of oil and natural gas in an area of Alaska that is contiguous to certain of our Alaskan interests. Savant plans to commence drilling of a test well on this acreage (referred to as the “Kupcake Prospect”) during the first half of 2008.

We will pool certain of our Alaska leasehold interests with Savant on a net acreage basis and jointly drill the test well. We will have an 8.5% working interests within the pooled area, for which Savant will be the operator. Our share of the dry hole cost associated with the drilling of the Savant well is expected to approximate $1.1 million. Our share of related testing costs is expected to approximate $200,000. These costs may decrease as Savant is actively pursuing additional partners for the project.

In June 2007 we acquired certain oil and gas interests and properties in northwest Colorado in an area covering more than 17,000 acres. At the time of acquisition, these oil and gas interests had no production. We hold a 100% working interest in the leases comprising part of the acquired assets. We are currently refining our development plans for the area and expect to start seismic work during the second half of 2008. The purchase price for the interests and properties was approximately $1.4 million, together with an overriding royalty of one to three percent based on the applicable net revenue interest remaining after the landowner’s royalty and existing burdens have been deducted. The purchase price was paid $345,477 in cash and $1,063,006 in shares of our restricted common stock. The number of shares issued was determined based upon the value of our common stock at the market close on June 21, 2007, less a 35% discount. Pursuant thereto, on July 6, 2007 we issued 1,832,769 shares of common stock to the seller. In January 2007 we loaned $180,000 to the seller. Repayment of this loan, which bore interest at an annual rate of 5%, was received in full at the closing of the acquisition.

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We will require additional financing to fund development costs associated with our existing prospects as well as for any additional lease acquisitions. No assurance can be given that such additional financing will be available to us as and when needed or, if available, the terms on which it will be available.

We plan to spend approximately $5 million during the year ending April 30, 2008 on exploration and development activities such as seismic data acquisition, additional lease acquisition, technical studies and participating in joint venture development and exploration drilling. We do not anticipate drilling on our Alaska properties during the next twelve months other than the Kupcake Prospect as described above. Our primary efforts in Alaska will focus on acquiring additional seismic data, conducting further technical evaluation of our Alaska leases, and exploring opportunities to sell a portion of our Alaskan working interests in an effort to reduce our risk and financial exposure.

 

We will require additional financing to meet our working capital requirements, including the cost of reviewing and negotiating transactions and other ordinary general and administrative costs such as regulatory compliance, investor relations, consulting and advisory services, Internet/web hosting, executive compensation, office and general expenses, professional fees, travel and entertainment, and rent and related expenses. We estimate that the level of working capital needed for these general and administrative costs for the next 12 months will approximate $1 million. However, this estimate is subject to change, depending on the number of transactions in which we ultimately become involved. In addition, funding will be required for follow-on development of working interest obligations of any successful exploration prospects.

Oil and gas exploration requires significant outlays of capital and in many situations may offer a limited probability of success. We hope to enhance our chances for success by effectively using available technology, rigorously evaluating sub-surface data, and, to the extent possible, managing dry hole and financial risks.

We intend to rely on synergistic partnering with sophisticated industry partners. The ideal partner would tend to be a regionally focused independent that has a solid grasp on the play’s history, and a demonstrated understanding of the technology required to exploit the play. However, there is no assurance that we will be able to successfully negotiate any such partnering agreement or raise the necessary financing to invest in such a venture, or that any such venture will yield us any revenues or profits.

We continue to target selected acquisitions of proved on-shore properties in the United States and Canada. We are biased toward acquisitions of long-lived reserves and intend to target negotiated acquisitions. By focusing our efforts on negotiated acquisitions, we seek to avoid competitive bidding situations that are the norm for the sale of these assets and typically result in higher sales prices.

We face competition from firms that are well established, successful, better capitalized and, in many instances, willing to pay more for properties than what we might consider prudent. Our success will depend on the execution of our business plan to

 

·

identify available transactions;

·

quickly evaluate which transactions are most promising; and

·

negotiate creative transaction structures.

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Presently our staff consists of our two executive officers, John Folnovic and Massimiliano Pozzoni. We do not expect significant changes in our number of employees during the next twelve months. We intend to outsource certain technical and administrative functions on an as-needed basis in order to conduct our operating activities. Our management team will select and hire these contractors and manage and evaluate their work performance.

Business Strategy

We plan to grow our business onshore in the U.S. through a balance of drilling and acquisitions. We will focus our efforts regionally to achieve economies of scale with predictable risk and bases of production. Our principal goals are to provide the Company and our shareholders with opportunity, growth and value. With these goals in mind, we have adopted the following objectives:

·

Lease potentially significant productive acreage in under-explored, neglected, but still highly productive basins such as the Cook Inlet and Beaufort Sea areas in Alaska;

·

Lease as much of the potentially productive natural gas acreage in unconventional gas plays that we can identify;

·

Focus exclusively onshore in North America (and away from geopolitical unrest) where we can benefit from the highly trained and experienced workforce, large available seismic and well control database, and readily available drilling and production technologies;

·

Acquire all of the existing conventional natural gas and oil production and reserves we can afford; and

·

Engage in low to medium risk exploration and development of oil and gas reserves with sophisticated, industry-leading partners.

We believe that natural gas demand is likely to steadily increase as the U.S. economy grows and as natural gas is increasingly seen as the most practical way to reduce greenhouse gas emissions and reduce the risk of climate change. We believe these factors will lead to continuing natural gas price strength in the years to come. Better technologies applied to unconventional reservoirs in a time of structurally higher natural gas prices will result in the discovery and development of significant new natural gas reserves.

As a result of these trends, we have expanded our focus beyond just Alaska and began to aggressively pursue new unconventional gas resource plays with potentially substantial upsides. We believe that this course of action will allow us to be well positioned for future success.

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As we pursue these objectives, our business will be subject to the risks typically associated with a start-up company in the competitive and volatile oil and gas resources business.

Our tactics to execute our strategies and achieve our goals and objectives include:

·

Increasing development of internally generated prospects and opportunities;

·

Funding prospects developed by proven geoscientists;

·

Completing negotiated acquisitions of proved properties;

·

Maintaining tight control of general and administrative and geological and geophysical costs by keeping employee levels low and outsourcing as much of our activities as possible;

·

Designing creative deal structures to access acreage, seismic data, prospects and capital;

·

Arranging necessary financing to execute the business plan; and

·

Using equity ownership incentives to align the interests of all our employees and management with that of our shareholders.

Going Concern

In its report as of and for the year ended April 30, 2007 dated July 25, 2007, our auditors, Malone and Bailey, PC expressed an opinion that there is substantial doubt about our ability to continue as a going concern. Our financial statements do not include any adjustments that may result from the outcome of this uncertainty. We have been in the exploration stage and have had no revenues since our inception. For the period from February 1, 2006 (inception of the exploration stage) to July 31, 2007, we have accumulated a net loss of $18.4 million. Our continuation as a going concern is dependent upon future events, including our ability to raise additional capital and to generate positive cash flows.

ITEM 3.

CONTROLS AND PROCEDURES

(a)   Evaluation of Disclosure Controls and Procedures. Under the supervision and with the participation of our senior management, consisting of our chief executive officer and chief financial officer, we evaluated the effectiveness of the design and operation of our “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, as of the end of the period covered by this report. Based on this evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures are not effective because of two adjustments identified in our internal review process related to complex accounting issues but not reflected in our draft financial statements. Appropriate adjustments and footnote disclosures were recorded and disclosed in this Quarterly Report on Form 10-QSB as part of our ordinary and customary process. We will continue to further improve our internal controls in an effort to remediate any deficiencies by reviewing our preparation and review processes over financial reporting. Our management and directors will continue to work with outside advisors to ensure that our controls and procedures remain adequate and effective.

(b)

Changes in Internal Control over Financial Reporting . There were no changes in our internal control over financial reporting that occurred during the period covered by this report that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

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PART II

 

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

On May 11, 2007 we issued an aggregate of 25,000 shares of our common stock to our five advisory board members representing payment of the quarterly fee due to them for the quarter ended April 30, 2007. The shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended, since the foregoing issuance did not involve a public offering, the recipient had access to information that would be included in a registration statement, the recipient took the shares for investment and not resale, and we took appropriate measures to restrict resale.

On July 6, 2007 we issued 1,832,769 shares of our common stock in connection with a June 21, 2007 Purchase and Sale Agreement in which we acquired certain oil and gas assets in Colorado. The Shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended, since the foregoing issuance did not involve a public offering, the recipient had access to information that would be included in a registration statement, the recipient took the shares for investment and not resale, and we took appropriate measures to restrict resale.

On August 30, 2007 we issued an aggregate of 100,000 shares of our common stock in connection with an aggregate of $250,000 in bridge loans we received from two persons on or about August 20, 2007. The shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended, since the foregoing issuance did not involve a public offering, the recipient had access to information that would be included in a registration statement, the recipient took the shares for investment and not resale, and we took appropriate measures to restrict resale.

On August 27, 2007 we issued 27,170 shares to one person pursuant to a January 1, 2007 Consulting Agreement. The shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended, since the foregoing issuance did not involve a public offering, the recipient had access to information that would be included in a registration statement, the recipient took the shares for investment and not resale, and we took appropriate measures to restrict resale.

On August 30, 2007 we issued two common stock purchase warrants to one person, each dated August 30, 2007 pursuant to the terms of $250,000 promissory notes dated April 10, 2007 and May 15, 2007. Each warrant is exercisable for a period of three years from the date of issuance. One warrant is exercisable for the purchase of up to 298,333 shares of our common stock at an exercise price of $1.17 per share. The other warrant is exercisable for the purchase of up to 182, 249 shares of our common stock at an exercise price of $1.92 per share. Each of the warrants was issued in reliance on Section 4(2) of the Securities Act of 1933, as amended, since the foregoing issuance did not involve a public offering, the recipient had access to information that would be included in a registration statement, the recipient took the shares for investment and not resale, and we took appropriate measures to restrict resale.

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On August 30, 2007 we issued an aggregate of 25,000 shares of our common stock to our five advisory board members representing payment of the quarterly fee due to them for the quarter ended July 31, 2007. The shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended, since the foregoing issuance did not involve a public offering, the recipient had access to information that would be included in a registration statement, the recipient took the shares for investment and not resale, and we took appropriate measures to restrict resale.

ITEM 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

By written consent dated May 4, 2007 our stockholders holding 34,750,000 (approximately 53.7%) of our outstanding common shares on May 4, 2007 authorized us to amend our Articles of Incorporation to increase our authorized capital stock from 120 million shares consisting of 100 million shares of common stock, $0.0001 par value and 20 million shares of preferred stock, $0.0001 par value to 270 million shares, consisting of 250 million shares of common stock, $0.0001 par value and 20 million shares of preferred stock, $0.0001 par value. The amendment required the affirmative vote of a majority of the outstanding shares of common stock entitled to vote thereon. There were no dissenters’ rights applicable to the amendment. Our stockholders were provided with notice of the proposed amendment. We have yet to file the amended Articles of Incorporation but intend to do so in the near future.

ITEM 5.

OTHER INFORMATION

On May 28, 2007 John Folnovic entered into a Stock Purchase Agreement with Massimiliano Pozzoni, our principal shareholder, pursuant to which Mr. Pozzoni sold 15,500,000 shares of our common stock to Mr. Folnovic at a price of $0.015 per share or an aggregate of $232,500. Although Mr. Folnovic was given good and marketable title to such shares free and clear of any and all liens, claims, encumbrances and adverse interest of any kind, Mr. Folnovic is not required to pay for the shares until 30 days following the occurrence of a “Liquidity Event”. For purposes of the Stock Purchase Agreement, a Liquidity Event is defined as (i) a Qualified IPO, (ii) a sale of any or all of the shares by Mr. Folnovic resulting in proceeds to Mr. Folnovic with a value of at least $1 million, (iii) receipt by Mr. Folnovic of cash or readily marketable property as dividends from us with respect to the shares (other than stock dividends) in an aggregate amount of at least $1 million or (iv) merger or consolidation of us resulting in cash proceeds or readily marketable proceeds to Mr. Folnovic with respect to the shares of at least $1 million. The term “Qualified IPO” means our first underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended, provided that (a) such registration covers the offer and sale of common stock with aggregate proceeds to us of at least $20 million, (b) such common stock is listed for trading either on the New York Stock Exchange, American Stock Exchange or the NASDAQ National Market, and (c) the per share public offering price for such common stock net of underwriter discounts and commissions exceeds $2.50 per share (adjusted appropriately for stock splits, stock dividends, recapitalizations and the like). In the event a Liquidity Event does not occur prior to June 30, 2017, Mr. Folnovic has the right to rescind his acquisition of the shares. In such event, Mr. Folnovic will be entitled to retain all dividends, distributions, or other rights or profits received by him as a result of his ownership of the shares. The Executive Employment Agreement originally provided Mr. Folnovic with the right to receive 1 million shares of our common stock at the end of every year of service under the Executive Employment Agreement up to a maximum aggregate of 5 million shares. In consideration of the Stock Purchase Agreement, Mr. Folnovic agreed to waive this right as set forth in the Amendment.

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On June 21, 2007 we entered into a Purchase and Sale Agreement with Constance Knight (the “Purchase and Sale Agreement”) pursuant to which we acquired certain oil and gas interests and properties in northwest Colorado in an area covering more than 17,000 acres. Presently, and at the time of acquisition, these oil and gas interests contain no producing properties. We are currently refining our development plans for the area and expect to start seismic work during the second half of 2008. For a more detailed discussion of the Purchase and Sale Agreement see “Part I, Item 2 Plan of Operation”.

On August 23, 2007 we received an aggregate of $250,000 in loan proceeds from two persons (the “Lenders”) and issued to each of the Lenders a secured promissory note in the principal amount of $125,000 (each a “Note” and collectively the “Notes”). Each Note bears interest at the rate of 12% per annum. Subject to earlier payment, at our option, interest on the unpaid principal amount of each Note is payable in monthly installments commencing September 1, 2007 and principal is due and payable on the earlier of November 19, 2007 or 15 days following the closing of an asset acquisition we have entered into with Prime Natural Resources, Inc., a Texas corporation. If all interest and principal due on the Note is not paid on or before November 19, 2007 the interest rate will be increased to 24% per annum from November 19, 2007 until the Note is repaid in full. Until paid in full, each Note is secured by 1,250,000 shares of our restricted common stock (the “Stock”) standing in the name of Massimiliano Pozzoni and/or John Folnovic. In connection therewith, we agreed to make, execute, acknowledge, deliver and file such documents and instruments, including without limitation a financing statement on Form UCC-1, as may be reasonably necessary, to effect complete, or perfect the security interest of the Lenders in the Stock. Pursuant to the Notes we issued 50,000 shares (the “Shares”) of our restricted common stock to and in the name of each Lender. Until such time that the Shares become eligible for resale pursuant to Rule 144(k) of the General Rules and Regulations under the Securities Act of 1933, as amended, the Shares have been granted piggyback registration rights. Such piggyback registration rights apply to all future registration statements of ours other than registration statements relating solely to employee benefit plans or business combinations. At the loan closings, we paid each Lender a cash fee of $3,750 to reimburse them for the costs and expenses incurred by them in connection with the loan transaction. We further agreed to pay the reasonable fees and disbursements of their respective legal counsels in connection with the enforcement of their rights under the Notes.

On August 31, 2007 our newly formed, wholly owned subsidiary, ICF Energy Corporation (“ICF”) entered into a Purchase and Sale Agreement (the “Agreement”) with Prime Natural Resources, Inc., a Texas corporation (“Prime”) whereby ICF agreed to acquire certain oil and gas properties and related assets (the property and assets are hereinafter collectively referred to as the “Assets”) of Prime located in Brazoria County, Texas for $3,500,000 (the “Purchase Price”). The Assets include the Devon Fee Gas Unit and the O’Leary Unit No. 1 and cover an aggregate of approximately 1,150 acres. The Assets include two producing wells with an estimated two BCF of recoverable gas and also include three additional exploration prospects in the Old Ocean Unit in Brazoria County, Texas. The properties are currently producing approximately one million standard cubic feet per day of gas and ten barrels of oil per day, net to the Asset owner. Present cash flow from the Assets is approximately $200,000 per month after taxes, royalties and operating expenses. The Purchase Price is payable $2,800,000 in cash and $700,000 in shares of our restricted common stock (the “Shares”) valued at the average closing trading price of our common stock for the ten trading days immediately preceding August 31, 2007. Under such valuation, we will be required to issue 1,928,375 Shares to Prime. Prime has been granted piggyback registration rights with respect to the Shares. Upon closing, the Agreement will be given retroactive effect to July 1, 2007 (the “Effective Time”). The cash portion of the Purchase Price is subject to upward adjustment based upon the amount of all costs and expenses paid by Prime that are directly attributable to the ownership, maintenance, development, production or operation for the Assets during the period of time between the Effective Time and the closing date. The cash portion of the Purchase Price is subject to downward adjustment in an amount equal to the sum of (i) the amount of all proceeds received by Prime that are directly attributable to the ownership, maintenance, production, development or operation of the Assets after the Effective Time excluding proceeds from any sale subsequent to the Effective Time of merchantable hydrocarbons in storage above the pipeline connection at the Effective Time, and (ii) the aggregate amount of all suspended funds as may be increased or decreased by Prime prior to the closing in accordance with Prime’s accounting practices consistently applied. The Purchase Price is also subject to adjustment by an amount equal to any net gas imbalance (including production, sales, processing and transportation imbalances) existing as of the Effective Time and to adjustment for property and other taxes. The maximum permitted downward adjustment to the Purchase Price is $350,000. Subject to the conditions stated in the Agreement and unless the parties agree otherwise, closing of the Asset acquisition must occur no later than September 21, 2007 provided that if all of the closing conditions have not been satisfied or waived by such date or any extended date, the party whose obligation to close is subject to the conditions that have not been satisfied or waived has the right to extend the date of closing for successive periods of up to 5 business days each until such conditions have been satisfied or waived or until the Agreement has been terminated. Notwithstanding the foregoing, either party may terminate the agreement at any time after September 30, 2007 if the closing has not occurred by such date. We are currently negotiating funding that will allow us to close the Asset acquisition although no assurance can be given that we will be successful in this endeavor.

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In August 2007 we cancelled our $500,000 convertible promissory note dated March 30, 2007 (the “Cancelled Note”) and replaced it with two $250,000 convertible promissory notes, dated April 10, 2007 and May 15, 2007, respectively (the “Replacement Notes”). The holder of the Cancelled Note agreed to the cancellation and replacement as the date of the new notes reflected the actual dates on which funds were received by us from the holder. Except for timeline changes owing to the dates of the Replacement Notes, the Replacement Notes contain the same material terms as the Cancelled Note. They bear interest at the rate of 8% per annum and subject to prior conversion or acceleration, note principal is due in a single payment on the third anniversary of the date of the note. Interest on the Replacement Notes is payable semi-annually with the first of such interest payments due the first day of the first month following 180 days from the respective dates of the Replacement Notes. Pursuant to the terms of the April 10, 2007 Replacement Note, on August 30, 2007 we issued 182,249 common stock purchase warrants to the holder, each exercisable for the purchase of one share of our common stock for a period of 3 years from issuance at a price of $1.92 per share. Pursuant to the terms of the May 10, 2007 Replacement Note, on August 30, 2007 we issued 298,330 common stock purchase warrants to the holder, each exercisable for the purchase of one share of our common stock for a period of 3 years from issuance at a price of $1.17 per share.

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ITEM 6.

EXHIBITS

 

(a)   Exhibits.

Exhibit No.		Description
4.1		$250,000 Convertible Promissory Note dated April 10, 2007
4.2		$250,000 Convertible Promissory Note dated May 15, 2007
4.3		Common Stock Purchase Warrant, dated August 30, 2007, for the purchase of 182,249 shares
4.4		Common Stock Purchase Warrant, dated August 30, 2007, for the purchase of 298,330 shares
31.1		Rule 13(a)-14(a)/15(d)-14(a) Certification of Principal Executive Officer
31.2		Rule 13(a)-14(a)/15(d)-14(a) Certification of Principal Financial Officer
32.1		Rule 1350 Certification of Chief Executive Officer
32.2		Rule 1350 Certification of Chief Financial Officer

 

SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

	TRUE NORTH ENERGY CORPORATION
Dated: September 17, 2007	By:	/s/ John Folnovic
		John Folnovic
		President, Chief Executive Officer

 

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