Toscana Resource Corporation Condensed Consolidated Interim Financial Statements

Transcription

1 TOSCANA RESOURCE CORPORATION Toscana Resource Corporation Condensed Consolidated Interim Financial Statements March 31, 2012 and 2011

2 Condensed Consolidated Interim Statements of Financial Position As at (CAD $) Assets March 31, 2012 December 31, 2011 Current assets Cash $ 19,470 $ 9,503,062 Accounts receivable 1,748,854 3,168,330 Inventory 68, ,119 Prepaid expenses 163, ,877 Risk management contracts (Note 4) 34,978-2,035,948 13,002,388 Non-current assets Property, plant & equipment (Note 5) 62,757,446 63,681,801 $ 64,793,394 $ 76,684,189 Liabilities Current liabilities Accounts payable and accrued liabilities $ 3,602,808 $ 7,390,166 Bank debt (Note 6) 30,250,640 37,215,065 Risk management contracts (Note 4) - 34,368 33,853,448 44,639,599 Non-current liabilities Decommissioning liabilities (Note 7) 6,944,658 7,343,174 Preferred shares (Note 8) 7,590,789 7,525,381 14,535,447 14,868,555 48,388,895 59,508,154 Shareholders' Equity Common shares (Note 8) 20,366,103 20,366,103 Preferred shares (Note 8) 1,522,193 1,530,500 Deficit (5,483,797) (4,720,568) 16,404,499 17,176,035 $ 64,793,394 $ 76,684,189 Subsequent events (Note 10) See accompanying notes to condensed consolidated interim financial statements. 2

3 Condensed Consolidated Interim Statements of Income and Comprehensive Income For the three months ended March 31 CAD $ Revenues Petroleum and natural gas income, net of royalties $ 4,007,311 $ 2,053,911 Royalty income 32,019 1,193 Other income 67, ,630 4,106,348 2,291,734 Gain on risk management contracts (Note 4) 347,767 - Gain on disposal of assets 10,085-4,464,200 2,291,734 Expenses Operating costs 1,850, ,184 Depletion and depreciation (Note 5) 1,490, ,231 General and administrative 472, ,346 Financing expense (Note 7,8) 573, ,261 Bad debt expense - 1,062 4,387,457 1,561,084 Net income and comprehensive income $ 76,743 $ 730,650 Basic and diluted income per share (Note 8) $0.04 $ 0.66 See accompanying notes to condensed consolidated interim financial statements. 3

4 Condensed Consolidated Interim Statements of Changes in Shareholders Equity For the three months ended March 31 CAD $ Share Capital Common Shares Balance, beginning of period $ 20,366,103 $ 6,224,091 Issued for cash through private offering -69,5214,766,000 Share issue costs - (623,988) Balance, end of period $ 20,366,103 $ 20,366,103 Preferred Shares Balance, beginning of period $ 1,530,500 $ - Share issue costs (Note 8) (8,307)- - Balance, end of period $ 1,522,193 $ - Deficit Deficit, beginning of period $ (4,720,568) $ (1,649,397) Dividends paid on common shares (839,972) (629,980) 1,649, Net income 76, ,650 Deficit, end of period $ (5,483,797) $ (1,548,727) See accompanying notes to condensed consolidated interim financial statements. 4

5 Condensed Consolidated Interim Statements of Cash Flows For the three months ended March 31 CAD $ Cash flows provided by (used in) operating activities Net income $ 76,743 $ 730,650 Adjustments for: Depletion and depreciation 1,490, ,231 Financing expense (Notes 7) 312, ,261 Preferred share finance expense (Note 8) 261,377 Bad debt expense - 1,062 Unrealized gain on risk management contracts (Note 4) (69,346) - Settlement of decommissioning liability (Note 7) (345,205) - Interest paid (263,258) - Change in non-cash working capital (Note 9) (1,848,485) 970,051 (384,978) 2,426,255 Cash flows provided by (used in) financing activities Proceeds on issuance of common shares, net of issue costs - 14,142,012 Preferred shares issue costs (8,307) - Dividends paid on common shares (839,972) (629,980) Dividends paid on preferred shares (195,969) - Increase (decrease) in bank indebtedness (6,964,422) 10,289,138 Change in non-cash working capital (Note 9) (135,093) (174,261) (8,143,763) 23,626,909 Cash flows used in investing activities Acquisition of property, plant and equipment (668,896) (25,961,473) Change in non-cash working capital (Note 9) (285,955) - (954,851) (25,961,473) Change in cash (9,483,592) 91,691 Cash, beginning of period 9,503,062 18,242 Cash, end of period $ 19,470 $ 109,933 See accompanying notes to condensed consolidated interim financial statements. 5

6 1. Nature of Operations, Basis of Presentation and Statement of Compliance Toscana Resource Corporation (the Corporation or TRC ) was incorporated under the Business Corporations Act (Alberta) on March 2, The Corporation is a mutual fund corporation primarily focused on investments in the energy sector of Western Canada. The Corporation has a wholly owned subsidiary Firenze Energy Ltd. ( Firenze ), formerly Onefour Energy Ltd., which was acquired on March 5, 2010 (Note 5). The address of the Corporation s registered office is Suite 2550, nd Street S.W., Calgary, Alberta, Canada, T2P 2W2. These condensed consolidated interim financial statements include the accounts of the Corporation and its subsidiary as at March 31, 2012 and December 31, 2011 and for the three month periods ended March 31, 2012 and 2011 and the operations are fully reflected in the consolidated financial statements. All intercompany transactions have been eliminated. These condensed consolidated interim financial statements, including comparatives, have been prepared in accordance with International Financial Reporting Standards ( IFRS ) applicable to the preparation of interim financial statements, specifically IAS 34 Interim Financial Reporting. These condensed consolidated interim financial statements do not include all of the information required for full annual financial statements and should be read in conjunction with the financial statements for the year ended December 31, The policies applied in these annual financial statements are based on IFRS issued and outstanding as of June 12, 2012 the date the Board of Directors authorized the financial statements for issuance. 2. Significant Accounting Policies a) Accounting standards issued The condensed consolidated interim financial statements follow the same accounting policies as the most recent annual audited financial statements. The condensed consolidated interim financial statements note disclosures do not include all of those required by IFRS applicable for annual financial statements. Accordingly, these condensed consolidated interim financial statements should be read in conjunction with the Corporation s audited consolidated financial statements for the year ended December 31, b) New accounting policies IFRS 7, Financial Instruments: Disclosures Amended, to include additional disclosure requirements in the reporting of transfer transactions and risk exposures relating to transfers of financial assets and the effect of those risks on an entity s financial position, particularly those involving securitization of financial assets. The standard is effective January 1,

7 2. Significant Accounting Policies - continued IAS 12, Income Taxes Amended in December 2010 to remove subjectivity in determining on which basis an entity measures the deferred tax relating to an asset. The amendment introduces a presumption that an entity will assess whether the carrying value of an asset will be recovered through the sale of the asset. The amendment to IAS 12 is effective for reporting periods beginning on or after January 1, The Corporation is currently evaluating the impact of this amendment to IAS 12 on its financial statements. c) Accounting standards issued but not yet applied Unless otherwise noted, the following revised standards and amendments are effective for annual periods beginning on or after January 1, 2013, with earlier application permitted. The Corporation is evaluating the impact that these standards may have on our results of operations and financial position. IFRS 9, Financial Instruments The IASB issued IFRS 9, which is the first phase of the IASB s project to replace IAS 39, Financial Instruments: Recognition and Measurement. The new standard is effective on January 1, 2015 and replaces the current multiple classification and measurement models for financial asset and liabilities with a single model that has only two classification categories: amortized cost and fair value. IFRS 10, Consolidated Financial Statements In May 2011, the IASB issued IFRS 10 which is the IASB s project to replace Standing Interpretations Committee 12, Consolidation Special Purpose Entities and the consolidation requirements of IAS 27, Consolidated and Separate Financial Statements. The new standard eliminates the current risk and rewards approach and established control as the single basis for determining the consolidation of an entity. IFRS 11, Joint Arrangements In May 2011, the IASB issued IFRS 11 to replace IAS 131, Interest in Joint Ventures. The new standard redefines joint operations and joint ventures and requires joint operations to be proportionately consolidated and joint ventures to equity accounted. Under IAS 31, joint ventures could be proportionately accounted. IFRS 12, Disclosure of Interests in Other Entities In May 2011, the IASB issued IFRS 12 which outlines the required disclosures for interests in subsidiaries and joint arrangements. The new disclosures require information that will assist financial statement users to evaluate the nature, risks and financial effects associated with an entity s interests in subsidiaries and joint arrangements. IFRS 13, Fair Value Measurement In May 2011, the IASB issued IFRS 13 which provides a common definition of fair value, establishes a framework for measuring fair value under IFRS and enhances the disclosures required for fair value measurements. The standard applies where fair value measurements are required and does not require new fair value measurements. IAS 1, Presentation of Items of Other Comprehensive income In June 2011, the IASB issued IAS 1 to split items of other comprehensive income between those that are reclassed to income and those that are not. This standard is effective on July 1,

8 3. Determination of Fair Values A number of the Corporation s accounting policies and disclosures require the determination of fair value, for financial assets and liabilities. Fair values have been determined for measurement and/or disclosure purposes based on the following methods. When applicable, further information about the assumptions made in determining fair values is disclosed in the notes specific to that asset or liability. i) Cash, accounts receivable, bank debt and accounts payable and accrued expenses: At March 31, 2012 and December 31, 2011, the fair value of these balances approximated the carrying values due to their short term to maturity. ii) iii) Derivatives: The fair value of risk management contracts is based on quoted market prices or in their absence, third party market indications and forecasts. Preferred shares: At the time of initial recognition, the fair value of the preferred shares debt portion is calculated using discounting of future cash flows and the interest rate based on the risk free rate plus assumed credit risk premium of 10.1%. At March 31, 2012, the fair value of the preferred shares is $7,813,078 and was determined using the risk free rate plus assumed credit risk premium of 10.2%. The Corporation s financial instruments recorded at fair value require disclosure regarding how the fair value was determined based on significant levels of inputs described in the following hierarchy: Level 1 Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions occur in sufficient frequency and value to provide pricing information on an ongoing basis. No level 1 financial instruments were identified at March 31, Level 2 Pricing inputs are other than quoted prices in active markets included in Level 1. Prices in Level 2 are either directly or indirectly observable as of the reporting date. Level 2 valuations are based on inputs including quoted forward prices for commodities, time value and volatility factors, which can be substantially observed or corroborated in the market place. The fair value measurement of the risk management contracts has a fair value hierarchy of Level 2. Level 3 Valuations in this level are those with inputs for the asset or liability that are not based on observable market data. No level 3 financial instruments were identified at March 31,

9 4. Financial Risk Management Credit Risk Credit risk is the risk of financial loss to TRC if a partner or counterparty to a product sales contract or financial instrument fails to meet its contractual obligations. TRC is exposed to credit risk with respect to its accounts receivable and risk management contracts. Most of TRC s accounts receivable relate to oil and natural gas sales and are subject to typical industry credit risks. TRC manages this credit risk as follows: By entering into sales contracts with only established credit worthy counterparties as verified by a third party rating agency, through internal evaluation or by required security such as letters of credit; By restricting cash accounts or investments and risk management transactions to counterparties that, at the time of transaction, are not less than investment grade. The maximum exposure to credit risk as at March 31, 2012 is as follows: March 31, 2012 December 31, 2011 Cash $ 19,470 $ 9,503,062 Accounts receivable 1,748,854 3,168,330 $ 1,768,324 $ 12,671,392 The majority of the credit exposure on accounts receivable at March 31, 2012 pertains to accrued revenue for March production volumes. The Corporation sells the majority of its production to six oil and natural gas marketers and therefore is not subject to concentration risk. Joint venture receivables are typically collected within one to three months of the joint venture bill being issued to the partner. The Corporation takes the majority of its revenue in kind and has minimal risk from joint venture receivables. When determining whether amounts that are past due are collectable, management assesses the credit worthiness and past payment history of the counterparty, as well as the nature of the past due amounts. TRC considers all amounts greater than 90 days to be past due. As at March 31, 2012, there were $5,160 of receivables aged over 90 days. The Corporation did not provide for any doubtful accounts nor was it required to write-off any receivables during the period ended March 31,

10 4. Financial Risk Management - continued Liquidity Risk Liquidity risk is the risk that the Corporation will not be able to meet its financial obligations as they are due. The Corporation ensures, as far as possible, that it will have sufficient liquidity to meet its liabilities when due, under normal and stressed conditions without incurring unacceptable losses or harm to the Corporation s reputation. The Corporation prepares annual capital expenditure budgets which are regularly monitored and updated as considered necessary. The Corporation also utilizes authorization for expenditures on its material non-operated projects to further manage capital expenditures. To facilitate the capital expenditure program, the Corporation has a revolving reserve-based credit facility (note 7) that is reviewed at least annually by the lender. The Corporation also attempts to match its payment cycle with collection of petroleum and natural gas revenues taken in kind on the 25th of each month. Accounts payable are considered due in one year or less. Bank debt was subject to review on May 29, Interest Rate Risk Interest rate risk is the risk that future cash flows will fluctuate as a result of changes in market interest rates. The Corporation is exposed to interest rate fluctuations on its bank debt which bears a floating rate of interest. For the period ended March 31, 2012, if interest rates had been 1% lower with all other variables held constant, earnings for the year would have been $75,627 higher due to lower interest expense. An equal and opposite impact would have occurred had interest rates been higher by the same amount. Commodity Price Risk Commodity price risk is the risk that future cash flows will fluctuate as a result of changes in commodity prices, affecting results of operations and cash generated from operating activities. Such prices may also affect the value of exploration and development properties and level of spending for future activities. Prices received by the Corporation for its production are largely beyond the Corporation s control as petroleum prices are impacted by world economic events that dictate the levels of supply and demand. The Corporation manages the risks associated with changes in commodity prices by entering into a variety of risk management contracts. At March 31, 2012, the following risk management contracts were outstanding with a mark-to-market asset value of $34,978. Type Volume Price Index Term Collar 200 bbls/d C$95/bbl floor/ C$107.30bbl/ceiling C$WTI April 2011 to Dec 2012 Swap 100 bbls/d C$91.10/bbl C$WTI Jan to Dec 2012 Call option 200 bbls/d US$105.00/bbl US$WTI Jan to Dec 2013 Swap 2,000 GJ/d C$4.14/GJ AECO Jan to Dec

11 4. Financial Risk Management - continued The following table illustrates the effects of movement in commodity prices on net income before tax due to changes in the fair value of risk management contracts in place at March 31, 2012, with all other variables held constant. Impact on net earnings March 31, 2012 Commodity price risk Increase in Cdn$ WTI oil $10/Bbl $ 109,792 Decrease in Cdn$ WTI oil $10/Bbl 995,313 Increase in Cdn$ AECO gas $0.50/GJ 330,104 Decrease in Cdn$ AECO gas $0.50/GJ 512,104 Capital Management The Corporation's objectives when managing capital is to safeguard the entity's ability to continue as a going concern, so that it can provide returns for shareholders and benefits for other stakeholders. The Corporation sets the amount of capital in proportion to risk. Methods employed to adjust the Corporation s capital structure could include any, all, or a combination of the following activities: issue new shares through a private placement; refinance existing bank debt facilities to change amounts or terms. The Corporation manages its capital structure and makes adjustments to it in light of changes in economic conditions and the risk characteristics of the underlying assets. The Corporation's objective is met by retaining adequate equity to provide for the possibility that cash flows from assets will not be sufficient to meet current and future obligations. The Board of Directors does not establish quantitative return on capital criteria for management, but rather promotes year over year sustainable profitable growth. March 31, 2012 December 31, 2011 Current assets 2,000,970 13,002,388 Current liabilities 3,602,808 7,390,166 Working capital surplus (deficit) (excluding risk management contracts and bank debt) (1,601,838) 5,612,222 Bank debt 30,250,640 37,215,065 The Corporation s share capital is not subject to external restrictions; however the credit facility borrowing commitment is based on the lender s semi-annual review of the Corporation s oil and natural gas reserves. The Corporation is subject to various covenants under its credit facility. Compliance with these covenants is monitored on a regular basis and as at March 31, 2012, the Corporation was in compliance with the covenants. 11

12 5. Property, plant and equipment Petroleum and natural gas properties Office furniture and equipment Total Cost or deemed cost Balance at December 31, 5,403,414-5,403, Additions/Acquisitions 69,976,340 3,150 69,979,490 Dispositions 5,000,000-5,000,000 Balance at December 31, 70,379,754 3,150 70,382, Additions/Acquisitions 566, ,418 Balance at March 31, ,946,172 3,150 70,949,322 Petroleum and natural gas properties Office furniture and equipment Total Depletion, depreciation and impairment losses Balance at December 31, 181, , Depletion and depreciation 4,625, ,625,839 Dispositions 622, ,661 Impairment losses 2,516,861-2,516,861 Balance at December 31, 6,700, ,701, Depletion and depreciation 1,490, ,490,773 Balance at March 31, ,191, ,191, Property, plant and equipment - continued Petroleum and natural gas properties Office furniture and equipment Total Net book amount At December 31, ,678,966 2,835 63,681,801 At March 31, ,754,753 2,693 62,757,446 12

13 6. Bank debt At March 31, 2012, the Corporation has a revolving operating credit facility, with a chartered bank, of up to $40 million, which bears interest equal to the prime rate plus 0.75% per annum. The interest rate at March 31, 2012 was 3.75% on the facility and 3.45% on the banker s acceptances. The credit facility provides that advances may be made by way of demand loan advances, banker s acceptances or letters of credit/guarantees. The facility is secured by a $40 million revolving credit agreement, a $50 million first floating charge over all assets of Toscana Resource Corporation and Firenze Energy Ltd. and an unlimited liability guarantee by Toscana Resource Corporation. At March 31, 2012, the revolving operating credit facility was drawn down $30,250,640 comprised of $782,645 demand loan advances and $29,467,995 in Banker s Acceptances. The Corporation also has a Letter of Credit for $1,000,000 which is used to support its hedging activities. The facility has a review date of May 29, This facility includes a financial covenant which requires the Corporation to maintain an adjusted working capital ratio of 1:1 at all times. The adjusted working capital ratio means the ratio of the current assets plus undrawn portion of the loan to the current liabilities excluding the loan balance. The Corporation is in compliance of this covenant as of March 31,

14 7. Decommissioning liabilities The Corporation is legally required to restore its properties to their original condition. Estimated future site restoration costs are based upon engineering estimates of the anticipated method and the extent of site restoration required in accordance with current legislation and industry practices in the various jurisdictions in which the Corporation has properties. As at March 31, 2012, the Corporation estimated the total undiscounted amount of cash flows required to settle its decommissioning liabilities to be $8,766,597, which is estimated to be incurred over the next 1 to 48 years. The Corporation calculated its liability using a discount rate of 2.56% ( %) and an inflation rate of 2%. March 31, 2012 $ December 31, 2011 $ Balance, beginning of period 7,343,174 89,370 Liabilities acquired - 6,006,601 Liabilities incurred - 81,214 Liabilities disposed - (50,656) Liabilities settled (345,205) (775,600) Revision in estimates (98,099) 1,768,315 Accretion expense 44, ,930 Balance, end of period 6,944,658 7,343,174 14

15 8. Share Capital a) Authorized Unlimited number of common shares with voting rights and no par value 666,700 Series A Preferred shares with no voting rights and $15 par value b) Common shares issued Number of Common Shares Amount $ Outstanding, December 31, ,332 6,224,091 Issued for cash 1,476,600 14,766,000 Share issue costs - (623,988) Outstanding, December 31, ,099,932 20,366,103 Issued for cash - - Share issue costs - - Outstanding, March 31, ,099,932 20,366,103 c) Preferred shares issued At March 31, 2012 the Corporation paid a dividend in the amount of $195,969 on the preferred shares. The Corporation also incurred $261,377 for interest and preferred share issue cost amortization. Debt Gross proceeds allocated to debt Allocation of debt issuance costs Amounts net of issuance costs December 31, ,142, ,045 7,525,381 Dividends paid (195,969) (195,969) Interest and share issue 261, ,377 costs March 31, ,207, ,045 7,590,789 During the quarter the Corporation paid $8,307 in share issue costs related to the preferred share issuance. Equity Gross proceeds allocated to equity Allocation of issuance costs Equity component net of issuance costs December 31, ,655, ,494 1,530,500 Share issue costs 8,307 8,307 March 31, ,655, ,801 1,522,193 15

16 d) Per Share Data March 31, 2012 March 31, 2011 Per share income Basic Diluted Weighted average shares outstanding Basic 2,099,932 1,099,125 Diluted 2,099,932 1,099,125 During the three months ended March 31, 2012, the Corporation had 653,228 (2010 Nil) preferred shares that were excluded from the calculation of diluted earnings per share as these shares were anti-dilutive. 9. Supplement cash flow information March 31, 2012 $ March 31, 2011 $ Changes in non-cash working capital: Accounts receivable 1,419,476 (2,153,418) Inventory 34,257 - Prepaid expenses 64,093 1,697,183 Accounts payable and accrued liabilities (3,787,359) 1,426,286 (2,269,533) 970,051 Changes in non-cash working capital related to: Operating (285,955) 970,051 Investing (1,848,485) - Financing (135,093) - (2,269,533) 970,051 16

17 10. Subsequent events Subsequent to March 31, 2012, the Corporation entered into the following transactions: a) The Corporation has signed a sale agreement to sell properties and working interests in the Joffre region for $22,800,000. The Corporation has also signed a purchase agreement to purchase properties and working interest in the Willesden Green region for $7,000,000. b) On April 25, 2012, the Corporation entered into an Amalgamation Agreement with Senmar Capital Corp., whereby it will pursue a business combination and constitute Senmar s Qualifying Transaction as a strategy to take TRC public. 17