Trans-Orient Petroleum 6-K Consolidated Interim Financial Statements

TRANS-ORIENT PETROLEUM LTD.

Consolidated Interim Financial Statements

For the three and nine months ended April 30, 2009 and 2008

(Unaudited)

In accordance with National Instrument 51-102, the Company discloses that its auditors
have not reviewed the unaudited interim financial statements for the quarter ended April 30, 2009.

 

Consolidated Interim Balance Sheets

(Expressed in United States Dollars)

		April 30, 2009			July 31, 2008
		(Unaudited – Prepared by			(Audited)
		Management)
Assets
Current
Cash and cash equivalents	$	4,955,023		$	6,171,793
Accounts receivable		39,095			51,821
Prepaid expenses		4,075			31,925
		4,998,193			6,255,539
Restricted cash		66,995			78,052
Investments (Note 4)		477,696			1,143,590
Property and equipment (Note 2)		1,626,062			1,523,917
Total Assets	$	7,168,946		$	9,001,098
Liabilities
Current
Accounts payable and accrued liabilities	$	10,151		$	107,723
Total Liabilities		10,151			107,723
Shareholders’ Equity
Share capital (Note 5)		23,690,325			23,690,325
Contributed surplus (Note 5)		358,821			192,137
Accumulated deficit		(13,925,796	)		(12,618,105	)
		10,123,350			11,264,357
Accumulated other comprehensive loss (Note 4)		(2,964,555	)		(2,370,982	)
Total Shareholders’ Equity		7,158,795			8,893,375
Total Liabilities and Shareholders’ Equity	$	7,168,946		$	9,001,098

See accompanying notes

 

Consolidated Interim Statements of Operations and Deficit

(Expressed in United States Dollars)

(Unaudited – Prepared by Management)

		Three Months			Three Months			Nine Months			Nine Months
		Ended			Ended			Ended			Ended
		April 30,			April 30,			April 30,			April 30,
		2009			2008			2009			2008
Expenses
General and administrative (Schedule)	$	194,297		$	367,082		$	869,024		$	962,846
Amortization		4,344			1,345			7,906			4,033
Foreign exchange		(68,016	)		60,217			289,391			62,557
Interest income		(11,586	)		(60,485	)		(85,787	)		(261,911	)
Loss on sale of investment		-			-			60,473			-
Stock option compensation		48,400			31,832			166,684			54,412
Net loss for the period		(167,439	)		(399,991	)		(1,307,691	)		(821,937	)
Deficit, beginning of period		(13,758,357	)		(11,788,616	)		(12,618,105	)		(11,366,670	)
Deficit, end of period	$	(13,925,796	)	$	(12,188,607	)	$	(13,925,796	)	$	(12,188,607	)
Loss per share - basic	$	(0.00	)	$	(0.01	)	$	(0.03	)	$	(0.02	)
- diluted	$	(0.00	)	$	(0.01	)	$	(0.03	)	$	(0.02	)
Weighted-average number of common
shares outstanding		36,545,225			36,545,225			36,545,225			36,545,225

See accompanying notes

 

Consolidated Interim Statements of Comprehensive Income (Loss)

(Expressed in United States Dollars)

(Unaudited – Prepared by Management)

		Three Months			Three Months			Nine Months			Nine Months
		Ended			Ended			Ended			Ended
		April 30,			April 30,			April 30,			April 30,
		2009			2008			2009			2008
Net loss for the period	$	(167,439	)	$	(399,991	)	$	(1,307,691	)	$	(821,937	)
Other comprehensive income (loss) in the period
Fair value adjustment to financial instruments
Investments (Note 4)		361,862			(843,674	)		(593,574	)		(1,155,589	)
Comprehensive income (loss) for the period	$	194,423		$	(1,243,665	)	$	(1,901,265	)	$	(1,977,526	)

See accompanying notes

 

Consolidated Interim Schedules of General and Administrative Expenses

(Expressed in United States Dollars)

(Unaudited – Prepared by Management)

		Three Months		Three Months		Nine Months		Nine Months
		Ended		Ended		Ended		Ended
		April 30,		April 30,		April 30,		April 30,
		2009		2008		2009		2008
General and Administrative Expenses
Accounting and audit	$	2,565	$	2,421	$	15,347	$	5,389
Consulting fees		40,397		2,604		139,457		2,604
Corporate relations and development		37,901		70,619		213,036		309,683
Director fees		5,683		74,947		40,030		204,973
Filing, regulatory and transfer agency fees		12,574		15,714		78,274		46,045
Legal		7,558		13,685		22,332		19,218
Office, rent and miscellaneous		33,956		87,815		99,315		155,746
Printing		-		8,406		20,648		21,772
Reports		-		5		27,015		14,245
Travel, promotion and accommodation		9,254		28,066		49,392		60,254
Wages and benefits		44,409		62,800		164,178		122,917
	$	194,297	$	367,082	$	869,024	$	962,846

See accompanying notes

 

Consolidated Interim Statements of Cash Flows

(Expressed in United States Dollars)

(Unaudited – Prepared by Management)

		Three Months			Three Months			Nine Months			Nine Months
		Ended			Ended			Ended			Ended
		April 30,			April 30,			April 30,			April 30,
		2009			2008			2009			2008
Net decrease of cash related to the
following:
Operating Activities
Net loss for the period	$	(167,439	)	$	(399,991	)	$	(1,307,690	)	$	(821,937	)
Items not affecting cash:
Amortization		4,344			1,345			7,906			4,033
Loss on sale of investments		-			-			60,473			-
Stock option compensation		48,400			31,832			166,684			54,412
Changes in non-cash working capital items:
Accounts payable and accrued liabilities		(13,821	)		(5,250	)		(13,251	)		(60,053	)
Accounts receivable		6,468			(57,943	)		12,726			(53,555	)
Prepaid expenses		3,917			(10,032	)		27,850			(50,321	)
Net cash used for operating activities		(118,131	)		(440,039	)		(1,045,302	)		(927,421	)
Financing Activities
Restricted cash		(1,830	)		(14,629	)		11,057			(18,384	)
Net cash provided by (used for) financing activity		(1,830	)		(14,629	)		11,057			(18,384	)
Investing Activities
Proceeds from sale of investments		-			-			11,847			-
Purchase of property and equipment		(53,663	)		(759,554	)		(194,372	)		(768,281	)
Net cash used for investing activities		(53,663	)		(759,554	)		(182,525	)		(768,281	)
Net decrease in cash		(173,624	)		(1,214,222	)		(1,216,770	)		(1,714,086	)
Cash and equivalents, beginning of period		5,128,647			7,999,856			6,171,793			8,499,720
Cash and equivalents, end of period	$	4,955,023		$	6,785,634		$	4,955,023		$	6,785,634
Supplemental cash flow information:
Interest paid		-			-			-			-
Interest received	$	11,586		$	60,485		$	85,787		$	261,911
Cash and equivalents comprised of:
Chartered bank discount notes	$	4,596,556		$	5,938,351		$	4,596,556		$	5,938,351
Cash held in treasury accounts		358,467			847,283			358,467			847,283
	$	4,955,023		$	6,785,634		$	4,955,023		$	6,785,634

Non-cash investing activities:
The Company incurred $8,642 in exploration expenditures which amounts were in accounts payable at April 30, 2009 (July 31, 2008 $92,963).

See accompanying notes

 

Notes to the Consolidated Interim Financial Statements

(Expressed in United States Dollars)

For the Nine Month Period Ended April 30, 2009

Note 1 – Accounting Policies and Basis of Presentation

The unaudited consolidated interim financial statements of Trans-Orient Petroleum Ltd. and its wholly owned subsidiaries have been prepared in accordance with generally accepted accounting principles in Canada, which were the same accounting policies and methods of computation as the audited consolidated financial statements as at July 31, 2008, with the exception of the changes discussed herein.

The disclosure which follows is incremental to the disclosure included in the annual consolidated financial statements. These unaudited consolidated interim financial statements to April 30, 2009 should be read in conjunction with the Company’s audited consolidated financial statements and the notes thereto for the year ended July 31, 2008.

a) Capital Disclosures

Effective August 1, 2008 the Company adopted CICA Handbook Section 1535 that requires disclosure of an entity’s objectives, policies and processes for managing capital, quantitative data about what the entity regards as capital and whether the entity has complied with any capital requirements and, if it has not complied, the consequences of such non-compliance.

Refer to Note 6

b) Financial Instruments

Effective August 1, 2008 the Company adopted CICA Handbook Section 3862, Financial Instruments - Disclosures and Section 3863 -Financial Instruments-Presentation which have replaced CICA Handbook Section 3861, Financial Instruments - Disclosure and Presentation. Sections 3862 and 3863 increase the disclosures currently required, which will enable users to evaluate the significance of financial instruments for an entity’s financial position and performance, including disclosures about fair value. In addition, disclosure is required of qualitative and quantitative information about exposure to risks arising from financial instruments, including specified minimum disclosures about credit risk, liquidity risk and market risk. The quantitative disclosures must provide information about the extent to which the entity is exposed to risk, based on information provided internally to the entity’s key management personnel.

Refer to Note 7

c)International Financial Reporting Standards (“IFRS”)

In February 2008 the Canadian Accounting Standards Board announced 2011 as the changeover date for publicly-listed companies to use IFRS, replacing Canada’s own generally accepted accounting principles. The specific implementation is set for interim and annual financial statements relating to fiscal years beginning on or after January 1, 2011. The transition date of January 1, 2011 will require restatement for comparative purposes of amounts reported by the Company for the year ended July 31, 2010. While the Company has begun assessing the adoption of IFRS for 2011, the financial reporting impact of the transition to IFRS cannot be reasonably estimated at this time.

NOTE 2 - PROPERTY AND EQUIPMENT

										Net Book
	Working		Net Book		Additions					Value at
	Interest		Value at		During the					April 30,
	%		July 31, 2008		Period		Amortization			2009
Oil and Gas Properties
Unproved
New Zealand:
PEP 38348	100	$	661,502	$	15,074	$	-		$	676,576
PEP 38349	100		779,355		62,796		-			842,151
PEP 50940	100		-		1,144		-			1,144
			1,440,857		79,014		-			1,519,871
Other:
Apartment and office
equipment			83,060		31,037		(7,906	)		106,191
		$	1,523,917	$	110,051	$	(7,906	)	$	1,626,062

The Company’s oil and gas properties are located in New Zealand and its interests in these properties are maintained pursuant to the terms of exploration and mining permits granted by the national government. The Company is satisfied that evidence supporting the current validity of these permits is adequate and acceptable by prevailing industry standards in respect to the current stage of exploration on these properties.

During the nine month period ended April 30, 2009, the Company was awarded a 100% interest in petroleum exploration permit 50940 (PEP 50940) located onshore in New Zealand’s East Coast Basin.

NOTE 3 – RELATED PARTY TRANSACTIONS

The Company is of the view that the amounts incurred for services provided by related parties approximates what the Company would incur to non-arms length parties for the same services.

During the nine month period ended April 30, 2009 the Company incurred $462,923 in certain general and administrative expenses through its wholly owned subsidiary, DLJ Management Corp (“DLJ”). The Company recovered $253,706 of these costs from related companies TAG Oil Ltd. (“TAG”) and AMG Oil Ltd. (“AMG”), with the net cost to the Company being recorded on the Company’s Consolidated Statements of Operations and Deficit. During the third quarter of the 2009 fiscal year, these costs included office rent of CDN$27,000 that was paid by DLJ to a private company owned by a former Director of the Company. The Company recovered CDN $14,625 of these costs, from TAG and AMG.

TAG and AMG are related to the Company through common directors and officers.

Consulting Agreements

On January 1, 2008, the Company entered into an agreement with the Company’s Chief Operating Officer to provide consultancy services to the Company for a term of one year with monthly compensation of $20,000. This agreement has since been extended for one more year. The Company and TAG also entered into an agreement in January 2008 that allows for TAG to utilize the Company’s Chief Operating Officer as a technical consultant on an ongoing basis by paying one half of the monthly compensation.

Pursuant to a consulting agreement dated January 1, 2009, the Company pays CDN$2,000 per month to the Company’s Chief Financial Officer.

Pursuant to consulting agreements dated July 10, 2008 and November 25, 2008, the Company pays a total of $84,000 per year to two former directors of the Company for consulting services.

Pursuant to agreements dated November 25, 2008, January 1, 2009 and April 1 2009, the Company pays CDN $6,000 per year, to three independent directors.

NOTE 4 - INVESTMENTS

At April 30, 2009, the Company’s ownership interests in investments are accounted for under the cost method of accounting as follows:

	Number of		July 31,								April 30,
	Common		2008		Sales						2009	Percentage
	Shares		Market		During the			Comprehensive			Market	of
	Held		Value		Period			Income/Loss			Value	Ownership
AMG Oil Ltd.	826,431	$	272,723	$	-		$	(8,264	)	$	264,459	3.56%
Austral Pacific Energy Ltd.	3,046,240		870,867		(72,320	)		(585,310	)		213,237	5.12%
		$	1,143,590	$	(72,320	)	$	(593,574	)	$	477,696

As at April 30, 2009 and in accordance with CICA 3855, the Company’s investments are recorded at market value.

During the nine months ending April 30, 2009, the Company sold 64,000 common shares of Austral Pacific Energy Ltd. with a book value of $72,320 for proceeds of approximately $11,847.

NOTE 5 - SHARE CAPITAL

a)          Authorized and Issued Share Capital

The authorized share capital of the Company consists of an unlimited number of common shares without par value.

	Number				Contributed
Issued and fully paid:	of Shares		Amount		Surplus
Balance at July 31, 2008	36,595,225	$	23,690,325	$	192,137
Additions during the period	-		-		166,684
Balance at January 31, 2009	36,595,225	$	23,690,325	$	358,821

b)	Share Purchase Warrants
	The following is a continuity of outstanding share purchase warrants:

	Number of Share	Weighted Average
	Purchase Warrants	Exercise Price
Balance at April 30, 2009	200,000	$ 0.80

c)	Incentive Stock Options
	The following is a continuity of outstanding incentive stock options:

	Number of		Weighted Average
	Options		Exercise Price
Balance at July 31, 2008	2,060,000		$ 0.58
Expired during the period	(250,000	)	0.50
Granted during the period	112,500		0.70
Expired during the period	(62,500	)	0.70
Expired during the period	(200,000	)	1.00
Expired during the period	(75,000	)	0.50
Expired during the period	(60,000	)	0.64
Balance at April 30, 2009	1,525,000		$ 0.89

The following summarizes information about stock options that are outstanding at April 30, 2009:

Number	Price	Weighted Average	Expiry	Options
of Shares	per Share	Remaining Contractual Life	Date	Exercisable
1,225,000	0.50	3.87	March 14, 2013	918,750
200,000	0.80	4.16	June 26, 2013	112,000
50,000	0.54	4.22	July 21, 2013	26,000
50,000	0.70	4.25	August 1, 2013	25,000
1,525,000		4.13		1,081,750

During the period ended April 30, 2009, the Company applied the Black-Scholes option pricing model using the closing market prices on the grant dates and a volatility ratio of 100% and a risk free interest rate of 3.5% to calculate option benefits of the options granted during the quarter ended April 30, 2009. The fair value of the option benefit is amortized over the vesting period of the options, generally being eighteen months.

Note 6 – Capital Disclosures

The Company’s primary objective for managing its capital structure is to maintain financial capacity for the purpose of sustaining the future development of the business and maintaining investor, creditor and market confidence.

The Company considers its capital structure to include shareholders’ equity and working capital. Management is continually monitoring changes in economic conditions and the risk characteristics of the underlying petroleum and natural gas industry. In the event that adjustments to the capital structure are necessary, the Company may consider issuing additional equity, raising debt or revising its capital investment programs.

The Company’s share capital is not subject to any external restrictions. The Company has not paid or declared any dividends since the date of incorporation, nor are any currently contemplated. There have been no changes to the Company’s approach to capital management during the period.

Note 7 – Financial Instruments

The nature of the Company’s operations expose the Company to credit risk, liquidity risk and market risk, and changes in foreign exchange rates and interest rates may have a material effect on cash flows, net income and comprehensive income.

This note provides information about the Company’s exposure to each of the above risks as well as the Company’s objectives, policies and processes for measuring and managing these risks.

The Company’s risk management policies are established to identify and analyze the risks faced by the Company, to set appropriate risk limits and to monitor market conditions and the Company’s activities. The Board of Directors has overall responsibility for the establishment and oversight of the Company’s risk management framework and policies.

a) Credit Risk

Credit risk is the risk of financial loss to the Company if counterparties do not fulfill their contractual obligations. The Company has assessed the risk of counterparties not fulfilling their contractual obligations as minimal.

Cash and cash equivalents consist of cash bank balances and short-term deposits maturing in less than 90 days. The Company’s short-term deposits are held with a Canadian chartered bank and are monitored to ensure a stable return. The Company’s short-term deposits currently consist of term deposits or chartered bank discount notes as it is not the Company’s policy to utilize complex, higher-risk investment vehicles.

The carrying amount of accounts receivable and cash and cash equivalents represents the maximum credit exposure. The Company does not have an allowance for doubtful accounts as at April 30, 2009 and did not provide for any doubtful accounts nor was it required to write-off any receivables during the nine months

ended April 30, 2009. As at April 30, 2009 there were no significant amounts past due or impaired.

b) Liquidity Risk

Liquidity risk is the risk that the Company will not be able to meet its work commitments and other financial obligations as they are due. The Company’s approach to managing liquidity is to ensure, to the extent possible, that it will have sufficient liquidity to meet its liabilities when due without incurring unacceptable losses or risking harm to the Company’s reputation.

The Company’s liquidity is dependent upon its current working capital and ability to raise funds. To forecast and monitor liquidity the Company prepares operating and capital expenditure budgets which are monitored and updated as considered necessary. Expected future cash expenditure to satisfy work commitments combined with operating costs is less than the Company’s current working capital in hand of $4.99 million. Considering these circumstances the Company’s liquidity risk is assessed as low. As at April 30, 2009 the Company’s only financial liabilities are accounts payable and accrued liabilities of $10,151.

c) Market Risk

Market risk is the risk that changes in foreign exchange rates, commodity prices and interest rates will affect the Company’s cash flows, net income and comprehensive income. The objective of market risk management is to manage and control market risk exposures within acceptable limits, while maximizing returns. The Company does not anticipate any market risk that will materially affect the Company’s cash flow and net income during the remainder of the 2009 fiscal year.

d) Foreign Currency Exchange Rate Risk

Foreign currency exchange rate risk is the risk that future cash flows, net income and comprehensive income will fluctuate as a result of changes in foreign exchange rates. Primarily all of the Company’s cash and cash equivalents are denominated in United States dollars and Canadian dollars, while operational and capital activities related to our properties are transacted primarily in New Zealand dollars with some administrative costs also being incurred in Canadian dollars.

The Company currently does not have significant exposure to other currencies and this is not expected to change in the foreseeable future as the work commitments on the Company’s oil and gas properties in New Zealand are expected to be carried out in New Zealand dollars.

e) 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 the level of spending for future activities.

The Company did not have any producing properties during the nine months ended April 30, 2009 however the Company does anticipate that changes in commodity prices may affect the economics of certain operations and lower commodity prices may, for the short-term, affect the value of the Company’s exploration properties.

f) 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 Company is exposed to interest rate fluctuations on its cash and cash equivalents which bear a floating rate of interest. The risk is not considered significant.

The Company did not have any interest rate swaps or financial contracts in place as at or during the nine months ended April 30, 2009. Variations in interest rates will not materially affect the Company.

g) Fair Value of Financial Instruments

The Company’s financial instruments as at April 30, 2009 included cash and cash equivalents, accounts receivable, investments and accounts payable and accrued liabilities. The fair value of the financial instruments with exception of the Company’s investments, approximate their carrying amounts due to their short terms to maturity. The fair value of the Company’s investments approximate their carrying value as they are recorded at market value at April 30, 2009.

The Company will assess at each reporting period whether financial assets, other than those classified as held-for-trading, are impaired. Any impairment loss will be included in net income for the period.

NOTE 8 – RESTRICTED CASH

The Company is required, in accordance with the Company’s credit card agreements, to provide security against the credit facility in the form of cash and cash equivalents. As at April 30, 2009, this security amounted to $66,995.

NOTE 9 - COMMITMENTS AND CONTINGENCIES

The Company participates in oil and gas exploration operations and is committed under agreements to complete certain exploration programs in order to maintain its interests. The Company’s management estimates that the total commitments for the remainder of fiscal 2009 are $30,000. However, prior to November 8, 2009 the Company is required to drill a well on each of PEP 38348 and PEP 38349 for a total cost of approximately $3,400,000, extend the timing of the permits terms or relinquish the permits. In addition the Company is required to reprocess seismic, conduct certain geological and geophysical studies and collect 10km’s of 2D seismic on PEP 50940 at a cost of approximately $250,000.

NOTE 10 – SEGMENTED INFORMATION

The Company operates in one industry: petroleum exploration. It operates in two geographical regions, therefore information on country segments is provided as follows:

For Nine Months Ended April 30,		Canada			New Zealand			Total Company
2009
Expenses:
General and administrative	$	818,902		$	50,122		$	869,024
Stock option compensation		166,684			-			166,684
Foreign exchange		287,784			1,607			289,391
Depreciation		7,906			-			7,906
		(1,281,276	)		(51,729	)		(1,333,005	)
Other items
Interest income		78,499			7,288			85,787
Loss on sale of investments		(60,473	)		-			(60,473	)
		18,026			7,288			25,314
Net loss for the period	$	(1,263,250	)	$	(44,441	)	$	(1,307,691	)
Total assets	$	5,373,046		$	1,795,900		$	7,168,946
Capital expenditures for the period	$	31,037		$	79,014		$	110,051