MANAGEMENT’S REPORT
To the Shareholders of Hemisphere Energy Corporation:
Management is responsible for the preparation of the financial statements and the consistent presentation of all other financial information that is publicly disclosed. The financial statements have been prepared in accordance with the accounting policies detailed in the notes to the financial statements and in accordance with IFRS and include estimates and assumptions based on management’s best judgment. Management maintains a system of internal controls to provide reasonable assurance that assets are safeguarded and that relevant and reliable financial information is produced in a timely manner.
The accompanying unaudited interim condensed financial statements have not been reviewed by the Company’s auditors.
The Audit Committee, consisting of independent members of the Board of Directors, has reviewed financial statements with management. The Board of Directors has approved the financial statements on the recommendation of the Audit Committee.
Vancouver, British Columbia
August 19, 2015
| (signed)“Don Simmons” | | (signed)“Dorlyn Evancic” |
| Don Simmons, President & CEO | | Dorlyn Evancic, Chief Financial Officer |
| 2 | Q2 2015 INTERIM CONDENSED FINANCIAL STATEMENTS |
CONDENSED STATEMENTS OF FINANCIAL POSITION
(Expressed in Canadian dollars)
(Unaudited)
| | Note | | June 30, 2015 | | | December 31, 2014 | |
| Assets | | | | | | | |
| Current assets | | | | | | | |
| Accounts receivable | 5 (a) | $ | 1,173,675 | | $ | 1,304,252 | |
| Prepaid expenses | | | 89,696 | | | 132,929 | |
| | | | 1,263,371 | | | 1,437,181 | |
| | | | | | | | |
| Non-current assets | | | | | | | |
| Reclamation deposits | 9 | | 105,535 | | | 105,535 | |
| Exploration and evaluation assets | 7, 12 | | 2,932,939 | | | 2,896,887 | |
| Property and equipment | 8, 12 | | 40,732,074 | | | 42,870,113 | |
| Deferred tax asset | | | 1,236,816 | | | 1,641,916 | |
| Total assets | | $ | 46,270,734 | | $ | 48,951,632 | |
| | | | | | | | |
| Liabilities | | | | | | | |
| Current liabilities | | | | | | | |
| Accounts payable and accrued liabilities | | $ | 1,762,556 | | $ | 5,897,643 | |
| Bank indebtedness | 12 | | 9,438,835 | | | 7,184,147 | |
| Total current liabilities | | | 11,201,390 | | | 13,081,790 | |
| | | | | | | | |
| Non-current liabilities | | | | | | | |
| Decommissioning obligations | 9 | | 5,268,435 | | | 5,177,607 | |
| | | | 16,469,825 | | | 18,259,397 | |
| | | | | | | | |
| Shareholders’ Equity | | | | | | | |
| Share capital | 13 | | 52,083,069 | | | 51,881,960 | |
| Share-based payment reserve | 13 (b) | | 2,642,515 | | | 2,513,122 | |
| Deficit | | | (24,924,675 | ) | | (23,702,847 | ) |
| Total shareholders’ equity | | | 29,800,909 | | | 30,692,235 | |
| Total liabilities and shareholders’ equity | | $ | 46,270,734 | | $ | 48,951,632 | |
Commitment (Note 14)
The accompanying notes are an integral part of these unaudited interim condensed financial statements.
On Behalf of the Board of Directors
| (signed)“Bruce McIntyre” | | (signed)“Don Simmons” |
| Bruce McIntyre, Director | | Don Simmons, Director |
| Q2 2015 INTERIM CONDENSED FINANCIAL STATEMENTS | 3 |
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Expressed in Canadian dollars)
(Unaudited)
| | | | Three Months Ended June | | | Six Months Ended June 30 | |
| | | | 30 | | | | |
| | Note | | 2015 | | | 2014 | | | 2015 | | | 2014 | |
| Oil and natural gas revenue | | $ | 3,284,020 | | $ | 3,799,461 | | $ | 6,212,284 | | $ | 7,363,497 | |
| Royalties | | | (214,321 | ) | | (777,349 | ) | | (456,032 | ) | | (1,329,017 | ) |
| Net oil and natural gas revenue | | | 3,069,699 | | | 3,022,112 | | | 5,756,251 | | | 6,034,480 | |
| | | | | | | | | | | | | | |
| Expenses | | | | | | | | | | | | | |
| Production and operating | | | 1,115,453 | | | 1,011,000 | | | 1,974,020 | | | 2,145,365 | |
| Exploration and evaluation | 7 | | 6,908 | | | 12,513 | | | 14,300 | | | 41,666 | |
| Depletion and depreciation | 2 (e) | | 1,450,649 | | | 987,443 | | | 3,096,060 | | | 1,863,720 | |
| General and administrative | 10, 13 (b) | | 520,233 | | | 378,580 | | | 1,202,686 | | | 652,320 | |
| | | | 3,093,243 | | | 2,389,536 | | | 6,287,066 | | | 4,703,072 | |
| Results from operating activities | | | (23,543 | ) | | 632,576 | | | (530,814 | ) | | 1,331,408 | |
| Finance expense | 11 | | (146,841 | ) | | (78,111 | ) | | (285,914 | ) | | (153,866 | ) |
| Gain on disposition | | | - | | | - | | | - | | | 2,942 | |
| Income (loss) before income tax | | | (170,384 | ) | | 554,465 | | | (816,730 | ) | | 1,180,484 | |
| Deferred tax expense | | | (405,100 | ) | | - | | | (405,100 | ) | | - | |
| Net income (loss) and | | | | | | | | | | | | | |
comprehensive income (loss) for
the period | 2 (e) | $ | (575,484 | ) | $ | 554,465 | | $ | (1,221,830 | ) | $ | 1,180,484 | |
Net income (loss) per share
Basic and diluted | 13 (d) | $ | (0.01 | ) | $ | 0.01 | | $ | (0.02 | ) | $ | 0.02 | |
The accompanying notes are an integral part of these unaudited interim condensed financial statements.
| 4 | Q2 2015 INTERIM CONDENSED FINANCIAL STATEMENTS |
CONDENSED STATEMENTS OF CASH FLOWS
(Expressed in Canadian dollars)
(Unaudited)
| | | | Three Months Ended June 30 | | | Six Months Ended June 30 | |
| | Note | | 2015 | | | 2014 | | | 2015 | | | 2014 | |
| Operating activities | | | | | | | | | | | | | |
| Net income (loss) for the period | 2 (e) | $ | (575,484 | ) | $ | 554,465 | | $ | (1,221,830 | ) | $ | 1,180,484 | |
| Items not affecting cash: | | | | | | | | | | | | | |
Depletion, depreciation and
accretion | 2 (e) | | 1,481,715 | | | 996,196 | | | 3,158,192 | | | 1,881,226 | |
| Gain on disposition | | | - | | | - | | | - | | | (2,942 | ) |
| Share-based payments | | | 2,742 | | | - | | | 221,752 | | | - | |
| Deferred tax expense (recovery) | | | 405,100 | | | - | | | 405,100 | | | - | |
| Funds flow from operations | | | 1,314,073 | | | 1,550,661 | | | 2,563,214 | | | 3,058,768 | |
| | | | | | | | | | | | | | |
| Changes in non-cash working capital | 16 | | (392,806 | ) | | 495,387 | | | (813,796 | ) | | (212,186 | ) |
| Cash provided by operating activities | | | 921,267 | | | 2,046,048 | | | 1,749,418 | | | 2,846,582 | |
| Investing activities | | | | | | | | | | | | | |
Property and equipment
expenditures | | | (609,264 | ) | | (1,362,310 | ) | | (720,279 | ) | | (5,130,528 | ) |
Exploration and evaluation
expenditures | | | (220,231 | ) | | (2,152,881 | ) | | (242,505 | ) | | (2,801,979 | ) |
Decommissioning obligation
expenditures | | | (2,591 | ) | | - | | | (2,591 | ) | | - | |
Proceeds from disposition of
equipment | | | - | | | - | | | - | | | 50,000 | |
| Changes in non-cash working capital | 16 | | 445,320 | | | 1,257,203 | | | (3,147,481 | ) | | 1,645,861 | |
| Cash used in investing activities | | | (386,765 | ) | | (2,257,988 | ) | | (4,112,855 | ) | | (6,236,646 | ) |
| Financing activities | | | | | | | | | | | | | |
Shares issued for cash, net of issue
costs | | | - | | | 9,214,919 | | | 108,750 | | | 9,243,044 | |
| Changes in non-cash working capital | 16 | | - | | | - | | | - | | | - | |
| Cash provided by financing activities | | | - | | | 9,214,919 | | | 108,750 | | | 9,243,044 | |
| | | | | | | | | | | | | | |
| Outflow of cash | | | 534,501 | | | 9,002,978 | | | (2,254,687 | ) | | 5,852,978 | |
Bank indebtedness, beginning of
period | | | (9,973,336 | ) | | (7,650,000 | ) | | (7,184,147 | ) | | (4,500,000 | ) |
Cash (bank indebtedness), end of
period | | $ | (9,438,835 | ) | $ | 1,352,978 | | $ | (9,438,835 | ) | $ | 1,352,978 | |
Supplemental cash flow information (Note 16)
The accompanying notes are an integral part of these unaudited interim condensed financial statements.
| Q2 2015 INTERIM CONDENSED FINANCIAL STATEMENTS | 5 |
CONDENSED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Expressed in Canadian dollars)
(Unaudited)
| | | | Number of | | | | | | Share-based | | | | | | | | | | |
| | | | common | | | | | | payment | | | Warrant | | | | | | | |
| | Note | | shares | | | Capital stock | | | reserve | | | reserve | | | Deficit | | | Total Equity | |
| Balance, December 31, 2013 | 2 (e) | | 61,307,498 | | $ | 42,127,674 | | $ | 2,574,789 | | $ | 204,479 | | $ | (22,568,372 | ) | $ | 22,338,570 | |
Non-flow-through share
issuance | | | 13,333,500 | | | 10,000,125 | | | - | | | - | | | - | | | 10,000,125 | |
| Share-based payments | | | - | | | - | | | 452,780 | | | - | | | - | | | 452,780 | |
| Share issuance costs, net of tax | | | - | | | (680,408 | ) | | - | | | - | | | - | | | (680,408 | ) |
| Exercise of stock options | | | 690,000 | | | 404,944 | | | (184,094 | ) | | - | | | - | | | 220,850 | |
| Expiry of stock options | | | - | | | - | | | (1,159 | ) | | - | | | 1,159 | | | - | |
| Exercise of warrants | | | 37,500 | | | 29,625 | | | - | | | (1,500 | ) | | - | | | 28,125 | |
| Expiry of warrants | | | - | | | - | | | (329,194 | ) | | (202,979 | ) | | 532,173 | | | - | |
| Net loss for the year | | | - | | | - | | | - | | | - | | | (1,667,807 | ) | | (1,667,807 | ) |
| Balance, December 31, 2014 | | | 75,368,498 | | $ | 51,881,960 | | $ | 2,513,122 | | $ | - | | $ | (23,702,847 | ) | $ | 30,692,235 | |
| | | | | | | | | | | | | | | | | | | | |
| Balance, December 31, 2014 | | | 75,368,498 | | $ | 51,881,960 | | $ | 2,513,122 | | $ | - | | $ | (23,702,847 | ) | $ | 30,692,235 | |
| Exercise of stock options | 13 (b) | | 435,000 | | | 201,109 | | | (92,359 | ) | | - | | | - | | | 108,750 | |
| Share-based payments | 13 (c) | | - | | | - | | | 221,752 | | | - | | | - | | | 221,752 | |
| Net loss for the period | | | - | | | - | | | - | | | - | | | (1,221,830 | ) | | (1,221,830 | ) |
| Balance, June 30, 2015 | | | 75,803,498 | | $ | 52,083,069 | | $ | 2,642,515 | | $ | - | | $ | (24,924,675 | ) | $ | 29,800,909 | |
Comparison with six months ended June 30, 2014:
| | | | Number of | | | | | | Share-based | | | | | | | | | | |
| | | | common | | | | | | payment | | | Warrant | | | | | | | |
| | Note | | shares | | | Capital stock | | | reserve | | | reserve | | | Deficit | | | Total Equity | |
| Balance, December 31, 2013 | 2 (e) | | 61,307,498 | | $ | 42,127,674 | | $ | 2,574,789 | | $ | 204,479 | | $ | (22,568,372 | ) | $ | 22,338,570 | |
| Non flow-through share issuance | | | 13,333,500 | | | 10,000,125 | | | - | | | - | | | - | | | 10,000,125 | |
| Share issuance costs | | | - | | | (921,007 | ) | | - | | | - | | | - | | | (921,007 | ) |
| Exercise of stock options | | | 375,000 | | | 135,800 | | | (111,100 | ) | | - | | | 111,100 | | | 135,800 | |
| Exercise of warrants | | | 37,500 | | | 28,125 | | | - | | | - | | | - | | | 28,125 | |
| Expiry of warrants | | | - | | | - | | | (329,194 | ) | | (120,828 | ) | | 450,022 | | | - | |
| Net income for the period | 2 (e) | | - | | | - | | | - | | | - | | | 1,180,484 | | | 1,180,484 | |
| Balance, June 30, 2014 | 2 (e) | | 75,053,498 | | $ | 51,370,717 | | $ | 2,134,495 | | $ | 83,651 | | $ | (20,826,766 | ) | $ | 32,762,097 | |
The accompanying notes are an integral part of these financial statements.
| 6 | Q2 2015 NOTES TO THE INTERIM CONDENSED FINANCIAL STATEMENTS |
NOTES TO THE INTERIM CONDENSED FINANCIAL STATEMENTS
For the three and six months ended June 30, 2015 and 2014
(Expressed in Canadian dollars)
Hemisphere Energy Corporation (the "Company") was incorporated under the laws of British Columbia on March 6, 1978. The Company’s principal business is the acquisition, exploration, development and production of petroleum and natural gas in Canada. It is a publicly traded company listed on the TSX Venture Exchange under the symbol "HME". The Company’s head office is located at Suite 2000, 1055 West Hastings Street, Vancouver, British Columbia, Canada V6E 2E9.
| | (a) | Statement of compliance |
These unaudited interim condensed financial statements ("Financial Statements") have been prepared in accordance with International Accounting Standard 34 –Interim Financial Reportingusing accounting policies consistent with the International Financial Reporting Standards ("IFRS"), as issued by the International Accounting Standards Board. These Financial Statements do not include all of the information required for full annual financial statements and should be read in conjunction with the Company’s audited annual financial statements for the year ended December 31, 2014.
These financial statements were authorized for issuance by the Board of Directors on August 19, 2015.
These Financial Statements have been prepared on a historical cost basis, except for financial instruments and share-based payments, which are stated at their fair values. In addition, these Financial Statements have been prepared using the accrual basis of accounting, except for cash flow information.
| | (c) | Functional and presentation currency |
These Financial Statements are presented in Canadian dollars which is the Company’s functional currency.
| | (d) | Use of estimates and judgments |
The preparation of these Financial Statements in conformity with IFRS requires management to make judgments, estimates and assumptions that may affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may materially differ from these estimates. Revisions to accounting estimates are recognized in the year in which the estimates are revised and in any future years affected.
| Q2 2015 NOTES TO THE INTERIM CONDENSED FINANCIAL STATEMENTS | 7 |
The following are the accounting policies that are subject to such judgments and the key sources of estimation uncertainty that the Company believes could have the most significant impact on the reported results and financial position.
Critical accounting judgments
Reserves
The estimate of oil and natural gas reserves is integral to the calculation of the amount of depletion charged to the statements of income (loss) and comprehensive income (loss) and is also a key determinant in assessing whether the carrying value of any of the Company’s development and production assets have been impaired. Changes in reported reserves can impact asset carrying values due to changes in expected future cash flows.
The Company’s Proved and Probable reserves are evaluated and reported on by independent reserve engineers at least annually in accordance with Canadian Securities Administrators’ National Instrument 51-101Standards of Disclosure of Oil and Gas Activities. Proved reserves are those reserves that can be estimated with a high degree of certainty to be recoverable. It is 90% likely that the actual remaining quantities recovered will exceed the estimated Proved reserves. Probable reserves are those additional reserves that are less certain to be recovered than Proved reserves. Reserve estimation is based on a variety of factors including engineering data, geological and geophysical data, projected future rates of production, commodity pricing and timing of future expenditures, all of which are subject to significant judgment and interpretation.
Identification of cash-generating units ("CGUs")
The Company’s assets are aggregated into CGUs for the purpose of calculating impairment. CGUs are based on an assessment of the unit’s ability to generate independent cash inflows. The determination of these CGUs was based on management’s judgment in regards to shared infrastructure, geographical proximity, petroleum type and similar exposure to market risk and materiality.
Recoverability of asset carrying values
At each reporting date, the Company assesses its petroleum and natural gas properties and exploration and evaluation assets for possible impairment, to determine if there is any indication that the carrying amounts of the assets may not be recoverable. An assessment is also made at each reporting date to determine whether there is an indication that previously recognized impairment losses no longer exist or have decreased. Determination as to whether and how much an asset is impaired, or no longer impaired, involves management estimates on highly uncertain matters such as future commodity prices, discount rates, production profiles, operating costs, future capital costs and reserves. Changes in circumstances may impact these estimates which may impact the recoverable amount of assets. Any change in the impairment loss or reversal of impairment loss could have a material financial impact in future periods but future depletion expense would be impacted as a result.
| 8 | Q2 2015 NOTES TO THE INTERIM CONDENSED FINANCIAL STATEMENTS |
Critical accounting estimates
Decommissioning obligations
Decommissioning costs will be incurred by the Company many years into the future. Amounts recorded for decommissioning obligations require the use of management’s best estimates of future decommissioning expenditures, expected timing of expenditures and future inflation rates. The estimates are based on internal and third party information and calculations are subject to changes in laws and regulations, public expectations, prices, discovery and analysis of site conditions, and changes in clean up technology. Actual costs and outflows can differ from estimates and may have a material impact on earnings or financial position.
Business combination
Business combinations are accounted for using the acquisition method. Under this method, management makes estimates of the fair value of assets acquired and liabilities assumed which includes assessing the value of petroleum and natural gas properties based upon the estimation of recoverable quantities of Proved and Probable reserves being acquired.
Share-based payments
The Company measures the cost of its share-based payments to directors, officers, employees and consultants by reference to the fair value of the equity instruments using the Black-Scholes option pricing model at the date they are granted. The assumptions used in determining fair value include: expected life of the options, risk-free rates of return and stock price volatility. Changes to assumptions may have a material impact on the amounts presented.
Income tax
Related assets and liabilities are recognized for the estimated tax consequences between amounts included in the financial statements and their tax base using substantively enacted future income tax rates. Timing of future revenue streams and future capital spending changes can affect the timing of any temporary differences, and accordingly, affect the amount of the deferred tax asset or liability calculated at a point in time. These differences could materially impact earnings.
| | (e) | Change in accounting policy |
The Company changed its accounting for depleting its petroleum and natural gas properties during the year ended December 31, 2014. The Company changed from using the unit-of-production method based on production volumes in relation to total estimated Proved reserves to total estimated Proved and Probable reserves. The change in policy was applied retrospectively, and the comparative figures for the three and six months ended June 30, 2014 have been adjusted to reflect this change.
| Q2 2015 NOTES TO THE INTERIM CONDENSED FINANCIAL STATEMENTS | 9 |
| 3. | Summary of Significant Accounting Policies |
These financial statements have been prepared in accordance with IFRS and follow the same accounting policies as described in Note 3 of the Company’s audited annual financial statements for the year ended December 31, 2014. There have been no changes to the Company’s accounting policies since the Company’s audited annual financial statements for the year ended December 31, 2014 were issued.
Fair value estimates of financial instruments are made at a specific point in time, based on relevant information about financial markets and specific financial instruments. As these estimates are subjective in nature, involving uncertainties and matters of significant judgment, changes in assumptions can significantly affect estimated fair values. At June 30, 2015, the Company's financial instruments include accounts receivable, reclamation deposits, bank indebtedness, and accounts payable and accrued liabilities.
The fair values of accounts receivable, reclamation deposits, accounts payable and accrued liabilities, and bank indebtedness approximate their carrying values due to the short-term maturity of these financial instruments.
| 5. | Financial Risk Management |
The Company’s activities expose it to a variety of financial risks that arise as a result of its exploration, development, production and financing activities such as credit risk, liquidity risk and market risk. This note presents information about the Company’s exposure to each of these risks. Management sets controls to manage such risks and monitors them on an ongoing basis pertaining to market conditions and the Company’s activities.
Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its payment obligations. This risk arises principally from the Company’s receivables from joint operators and oil and natural gas marketers, and reclamation deposits. The credit risk associated with reclamation deposits is minimized substantially by ensuring this financial asset is placed with major financial institutions with strong investment-grade ratings by a primary ratings agency. The credit risk associated with accounts receivable is mitigated as the Company monitors monthly balances to limit the risk associated with collections. The Company does not anticipate any default. There are no balances past due or impaired.
The maximum exposure to credit risk is as follows:
| | | As at | |
| | | June 30, 2015 | | | December 31, 2014 | |
| Accounts receivable | | | | | | |
Trade receivables | $ | 1,123,699 | | $ | 1,041,843 | |
| Receivable from joint operators | | 49,976 | | | 95,355 | |
| Reclamation deposits | | 105,535 | | | 105,535 | |
| | $ | 1,279,210 | | $ | 1,242,733 | |
| 10 | Q2 2015 NOTES TO THE INTERIM CONDENSED FINANCIAL STATEMENTS |
The Company sells the majority of its oil production to a single oil marketer and, therefore, is subject to concentration risk which is mitigated by management’s policies and practices related to credit risk, as discussed above. The Company has not historically experienced any collection issues with its oil marketer.
Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they become due. The Company’s approach to managing liquidity risk is to ensure, as far as possible, that it will have sufficient liquidity to meet its liabilities when they become due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Company.
At June 30, 2015, the Company had negative working capital of $9,938,019 (December 31, 2014 - $11,644,609) which included bank indebtedness of $9,438,835 (December 31, 2014 - $7,184,147). The Company funds its operations through production revenue and a demand operating credit facility (Note 12). All of the Company’s financial liabilities have contractual maturities of less than 90 days.
Market risk is the risk that changes in market prices, such as foreign exchange rates, other prices and interest rates will affect the value of the financial instruments. Market risk is comprised of interest rate risk, foreign currency risk, commodity price risk and other price risk.
Interest rate risk is the risk that future cash flows will fluctuate as a result of changes in market interest rates. Borrowings under the Company’s credit facilities are subject to variable interest rates. A one percent change in interest rates would not have a material effect on net income (loss) and comprehensive income (loss).
| | (ii) | Foreign currency risk |
The Company’s functional and reporting currency is the Canadian dollar. The Company does not sell or transact in any foreign currency; however, commodity prices are largely denominated in United States dollars ("USD"), and as a result the prices that the Company receives are affected by fluctuations in the exchange rates between the USD and the Canadian dollar. The exchange rate effect cannot be quantified, but generally an increase in the value of the Canadian dollar compared to the USD will reduce the prices received by the Company for its crude oil and natural gas sales. The Company did not have any foreign exchange rate swaps or related contracts in place as at June 30, 2015.
| Q2 2015 NOTES TO THE INTERIM CONDENSED FINANCIAL STATEMENTS | 11 |
| | (iii) | Commodity price risk |
Commodity prices for petroleum and natural gas are impacted by global economic events that dictate the levels of supply and demand, as well as the relationship between the Canadian dollar and the USD. Significant changes in commodity prices may materially impact the Company’s ability to raise capital. The Company has not entered into any commodity hedge contracts as at June 30, 2015.
Other price risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate due to changes in market prices, other than those arising from interest rate risk or foreign currency risk. The Company is not exposed to significant other price risk.
The Company manages its capital with the following objectives:
| | (a) | To ensure sufficient financial flexibility to achieve the Company’s ongoing business objectives including the replacement of production, funding of future growth opportunities and pursuit of accretive acquisitions; and |
| | | |
| | (b) | To maximize shareholder return through enhancing the Company’s share value. |
The Company monitors its capital structure and makes adjustments according to market conditions in an effort to meet its objectives given the current outlook of the Company and industry in general. The capital structure of the Company is composed of shareholders’ equity and the undrawn component of the Company’s credit facilities. The Company may manage its capital structure by issuing new shares, repurchasing outstanding shares, obtaining additional financing from the Company’s credit facilities, issuing new debt instruments or other financial or equity-based instruments, adjusting capital spending or disposing of assets. The capital structure is reviewed on an ongoing basis.
The Company’s capital structure as at June 30, 2015 and December 31, 2014 were as follows:
| | | June 30, 2015 | | | December 31, 2014 | |
| Shareholders’ equity | $ | 29,800,909 | | $ | 30,692,235 | |
| Undrawn component of bank credit facilities | | 5,561,166 | | | 7,815,853 | |
| Total capital | $ | 35,362,075 | | $ | 38,508,088 | |
As at June 30, 2015, the Company had total available credit facility of $15,000,000 (December 31, 2014 - $15,000,000) of which the Company had drawn $9,438,835 (December 31, 2014 - $7,184,147). The Company is subject to a financial covenant as described in Note 12.
| 12 | Q2 2015 NOTES TO THE INTERIM CONDENSED FINANCIAL STATEMENTS |
| 7. | Exploration and Evaluation Assets |
Exploration and evaluation assets consist of the Company’s exploration projects, which are pending the determination of Proved and Probable reserves. A transfer from exploration and evaluation assets to property and equipment is made when a well has come on production or an exploration project has been completed. As at June 30, 2015, the Company transferred $206,452 (December 31, 2014 - $993,271) to property and equipment.
| Cost | | | |
| Balance, December 31, 2013 | $ | 2,000,613 | |
| Additions | | 2,080,432 | |
| Exploration and evaluation expense | | (190,887 | ) |
| Transfer to property and equipment | | (993,271 | ) |
| Balance, December 31, 2014 | $ | 2,896,887 | |
| Additions | | 256,803 | |
| Exploration and evaluation expense | | (14,300 | ) |
| Transfer to property and equipment | | (206,452 | ) |
| Balance, June 30, 2015 | $ | 2,932,939 | |
| | | Petroleum and | | | | | | | |
| Cost | | Natural Gas | | | Other Equipment | | | Total | |
| Balance, December 31, 2013 | $ | 39,119,038 | | $ | 67,522 | | $ | 39,186,560 | |
| Additions | | 22,482,341 | | | 46,970 | | | 22,529,311 | |
| Transfer from exploration and evaluation assets | | 993,271 | | | - | | | 993,271 | |
| Balance, December 31, 2014 | $ | 62,594,650 | | $ | 114,492 | | $ | 62,709,142 | |
| Additions | | 751,567 | | | - | | | 751,567 | |
| Transfer from exploration and evaluation assets | | 206,452 | | | - | | | 206,452 | |
| Balance, June 30, 2015 | $ | 63,552,668 | | $ | 114,492 | | $ | 63,667,161 | |
| Accumulated Depletion, Depreciation, Amortization | | | | | | | | | |
| and Impairment Losses | | | | | | | | | |
| Balance, December 31, 2013 | | 11,720,611 | | | 54,504 | | | 11,775,115 | |
| Charge for the year | | 5,353,585 | | | 7,404 | | | 5,360,989 | |
| Impairment loss | | 2,702,925 | | | - | | | 2,702,925 | |
| Balance, December 31, 2014 | $ | 19,777,121 | | $ | 61,908 | | $ | 19,839,029 | |
| Charge for the period | | 3,089,333 | | | 6,727 | | | 3,096,060 | |
| Balance, June 30, 2015 | $ | 22,866,454 | | $ | 68,635 | | $ | 22,935,089 | |
| Net Book Value | | | | | | | | | |
| December 31, 2014 | $ | 42,817,529 | | $ | 52,584 | | $ | 42,870,113 | |
| June 30, 2015 | $ | 40,686,215 | | $ | 45,857 | | $ | 40,732,074 | |
| 9. | Decommissioning Obligation |
The Company’s decommissioning obligation is estimated based on its net ownership interest in all wells and facilities, estimated costs to reclaim and abandon these wells and facilities, and the estimated timing of the costs to be incurred in future years. The Company uses Alberta Energy Regulator guidelines for determining abandonment and reclamation estimates.
The Company estimates the total undiscounted amount of cash flows required to settle its decommissioning obligations as at June 30, 2015 is $5,957,751 (December 31, 2014 - $5,923,892). These payments are expected to be made over the next 38 years with the majority of costs to be incurred between 2022 and 2038. The discount factor, being the risk-free rate related to the liability, is 2.40% (December 31, 2014 - 2.40%). Inflation of 1.70% (December 31, 2014 - 1.70%) has also been factored into the calculation. The Company also has $105,535 (December 31, 2014 - $105,535) in various reclamation bonds for its properties held by the British Columbia Ministry of Energy, Mines and Petroleum Resources.
| Q2 2015 NOTES TO THE INTERIM CONDENSED FINANCIAL STATEMENTS | 13 |
| | | June 30, 2015 | | | December 31, 2014 | |
| Decommissioning obligation, beginning of period | $ | 5,177,607 | | $ | 2,011,282 | |
| Increase in estimated future obligations | | 31,287 | | | 3,099,549 | |
| Decommissioning obligation expenditures | | (2,591 | ) | | - | |
| Accretion expense | | 62,131 | | | 66,776 | |
| Decommissioning obligation, end of period | $ | 5,268,435 | | $ | 5,177,607 | |
| 10. | General and Administrative Expenses ("G&A") |
| | | Three Months Ended June 30 | | | Six Months Ended June 30 | |
| | | 2015 | | | 2014 | | | 2015 | | | 2014 | |
| Gross G&A | $ | 565,333 | | $ | 480,612 | | $ | 1,036,235 | | $ | 908,289 | |
| Capitalized G&A and overhead recoveries | | (47,842 | ) | | (102,032 | ) | | (55,301 | ) | | (255,969 | ) |
| Net G&A | $ | 517,491 | | $ | 378,580 | | $ | 980,934 | | $ | 652,320 | |
| Share-based payments | | 2,742 | | | - | | | 221,752 | | | - | |
| Total G&A | $ | 520,233 | | $ | 378,580 | | $ | 1,202,686 | | $ | 652,320 | |
| 11. | Finance Income and Expense |
| | | Three Month Ended June 30 | | | Six Months Ended June 30 | |
| | | 2015 | | | 2014 | | | 2015 | | | 2014 | |
| Finance expense: | | | | | | | | | | | | |
| Interest expense | $ | 115,775 | | $ | 64,918 | | $ | 223,783 | | $ | 128,861 | |
| Part XII.6 tax | | - | | | 4,440 | | | - | | | 7,500 | |
| Accretion of provision | | 31,066 | | | 8,753 | | | 62,131 | | | 17,506 | |
| Total | $ | 146,841 | | $ | 78,111 | | $ | 285,914 | | $ | 153,866 | |
The Company has a demand operating credit facility in the amount of $15,000,000 with Alberta Treasury Branches. The facility is secured by a general security agreement and a floating charge on all lands of the Company. The facility bears interest at the bank’s prime rate plus 1.75%, as well as a standby charge for any undrawn funds.
Pursuant to the terms of the credit facility, the Company has provided a financial covenant that at all times its working capital ratio shall not be less than 1.0. The working capital ratio is defined under the terms of the credit facilities as current assets including the undrawn portion of the revolving operating demand line credit facility, to current liabilities, excluding any current bank indebtedness.
At June 30, 2015, the Company has drawn a total of $9,438,835 from its credit facility (December 31, 2014 - $7,184,147) and was in compliance with the above financial covenant. During the period, the Company underwent the annual review of its credit facility, which was completed in July 2015 (see Note 17).
| 14 | Q2 2015 NOTES TO THE INTERIM CONDENSED FINANCIAL STATEMENTS |
Unlimited number of common shares without par value.
Issued and outstanding
As at June 30, 2015, the Company had 75,803,498 common shares issued and outstanding.
During the six months ended June 30, 2015, the Company issued 435,000 common shares for the exercise of stock options at $0.25 each.
The Company has a stock option plan in place and is authorized to grant stock options to officers, directors, employees and consultants whereby the aggregate number of shares reserved for issuance may not exceed 10% of the issued shares at the time of grant and 5% of the issued shares to each optionee. Stock options are non-transferable and have a maximum term of five years. Stock options terminate no later than 90 days (30 days for investor-related services) upon termination of employment or employment contract and one year in the case of retirement, death or disability. The grant price may not be less than the last closing price of the Company’s shares and not less than $0.10 per share.
During the six months ended ended June 30, 2015, the Company received gross proceeds of $108,750 from the exercise of 435,000 stock options at $0.25 each.
Details of the Company’s stock options as at June 30, 2015 are as follows:
| | | | | | | | | Changes in the Period | | | | | | | |
| | | | | | Balance | | | | | | | | | | | | Balance | | | Balance | |
| | | | | | Outstanding | | | | | | | | | | | | Outstanding | | | Exercisable | |
| Exercise | | Expiry | | | December 31, | | | | | | | | | Expired/ | | | June 30, | | | June 30, | |
| Price | | Date | | | 2014 | | | Granted | | | Exercised | | | Cancelled | | | 2015 | | | 2015 | |
| $0.25 | | 8-Mar-15 | | | 435,000 | | | - | | | (435,000 | ) | | - | | | - | | | - | |
| $0.26 | | 30-Sep-15 | | | 490,000 | | | - | | | - | | | - | | | 490,000 | | | 490,000 | |
| $0.30 | | 23-Dec-15 | | | 375,000 | | | - | | | - | | | - | | | 375,000 | | | 375,000 | |
| $0.30 | | 27-Jan-16 | | | 200,000 | | | - | | | - | | | - | | | 200,000 | | | 200,000 | |
| $0.38 | | 9-Feb-16 | | | 50,000 | | | - | | | - | | | - | | | 50,000 | | | 50,000 | |
| $0.40 | | 26-May-16 | | | 475,000 | | | - | | | - | | | - | | | 475,000 | | | 475,000 | |
| $0.48 | | 5-Jul-16 | | | 50,000 | | | - | | | - | | | - | | | 50,000 | | | 50,000 | |
| $0.70 | | 8-Feb-17 | | | 1,500,000 | | | - | | | - | | | - | | | 1,500,000 | | | 1,500,000 | |
| $0.65 | | 24-Apr-17 | | | 75,000 | | | - | | | - | | | - | | | 75,000 | | | 75,000 | |
| $0.61 | | 5-Jul-17 | | | 425,000 | | | - | | | - | | | - | | | 425,000 | | | 425,000 | |
| $0.50 | | 8-Mar-18 | | | 250,000 | | | - | | | - | | | - | | | 250,000 | | | 250,000 | |
| $0.55 | | 6-Jan-19 | | | 660,000 | | | - | | | - | | | - | | | 660,000 | | | 660,000 | |
| $0.65 | | 29-Sep-19 | | | 785,000 | | | - | | | - | | | - | | | 785,000 | | | 785,000 | |
| $0.61 | | 7-Oct-19 | | | 200,000 | | | - | | | - | | | - | | | 200,000 | | | 200,000 | |
| $0.24 | | 29-Jan-20 | | | - | | | 1,225,000 | | | - | | | - | | | 1,225,000 | | | 1,206,250 | |
| $0.39 | | 1-Mar-20 | | | - | | | 100,000 | | | - | | | - | | | 100,000 | | | 100,000 | |
| | | | | | 5,970,000 | | | 1,325,000 | | | (435,000 | ) | | - | | | 6,860,000 | | | 6,841,250 | |
| Weighted-average | | | | | | | | | | | | | | | | | | | |
| exercise price | | $ | 0.52 | | $ | 0.25 | | $ | 0.25 | | | - | | $ | 0.49 | | $ | 0.49 | |
| Q2 2015 NOTES TO THE INTERIM CONDENSED FINANCIAL STATEMENTS | 15 |
For the six months ended June 30, 2015, the Company recognized $221,752 (June 30, 2014 - $nil) in share-based payment expense from the granting of 1,325,000 incentive stock options (June 30, 2014 – nil) to directors, officers, employees and consultants of the Company, of which 1,300,000 vested immediately. On January 29, 2015, 25,000 stock options were granted to a company performing investor relations services at an exercise price of $0.24 each and vest 25% at each three-month interval from the grant date. As at June 30, 2015, $2,742 share-based payment expense was recognized for 6,250 stock options that vested in the period.
The fair value of the granted stock options was determined using the Black-Scholes option pricing model with the following weighted-average assumptions:
| | | June 30, 2015 | | | June 30, 2014 | |
| Expected life (years) | | 5.00 | | | - | |
| Interest rate | | 0.79% | | | - | |
| Volatility | | 91.71% | | | - | |
| Dividend yield | | 0.00% | | | - | |
| Fair value at grant date | $ | 0.17 | | | - | |
The weighted-average exercise price for stock options granted during the six months ended June 30, 2015 was $0.25 (June 30, 2014 - $nil). The forfeiture rate has been estimated at 0% (June 30, 2014 - nil).
During the six months ended June 30, 2015, the Company removed $92,359 (year ended December 31, 2014 - $184,094) from the share-based payment reserve and recorded a corresponding recovery in capital stock for exercised stock options.
Option pricing models require the input of highly subjective assumptions including the expected price volatility. Changes in the subjective input assumptions can materially affect the fair value estimate
| | (c) | Share purchase warrants |
As at June 30, 2015, the Company had no outstanding share purchase warrants.
| | (d) | Income (loss) per share |
| | | Three Months Ended June 30 | | | Six Months Ended June 30 | |
| | | 2015 | | | 2014 | | | 2015 | | | 2014 | |
| Income (loss) for the period | $ | (575,484 | ) | $ | 554,465 | | $ | (1,221,830 | ) | $ | 1,180,484 | |
Weighted average number of
common shares outstanding,
basic | | 75,803,498 | | | 68,335,652 | | | 75,713,498 | | | 64,849,484 | |
Dilutive stock options and share
purchase warrants | | - | | | 1,763,450 | | | - | | | 1,691,805 | |
Weighted average number of
common shares outstanding, fully
diluted | | 75,803,498 | | | 70,099,102 | | | 75,713,498 | | | 66,541,289 | |
Income (loss) per share, basic and
fully diluted | $ | (0.01 | ) | $ | 0.01 | | $ | (0.02 | ) | $ | 0.02 | |
| 16 | Q2 2015 NOTES TO THE INTERIM CONDENSED FINANCIAL STATEMENTS |
For the three and six months ended June 30, 2015, the Company incurred a loss; therefore, dilutive stock options and share purchase warrants were nil. For the three and six months ended June 30, 2014, the Company had dilutive options and share purchase warrants of 1,763,450 and 1,691,805, respectively.
The Company has a commitment to make monthly rental payments pursuant to the office rental agreement at its current location until May 30, 2018. The following table shows the Company’s rental commitment amounts for the next four fiscal years:
| | | 2015 | | | 2016 | | | 2017 | | | 2018 | |
| Rental commitment | $ | 95,613 | | $ | 191,226 | | $ | 191,226 | | $ | 79,678 | |
For the three months ended June 30, 2015, rent expense amounted to $47,639 (June 30, 2014 - $38,287). For the six months ended June 30, 2015, rent expense amounted to $95,209 (June 30, 2014 - $60,612).
| 15. | Related Party Transactions |
For the three and six months ended June 30, 2015, the Company paid fees of $10,000 and $20,000, respectively, to a director of the Company. These fees were charged for services provided by the Chairman of the Company’s Board of Directors.
Remuneration of key executive personnel, consisting of the Company’s officers, directors and Chairman, were awarded as follows for the three and six months ended June 30, 2015 and 2014:
| | | Three Months Ended June 30 | | | Six Months Ended June 30 | |
| | | 2015 | | | 2014 | | | 2015 | | | 2014 | |
| Short-term benefits | $ | 205,000 | | $ | 157,500 | | $ | 410,000 | | $ | 315,000 | |
| Share-based payments | $ | - | | $ | - | | $ | 135,660 | | $ | - | |
No long-term benefits were paid to related parties.
| 16. | Supplemental Cash Flow Information |
| | | Three Months Ended June 30 | | | Six Months Ended June 30 | |
| | | 2015 | | | 2014 | | | 2015 | | | 2014 | |
| Provided by (used in): | | | | | | | | | | | | |
| Accounts receivable | $ | 9,471 | | $ | 434,568 | | $ | 130,577 | | $ | (90,363 | ) |
| Prepaid expenses | | 21,736 | | | 15,061 | | | 43,232 | | | 15,020 | |
| Accounts payable and accrued liabilities | | 21,307 | | | 1,302,961 | | | (4,135,087 | ) | | 1,509,017 | |
| Total changes in non-cash working capital | $ | 52,514 | | $ | 1,752,589 | | $ | (3,961,277 | ) | $ | 1,433,674 | |
| Provided by (used in): | | | | | | | | | | | | |
| Operating activities | $ | (392,806 | ) | $ | 495,387 | | $ | (813,796 | ) | $ | (212,187 | ) |
| Investing activities | | 445,320 | | | 1,257,203 | | | (3,147,481 | ) | | 1,645,861 | |
| Financing activities | | - | | | - | | | - | | | - | |
| Total changes in non-cash working capital | $ | 52,514 | | $ | 1,752,589 | | $ | (3,961,277 | ) | $ | 1,433,674 | |
| Q2 2015 NOTES TO THE INTERIM CONDENSED FINANCIAL STATEMENTS | 17 |
Interest paid on the Company’s bank loan during the three months ended June 30, 2015 was $115,775 compared to $64,918 for the three months ended June 30, 2014. For the six months ended June 30, 2015 and 2014 the interest paid on the Company’s bank loan were $223,783 and $128,861, respectively.
On July 28, 2015, the Company announced that, following the annual review with its lender, its credit facility will remain at $15,000,000 with no changes to covenants or applicable margins on borrowing costs. Funds available under the credit facility are $14,000,000, and access to the remaining $1,000,000 is based on additional approval with the Company’s lender. The Company’s next review is scheduled for October 31, 2015.
The reconciliation of income tax computed at the blended statutory tax rate of 26.6% to income tax (recovery) expense is:
| | | Six Months Ended | | | Year Ended | |
| | | June 30, 2015 | | | December 31, 2014 | |
| Loss before income tax | $ | (816,730 | ) | $ | (1,538,255 | ) |
| Statutory income tax rate | | 26.6% | | | 26.00% | |
| Expected income tax expense (recovery) | | (217,250 | ) | | (399,946 | ) |
| Non-deductible items | | 17,702 | | | 21,720 | |
| Temporary differences of property and equipment | | | | | | |
| and evaluation and exploration assets | | 632,675 | | | 507,778 | |
| Effect of change in tax rate | | (28,027 | ) | | - | |
| Unused tax losses and tax offsets not recognized | | - | | | - | |
| Deferred tax expense (recovery) | $ | 405,100 | | $ | 129,552 | |
The Company operates in one reportable operating segment, being the acquisition, exploration, development and production of petroleum and natural gas interests. The Company’s assets and activities are located in Canada.
