BERKLEY RESOURCES INC.
BALANCE SHEETS
(Prepared by Management)
As at | March 31, 2007 | December 31, 2006 | ||||||
(Unaudited) | (Audited) | |||||||
ASSETS | ||||||||
Current Assets | ||||||||
| Cash | $ | 143,959 | $ | 498,246 | ||||
| Accounts receivable | 476,226 | 607,436 | ||||||
| Taxes recoverable | 1,702 | 16,145 | ||||||
| Prepaid expenses | 31,360 | 15,933 | ||||||
| Deferred financing fees | 85,918 | 134,247 | ||||||
| 739,165 | 1,272,007 | |||||||
Oil and gas properties and equipment (Note 4) | 9,209,969 | 8,581,024 | ||||||
Other property plant and equipment (Note 6) | 4,312 | 4,724 | ||||||
Assets of discontinued operations (Note 2 and 5) | 2,038,924 | 2,038,924 | ||||||
| $ | 11,992,370 | $ | 11,896,679 | |||||
LIABILITIES | ||||||||
Current Liabilities | ||||||||
| Accounts payable and accrued liabilities | $ | 919,052 | $ | 1,015,594 | ||||
| Due to related parties (Note 10) | 96,694 | 68,433 | ||||||
| Bank loans and liabilities of discontinued operations (Note 2 and 7) | 3,864,253 | 3,377,612 | ||||||
| 4,879,999 | 4,461,639 | |||||||
Asset Retirement Obligation | 138,475 | 135,675 | ||||||
| 5,018,474 | 4,597,314 | |||||||
SHAREHOLDERS' EQUITY | ||||||||
Share Capital (Note 8) | 11,577,934 | 11,577,934 | ||||||
Contributed Surplus | 856,876 | 804,412 | ||||||
Deficit | (5,460,914 | ) | (5,082,981 | ) | ||||
| 6,973,896 | 7,299,365 | |||||||
| $ | 11,992,370 | $ | 11,896,679 | |||||
NOTE 1 – NATURE OF OPERATIONS
Approved by the Directors:
“Matt Wayrynen” Director “Lindsay Gorrill” Director
BERKLEY RESOURCES INC.
STATEMENTS OF OPERATIONS
(Unaudited - Prepared by Management)
Three Months Ended March 31, | ||||||||
2007 | 2006 | |||||||
OIL AND GAS REVENUE | $ | 473,977 | $ | 483,668 | ||||
Oil and gas production expenses | ||||||||
| Operating costs | 212,226 | 185,280 | ||||||
| Interest on loans | 49,710 | - | ||||||
| Amortization, depletion and accretion | 252,800 | 222,250 | ||||||
| 514,736 | 407,530 | |||||||
| NET OIL AND GAS INCOME (LOSS) | (40,759 | ) | 76,138 | |||||
GENERAL AND ADMINISTRATIVE EXPENSES | ||||||||
| Administrative, office services and premises | 85,237 | 80,958 | ||||||
| Stock based compensation | 52,464 | 73,940 | ||||||
| Management fees | 58,177 | 62,573 | ||||||
| Consulting fees | 28,310 | 63,594 | ||||||
| Professional fees | 5,597 | 22,280 | ||||||
| Finance fees on debt | 48,329 | - | ||||||
| Filing and transfer agent fees | 9,592 | 9,748 | ||||||
| Shareholder information | 10,055 | 2,974 | ||||||
| Amortization | 507 | 365 | ||||||
| (298,268 | ) | (316,432 | ) | |||||
OTHER INCOME (EXPENSES) | ||||||||
| Interest expense | (845 | ) | (842 | ) | ||||
| Write-down of receivable | (11,995 | ) | - | |||||
| Interest and other income | 664 | 6,494 | ||||||
| (310,444 | ) | (310,780 | ) | |||||
LOSS BEFORE DISCONTINUED OPERATIONS | (351,203 | ) | (234,642 | ) | ||||
| Discontinued Operations | (26,730 | ) | (33,088 | ) | ||||
LOSS FOR THE PERIOD | $ | (377,933 | ) | $ | (267,730 | ) | ||
BASIC AND DILUTED LOSS PER SHARE BEFORE DISCONTINUED OPERATIONS | $ | (0.02 | ) | $ | (0.02 | ) | ||
BASIC AND DILUTED LOSS PER SHARE AFTER DISCONTINUED OPERATIONS | $ | (0.02 | ) | $ | (0.02 | ) | ||
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING | 18,857,608 | 14,184,955 | ||||||
BERKLEY RESOURCES INC.
STATEMENTS OF DEFICIT
(Unaudited - Prepared by Management)
Three Months Ended March 31, | ||||||||
2007 | 2006 | |||||||
(Restated) | ||||||||
(Note 13) | ||||||||
DEFICIT, beginning of period | $ | (5,082,981 | ) | $ | (1,846,222 | ) | ||
| Loss for the period | (377,933 | ) | (267,730 | ) | ||||
DEFICIT, end of period | $ | (5,460,914 | ) | $ | (2,113,952 | ) | ||
BERKLEY RESOURCES INC.
STATEMENTS OF CASH FLOWS
(Unaudited - Prepared by Management)
Three Months Ended March 31, | ||||||||
2007 | 2006 | |||||||
CASH PROVIDED BY (USED IN) | ||||||||
OPERATING ACTIVITIES | ||||||||
| Loss for the period from continuing operations | $ | (351,203 | ) | $ | (234,642 | ) | ||
| Items not requiring cash in the year: | ||||||||
| Amortization, depletion and accretion | 253,307 | 222,615 | ||||||
| Finance fees on debt | 48,329 | - | ||||||
| Stock based compensation | 52,464 | 73,940 | ||||||
| 2,897 | 61,913 | |||||||
| Net change in non-cash working capital balances: | ||||||||
| Accounts receivable | 131,210 | 67,960 | ||||||
| Taxes recoverable | 14,443 | 16,705 | ||||||
| Prepaid expenses | (15,427 | ) | (15,716 | ) | ||||
| Prepaid oil and gas costs | - | 295,350 | ||||||
| Accounts payable and accrued liabilities | (96,542 | ) | 273,447 | |||||
| Due to related parties | 28,261 | (71,004 | ) | |||||
| 64,842 | 628,655 | |||||||
INVESTING ACTIVITIES | ||||||||
| Oil and gas properties and equipment, net | (878,945 | ) | (1,019,866 | ) | ||||
| Other property, plant and equipment | (95 | ) | - | |||||
| (879,040 | ) | (1,019,866 | ) | |||||
FINANCING ACTIVITIES | ||||||||
| Issuance of common shares | - | - | ||||||
| - | - | |||||||
Net cash increase (decrease) from continuing operations | (814,198 | ) | (391,211 | ) | ||||
Net cash increase (decrease) from discontinued operations (Note 2) | 459,911 | (163,257 | ) | |||||
Cash, beginning of period | 498,246 | 1,894,681 | ||||||
Cash, end of period | $ | 143,959 | $ | 1,340,213 | ||||
BERKLEY RESOURCES INC.
NOTES TO FINANCIAL STATEMENTS
March 31, 2007
(Unaudited - Prepared by Management)
NOTE 1 – NATURE OF OPERATIONS
Berkley was created on the amalgamation of Fortune Island Mines Ltd., Kerry Mining Ltd. and Berkley Resources Ltd. under the Company Act (British Columbia) on July 18, 1986. The Company is in the business of acquisition, exploration, development and production from petroleum and natural gas interests in Alberta and Saskatchewan, Canada. The Company also rents commercial office space in a building it owns in Vancouver, Canada. The commercial rental operations have been discontinued as a result of the planned sale of the building subsequent to the period end (Note 2).
These financial statements have been prepared on the basis of accounting principles applicable to a going concern which assumes that Berkley Resources Inc. (the “Company” or “Berkley”) will continue in operation for the foreseeable future in regards to its oil and gas operations and will be able to realize its assets and discharge its liabilities in the normal course of operations.
The Company’s ability to continue as a going concern is dependent upon its ability to raise additional capital through the issuance of treasury shares or debt and achieve profitable operations in the future.
If the going concern assumption were not appropriate for these financial statements, then adjustments would be necessary in the carrying values of assets and liabilities, reported revenues and expenses, and the balance sheet classifications used.
NOTE 2 – DISCONTINUED OPERATIONS
During the period ended March 31, 2007, the Company entered into an agreement to sell its real estate assets in Vancouver, British Columbia. Therefore the rental property asset and liability amounts are now disclosed as Assets of discontinued operations and Bank loans and liabilities of discontinued operations respectively on the Balance Sheet and the operations segment disclosed as discontinued operations on the Statement of Operations. The rental property asset is expected to be sold for $4,000,000 on or before September 7, 2007 and has a carrying value of $2,038,924. Summarized financial information relating to the discontinued operations is as follows:
Assets:
| March 31, 2007 | December 31, 2006 | |||||||
| Building, at cost | $ | 447,652 | $ | 447,652 | ||||
| Less: Accumulated amortization | (147,722 | ) | (147,722 | ) | ||||
| 299,930 | 299,930 | |||||||
| Land, at cost | 1,738,994 | 1,738,994 | ||||||
| $ | 2,038,924 | $ | 2,038,924 | |||||
Liabilities:
| March 31, 2007 | December 31, 2006 | |||||||
| Canadian Imperial Bank of Commerce loan | $ | 563,431 | $ | 577,612 | ||||
| Quest Capital Corp. loan | 2,800,000 | 2,800,000 | ||||||
| Deposit held on planned sale of rental property | 500,822 | - | ||||||
| $ | 3,864,253 | $ | 3,377,612 | |||||
BERKLEY RESOURCES INC.
NOTES TO FINANCIAL STATEMENTS
March 31, 2007
(Unaudited - Prepared by Management)
NOTE 2 – DISCONTINUED OPERATIONS (continued)
Operating results:
| Three Months Ended March 31, | ||||||||
| 2007 | 2006 | |||||||
| Rental Revenue | $ | 62,346 | $ | 60,832 | ||||
| Rental operations expenses | ||||||||
| Operating costs | 46,117 | 44,631 | ||||||
| Interest on bank loan | 42,959 | 45,925 | ||||||
| Amortization | - | 3,364 | ||||||
| 89,076 | 93,920 | |||||||
| Net Rental Loss | $ | (26,730 | ) | $ | (33,088 | ) | ||
Cash flows:
| Three Months Ended March 31, | ||||||||
| 2007 | 2006 | |||||||
| Operating activities | ||||||||
| Loss for the period | $ | (26,730 | ) | $ | (33,088 | ) | ||
| Amortization | - | 3,364 | ||||||
| (26,730 | ) | (29,724 | ) | |||||
| Financing activities | ||||||||
| Deposit received on planned sale of rental property | 500,822 | - | ||||||
| Bank and other loans received | - | (133,533 | ) | |||||
| Bank and other loans repaid | (14,181 | ) | - | |||||
| 486,641 | (133,533 | ) | ||||||
| Net cash increase (decrease) in cash from discontinued operations | $ | 459,911 | $ | (163,257 | ) | |||
NOTE 3 – BASIS OF PRESENTATION
These unaudited Financial Statements have been prepared in accordance with the instructions for the preparation of such financial statements contained in the CICA Handbook Section 1751. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such instructions. These Unaudited Financial Statements should be read in conjunction with the Audited Financial Statements and Notes thereto for the fiscal year ended December 31, 2006. These Financial Statements, and accompanying Notes, have not been reviewed by an auditor.
In the opinion of the Company’s management, all adjustments considered necessary for a fair presentation of these unaudited financial statements have been included and all such adjustments are of a normal recurring nature. Operating results for the nine month period ended September 30, 2006 are not necessarily indicative of the results that can be expected for the year ended December 31, 2006.
BERKLEY RESOURCES INC.
NOTES TO FINANCIAL STATEMENTS
March 31, 2007
(Unaudited - Prepared by Management)
NOTE 4 – OIL AND GAS PROPERTIES AND EQUIPMENT
March 31, 2007 | December 31, 2006 | |||||||
| Oil and gas properties and equipment, cost | $ | 16,914,596 | $ | 16,035,651 | ||||
| Less: Accumulated amortization and depletion | (7,704,627 | ) | (5,069,627 | ) | ||||
| Write-down of oil and gas properties | - | (2,385,000 | ) | |||||
| $ | 9,209,969 | $ | 8,581,024 | |||||
Oil and gas properties and equipment includes the cost of unproven properties of approximately $3,891,080 at March 31, 2007 (December 31, 2006 - $3,832,346), which are currently not subject to depletion.
NOTE 5 – ASSETS OF DISCONTINUED OPERATIONS
March 31, 2007 | December 31, 2006 | |||||||
| Building, at cost | $ | 447,652 | $ | 447,652 | ||||
| Less: Accumulated amortization | (147,722 | ) | (147,722 | ) | ||||
| 299,930 | 299,930 | |||||||
| Land, at cost | 1,738,994 | 1,738,994 | ||||||
| $ | 2,038,924 | $ | 2,038,924 | |||||
NOTE 6 – OTHER CAPITAL ASSETS
March 31, 2007 | December 31, 2006 | |||||||||||||||
Cost | Accumulated amortization | Net | Net | |||||||||||||
| Computer equipment | $ | 28,477 | $ | (26,174 | ) | $ | 2,303 | $ | 2,609 | |||||||
| Furniture and fixtures | 8,521 | (6,513 | ) | 2,008 | 2,114 | |||||||||||
| Truck | 39,040 | (39,039 | ) | 1 | 1 | |||||||||||
| $ | 76,038 | $ | (71,726 | ) | $ | 4,312 | $ | 4,724 | ||||||||
BERKLEY RESOURCES INC.
NOTES TO FINANCIAL STATEMENTS
March 31, 2007
(Unaudited - Prepared by Management)
NOTE 7 – BANK LOANS AND LIABILITIES OF DISCONTINUED OPERATIONS
March 31, 2007 | December 31, 2006 | |||||||
| Canadian Imperial Bank of Commerce loan | $ | 589,402 | $ | 577,612 | ||||
| Quest Capital Corp. loan | 2,800,000 | 2,800,000 | ||||||
| Deposit held on planned sale of rental property | 500,822 | - | ||||||
| $ | 3,864,253 | $ | 3,377,612 | |||||
The bank loan payable to the Canadian Imperial Bank of Commerce (“CIBC”) bears interest at prime plus 1.00% per annum, is due on demand, and is secured by a first mortgage in the amount of $650,000 over the Company’s rental property (Note 4) and an assignment of rents and insurance. Also, one director has supplied a guarantee of $300,000.
The bank loan payable to Quest Capital Corp (“Quest”) bears interest at 12.00% per annum with monthly interest only payments of approximately $28,000 and is secured by a promissory note, a second mortgage and assignment of rents over the Company’s real estate, a first charge debenture over the oil and gas assets and a general security agreement. The balance of the loan is due September 7, 2007. The lender, at its option, may extend the maturity date of this loan by one year at the request of the Company.
In addition, the Company has a $50,000 revolving demand credit line with the CIBC that bears interest at prime plus 1% per annum. As at March 31, 2007, there was a nil balance outstanding with regard to the credit line.
BERKLEY RESOURCES INC.
NOTES TO FINANCIAL STATEMENTS
March 31, 2007
(Unaudited - Prepared by Management)
NOTE 8 – SHARE CAPITAL
(a) Authorized
Unlimited common shares, without par value
| March 31, 2007 | December 31, 2006 | |||||||||||||||
Issued and fully paid: | Number of Shares | Amount | Number of Shares | Amount | ||||||||||||
| Balance, beginning of period | 18,857,608 | $ | 11,577,934 | 14,184,955 | $ | 8,762,671 | ||||||||||
| Issued in the year for cash: | ||||||||||||||||
| Pursuant to private placements: | ||||||||||||||||
| - flow-through for cash | - | - | 3,613,015 | 3,251,713 | ||||||||||||
| - non-flow-through for cash | - | - | 755,600 | 642,260 | ||||||||||||
| - non-flow-through for services | - | - | 301,538 | 196,000 | ||||||||||||
| Exercise of stock options | - | - | - | - | ||||||||||||
| Exercise of warrants | - | - | 2,500 | 3,750 | ||||||||||||
| Share issuance costs | - | - | - | (246,361 | ) | |||||||||||
| Future income taxes on renouncement of resource property expenditures | - | - | - | (1,114,694 | ) | |||||||||||
| Future income taxes on share issue costs | - | - | - | 82,595 | ||||||||||||
| Contributed surplus on exercise of stock options | - | - | - | 16,460 | ||||||||||||
| Balance, end of period | 18,857,608 | $ | 11,577,934 | 18,857,608 | $ | 11,577,934 | ||||||||||
(b) Stock options
March 31, 2007 | December 31, 2006 | |||||||||||||||
Number of shares subject to option | Weighted average exercise price per share | Number of shares subject to option | Weighted average exercise price per share | |||||||||||||
| Balance outstanding, beginning of period | 2,214,000 | $ | 0.68 | 1,634,000 | $ | 0.72 | ||||||||||
| Activity in the period: | ||||||||||||||||
| Granted | - | - | 600,000 | 0.56 | ||||||||||||
| Exercised | - | - | - | - | ||||||||||||
| Cancelled | (13,500 | ) | 0.70 | (20,000 | ) | 0.78 | ||||||||||
| Lapsed | - | - | - | - | ||||||||||||
Balance outstanding, end of period | 2,200,500 | $ | 0.67 | 2,214,000 | $ | 0.68 | ||||||||||
BERKLEY RESOURCES INC.
NOTES TO FINANCIAL STATEMENTS
March 31, 2007
(Unaudited - Prepared by Management)
NOTE 8 – SHARE CAPITAL (continued)
A summary of stock options outstanding is as follows:
Exercise Price Per Share | Expiry date | Number of Shares Remaining Subject to Options at End of Period | |
March 31, 2007 | December 31, 2006 | ||
| $0.52 | September 19, 2008 | 580,500 | 580,500 |
| $0.57 | September 19, 2008 | 150,000 | 150,000 |
| $0.81 | October 19, 2009 | 200,000 | 200,000 |
| $0.77 | October 29, 2009 | 37,500 | 37,500 |
| $0.90 | December 23, 2010 | 637,500 | 640,000 |
| $0.56 | September 21, 2011 | 595,000 | 600,000 |
| 2,200,500 | 2,214,000 | ||
The Company has adopted a 2006 Stock Option Plan (the “Plan”) which provides for the granting of options to acquire up to 2,837,000 shares. The Plan provides for the granting of options to employees and service providers, with no single optionee to be granted options in excess of 5% of the number of issued shares of the Company. All options are to be granted at fair value, and the term of the options granted is not to exceed five years. Options to acquire a total of 2,200,500 shares have been granted and are outstanding at March 31, 2007 under the Plan.
Effective January 1, 2004, the Company adopted the provisions of CICA Handbook Section 3870 “Stock Based Compensation and Other Stock Based Payments” with respect to the fair market value accounting for stock options granted to employees. In prior years, the Company recorded the fair market value of the stock options granted to non-employees only as compensation expense.
During the three months ended March 31, 2007, there were no stock options granted.
During the year ended December 31, 2006 the Company granted stock options for the purchase of up to 600,000 shares at a price of $0.56 per share exercisable on or before September 21, 2011 to directors, officers, employees and consultants of the Company. The fair value of the options to be charged to operations over the eighteen month vesting period is $198,900. The fair value of the options granted was estimated at the date of granting using the Black-Scholes option pricing model with the following assumptions: risk free interest rate of 3.91%, dividend yield of 0%, volatility factor of 55%, and an average life of 3 years.
The Black-Scholes valuation model was developed for use in estimating the fair value of traded options which are fully transferable and freely traded. In addition, option valuation models require the input of highly subjective assumptions including estimated stock price volatility. Because the Company’s stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.
BERKLEY RESOURCES INC.
NOTES TO FINANCIAL STATEMENTS
March 31, 2007
(Unaudited - Prepared by Management)
NOTE 8 – SHARE CAPITAL (continued)
(c) Warrants
A summary of share purchase warrants outstanding is as follows:
Exercise Price Per Share | Expiry date | Number of Warrants | |
March 31, 2007 | December 31, 2006 | ||
| $1.25 | December 28, 2007 | 636,000 | 636,000 |
| $1.20/$1.50 | April 30, 2007 / December 31, 2007 | 377,800 | 377,800 |
| 1,013,800 | 1,013,800 | ||
NOTE 9 – INCOME TAXES
The potential benefit of net operating loss carry forwards has not been recognized in the financial statements since the Company cannot be assured that it is more likely than not that such benefit will be utilized in future years.
NOTE 10 – RELATED PARTY TRANSACTIONS
Due to related parties consists of $16,742 (2006 - $16,651) due to Directors of the Company for Directors fees and expense reimbursements and $79,952 (2006 - $51,782) to a private company owned by public companies having common Directors that provides administrative services, office supplies and accounting services.
Management and consulting fees totaling $58,177 (2006 - $62,573) were paid to Directors and their private companies in the period.
Consulting fees totaling $16,000 (2006 - $24,000) were paid to a former Director and his spouse in the period. The commitment towards these fees has ended in the period.
Administrative services, office supplies and accounting charges totaling $26,624 (2006 - $26,427) were paid to Oniva International Services Corp. (“Oniva”), a private company owned by public companies having common Directors. The Company takes part in a cost sharing arrangement to reimburse Oniva for a variable percentage of its overhead expenses, to reimburse 100% of its out-of-pocket expenses incurred on behalf of the Company, and to pay a percentage fee based on the total overhead and corporate expenses. The agreement may be terminated with one-month notice by either party.
The transactions were in the normal course of operations and agreed to by the related party and the Company and have had been measured at the exchange amount.
BERKLEY RESOURCES INC.
NOTES TO FINANCIAL STATEMENTS
March 31, 2007
(Unaudited - Prepared by Management)
NOTE 11 – COMMITMENTS
On December 12, 2006, the Company entered into a consulting agreement with an unrelated party. The consultant will provide assistance in various financing activities. The Company will pay a cash fee of 7% of the gross amount of proceeds of an equity financing or mezzanine financing and 3% of gross amount and proceeds of a debt financing, loan, line of credit or other non-equity financing sourced by the consultant respectively. The agreement terminates on November 9, 2007.
As at March 31, 2007, $2,505,896 of eligible Canadian exploration expenditures had not yet been expended by the Company. The Company is committed to spend this amount on qualifying expenditures by December 31, 2007.
NOTE 12 – COMPARATIVE FIGURES
Certain of the comparative figures for 2006 have been reclassified, where applicable, to conform to the presentation adopted for the current year.
NOTE 13 – PRIOR PERIOD ADJUSTMENT
During the year ended December 31, 2006, the Company determined that the 2005 financial statements erroneously stated a write-down against its oil and gas properties and equipment. The original ceiling test calculations resulted in a write-down of $1,400,000 which was applied against operations in 2005. A correction in the calculations in accordance with Canadian GAAP resulted in no write-down being required. An adjustment has been made to credit the write-down expense and debit accumulated amortization and depletion for the amount of $1,400,000. The effect on the opening deficit for the three month period ended March 31, 2006 was a decrease from $3,246,222 to $1,846,222.
NOTE 14 – SUBSEQUENT EVENTS
Subsequent to the period ended March 31, 2007 the Company has arranged a non-brokered private placement of up to 3,320,000 flow-through shares at a price of $0.75 per share. Each flow-through share will entitle the investor to the tax benefits of the qualifying Canadian exploration expenses incurred by the Company, which will be “flowed-through” to the investor.
Subsequent to the period ended March 31, 2007 the Company has also arranged a non-brokered private placement of up to 680,000 units at a price of $0.75 per unit with each unit consisting of one common share and one-half non-transferable share purchase warrant. Each whole warrant under the Non Flow Through Offering will entitle the investor to purchase one additional share at a price of $1.00 during the first year from the date of closing.