AGM Documents 3

Yoho Resources Inc. Announces Year End Operating and Financial Results

Calgary, Alberta – December 14, 2005 - Yoho Resources Inc. ("Yoho" or the “Company”) is pleased to

announce the operating and financial results for the period from December 23, 2004 to September 30,
2005.

SUMMARY OF OPERATING AND FINANCIAL RESULTS

 Three Months Ended
Period from
December 23,
2004 to
September 30,
2005

 

December 31,
2004 (1)
March 31,
2005
June 30,
2005
September 30,
2005

Operating Production

         
Heavy oil (bbls/d)   302  307  257  233  267
Light oil and NGL (bbls/d) - - - 5 2
Natural gas (mcf/d) 2,091 1,821 1,772 1,578 1,735
BOE (boe/d) 650 610 553 501 556
Average Prices          
Heavy oil ($/bbl) 22.52 17.72 29.86 41.42 29.03
Light oil ($/bbl) - - - 69.93 -
Natural gas ($/mcf) 6.22 6.75 7.37 9.98 7.84
Financial ($)          
Petroleum & natural gas sales 178,234 1,595,241 1,887,918 2,357,191 6,018,584
Funds from operations 105,744 418,316 1,035,013 1,561,615 3,120,688
per share (basic & diluted) 0.08 0.04 0.09 0.12 0.34
Net income (loss) 3,360 32,265 (202,396) 1,606,033 1,439,262
per share (basic & diluted) - - (0.02) 0.13 0.16

(1) The results for the three months ended December 31, 2004 include nine days of oil and gas operations from the
acquisition of 11 petroleum and natural gas companies on December 23, 2004.

In the first fiscal quarter, Yoho has continued with exploration activity in the Peace River Arch. From
October to date, the Company has participated in the drilling of six (2.5 net) wells, resulting in one (0.5 net)
cased oil well, two (0.73 net) cased gas wells and three (1.3 net) wells which were dry and subsequently
abandoned. The two gas wells are currently undergoing completion operations and are expected to be on
production during the second fiscal quarter.

Yoho’s independent reserve evaluators, GLJ Petroleum Consultants, have evaluated the Company’s
reserves as at September 30, 2005.



 

 ProvedProved plus
Heavy Oil (Mbbl) 295 350
Light Oil and NGLs (Mbbl) 8 62
Natural Gas (MMcf) 1,538 2,707
BOE (1) 560 863
Present Value, before tax, at 10% discount ($ thousands) 14,573 17,001

(1) In conformity with National Instrument 51-101, Standards for Disclosure of Oil and Gas Activities (“NI 51-101), natural gas
volumes have been converted to barrels of oil equivalent (“boe”) using a conversion rate of six thousand cubic feet of natural
gas to one barrel of oil. This ratio is based on an energy equivalency conversion method primarily applicable at the burner tip
and does not represent a value equivalency at the wellhead. Readers are cautioned that the term “boe” may be misleading,
particularly if used in isolation.

 

Yoho’s voting common shares trade on the TSX Venture Exchange under the symbol “YO”.  Additional
information regarding Yoho Resources Inc. is available under the Company’s profile on SEDAR at
www.sedar.com.

The consolidated financial statements for the period from December 23, 2004 to September 30, 2005 and
the related MD&A are attached.

For more information please contact:

Wendy S. Woolsey
Vice President, Finance and CFO
Yoho Resources Inc.
Phone: (403) 537-1771 ext 102

The TSX Venture Exchange has neither approved nor disapproved the contents

of this press release.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain statements regarding Yoho Resources Inc. include management’s assessments of future plans and operations, may constitute forward-looking statements under applicable securities laws and necessarily involve known and unknown risks and uncertainties, most of which are beyond Yoho's control. These risks may cause actual financial and operating results, performance, levels of activity and achievements to differ materially from those expressed in, or implied by, such forward-looking statements.

Such factors include, but are not limited to: the impact of general economic conditions in Canada and the United States; industry conditions including changes in laws and regulations including adoption of new environmental laws and regulations, and changes in how they are interpreted and enforced; competition; the lack of availability of qualified personnel; fluctuations in commodity prices; the results of exploration and development drilling and related activities; imprecision in reserve estimates; the production and growth potential of Yoho's various assets; fluctuations in foreign exchange or interest rates; the ability to access sufficient capital from internal and external sources; and obtaining required approvals of regulatory authorities.

Accordingly, Yoho gives no assurance nor makes any representations or warranty that the expectations conveyed by the forward-looking statements will prove to be correct and actual results may differ materially from those anticipated in the forward looking statements. Yoho undertakes no obligation to publicly update or revise any forward-looking statements.

Yoho Resources Inc.
Management’s Discussion and Analysis
For the Period from December 23, 2004 to September 30, 2005

The following management’s discussion and analysis (“MD&A”) reviews Yoho Resources Inc.’s (“Yoho” or the “Company”) activities and results of operations for the period from December 23, 2004 to September 30, 2005 and should be read in conjunction with the consolidated financial statements for the period ended September 30, 2005.

CORPORATE

Yoho was continued under the laws of the Province of Alberta on December 23, 2004. On December 20, 2004, the shareholders of the Company appointed a new board of directors and recruited a management team for its newly acquired oil and gas business.

On December 21, 2004, the Company received approval of the Alberta Court of Queen's Bench pursuant to the Companies Creditor Arrangement Act (Canada) (the "CCAA") as well as the approval of the Ontario Superior Court of Justice pursuant to the Business Corporations Act (Ontario), on December 23, 2004, of a Plan of Arrangement (the “Arrangement”) between the Company, Yoho Resources Investment Partnership, VIQ Solutions Inc. ("VIQ Solutions") and the Company's shareholders and creditors. The transactions implemented under the Arrangement are described in note 1 of the consolidated financial statements.

Effective December 23, 2004, the Company acquired all of the issued and outstanding shares of 11 petroleum and natural gas companies and transformed itself into a petroleum and natural gas exploration, development and marketing company operating in western Canada.

BASIS OF PRESENTATION

The consolidated financial statements for the period from December 23, 2004 to September 30, 2005 include the results of operations from the petroleum and natural gas properties from the acquisition date of December 23, 2004. The Company has adopted “fresh-start’” accounting as a result of the corporate reorganization under the Arrangement. The deficit at the date of the corporate reorganization has been eliminated against the share capital. The comparative information for the prior year has not been presented as the results of the periods before the corporate reorganization are not comparable to the current periods. The MD&A for the period ended September 30, 2005 does not review activities and results of operations for the previous year, but focuses on the new oil and gas activities since December 23, 2004.

NON-GAAP FINANCIAL MEASURES

Yoho evaluates performance based on net income and funds from operations. Funds from operations and funds from operations per share are not measurements based on generally accepted accounting principles (“GAAP”), but are financial terms commonly used in the oil and gas industry. The Company’s funds from operations is detailed on the Consolidated Statement of Cash Flow and may not be comparable to other companies. Yoho calculates funds from operations per share using the same method and shares outstanding which are used in the determination of net income per share. The Company considers it a key measure as it demonstrates the ability of the Company to generate the funds necessary to finance future capital investments.

Yoho also uses “operating netbacks” as a key performance indicator. Operating netbacks do not have a standardized meaning prescribed by Canadian GAAP and therefore may not be comparable with the calculation of similar measures by other companies. Operating netbacks are determined by deducting royalties, production expenses and transportation from oil and gas sales revenue.

Funds from operations and operating netbacks are not intended to represent operating profits, nor should they be viewed as an alterative to cash flow provided by operating activities, net earnings or other measures of financial performance calculated in accordance with GAAP.

In conformity with National Instrument 51-101, Standards for Disclosure of Oil and Gas Activities (“NI 51- 101), natural gas volumes have been converted to barrels of oil equivalent (“boe”) using a conversion rate of six thousand cubic feet of natural gas to one barrel of oil. This ratio is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead. Readers are cautioned that the term “boe” may be misleading, particularly if used in isolation.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This discussion and analysis contains forward-looking statements related to future events or future performance.  Certain statements regarding Yoho Resources Inc. include management’s assessments of  future plans and operations, may constitute forward-looking statements under applicable securities laws  and necessarily involve known and unknown risks and uncertainties, most of which are beyond Yoho's  control. These risks may cause actual financial and operating results, performance, levels of activity and  achievements to differ materially from those expressed in, or implied by, such forward-looking statements.

Such factors include, but are not limited to: the impact of general economic conditions in Canada and the  United States; industry conditions including changes in laws and regulations including adoption of new  environmental laws and regulations, and changes in how they are interpreted and enforced; competition  from other producers, the lack of availability of drilling rigs and other field services, the lack of availably of
qualified personnel; fluctuations in commodity prices; the results of exploration and development drilling  and related activities; imprecision in reserve estimates; the production and growth potential of Yoho's  various assets; fluctuations in foreign exchange or interest rates; the ability to access sufficient capital  from internal and external sources; and obtaining required approvals of regulatory authorities.

Accordingly, Yoho gives no assurance nor makes any representations or warranty that the expectations conveyed by the forward-looking statements will prove to be correct and actual results may differ  materially from those anticipated in the forward looking statements.  Readers should not place undue  reliance on any such forward-looking statements, which speak only as of the date they were made.  Yoho  undertakes no obligation to publicly update or revise any forward-looking statements.

This MD&A was reviewed and approved by the Company’s Audit Committee and Board of Directors on  December 13, 2005.

Additional information regarding Yoho Resources Inc. is available under the Company’s profile on SEDAR
at www.sedar.com.
 
CHANGE IN ACCOUNTING POLICIES

During the first quarter, the Company adopted new accounting polices related to the accounting for the
petroleum and natural gas operations (see note 2 of the consolidated financial statements).  The initial
adoption of these accounting policies did not impact any prior periods of the Company.

SUMMARY OF QUARTERLY OPERATING AND FINANCIAL RESULTS

 

Three Months Ended

Period from December 23, 2004 to September 30, 2005

 

December 31, 2004 (1)

March 31, 2005

June 30, 2005

September 30, 2005

Operating

         

Production

         

Heavy oil (bbls/d)

302

307

257

233

267

Light oil and NGL (bbls/d)

-

-

-

5

2

Natural gas (mcf/d)

2,091

1,821

1,772

1,578

1,735

BOE (boe/d)

650

610

553

501

556

           

Reference Prices

         

Edmonton par oil ($/bbl)

47.24

50.10

52.88

63.72

53.49

LLB heavy oil ($/bbl)

28.52

30.28

31.97

44.31

33.77

AECO gas ($/GJ)

6.57

6.89

7.37

9.37

7.55

           

Average Prices

         

Heavy oil ($/bbl)

22.52

17.72

29.86

41.42

29.03

Light oil ($/bbl)

-

-

-

69.93

-

Natural gas ($/mcf)

6.22

6.75

7.37

9.98

7.84

           

Financial ($)

         

Petroleum and natural gas sales

178,234

1,595,241

1,887,918

2,357,191

6,018,584

Funds from operations

105,744

418,316

1,035,013

1,561,615

3,120,688

  per share (basic & diluted)

0.08

0.04

0.09

0.12

0.34

Net income (loss)

3,360

32,265

(202,396)

1,606,033

1,439,262

  per share (basic & diluted)

-

-

(0.02)

0.13

0.16

           

Operating Netback and Net Income per boe

       

Petroleum and natural gas sales

30.44

29.04

37.55

51.10

38.38

Royalties

(4.25)

(4.39)

(4.64)

(3.65)

(4.26)

Operating expenses

(5.09)

(6.07)

(4.69)

(7.10)

(5.91)

Processing fees

-

(7.38)

(3.46)

(0.32)

(3.79)

Transportation

-

(0.98)

(0.95)

(1.55)

(1.10)

Operating net back

21.10

10.22

23.81

38.48

23.32

General & administrative

(2.14)

(2.59)

(3.81)

(3.11)

(3.12)

Interest expense, net

(0.90)

0.05

0.65

(1.68)

(0.31)

Current taxes

-

(0.07)

(0.08)

0.16

-

Funds from operations

18.06

7.61

20.57

33.85

19.89

Depletion, depreciation and accretion

(17.49)

(17.66)

(17.21)

(20.43)

(18.37)

Stock based compensation

-

-

(6.19)

(3.02)

(2.87)

Gain on sale of short-term investment

-

10.63

-

-

3.72

Future income taxes

-

-

(1.20)

24.41

6.79

Net income (loss)

0.57

0.58

(4.03)

34.81

9.16

           

Total assets

24,997,971

23,435,965

25,626,711

29,127,571

29,127,571

(1) The results for the three months ended December 31, 2004 include nine days of oil and gas operations from the acquisition of the 11 petroleum and natural gas companies on December 23, 2004.

RESULTS OF OPERATIONS

Production: Production for the fourth quarter averaged 501 boe per day.  Oil production was 238 barrels per day and natural gas production was 1,578 mcf per day.  Production was lower in the fourth quarter compared to the third quarter due to natural declines and two low working interest gas wells that were shut in during the quarter.  The new oil wells drilled in the fourth quarter were not on production until late September, 2005 and did not contribute significantly to the total production for the quarter.

Production for the period ended September 30, 2005 averaged 556 boe per day.  Oil production was 267 barrels per day and natural gas production was 1,735 mcf per day. 

Revenue:  Petroleum and natural gas sales for the fourth quarter were $2,357,191.  During the fourth quarter, the Company received a net price of $41.42 per barrel for crude oil and natural gas liquids and $9.98 per mcf for natural gas.  The wellhead price received for the Company’s heavy oil is impacted by the heavy oil differential and the price of diluent added to the heavy oil in the Seal area to meet pipeline specifications.  Posted prices for heavy oil were higher during the fourth quarter as compared to the third quarter.

Petroleum and natural gas sales for the period ended September 30, 2005 quarter were $6,018,584.  Yoho received a net price of $29.03 per barrel for crude oil and natural gas liquids and $7.84 per mcf for natural gas. 

Royalties: Total royalties, net of ARTC, for the fourth quarter were $168,517 compared to $233,253 for the prior quarter.  Royalties for the fourth quarter were 7.1% of sales compared to 12.3% of sales for the third quarter.  The increased price received for heavy oil in the fourth quarter reduced the royalty rate as a percentage of sales revenue.

Royalties for the period ended September 30, 2005 were $667,954 (11.1% of sales revenue).

Operating Expenses: Operating expenses for the fourth quarter were $327,321 compared to $235,692 for the third quarter.  Oil operating expenses were $7.27 per barrel in the fourth quarter compared to $5.13 per barrel in the second quarter.  Natural gas operating expenses were $1.04 per mcf in the fourth quarter compared to $0.72 per mcf in the second quarter.  The increase in operating expenses per unit is due to the lower production volumes for the fourth quarter.  Natural gas operating expenses also increased due to the acquisition in July, 2005 of a working interest ownership in the facilities in the Company’s main gas producing area.  Yoho is now charged for operating costs in the area instead of processing fees.

Operating expenses for the period ended September 30, 2005 were $926,113.  Oil operating expenses averaged $6.01 per barrel and natural gas operating expenses averaged $0.97 per mcf.

Processing Fees:           The Company’s gas production is operated by third parties.  Yoho pays fees to other operators for processing, gathering and compression through third party facilities.  Processing fees for the fourth quarter were $14,798, compared to fees in the third quarter of $173,801.  The substantial decrease in processing fees in the fourth quarter is the result of the acquisition in July, 2005 of a working interest ownership in the facilities in the Company’s main gas producing area. 

Processing fees for fiscal 2005 were $593,863 ($1.21 per mcf).

Transportation:   Transportation expense during the fourth quarter was $71,373 compared to $47,756 during the previous quarter, as wet weather caused increased trucking charges on the Company’s oil properties.  The expense for the period from December 23, 2004 to September 30, 2005 was $173,016.

General and Administrative Expenses:   General and administrative expenses for the three months ended September 30, 2005 were $143,431 ($3.11 per boe) compared to $191,405 ($3.81 per boe) for the prior quarter.  The decrease is due to higher costs for consultants used during the third quarter.  During the period ended September 30, 2005, a total of $323,000 of corporate expenses relating to exploration and development activities were capitalized. 

Depletion, Depreciation and Accretion:   The provision for depletion, depreciation and accretion for the fourth quarter was $942,429 ($20.43 per boe) for the compared to $865,565 ($17.21 per boe) for the third quarter.  The increase in depletion is the result of the acquisition in July, 2005 of the natural gas facilities, which increased the cost base of property, plant and equipment without a corresponding increase in the Company’s petroleum and natural gas reserves.

Depletion, depreciation and accretion for the period ended September 30, 2005 was $2,880,536 ($18.37 per boe).

The petroleum and natural gas properties were subject to a ceiling test at September 30, 2005.  No write-down was required under this calculation.

Stock-based Compensation: During the fourth quarter, the Company expensed $139,160 in stock-based compensation expense related to outstanding stock options and warrants.  Stock-based compensation for the third quarter was $311,437.  The total stock-based compensation for the period from December 23, 2004 to September 30, 2005 was $405,597.

Income Taxes: At September 30, 2005, Yoho had a total of $17 million of non-capital losses available to reduce future taxable income and corporate income taxes.  In addition, the Company has other deductions of $12 million available to reduce future taxable income and capital losses of $6.4 million available to offset future taxable capital gains.  The future income tax recovery for the period ended September 30, 2005 of $1,065,600 is the result of the recognition of the benefit of the non-capital losses.

Net Income :   Net income for the fourth quarter was $1,606,033 ($0.13 per share basic and diluted).  Petroleum and natural gas sales were higher in the fourth quarter, as increased average prices received offset lowered production.  The increased revenue and future income tax recovery offset increased charges for depletion, depreciation and accretion.  Net income for the period from December 23, 2004 to September 30, 2005 was $1,439,262 ($0.16 per share basic and diluted) and included a $584,107 gain on the sale of marketable securities and a future income tax recovery of $1,065,600.

Funds from Operations:     Funds from operations for the three months ended September 30, 2005 were $1,561,615 ($0.12 per share basic and diluted based on 12,575,438 weighted average shares outstanding).  Funds from operations for the period from December 23, 2004 to September 30, 2005 were $3,120,688 ($0.34 per share basic and diluted based on 9,124,107 weighted average shares outstanding). 

 

Capital Expenditures

The following table summarizes the Company’s capital expenditures by quarter for the period from December 23, 2004 to September 30, 2005:

 

Three Months Ended

Period from

December 23, 2004 to

September 30, 2005

 

December 31, 2004 (1)

March 31, 2005

June 30, 2005

September 30, 2005

Land

$                   -

$  1,455,398

$  369,514

$    856,022

$  2,680,934

Seismic

-

468,317

663,208

442,146

1,573,671

Drilling and completion

-

642,776

334,108

2,190,755

3,167,639

Equipment and facilities

-

-

-

2,886,983

2,886,983

Other assets

-

183,108

158,235

187,569

528,912

Total exploration and development

-

2,749,599

1,525,065

6,563,475

10,838,139

Corporate acquisitions

 9,972,771

-

-

-

9,972,771

Total capital expenditures

$   9,972,771

$  2,749,599

$   1,525,065

$ 6,563,475

$   20,810,910

(1) The information for the three months ended December 31, 2004 includes the acquisition of the 11 petroleum and natural gas companies on December 23, 2004.

In February 2005, Yoho completed the acquisition of approximately 18,080 gross (9,040 net) acres of undeveloped oil and natural gas properties and related seismic assets which will be operated by the Company.   These lands are located in the Peace River Arch area of North Central Alberta.  The aggregate purchase price for these properties and seismic assets was $1,200,000, which was funded by the issue of 500,000 shares at $2.00 per share and $200,000 in cash. 

Since December 23, 2004, Yoho has acquired an additional 49,761 gross (23,700 net acres) of land.  Yoho has also acquired 236.4 km of 2D seismic data and shot a 15 km2 3D seismic program over the undeveloped land.   Yoho has participated in drilling eight (3.59 net) exploration wells in the Peace River Arch area resulting in three (1.5 net) exploration discoveries which were cased as oil wells and five (2 net) wells which were dry and subsequently abandoned.  Two of the oil wells were placed on production in late September, 2005, with the third oil well on production in October, 2005.  In July, 2005, the Company closed a purchase of a working interest in a gas production facility for a total purchase price of $2,700,000. 

LIQUIDITY AND CAPITAL RESOURCES

The Company has in place bank credit facilities which allow borrowings up to $4,000,000 under a revolving operating demand loan for general corporate purposes including capital expenditures.  The advances are due on demand and bear interest at prime plus 0.75% per annum.  The Company also has a Treasury Risk Line up to a maximum of $1,300,000 available for interest rate, foreign exchange and commodity prices risk management.  This obligation is to be settled based on contract maturities payable from corporate cash flow.  The credit facilities are secured by a $25,000,000 debenture with a floating charge over all assets and a negative pledge and undertaking to provide fixed charges on the Company's major producing petroleum and natural gas reserves.  No amounts were drawn under the bank credit facilities as at September 30, 2005.

During the three months ended March 31, 2005, Yoho completed a private placement financing of 405,273 non-voting common shares and 1,675,000 voting common shares, at the price of $2.00 per share, for aggregate proceeds of $4,160,546. 

In May 2005, the Company completed a private placement financing of 1,033,000 shares at a price of $2.00 per share for total gross proceeds of $2,066,000.  Also issued as part of the private placement were 1,000,000 warrants to purchase a total of 1,000,000 voting common shares of the Company.  The warrants have an exercise price of $2.50, are exercisable on November 13, 2007 and expire December 13, 2007.

The Company has granted 1,105,000 options under the share option plan to employees, officers and directors.  The options have a $2.00 exercise price and vest one third immediately, and one third on each of the first and second anniversaries of the date of the grant and expire five years from the date of grant. 

In July, 2005, the Company closed a purchase of a working interest in a gas production facility for a total purchase price of $2,700,000.  In August, 2005, the Company repaid the demand promissory notes due to shareholder totaling $1,050,000.  These transactions were financed by the cash received from the prior equity issues.

In October, 2005, the Company completed a private placement financing of 140,000 units, at the price of $2.00 per unit for total proceeds of $280,000.  Each unit consisted of one voting common share and a warrant (the "Warrants") to purchase a total of 92,226 voting common shares of the Company.  The Warrants have an exercise price of $2.50, are to vest 30 months from the date of issuance and, upon vesting, are exercisable for a period of 30 days. 

The cash generated by funds from operations, the equity issues and available through the credit facility will allow Yoho to fund its planned capital expenditures for the next fiscal year. 

OFF BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS

Yoho has various contractual obligations and commitments arising in the normal course of operations and financing activities. The commitments have been disclosed in note 13 to the consolidated financial statements.  These obligations and commitments have been considered when assessing the cash requirements in the above discussion of future liquidity.

The Company’s bank credit facilities are subject to periodic review, with the next review to be before January 31, 2006.  Yoho does not expect any material changes to the bank credit facility as a result of this review.

The Company does not have any arrangements or obligations that are not reflected in the consolidated financial statements.

RELATED PARTY TRANSACTIONS

The Company’s related party transactions are disclosed in note 11 to the consolidated financial statements.

RISK AND RISK MANAGEMENT

The exploration for and the development, production and marketing of petroleum and natural gas involves a wide range of business and financial risks, some of which are beyond the Company’s control.  Included in these risks are the uncertainty of finding new reserves, the fluctuations of commodity prices, the volatile nature of interest and foreign exchange rates, and the possibility of changes to royalty, tax and environmental regulations.  The petroleum industry is highly competitive and the Company competes with a number of other entities, many of which have greater financial and operating resources.

Operational risks include drilling unsuccessful or uneconomic exploration and development wells, cost overruns, reservoir performance, safety and environmental concerns, access to cost effective contract services, product marketing and hiring and retaining qualified employees.  The business risks facing the Company are mitigated in a number of ways.  Geological, geophysical, engineering, environmental and financial analyses are performed on new exploration prospects, development projects and potential acquisitions to ensure a balance between risk and reward.  Yoho employs a team of highly motivated and experienced staff skilled in managing these risks and uncertainties.  Management is familiar with operations and has extensive experience working in the Company’s primary area of operations, west central Alberta.  The Company also maintains an insurance program commensurate with its levels and scope of operations to protect against loss from destruction of assets, pollution, blowouts or other losses.

Despite best practice analysis being conducted on all projects, there are numerous uncertainties inherent in estimating quantities of petroleum and natural gas reserves, including future oil and natural gas prices, engineering data, projected future rates of production and the timing of future expenditures.  The process of estimating petroleum and natural gas reserves requires substantial judgment, resulting in imprecise determinations, particularly for new discoveries.  An independent engineering firm evaluates the Company’s properties annually to determine a fair estimate of serves.  The Reserves Committee, consisting of independent members of the Company’s Board of Directors, assists the Board in their annual review of the reserves evaluation.

The provision for depletion and depreciation in the financial statements and the ceiling test are based on reserves estimates.  Any future significant revisions could result in a full cost accounting write-down or material changes to the annual rate of depletion and depreciation.

Financial risks include fluctuations in commodity prices, exchange rates and interest rates, all of which are beyond control of the Company.  Yoho has access to and, when considered prudent, will use various financial instruments and fixed price physical sales contracts to manage its exposure to these financial risks.  The Company actively manages its working capital and debt positions.  Yoho may be required to use future equity issues or increased levels of borrowing to maintain its financial position or raise funds necessary to carry out significant capital expenditure programs.

Yoho is subject to a variety of regulatory risks that it does not control.  The Company has a safety first policy and maintains an Emergency Response Plan to effectively deal with operational or environmental matters that may arise.  Government regulations are monitored on an ongoing basis to ensure the Company continues to be in compliance.

OUTLOOK FOR 2006

The capital budget for Yoho for its fiscal year ending September 30, 2006 has been set at $17.7 million.  The Company plans on drilling 30 wells with an average 50% working interest.  The budget has been allocated as follows: $9.3 million for drilling and completing wells, $3.3 million for land and seismic and $2.6 million for facilities and $2.0 million for acquisitions.  The capital expenditures are to be funded by funds from operations and use of the bank credit facilities.

During the 2006 fiscal year, Yoho expects to continue its exploration program in the Peace River Arch with 20 (10 net) wells scheduled to be drilled.  In addition, a 10 (5 net) well development drilling program is planned for the Basset Lake area of northern Alberta.  After giving effect to the 2006 capital expenditure program, Yoho expects production to average 800 boe per day for fiscal 2006, with an exit production rate in September, 2006 of approximately 1,100 boe per day. 

 

Yoho Resources Inc.
Consolidated Balance Sheets
As at September 30, 2005 and 2004

 

September 30,

September 30,

 

2005

2004

Assets

(note 1)

Current assets

   

    Cash

$      2,724,468

$                 -

    Accounts receivable

3,807,229

-

    Current assets before corporate reorganization

-

2,907,154

 

6,531,697

2,907,154

     

Petroleum and natural gas properties (note 3)

18,115,877

-

Future income taxes (note 9)

4,479,997

-

Non-current assetsbefore corporate reorganization

-

2,710,017

 

$    29,127,571

$    5,617,171

     
     

Liabilities

   

Current liabilities

   

    Accounts payable and accrued liabilities

$        3,504,977

$                   -

    Current liabilities before corporate reorganization

-

6,065,940

 

3,504,977

6,065,940

     

Asset retirement obligations (note 5)

592,169

-

Non-current liabilities before corporate reorganization

-

95,085

 

4,097,146

6,161,025

     

Shareholders’ Equity

   

Share capital (note 6)

23,140,566

41,657,844

Contributed surplus (notes 6 and 7)

450,597

1,939,913

Cumulative foreign currency adjustments

-

(549)

Retained earnings (notes 1 and 8)

1,439,262

(44,141,062)

 

25,030,425

(543,854)

 

$    29,127,571

$     5,617,171

     

Commitments and contingencies (note 13)

   

Subsequent event (note 14)

   
     

See accompanying notes to the consolidated financial statements.

   
     

 

Yoho Resources Inc.
Consolidated Statements of Operations and Retained Earnings
Period from December 23, 2004 to September 30, 2005

 

Period from December 23, 2004 to

 

September 30, 2005

Revenue

 

Petroleum and natural gas sales

$        6,018,584

Royalties, net of Alberta royalty tax credit

(667,954)

Other income

661,440

 

6,012,070

Expenses

 

Operating

926,113

Processing fees

593,863

Transportation

173,016

General and administrative

489,365

Stock-based compensation (note 7)

450,597

Interest

124,918

Depletion, depreciation and accretion

2,880,536

 

5,638,408

   

Income before income taxes

373,662

   

Income taxes (recovery) (note 9)

 

Future

(1,065,600)

 

(1,065,600)

   

Net income

1,439,262

   

Deficit, beginning of period

(44,141,062)

Adjustment to deficit on corporate reorganization (note 1)

128,707

Reduction of deficit under reorganization (notes 1 and 6)

44,012,355

   

Retained earnings, end of period

$     1,439,262

   
   

Net income per share (note 8)

 

Basic and diluted

$              0.16

See accompanying notes to the consolidated financial statements.

 

Yoho Resources Inc.
Consolidated Statements of Cash Flows
Period from December 23, 2004 to September 30, 2005

 

Period from December 23, 2004 to

Cash provided by (used in):

September 30, 2005

   

Operating activities

 

Net income

$          1,439,262

Items not affecting cash:

 

    Stock-based compensation

450,597

    Depletion, depreciation and accretion

2,880,536

    Future income tax recovery

(1,065,600)

    Gain on sale of marketable securities

(584,107)

Funds from operations

3,120,688

Change in non-cash working capital

(1,107,824)

 

2,012,864

   

Financing activities

 

Issuance of share capital for cash, net of issue costs

13,041,546

Payment of notes payable

(4,500,000)

Payment of amount due to shareholder (note 11)

(1,050,000)

 

7,491,546

   

Investing activities

 

Petroleum and natural gas property expenditures

(9,838,139)

Proceeds on sale of marketable securities

2,389,757

Change in non-cash working capital

668,440

 

(6,779,942)

   

Change in cash during the period

2,724,468

Cash, beginning of period

-

Cash, end of period

$       2,724,468

   

See accompanying notes to the consolidated financial statements.

 

Yoho Resources Inc.
Notes to the Consolidated Financial Statements
Period from December 23, 2004 to September 30, 2005

1.         CORPORATE REORGANIZATION AND BASIS OF PRESENTATION

General

Yoho Resources Inc. (the “Company”), formerly VoiceIQ Inc., was incorporated under the Business Corporations Act of the province of Alberta on July 12, 1993 and by Articles of Continuance dated October 1, 1996, the Company was continued under the laws of the Province of Ontario.  On December 23, 2004, the Company was continued under the laws of the Province of Alberta.  On December 20, 2004, the shareholders of the Company appointed a new board of directors. 

Creditor settlement

On December 21, 2004, the Company received approval of the Alberta Court of Queen's Bench pursuant to the Companies’ Creditor Arrangement Act (Canada) (the "CCAA") as well as the approval, on December 23, 2004, of the Ontario Superior Court of Justice pursuant to the Business Corporations Act (Ontario), of a Plan of Arrangement (the “Arrangement”) between the Company, Yoho Resources Investment Partnership, VIQ Solutions Inc. ("VIQ Solutions") and the Company's shareholders and creditors.  The transactions implemented under the Plan of Arrangement are described below and in Note 7.

Basis of Presentation

The consolidated financial statements include the results of operations from the petroleum and natural gas properties from the acquisition date of December 23, 2004.  The Company has adopted “fresh-start’” accounting as a result of the corporate reorganization under the Arrangement.  The deficit at the date of the corporate reorganization has been eliminated against the share capital (note 6).  The comparative information for the prior year has not been presented as the results of the year before the corporate reorganization are not comparable to the current period.

Corporate Reorganization

On December 23, 2004, pursuant to the Plan of Arrangement, all of the Company's voice capture, digitization and compression assets and business were transferred to VIQ Solutions at a purchase price of $2,849,647.  The purchase price was paid through the issuance of 36,776,310 shares of VIQ Solutions to the Company.  These shares were subsequently distributed to the existing shareholders of the Company on that date.  The following is a summary of the transaction:

Net assets transferred:

 

Cash

$       236,234

Accounts receivable

517,577

Fixed assets

321,847

Outstanding shares of Voice IQ Australia Pty Limited

800,000

Intercompany loan receivable from VoiceIQ Australia Pty Limited

1,750,386

Intangible assets

400,000

Prepaid expenses and deposits

56,669

Accounts payable and accrued liabilities

(633,872)

Deferred revenue

(232,766)

Liabilities of the Company not compromised under the CCAA

(292,000)

Future obligations

(74,428)

Total purchase price

$     2,849,647

All of the liabilities noted above, to the extent not compromised under the CCAA, have been assumed by VIQ Solutions pursuant to the Arrangement and VIQ Solutions has indemnified the Company in respect of these obligations and any other liabilities related to the former technology business of the Company.

Selected financial information for the pre-reorganization operations is summarized below:

 

Period Ending

December 23, 2004

 

Gross revenue

$     2,711,101

Results of pre-reorganization operations:

 

Net loss from pre-reorganization operations, net of tax of nil

(525,932)

Net gain on creditor settlement under CCAA, net of tax of nil

1,653,699

Assets and liabilities transferred under corporate reorganization, net of tax of $nil

(999,060)

Adjustment to deficit on corporate reorganization

$      128,707

Acquisition of oil and gas companies

On December 23, 2004, the Company acquired all of the issued and outstanding shares of 960330 Alberta Ltd., 960331 Alberta Ltd., 960332 Alberta Ltd., 960333 Alberta Ltd., 960334 Alberta Ltd., Edam Joint Venture Ltd., Atlee Joint Venture Ltd., Sousa Joint Venture Ltd., Hamilton Lake III Joint Venture Ltd., Basset Lake Joint Venture Ltd. and Basset Lake III Joint Venture Ltd. (the "JV companies") and commenced operations as a petroleum and natural gas exploration and development company operating in western Canada.

The acquisitions were accounted for under the purchase method and their operations have been included from the date of acquisition.  The estimated fair value of the assets acquired and liabilities assumed at the date of acquisition is summarized below. 

Petroleum and natural gas properties

$     9,972,771

Current assets

3,073,130

Future income tax asset

4,479,997

Current liabilities

(1,704,612)

Asset retirement obligation

(406,666)

Total net assets acquired

$     15,414,620

Financed by:

 

Issue of 5,082,310 non-voting common shares at fair value

$    10,164,620

Issue of notes payable

4,500,000

Costs associated with acquisition

750,000

Total purchase price

$     15,414,620

The notes payable, issued to former shareholders of the JV companies, were repaid in January 2005. 

 

2.         SIGNIFICANT ACCOUNTING POLICIES

Consolidation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries and partnership from the respective dates of acquisition of the subsidiary companies.  Inter-company transactions and balances are eliminated upon consolidation.

Measurement Uncertainty

The preparation of the consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and revenues and expenses during the reporting period.  Actual results, including petroleum and natural gas sales, royalties and operating expenses, can differ from those estimates.

In particular, amounts recorded for depreciation and depletion and amounts used for ceiling test calculations are based on estimates of petroleum and natural gas reserves and future costs required to develop those reserves.  The Company’s reserve estimates are evaluated annually by an independent engineering firm.  By their nature, these estimates of reserves and the related future cash flows are subject to measurement uncertainty, and the impact on the consolidated financial statements of future periods could be material.

The amounts recorded for asset retirement obligations were estimated based on the Company’s net ownership interest in all wells and facilities, estimated costs to abandon and reclaim the wells and the facilities and the estimated time period during which these costs will be incurred in the future.  Any changes to these estimates could change the amount recorded for asset retirement obligations and may materially impact the consolidated financial statements of future periods.

In order to recognize stock-based compensation expense, the Company estimates the fair value of stock options and warrants granted using assumptions related to interest rates, expected life of the option, volatility of the underlying security and expected dividend yields.  These assumptions may vary over time.

Cash and cash equivalents

Cash and cash equivalents include monies on deposit and short-term investments, accounted for at cost, which have an initial maturity date of not more than 90 days.

Petroleum and Natural Gas Operations

The Company follows the full cost method of accounting for its petroleum and natural gas operations whereby all costs relating to the exploration for and development of petroleum and natural gas reserves are capitalized in one Canadian cost centre and charged against income, as set out below.  Such costs include land acquisition, drilling of productive and non-productive wells, geological and geophysical, production facilities, carrying costs directly related to unproved properties and corporate expenses directly related to acquisition, exploration and development activities and do not include any costs related to production or general overhead expenses.  These costs along with estimated future capital costs that are based on current costs and that are incurred in developing proved reserves are depleted and depreciated on a unit of production basis using estimated proved petroleum and natural gas reserves, with both production and reserves stated before royalties.  For purposes of this calculation, petroleum and natural gas reserves are converted to a common unit of measurement on the basis of their relative energy content where six thousand cubic feet of gas equates to one barrel of oil.  Costs of acquiring and evaluating unproved properties are excluded from costs subject to depletion and depreciation until it is determined whether proved reserves are attributable to the properties or impairment occurs.  Unproved properties are evaluated for impairment on an annual basis.

Gains or losses on the disposition of petroleum and natural gas properties are recognized only when crediting the proceeds to costs would result in a change of 20 percent or more in the depletion rate.

The net amount at which petroleum and natural gas properties are carried is subject to a cost recovery test (the “ceiling test”).  The ceiling test is a two-stage process which is to be performed at least annually.  The first stage of the test is a recognition test which compares the undiscounted future cash flow from proved reserves at forecast prices plus the cost less impairment of unproved properties to the net book value of the petroleum and natural gas assets to determine if the assets are impaired.  An impairment loss exists when the carrying amount of the petroleum and natural gas assets exceeds such undiscounted cash flow.  The second stage determines the amount of the impairment loss to be recorded.  The impairment is measured as the amount by which the net book value of the petroleum and natural gas assets exceeds the future discounted cash flow from proved plus probable reserves at forecast prices.  Any impairment is recorded as additional depletion and depreciation.

Joint Interests

A portion of the Company’s exploration, development and production activities is conducted jointly with others.  These consolidated financial statements reflect only the Company’s proportionate interest in such activities.

Asset Retirement Obligations

The Company recognizes a liability at discounted fair value for the future abandonment and reclamation associated with the petroleum and natural gas properties.  The fair value of the liability is capitalized as part of the cost of the related asset and amortized to expense over its useful life.  The liability accretes until the date of expected settlement of the retirement obligations.  The related accretion expense is recognized in the statement of operations.  The provision will be revised for any changes to timing related to cash flow or undiscounted abandonment costs.  Actual expenditures incurred for the purpose of site reclamation are charged to the asset retirement obligations to the extent that the liability exists on the balance sheet.  Differences between the actual costs incurred and the fair value of the liability recorded are recognized in income in the period incurred.

Future Income Taxes

The Company follows the liability method of accounting for income taxes.  Under this method, future income tax assets and liabilities are recognized, at substantively enacted rates, for differences between the amount reported for financial statement purposes and their respective tax basis.  The effect of a change in income tax rates on future income tax assets and liabilities is recognized in income in the period that the change occurs.  

Flow-through Shares

The Company has financed a portion of its exploration and development activities through the issue of flow-through shares.  Under the terms of the flow-through share agreements, the tax attributes of the related expenditure are renounced to the subscribers.  The estimated tax benefits transferred to shareholders are recorded as a future income tax liability at the time of renunciation and a reduction in share capital.

Revenue Recognition

Revenues from the sale of crude oil, natural gas and natural gas liquids owned by the Company are recognized when title passes from the Company to its customers.

Derivative Financial Instruments

The Company may enter into financial instruments and forward sales contracts to manage its exposure to fluctuations in commodity prices, interest rates and foreign exchange rates.  The Company does not use financial instruments for trading or speculative purposes.  Financial instruments used as hedging transactions must be documented and it must be demonstrated that the hedges are sufficiently effective in order to continue accrual accounting for positions hedged with financial instruments.  Financial instruments that do not qualify for hedge accounting are recognized in the balance sheet and measured at fair value, with changes in fair value reported separately in the statement of operations as income or expense.

Stock-based Compensation

The Company records compensation expense in the consolidated financial statements for stock options and warrants granted to directors, employees and consultants using the fair value method.  Fair values are determined using the Black‑Scholes option pricing model and assumptions regarding interest rates, underlying volatility of the Company’s stock and expected life of the options and warrants are made.  Compensation costs are recognized over the vesting period.

Per-share Amounts

Basic net income per share is computed by dividing net income by the weighted average number of shares outstanding during the year.  Diluted per share amounts reflect the potential dilution that could occur if stock options or warrants were exercised.  The treasury stock method is used to determine the dilutive effect of stock options and warrants, whereby any proceeds from the exercise of these or other dilutive instruments are assumed to be used to purchase shares at the average market price during the period.

3.         PETROLEUM AND NATURAL GAS PROPERTIES

 

September 30, 2005

September 30, 2004

Petroleum and natural gas properties

$    20,956,069

$               -

Accumulated depletion and depreciation

(2,840,192)

-

 

$    18,115,877

$              -

In calculating the depletion and depreciation provision for the period ended September 30, 2005, $3.9 million of costs relating to undeveloped properties were excluded from costs subject to depletion and depreciation.  During the period ended September 30, 2005, a total of $322,594 of corporate expenses relating to exploration and development activities were capitalized.

The petroleum and natural gas properties are subject to a ceiling test, which was calculated at September 30, 2005 using the following benchmark reference prices for the years 2006 to 2010 adjusted for commodity differentials and transportation specific to the Company:

 

2006

2007

2008

2009

2010

Edmonton ($Cdn/bbl)

70.50

64.75

60.00

56.50

54.75

Heavy crude (12API) at Hardisty ($Cdn/bbl)

36.00

35.75

35.25

35.25

35.00

Alberta Plant Gate ($Cdn/mcf)

10.10

8.60

7.85

7.30

7.30

4.         BANK CREDIT FACILITIES

The Company has in place bank credit facilities which allow borrowings up to $4,000,000 under a revolving operating demand loan for general corporate purposes including capital expenditures.  The advances are due on demand and bear interest at bank prime rate plus 0.75% per annum.  The Company also has a Treasury Risk Line up to a maximum of $1,300,000 available for interest rate, foreign exchange and commodity prices risk management.  This obligation is to be settled based on contract maturities payable from corporate cash flow.  The credit facilities are secured by a $25,000,000 debenture with a floating charge over all assets and a negative pledge and undertaking to provide fixed charges on the Company's major producing petroleum and natural gas reserves.  The credit facilities are subject to periodic review by the bank, with the next review to be before January 31, 2006.  No amounts were drawn under the bank credit facilities as at September 30, 2005.

5.         ASSET RETIREMENT OBLIGATIONS

 

September 30, 2005

September 30, 2004

Balance, beginning of period

$                -

$         -

Liabilities incurred

552,303

-

Accretion

39,866

-

Balance, end of period

$     592,169

$        -

The Company’s asset retirement obligations are based on the Company’s net ownership in wells and facilities.  Management estimates the costs to abandon and reclaim the wells and the facilities and the estimated time period during which these costs will be incurred in the future.  These costs are expected to be incurred between 2006 and 2020.  Estimated cash flow has been discounted at a credit-adjusted risk free rate of 9 percent and an inflation rate of 1.5 percent.

6.         SHARE CAPITAL

Pursuant to the Plan of Arrangement (note 1), the Company was continued under the Business Corporations Act (Alberta), which continuation included the deletion of the common shares from the Articles amended to include a new class of non‑voting common shares and a new class of voting common shares.  Existing shareholders exchanged each common share of the Company held by them for one share of VIQ Solutions and 0.012877 new common shares of the Company, resulting in a consolidation of the common shares of the Company.

Authorized

An unlimited number of voting common shares and an unlimited number of non‑voting common shares.

Issued

Voting Common Shares:

Number of shares

 

Amount

Balance, October 1, 2004

36,372,804

 

$  41,657,844

Issued for cash upon exercise of warrants

100,000

 

25,000

Issued for cash upon exercise of options

471,300

 

70,695

Surrendered for cancellation

(167,794)

 

-

Consolidation of voting common shares, December 23, 2004

(36,302,705)

 

-

Reduction of deficit under corporate reorganization

-

 

(42,066,039)

Issued to creditors under CCAA settlement

156,250

 

312,500

Issued for cash upon private placement, net of expenses

3,958,000

 

7,818,000

Flow-through shares issued for cash

1,250,000

 

3,000,000

Tax effect of flow-through shares

-

 

(1,128,600)

Issued for asset purchase

500,000

 

1,000,000

Balance September 30, 2005

6,337,855

 

$  10,689,400

Non-Voting Common Shares:

Number of shares

 

Amount

Issued for cash upon private placement, net of expenses

1,155,273

 

$    2,286,546

Issued on corporate acquisitions

5,082,310

 

10,164,620

Balance September 30, 2005

6,237,583

 

$  12,451,166

Total Common Shares:

Number of shares

 

Amount

Balance September 30, 2005

12,575,438

 

$  23,140,566

At September 30, 2005, the Company had fulfilled its commitments under the flow-through shares issued during the period.

Contributed Surplus

 

September 30, 2005

Balance September 30, 2004

$     1,939,913

Adjustment for corporate reorganization (note1)

(1,939,913)

Stock based compensation expense

450,597

Balance September 30, 2005

$        450,597

Warrants

In May 2005, the Company completed a private placement financing of 1,033,000 shares at a price of $2.00 per share for total gross proceeds of $2,066,000.  Also issued as part of the private placement were 1,000,000 warrants to purchase a total of 1,000,000 voting common shares of the Company.  The warrants have an exercise price of $2.50, are exercisable on or after November 13, 2007 and expire on December 13, 2007.

Share option plan

Effective December 23, 2004, a new share option plan was adopted by the Company.  All options outstanding under the former plan were immediately cancelled.  A committee appointed by the Board of Directors may from time to time designate bona fide directors, employees, and consultants of the Company and its subsidiaries to whom options to purchase voting common shares of the Company may be granted and the number of voting common shares to be optioned to each.  Under the plan, the number of shares reserved for issuance pursuant to the exercise of all options may not exceed 10% of the issued and outstanding shares on a non‑diluted basis at any time. 

 

Number of options

 

Weighted Average Exercise Price

 

Weighted Average Remaining Term

Balance December 23, 2004

-

 

-

 

-

Granted

1,105,000

 

$        2.00

 

-

Balance September 30, 2005

1,105,000

 

$        2.00

 

4.6 years

           

Number Exercisable at September 30, 2005

368,333

 

$        2.00

 

4.6 years

The options vest one third immediately and one third on each of the first and second anniversaries of the date of the grant and expire on May 13, 2010. 

Reduction in deficit

The opening deficit, contributed surplus and cumulative foreign currency adjustments have been eliminated against share capital under the corporate reorganization (note 1).

7.       STOCK-BASED COMPENSATION

The Company has recorded stock-based compensation for all stock options and warrants granted.  The compensation expense is calculated based upon the fair value of stock options and warrants on the date of the grant using the Black-Scholes option pricing model using the following assumptions: expected volatility of 50%, risk-free interest rate of 4.5%; expected life of 2 years and expected future dividends of nil.  The compensation expense is recognized over the vesting period of the stock options and warrants.  During the period ended September 30, 2005, $450,597 was recognized as stock-based compensation expense with a corresponding increase to contributed surplus.

8.       NET INCOME PER SHARE

The Company applies the treasury stock method to assess the dilutive effect of outstanding stock options and warrants on net income per share.  Basic net income per share is calculated using net income and the weighted average number of common shares outstanding.  Diluted net income per share is calculated using net income and the weighted average number of diluted common shares outstanding.  There was no dilutive effect of the stock options and warrants outstanding for the period ended September 30, 2005 as the respective exercise prices did not exceed the average price of the shares during the period.

 

Period from

December 23, 2004 to

September 30, 2005

Weighted average number of common shares outstanding

9,124,107

Dilutive effect of stock options and warrants

-

Weighted average number of diluted common shares outstanding

9,124,107

9.       INCOME TAXES

The provision for income taxes differs from the result which would be obtained by applying the combined Canadian federal and provincial statutory income tax rate as follows

 

Period from

December 23, 2004 to

September 30, 2005

Income before income taxes

$         373,662

   

Expected income taxes at the statutory rate of 38.4%

$         143,486

Increase (decrease) in taxes resulting from:

 

Non-deductible Crown royalties

154,230

Resource allowance

(216,004)

Stock-based compensation

173,029

Gain on sale of marketable securities

(224,297)

Effect of change in valuation allowance

(1,070,798)

Other

(25,246)

Provision for income taxes

$     (1,065,600)

 

The components of future income taxes are as follows:

 

September 30,2005

September 30, 2004

Non-capital losses

$      6,367,978

$     5,326,000

Capital losses

1,113,890

2,159,000

Scientific research and experimental development

1,431,780

2,833,000

Share issue costs

204,542

184,000

Excess (shortfall) of tax bases of assets

 over carrying value

(2,027,280)

1,679,000

Asset retirement obligation

205,187

-

Valuation allowance

(2,816,100)

(12,018,000)

Future income tax asset

$     4,479,997

$       163,000

At September 30, 2005, the Company has available prior years’ losses of $17,890,000.  These losses are available to reduce taxable income in future years and, if not utilized, will expire as follows:

2006

$    2,866,000

2007

1,705,000

2008

7,702,000

2009

225,000

2010

1,539,000

2014

3,853,000

 

$  17,890,000

10.     FINANCIAL INSTRUMENTS

The Company's financial instruments consist of accounts receivable, accounts payable and accrued liabilities, amount due to shareholder.  Unless otherwise noted, it is management's opinion that the Company is not exposed to significant interest, currency or credit risks arising from these financial instruments. The fair value of these financial instruments approximates their carrying values, unless otherwise noted.

11.        RELATED PARTY TRANSACTIONS

During the period ended September 30, 2005, the following related party transactions were entered into:

A total of $260,070 of legal fees related to the corporate restructuring, the acquisition cost of the oil and gas business, share issue costs and general legal matters were incurred to a law firm in which one of the Company's directors is a partner.

During 2005, management and employees participated in private placement financings at a price of $2.00 per share.  Also 1,000,000 warrants to purchase a total of 1,000,000 voting common shares of the Company were issued to management and employees as part of the May, 2005 private placement.

As part of the acquisition of the JV companies, an amount was due to a shareholder consisting of demand promissory notes totaling $1,050,000.  The amount due to shareholder was paid during the period ended September 30, 2005.

At September 30, 2005, there was $800 in accounts payable outstanding to a company controlled by an officer and director in payment of a gross overriding royalty on certain Company lands.

 

12.        CASH FLOW INFORMATION

During the period the Company made the following cash outlays in respect of interest expense and current income taxes.

 

Period from

December 23, 2004 to

September 30, 2005

Interest

$     29,622

Current income taxes

$     32,617

13.        COMMITMENTS AND CONTINGENCIES

At September 30, 2005, the Company had commitments for the lease of office space totaling $21,183 for the remainder of 2005, $102,399 in 2006 and $27,072 in 2007.  The Company also has a commitment for natural gas transportation as follows: 2006 - $10,721; 2007 - $126,226; 2008 - $126,226; and 2009 - $31,124.

The refundable investment tax credits totaling $844,000 the Company received and accrued related to the years ended September 30, 2002, 2001 and 2000 are subject to review and audit by the Canada Revenue Agency.  Although the Company has used its best judgment and understanding of the related income tax legislation in determining these amounts, it is possible that the amounts could change by a material amount in the near term, dependent on the review and audit by the Canadian Revenue Agency. 

14.        SUBSEQUENT EVENT

In October, 2005, the Company completed a private placement financing of 140,000 units, at the price of $2.00 per unit for total proceeds of $280,000.  Each unit consisted of one voting common share and a warrant (the "Warrants") to purchase a total of 92,226 voting common shares of the Company.  The Warrants have an exercise price of $2.50, are to vest 30 months from the date of issuance and, upon vesting, are exercisable for a period of 30 days.