Adulis Resources Inc.
02 December 2004
ADULIS RESOURCES INC.
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2004
ADULIS resources inc.
Notice to Reader
The accompanying unaudited interim consolidated financial statements of Adulis
Resources Inc. for the quarter ended September 30, 2004 have been prepared by
management and approved by the Audit Committee and the Board of Directors of the
Corporation. These statements have not been reviewed by the Corporation's
external auditors.
DATED the 29th day of November, 2004.
(signed) 'Ray Antony'
Ray Antony,
Chairman and Chief Financial Officer
#610, 706 - 7th Avenue S.W. Calgary, AB T2P 0Z1 Tel: (403) 266-7512 Fax: (403)
262-7833
ADULIS RESOURCES INC.
CONSOLIDATED BALANCE SHEETS (Note 1)
(Unaudited)
ASSETS
September 30, 2004 December 31, 2003
----------- -----------
Current assets:
Cash and cash $ 11,816,090 $ 2,855,865
equivalents
Accounts receivable 56,919 25,409
----------- -----------
11,873,009 2,881,274
Drilling
advance (Note
6) 10,768,000 --
Cash
restricted
(Note 4) 937,500 969,300
Other advances 6,310 4,544
Resource
properties
(Note 5) 6,713,398 3,317,376
----------- -----------
$ 30,298,217 $ 7,172,494
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued $ 182,237 $ 78,448
liabilities
Shareholders' equity:
Share capital (Note 7) 38,802,709 15,279,615
Contributed surplus 169,539 123,639
Deficit (8,856,268) (8,309,208)
--------- -----------
30,115,980 7,094,046
--------- -----------
$ 30,298,217 $ 7,172,494
========= ===========
ADULIS RESOURCES INC.
CONSOLIDATED STATEMENTS OF LOSS AND DEFICIT
(Unaudited)
Three months Nine months Three months Nine months
ended ended ended ended
September 30, September 30, September 30, September 30,
2004 2004 2003 2003
Revenues:
Interest $ 9,123 $ 43,354 $ -- $ --
Expenses:
Bank charges 48,089 48,314 226 296
and foreign
exchange
Consulting and 168,724 270,724 7,500 22,500
management
Office 28,097 55,702 5,175 27,137
Professional (2,840) 59,455 1,758 11,612
fees
Public company 55,315 69,872 1,938 11,175
costs
Travel 40,447 40,447 -- 3,530
Write-off of -- -- 243,752 243,752
mineral
properties
Stock-based -- 45,900 -- --
compensation
Note 7)
337,832 590,414 260,349 320,002
Net loss for the period (328,709) (547,060) (260,349) (320,002)
Deficit, beginning of period (8,527,559) (8,309,208) (7,763,646) (7,703,993)
Deficit, end of period $ (8,856,268) (8,856,268) $ (8,023,995) $ (8,023,995)
Loss per share $ 0.01 0.02 $ 0.03 $ 0.04
ADULIS RESOURCES INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
Three months Nine months Three months Nine months
ended ended September ended ended
September 30, 30, 2004 September September
2004 30, 2003 30, 2003
Cash flow related to the
following activities:
Operating:
Net loss $ (328,709) $ (547,060) $ (260,349) $ (320,002)
Adjustments
for:
Write-off of -- -- 243,752 243,752
mineral
properties
Stock-based -- 45,900 -- --
compensation
(328,709) (501,160) (16,597) (76,250)
Changes in non-cash working 26,377 72,279 (1,580) (31,288)
capital
(302,332) (428,881) (18,177) (107,538)
Financing:
Issue of common shares 11,114,924 20,748,094 -- --
Investing:
Advances to agent -- (1,766) -- --
Additions to resource properties (529,124) (621,022) -- (22,884)
Drilling advances (Note 5) -- (10,768,000) -- --
(529,124) (11,390,788) -- (22,884)
Net Increase (decrease) in cash 10,283,468 8,928,425 (18,177) (130,442)
Cash, beginning of period 2,470,122 3,825,165 43,705 155,950
Cash, end of period $ 12,753,590 12,753,590 $ 25,528 $ 25,528
Represented by:
Cash and cash equivalents 11,816,090 11,816,090 25,528 25,528
Restricted cash 937,500 937,500 -- --
12,753,590 12,753,590 25,528 25,528
ADULIS RESOURCES INC.
Notes to the Consolidated Financial Statements
September 30, 2004
(Unaudited) Page 1
1. CONTINUATION OF THE BUSINESS
The accompanying financial statements have been prepared on a going concern
basis which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business.
Adulis Resources Inc. (the 'Company') has incurred a net loss in the current
period and has a deficit amounting to $8,856,268. All of the Company's
operations involve resource properties in Colombia. The exploration and
development of these properties is dependent upon the ability of the Company to
obtain necessary financing to complete the discovery and development of
economically recoverable reserves and future profitable production from the
properties or realization of proceeds from disposition of the properties. Should
these events not occur, the Company may not be able to continue as a going
concern, and the carrying value of resource properties and related deferred
costs and the carrying value and classification of other assets and liabilities
may change accordingly.
In the opinion of management, the unaudited financial statements contain all
adjustments of a normal and recurring nature necessary to present fairly the
Company's financial position at September 30, 2004 and the results of its
operations and its cash flows for the three and nine months ended September 30,
2004 and 2003.
The results of operations and cash flows for the three and nine months ended
September 30, 2004 are not necessarily indicative of the results of operations
or cash flows to be expected for the year ending December 31, 2004. The notes to
these interim financial statements do not conform in all respects to the note
disclosure requirements of generally accepted accounting policies for annual
financial statements.
2. SIGNIFICANT ACCOUNTING POLICIES
Measurement uncertainty
The consolidated financial statements are prepared in accordance with Canadian
generally accepted accounting principles. Management makes 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. By
their nature, these estimates are subject to measurement uncertainty and the
effect on the consolidated financial statements of changes in such estimates in
future periods could be significant.
ADULIS RESOURCES INC.
Notes to the Consolidated Financial Statements
September 30, 2004
(Unaudited) Page 2
Income taxes
The Company follows the liability method of accounting for income taxes. Under
this method, future income tax assets and liabilities are measured based upon
temporary differences between the carrying values of assets and liabilities and
their tax basis. Income tax expense (recovery) is computed based on the change
during the year in the future tax assets and liabilities. Effects of changes in
tax laws and tax rates are recognized when substantively enacted.
The Company establishes a valuation allowance against future income tax assets
if, based on available information, it is more likely than not that some or all
of the future income tax assets will not be realized.
Basic and diluted loss per share
The basic loss per share is determined using the weighted average number of
shares outstanding during the year. The diluted loss per share, which is
calculated using the treasury method, is equal to the basic loss per share due
to the anti-dilutive effect of stock options and warrants.
Stock-based compensation
The Company has a stock option plan as described in Note 7. No compensation
expense has been recorded upon the granting of the options at market prices.
Effective January 1, 2002, the Company adopted CICA 3870 'Stock-Based
Compensation and Other Stock-Based Payments'. As permitted by CICA 3870, the
Company has applied this change prospectively for new awards granted on or after
January 1, 2002. For periods prior to January 1, 2002, the Company did not
recognize any compensation expense when stock options were issued to employees.
Cash and cash equivalents
Cash and cash equivalents includes short-term investments with a maturity of 90
days or less at the time of issue.
Oil and gas properties
The Company follows the full cost method of accounting for oil and gas
properties and related expenditures in accordance with the guideline issued by
the Canadian Institute of Chartered Accountants, whereby all costs associated
with the exploration for and development of oil and gas reserves are capitalized
in cost centers on a country-by-country basis and charged against earnings as
set out below. Such costs include royalty acquisition, land acquisition,
geological and geophysical, carrying charges of non-producing properties and
costs of drilling both productive and non-productive wells. Unevaluated
properties are assessed periodically for impairment.
ADULIS RESOURCES INC.
Notes to the Consolidated Financial Statements
September 30, 2004
(Unaudited) Page 3
Oil and gas properties cont'd
Gains or losses are not recognized upon disposition of oil and gas properties or
royalty interests unless crediting the proceeds against accumulated costs would
result in a change in the rate of depletion in a cost centre of 20% or more.
Depletion is provided on costs accumulated in producing cost centers using the
unit-of-production method. For purposes of the depletion calculation, gross
proved oil and gas reserves, as determined by engineering consultants, are used
and converted to a common unit of measure based on their approximate energy
content of six thousand cubic fee of natural gas to one barrel of crude oil. The
Company's resource properties are currently in the development stage;
accordingly, no depletion has been calculated against these assets.
The Company calculates a ceiling test whereby the carrying value of property and
equipment is compared to the sum of the undiscounted cash flows expected to
result from the future production of proved reserves and the sale of unproved
properties. Cash flows are based on third party quoted forward prices, adjusted
for transportation and quality differentials. Should the ceiling test result in
an excess of carrying value, the Company would then measure the amount of
impairment by comparing the carrying amounts of property and equipment to an
amount equal to the estimated net present value of future cash flows from proved
plus probable reserves and the sale of unproved properties. The Company's
risk-free interest rate is used to arrive at the net present value of the future
cash flows. Any excess carrying would be recorded as a permanent impairment.
3. CHANGES IN ACCOUNTING POLICIES
Asset retirement obligations
Effective January 1, 2004, the Company retroactively adopted the Canadian
Institute of Chartered Accountants ('CICA') Handbook Section 3110, 'Asset
Retirement Obligations'. The new recommendations require that the recognition of
the fair value of obligations associated with the retirement of tangible
long-lived assets be recorded in the period the asset is put into use, with a
corresponding increase to the carrying amount of the related asset. The
obligations recognized are statutory, contractual or legal obligations. The
liability is accreted over time for changes in the fair value of the liability
through charges to accretion which is included in depletion, depreciation and
accretion expense. The costs capitalized to the related assets are amortized to
earnings in a manner consistent with the depletion and depreciation of the
underlying asset. The impact of the adoption of the new standard on the
financial statements is insignificant.
ADULIS RESOURCES INC.
Notes to the Consolidated Financial Statements
September 30, 2004
(Unaudited) Page 4
Property and equipment - oil and gas
Effective January 1, 2004, the Company adopted Accounting Guideline 16, 'Oil and
Gas Accounting - Full Cost' (AcG-16'), which replaces Accounting Guideline 5,
'Full Cost Accounting in the Oil and Gas Industry'. AcG-16 modifies how the
ceiling test is performed and is consistent with CICA section 3063, 'Impairment
of Long-lived Assets'. The recoverability of a cost centre is tested by
comparing the carrying value of the cost centre to the sum of the undiscounted
cash flows expected from the cost centre's use and eventual disposition. If the
carrying value is unrecoverable, the cost centre is written down to its fair
value using the expected present value approach. This approach incorporates
risks and uncertainties in the expected future cash flows which are discounted
using a risk free rate. The adoption of AcG-16 had no effect on the Company's
financial results.
Impairment of long-lived assets
Effective January 1, 2004, the Company adopted CICA Handbook Section 3063,
'Impairment of Long-lived Assets', which had no effect on the consolidated
financial statements.
4. RESTRICTED CASH
On December 5, 2003, the Company acquired the rights to an exploration property
in Colombia and an associated US$750,000 term deposit. The term deposit is being
held by the Royal Bank of Canada as security for a letter of credit issued in
favor of Ecopetrol. The term deposit will be released to the Company on
completion of its exploration commitment related to the property acquired.
5. RESOURCE PROPERTIES
Dispositions and
December 31, Write-Offs December 31, September 30,
2002 Additions $ 2003 Additions 2004
$ $ $ $ $
Mining
properties
Eritrea 275,288 -- (275,288) -- -- --
Oil and gas
properties
Nigeria 121,148 22,884 (144,032) -- -- --
Colombia -- 3,317,376 -- 3,317,376 3,396,022 6,713,398
Total costs 396,436 3,340,260 (419,320) 3,317,376 3,396,022 6,713,398
ADULIS RESOURCES INC.
Notes to the Consolidated Financial Statements
September 30, 2004
(Unaudited) Page 5
RESOURCE PROPERTIES cont'd
During 2003, the Company sold its Eritrean mining properties and wrote-off its
Nigerian oil and gas properties, as it will not be pursuing the exploration and
development of these properties.
For the nine month period ended September 30, 2004, the Company capitalized
overhead costs relating to exploration and development activities in Colombia of
$105,040 (September 30, 2003 - $Nil).
Guachiria Block
The Company acquired a 25% working interest in the oil and gas rights in the
Guachiria Prospect in east central Colombia on December 22, 2003 upon payment of
US$800,000. In August, 2004 the Company acquired an additional 25% interest in
this Block for US$400,000.
Salinas Block
The Salinas Block consists of 325,000 acres located on the Guijira Peninsula in
northern Colombia.
There are currently three independent exploration prospects on the Salinas Block
('Salinas'). One exploratory well must be drilled by the Company on the Salinas
Block, to be spudded not later than December 28, 2004. If the Company does not
meet this commitment, it will be required to relinquish the Salinas Prospect and
its term deposit (see Note 4).
In July, 2004 the vendors of this property exercised the right to convert their
gross overriding royalty into 1,500,000 common shares of the Company. This
amount was recorded at the fair value of the shares at that date and $2,775,000
was added to the cost of the property.
6. DRILLING ADVANCE
In June, 2004, the Company completed the acquisition from Solana Petroleum
Exploration Colombia Limited ('Solana') of a 40% share of Solana's interest in a
group of ready to drill hydrocarbon prospects by the payment of $10,768,000
(US$8,000,000) pursuant to the terms of the Funding and Assignment Agreement
dated March 30, 2004 (the 'FAA') between Solana and Adulis. The $10,768,000
(US$8,000,000) has been used by Solana to satisfy a portion of its funding
obligations to Ramshorn International Limited ('Ramshorn') under the Exploration
Participation Agreement dated June 14, 2004 (the 'EPA') between Solana and
Ramshorn. Pursuant to the EPA, Solana agreed to fund 96% of Ramshorn's share of
drilling costs of an exploration drilling program (consisting of 5 exploration
wells) to earn 75% of Ramshorn's interest as set out in a Shared Risk Contract
dated May 25, 2004 (the 'SRC') entered into between Ramshorn and ECOPETROL in
respect of the area under contract pursuant to the SRC.
ADULIS RESOURCES INC.
Notes to the Consolidated Financial Statements
September 30, 2004
(Unaudited) Page 6
DRILLING ADVANCE cont'd
The amount of $10,768,000 (US$8,000,000) is held in a fiduciary account in the
name of Ramshorn and will be used solely to fund the Adulis/Solana share of
exploration costs and further funding may be required as the drilling program
proceeds.
7. SHARE CAPITAL
Authorized share capital consists of an unlimited number of common shares.
Issued
Number of Shares Amount
$
Common shares
Balance, December 31, 2002 8,480,766 8,123,626
Private placement (Note 7(a)) 7,500,000 4,500,000
Property acquisition (Note 7(b)) 5,000,000 3,000,000
Share issue costs:
Fair value of warrants granted (Note 7(e)) -- (246,699)
Other -- (344,011)
20,980,766 15,032,916
Warrants:
Fair value of warrants granted (Note 7(e)) -- 246,699
Balance, December 31, 2003 20,980,766 15,279,615
Exercise of stock options (Note 7(d)) 360,000 86,000
Private placement (Note 7(c)) 5,300,000 10,600,000
Exercise of purchase warrants (Note 7(c)) 5,300,000 11,925,000
Exercise of broker warrants (Note 7(e)) 250,000 150,000
Conversion of rights (Note 7(e)) 1,500,000 2,775,000
Share issue costs:
Fair value of warrants granted (Note 7(e)) -- (191,000)
Other -- (2,012,906)
33,690,766 38,611,709
Warrants:
Fair value of warrants granted (Note 7(e)) -- 191,000
Balance, September 30, 2004 33,690,766 38,802,709
a) On December 5, 2003, the Company issued 7,500,000 common shares at a price of
$0.60 per share for aggregate proceeds of $4,500,000.
ADULIS RESOURCES INC.
Notes to the Consolidated Financial Statements
September 30, 2004
(Unaudited) Page 7
SHARE CAPITAL cont'd
b) On December 5, 2003, the Company acquired the rights to an exploration
property in Colombia and an associated US$750,000 term deposit (see Note 4), in
exchange for 5,000,000 common shares.
c) On June 23, 2004, the Company completed a Private Placement of 5,300,000
units at a price of C$2.00 per unit for a total gross proceeds of C$10,600,000.
Each unit consisted of one common share and one common share purchase warrant (a
'Warrant'). These warrants were exercised in September, 2004 at $2.25 per share
for total gross proceeds of $11,935,000.
In connection with the Private Placement, the agent received a commission of
$689,000 cash and 265,000 Broker Warrants. Each Broker Warrant entitles the
agent to purchase one common share at the price of $2.00 per share during the
period expiring June 28, 2005. The agent also received a commission of 6.5% of
the proceeds received by Adulis on the exercise of the Purchase Warrants.
d) Stock option plan
For the nine months ended September 30, 2004, the Company issued 360,000 common
shares on exercise of stock options.
The Company has granted options to purchase common shares to directors,
officers, employees and non-employees. Each option permits the holder to
purchase one common share of the Company at the stated exercise price. Options
granted vest over one year and are exercisable on a cumulative basis over five
years. In accordance with the Company's stock option plan, these options have an
exercise price equal to the market price at the date of grant. At September 30,
2004, 820,000 (December 31, 2003 - 1,142,500) common shares are reserved for
issuance under the stock option plan.
September 30
2004 2003
Number Weighted Average Exercise Price Number Weighted Average Exercise Price
of ($ per share) of ($ per share)
Shares Shares
Outstanding, 1,142,500 0.43 462,500 0.16
beginning of
period
Granted, 100,000 1.91 680,000 0.60
during the
period
Exercised (360,000) 0.24 -- --
during the
period
Expired or
cancelled (62,500) 0.60 -- --
during the
period
Outstanding, 820,000 0.67 1,142,500 0.43
end of
period
Exercisable, 430,000 0.59 802,500 0.35
end of
period
ADULIS RESOURCES INC.
Notes to the Consolidated Financial Statements
September 30, 2004
(Unaudited) Page 8
SHARE CAPITAL cont'd
September 30, 2004
Exercise Number Weighted Average Weighted Number Weighted
Price of Remaining Average of Average
Range Options Outstanding Contractual Life Exercise Price Options Exercise
($ per share) (years) ($ per share) Exercisable Price
($ per share)
0.10 140,000 2.0 0.10 140,000 0.10
1.91 100,000 4.5 1.91 50,000 1.91
0.60 580,000 4.0 0.60 240,000 0.60
820,000 3.6 0.67 430,000 0.59
December 31, 2003
Exercise Number Weighted Average Weighted Number Weighted
Price of Remaining Average of Average
Range Options Outstanding Contractual Life Exercise Price Options Exercise
($ per share) (years) ($ per share) Exercisable Price
($ per share)
0.10 400,000 2.0 0.10 400,000 0.10
0.60 62,500 0.1 0.60 62,500 0.60
0.60 680,000 4.9 0.60 340,000 0.60
1,142,500 3.6 0.43 802,500 0.35
For stock options granted prior to January 1, 2004, the Company has elected to
apply the intrinsic value based method and accordingly, no compensation expense
has been recognized in the consolidated financial statements for stock options
granted to directors, officers and employees. Had the fair value method been
used, compensation expense of the following amounts (December 31, 2003 -
$131,573 would have been recognized. Stock-based compensation expense of $45,900
(December 31, 2003 - $54,822) related to options granted to non-employees has
been recognized in accordance with the fair value method with a corresponding
credit to contributed surplus.
Pro forma net loss - fair value method of accounting for stock options
September 30, 2004 December 30, 2003
$ $
Net loss attributable to common
shareholders
As reported (547,060) (602,215)
Pro forma (547,060) (736,788)
Basic and diluted loss per common
share
($ per share)
As reported (0.02) (0.06)
Pro forma (0.02) (0.07)
ADULIS RESOURCES INC.
Notes to the Consolidated Financial Statements
September 30, 2004
(Unaudited) Page 9
SHARE CAPITAL cont'd
e) Warrants and rights
On June 23, 2004, the Company granted to its agent, warrants to acquire 265,000
common shares of the Company at a price of $2.00 per share. These warrants
expire on June 28, 2005. On December 5, 2003, the Company granted to its agent,
warrants to acquire 450,000 common shares of the Company at a price of $0.60 per
share which expire on December 5, 2004. For the nine month period ended
September 30, 2004 (September 30, 2003 - $Nil), the stock-based compensation
expense of $191,000 (December 31, 2003 - $246,699) ascribed to these warrants
and has been recognized as a reduction to share capital in accordance with the
fair value method.
On December 5, 2003, the Company granted the vendors of the Salinas property in
Colombia, the rights to acquire 1,500,000 common shares of the Company in
exchange for their 3% gross overriding interest in the property. These rights
were converted to 1,500,000 common shares in July, 2004.
8. RELATED PARTY TRANSACTIONS
For the nine months ended September 30, 2004, management fees of $48,000
(September 30, 2003 - $22,500) were paid to a company controlled by an officer
of the Company and are included in consulting expenses.
These fees are for management services in the normal course of operations and
are measured at the exchange amount, which is the amount of consideration
established and agreed to by the related parties.
9. FINANCIAL INSTRUMENTS
Carrying values of financial instruments, which include cash and cash
equivalents, accounts receivable and accounts payable approximate their fair
value due to the short-term nature of these amounts. The fair value of the term
deposit classified as restricted cash is not significantly different from its
fair value.
The Company is exposed to risks from foreign exchange rates as it operates
internationally and holds foreign denominated cash and cash equivalents and
restricted cash.
ADULIS RESOURCES INC.
Notes to the Consolidated Financial Statements
September 30, 2004
(Unaudited) Page 10
10. SUBSEQUENT EVENTS
a) In July, 2004, the Company announced that it had entered into a share
purchase agreement dated June 25, 2004 with the shareholders of Solana Petroleum
Exploration Colombia Limited ('Solana') pursuant to which the Company has agreed
to purchase all of the issued and outstanding shares of Solana in consideration
for an aggregate of 12,000,000 common shares of the Company at a deemed price of
$2.00 per common share. The closing of the proposed acquisition is expected to
occur concurrently with the completion of the proposed financing described in
(d) below.
b) The proposed acquisition of the outstanding shares of Solana and issuance by
the Company of common shares in consideration thereof is subject to regulatory
approval. Furthermore, any common shares of the Company received by the
shareholders of Solana as part of the transaction will be subject to any
required statutory and regulatory hold periods.
c) On October 8, 2004, the Company acquired a 25% working interest in the
Gaviotas Block from Solana for $US500,000.
d) On November 24, 2004, the Company entered into an Agency Agreement to issue
18,180,818 shares at a price of $2.75 per share.
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