Bontan Corporation Inc. Consolidated Financial Statements

 

 

 

 

 

 

 

 

Bontan Corporation Inc.

 

Consolidated Financial Statements

 

For the Years Ended March 31, 2005 and 2004

 

(Canadian Dollars)

 

1.

 

 

 

 

 

 

AUDITORS’ REPORT

 

 

To the Shareholders of

Bontan Corporation Inc.

 

We have audited the consolidated balance sheets of Bontan Corporation Inc. as at March 31, 2005 and 2004, and the consolidated statements of income, retained earnings and cash flows for the years then ended. These consolidated financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

 

We conducted our audit in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.

 

In our opinion, these consolidated financial statements present fairly, in all materials respects, the financial position of the company as at March 31, 2005 and 2004, and the results of its operations and its cash flows for the years then ended in accordance with Canadian generally accepted accounting principles.

 

The consolidated financial statements for the year ended March 31, 2003 were audited by another firm of Chartered Accountants, who expressed an opinion without reservation on those consolidated financial statements in their report dated June 16, 2003.

 

 

 

 

 

July 27, 2005

Chartered Accountants

Thornhill, Ontario

 

2.

 

 

 

 

 

 

COMMENTS BY AUDITORS FOR U.S READERS ON CANADA - U.S. REPORTING DIFFERENCES

 

 

In the United States, reporting standards for auditors require the addition of an explanatory paragraph (following the opinion paragraph) when the consolidated financial statements are affected by conditions and events that cast substantial doubt on the Company's ability to continue as a going concern, such as those described in Note 1 to the consolidated financial statements.

 

The opinion on page 1 is expressed in accordance with Canadian reporting standards, which do not permit a reference to such events and conditions in the auditors' report when these are adequately disclosed in the consolidated financial statements.

 

 

 

 

 

July 27, 2005

Chartered Accountants

Thornhill, Ontario

 

 

3.

 

Bontan Corporation Inc.

 

Consolidated Balance Sheets

(Canadian Dollars)

March 31, 2005 and 2004

 

 

 

 

 

Approved by the Board                ”Kam Shah”              Director         ”Dean Bradley”       Director

                                                           (signed)                                                (signed)

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these financial statements

 

4.

 

Bontan Corporation Inc.

Consolidated Statements of Operations

(Canadian Dollars)

For the Years Ended March 31, 2005, 2004 and 2003

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these financial statements

 

5.

 

Bontan Corporation Inc.

Consolidated Statements of Cash Flows

(Canadian Dollars)

For the Years Ended March 31, 2005, 2004 and 2003

 

 

The accompanying notes are an integral part of these financial statements

 

6.

 

Bontan Corporation Inc.

Consolidated Statement of Shareholders’ Equity

(Canadian Dollars)

For the Years Ended March 31, 2005, 2004 and 2003

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these financial statements

 

7.

 

Bontan Corporation Inc.

Notes to Consolidated Financial Statements

(Canadian Dollars)

 

 

1.

NATURE OF OPERATIONS

 

Bontan Corporation Inc. (“the Company”) is a diversified natural resource company that operates and invests in major exploration and exploitation projects in countries around the globe through its subsidiaries by acquiring joint venture, indirect participation interest and working interest in those projects.

 

GOING CONCERN

 

The Company’s new business strategy, which evolved in fiscal 2004 involves activities in the exploration and development of oil, gas and mineral resources. The business of exploring for minerals and oil and gas involves a high degree of risk, and few properties that are explored are ultimately developed into producing mines and wells. Significant expenditures may be required to establish proven reserves, to develop recovery processes, and to construct mining, drilling and processing facilities at a particular site. It is not possible to ensure that the current exploration programs in which the Company holds interests will result in profitable commercial operations.

 

Although the Company has taken steps to verify title to resource properties in which it plans to acquire interest, in accordance with industry standards for the current stage of exploration of such properties, these procedures do not guarantee the Company's title. Property title may be subject to prior agreements and non-compliance with regulatory requirements.

 

The Company expects to selectively explore and develop the portfolio, through joint venture arrangements or otherwise. The scheduling and scale of such future activities will depend on results and market conditions. Repatriation of earnings and capital from overseas countries is subject to compliance with registration requirements. There can be no assurance that restrictions on repatriation will not be imposed in the future.

 

The Company has experienced negative cash flows from operating activities in recent years. The Company estimates that it will have adequate funds available from current working capital, operations, and committed and prospective financing to meet its existing corporate, administrative and operational obligations in the coming year. If adequate funds are not available from the sources noted above, then the Company may be required to raise additional financing through equity issuance, borrowings and /or sale of its assets. While the Company has been successful in the past in raising financing there is no assurance that the Company will be able to raise the necessary funding to meet its obligations.

 

These consolidated financial statements have been prepared on a going concern basis and do not include any adjustments that might be necessary should the Company be unable to continue as a going concern and, therefore, be required to realize its assets and discharge its liabilities in other than the normal course of business.

 

 

 

 

 

 

 

 

8.

 

Bontan Corporation Inc.

Notes to Consolidated Financial Statements

(Canadian Dollars)

 

 

2.

SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in Canada, which do not materially differ from accounting principles generally accepted in the United States (U.S. GAAP) except as described in Note 18 “Differences from United States Generally Accepted Accounting Principles”.

 

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries as detailed below. All inter-company balances and transactions have been eliminated on consolidation.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

9.

 

Bontan Corporation Inc.

Notes to Consolidated Financial Statements

(Canadian Dollars)

 

 

2.

SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Mineral Properties

 

The cost of each mineral property, or interest therein, together with exploration costs are capitalized until the properties to which they relate are placed into production, sold or abandoned. These costs will be amortized on the basis of units produced in relation to the proven reserves available on the related property following commencement of production. Costs of abandoned properties are written off to operations.

 

The costs capitalized do not necessarily reflect present or future values. The ultimate recovery of such amounts depends on the discovery of economically recoverable reserves, successful commercial development of the related properties, availability of financing and future profitable production or proceeds from the disposition of the properties.

 

Although the Company has taken steps to verify the title to resource properties in which it has an interest, in accordance with industry standards for the current stage of exploration of such properties, these procedures do not guarantee the Company’s title. Property title may be subject to unregistered prior agreements, transfers or aboriginal land claims and title may be affected by undetected defects.

 

Oil and Gas Properties Interest

 

Interests held in oil and gas properties are recorded on the basis of successful efforts method of accounting for oil and gas exploration and development activities under which direct acquisition costs of development properties, geological and geophysical costs associated with these properties and costs of development and exploratory wells that result in additions to proven reserves are capitalized. When the carrying value of a property exceeds its net recoverable amount that may be estimated by quantifiable evidence of an economic geological resource or reserve, joint venture expenditure commitments or the Company’s assessment of its ability to sell the property for an amount exceeding the deferred costs, provision is made for the impairment in value.

 

Short-term Investments

 

Short-term investments are investments that are either highly liquid or are to be disposed of within a one year period and are recorded at lower of cost and market value.

 

Foreign Currency Translation

 

The functional currency of the Company is the Canadian dollar.  Monetary assets and liabilities are translated at exchange rates in effect at the balance sheet date.  Non-monetary assets are translated at exchange rates in effect when they were acquired.  Revenue and expenses are translated at the approximate average rate of exchange for the year, except that amortization is translated at the rates used to translate related assets. The resulting gains or losses on translation are included in the consolidated statement of operations.

 

 

 

 

 

 

 

10.

 

Bontan Corporation Inc.

Notes to Consolidated Financial Statements

(Canadian Dollars)

 

 

2.

SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Future Income Taxes

 

The Company follows the asset and liability method of accounting for income taxes.  Under this method, future income tax assets and liabilities are determined based on temporary differences between financial reporting and tax bases of assets and liabilities, as well as for the benefit of losses available to be carried forward to future years for tax purposes.  Future income tax assets and liabilities are measured using substantively enacted tax rates and laws that will be in effect when the differences are expected to reverse.  Future income tax assets are recognized in the financial statements if realization is considered more likely than not.

 

Stock-Based Compensation Plan

 

The Company follows a fair value based method of accounting for all Stock-based Compensation and Other Stock-based Payments to employees and non-employees.  The fair value of all share purchase options is expensed over their vesting period with a corresponding increase to contributed surplus. Upon exercise of share purchase options, the consideration paid by the option holder, together with the amount previously recognized in contributed surplus, is recorded as an increase to share capital. The Company uses the Black-Scholes option valuation model to calculate the fair value of share purchase options at the date of grant.

The market value of the Company’s share on the date of issuance of shares under any stock compensation plan is considered as fair value of the shares issued.

 

Loss Per Share

 

Basic loss per share is calculated by dividing net loss (the numerator) by the weighted average number of common shares outstanding (the denominator) during the period.  Diluted loss per share reflects the dilution that would occur if outstanding stock options and share purchase warrants were exercised or converted into common shares using the treasury stock method and are calculated by dividing net loss applicable to common shares by the sum of the weighted average number of common shares outstanding and all additional common shares that would have been outstanding if potentially dilutive common shares had been issued.

The inclusion of the Company’s stock options and share purchase warrants in the computation of diluted loss per share would have an anti-dilutive effect on loss per share and are therefore excluded from the computation.  Consequently, there is no difference between basic loss per share and diluted loss per share.

 

 

3.

SHORT TERM INVESTMENTS

 

Short-term investments comprise marketable securities. The net cost of the securities on hand at March 31, 2005 of $ 92,735 was written down to its fair market value and an unrealized loss of $16,348 was adjusted against gain on disposal of investments in the consolidated statements of operations.

 

 

11.

 

Bontan Corporation Inc.

Notes to Consolidated Financial Statements

(Canadian Dollars)

 

 

4.

DEFERRED STOCK BASED COMPENSATION

 

Deferred stock option compensation relates to the fair value of shares and options issued under the Company’s Option Plans to consultants for services that will be performed during the period subsequent to the balance sheet date. Changes during the year were as follows:

 

 

 

5.

ADVANCES

 

The advances comprised funds provided to a non-affiliated corporation from time to time during the previous year for the purpose of acquiring an indirect participation interest (IPI) of approximately 0.88% in phase one of an oil exploration program in Papua New Guinea.

 

The advances carried no interest, and were secured by a first charge on the IPI and were convertible into such IPI at the option of the Company pursuant to the terms of the loan agreement dated July 21, 2003.

On July 9, 2004, the Company exercised its option and converted its advances into IPI. (See Note 6 )

 

 

6.

OIL AND GAS PROPERTIES INTERESTS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

12.

 

Bontan Corporation Inc.

Notes to Consolidated Financial Statements

(Canadian Dollars)

 

 

6.

OIL AND GAS PROPERTIES INTERESTS (Continued)

 

(i)

On July 9, 2004, the Company converted its advances to a non-affiliated corporation (note 5) for the purpose of acquiring an Indirect Participation Interest (IPI) in a Phase One oil exploration program in Papua New Guinea into (i) US$270,900 into 15,262 shares of InterOil Corporation according to the terms of the IPI agreement and (ii) the balance of the advances of approximately US$1.6 million for a 0.75% IPI. Under the IPI Agreement terms, the funds paid towards IPI would be used for exploration program involving maximum of 16 wells. The program is managed by InterOil Corporation, a non related public company.   Should the aggregate of all discoveries resulting from Phase One Exploration Program be less than 5 million barrels of recoverable Petroleum , the Company would receive 89,577 common shares of InterOil Corporation at an agreed valuation of US$17.75 per share under a backstop payment clause in the IPI agreement. Further, until InterOil Corporation elects to proceed with a completion program, the Company will have an option to opt out of the program and convert its IPI into 89,577 common shares of InterOil Corporation at an agreed valuation of US$17.75 per share.

 

Subsequent to the year-end, the Company sold its IPI to a non-related privately held institutional investor for US$ 3.2 million (see Note 15). As a result, cost of the interest in the oil properties is included under current assets in the financial statements as at March 31, 2005.

 

(ii)

On October 15, 2004, the Company entered into an exploration agreement with a private investors group in the United States under which it acquired 49% gross working interest in a gas exploration project in the State of Louisiana, USA. The total estimated project cost is approximately US$ 7 million. Up to March 31, 2005, several cash calls were made by the Operators of the project to pay for the seismographic costs and leases secured on the land targeted for exploratory drilling.  The Company’s share of these cash calls is included above under exploration costs.  Exploratory drilling on this project has not yet begun. Management does not believe that there has been an impairment in the value of the interest, therefore there is no need for any write off or reduction in the capitalized costs.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bontan Corporation Inc.

Notes to Consolidated Financial Statements

(Canadian Dollars)

 

 

7.

MINERAL PROPERTIES

 

 

 

 

Rio Abaeté

- On September 2, 2004, Astrogemas Mineraçāo Ltd. (AML), a subsidiary of Bontan Diamond Corporation, which in turn was a wholly owned subsidiary of the Company entered into a joint venture agreement with a Brazilian corporation to mine for diamonds on two claim areas totalling to 1,593 hectares situated in Rio Abaeté in the State of Mina Gerais in Brazil. Under the agreement, the Company would own a 95% interest and would also be entitled to royalties ranging from 2.5% to 5% on the gross proceeds of diamonds, which might be mined in areas licens