Interim Consolidated Financial Statements
September 30, 2009
(Unaudited and Expressed in Canadian Dollars)
Notice of No Auditor Review
The accompanying unaudited interim consolidated financial statements of Quaterra Resources Inc. (the “Company”) have been prepared by, and are the responsibility of, the Company’s management. The Company’s independent auditor has not performed a review of these interim consolidated financial statements.
Quaterra Resources Inc. |
(An Exploration Stage Company) |
Consolidated Balance Sheets |
(Unaudited and Expressed in Canadian Dollars) |
September 30, 2009 | December 31, 2008 | ||||||||
Assets | |||||||||
Current assets: | |||||||||
Cash and cash equivalents | $ | 4,756,444 | $ | 524,590 | |||||
Restricted cash | Note 4 | - | 56,028 | ||||||
Other receivables | 37,247 | 152,375 | |||||||
Prepaid and deposits | 45,225 | 165,389 | |||||||
Amount due from Joint Venture Partner | 16,591 | 88,110 | |||||||
4,855,507 | 986,492 | ||||||||
Equipment | Note 5 | 154,421 | 208,022 | ||||||
Mineral properties | Note 6 | 35,143,457 | 32,885,071 | ||||||
Reclamation bonds | 275,793 | 317,704 | |||||||
Deferred financing fees | 37,693 | - | |||||||
$ | 40,466,871 | $ | 34,397,289 | ||||||
Liabilities and Shareholders' Equity | |||||||||
Current liabilities: | |||||||||
Accounts payable and accrued liabilities | $ | 518,692 | $ | 1,106,783 | |||||
Due to related parties | Note 9 | 738,755 | 49,178 | ||||||
Current portion of promissory note | Note 6(h)(vi) | - | 334,950 | ||||||
1,257,447 | 1,490,911 | ||||||||
Liability component of convertible notes | Note 7 | 4,069,229 | 2,953,370 | ||||||
5,326,676 | 4,444,281 | ||||||||
Shareholders' Equity | |||||||||
Share capital | Note 8 | 55,328,428 | 48,318,994 | ||||||
Equity component of convertible notes | Note 7 | 371,812 | 259,164 | ||||||
Contributed surplus | 11,146,598 | 10,002,333 | |||||||
Deficit | (31,706,643 | ) | (28,627,483 | ) | |||||
35,140,195 | 29,953,008 | ||||||||
$ | 40,466,871 | $ | 34,397,289 | ||||||
Nature of operations and going concern (Note 1) | |||||||||
Commitments (Note 10) | |||||||||
Subsequent events (Note 15) |
Approved on behalf of the Board of Directors:
“Thomas Patton”(signed) | “Robert Gayton” (signed) | |
Thomas Patton | Robert Gayton |
(See accompanying notes to consolidated financial statements)
Page 2 of 27
Quaterra Resources Inc. |
(An Exploration Stage Company) |
Consolidated Statements of Operations |
(Unaudited and Expressed in Canadian Dollars) |
Three months ended September 30, | Nine months ended September 30, | |||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||
General Administrative Expenses | ||||||||||||
Administration | 22,965 | 23,865 | 67,755 | 60,165 | ||||||||
Amortization | 17,868 | 20,476 | 53,601 | 57,547 | ||||||||
Consulting | 107,942 | 217,541 | 291,643 | 539,197 | ||||||||
Directors and officers fees | 37,633 | 54,999 | 118,373 | 99,999 | ||||||||
Investor relations and communications | 31,324 | 70,986 | 118,588 | 356,929 | ||||||||
Office and general | 159,008 | 152,587 | 482,931 | 470,233 | ||||||||
Professional fees | 81,302 | 118,464 | 297,526 | 537,885 | ||||||||
Regulatory fees and taxes | 54,848 | 28,452 | 116,374 | 131,605 | ||||||||
Salaries and benefits | 86,902 | 88,722 | 290,181 | 326,046 | ||||||||
Stock based compensation (Note 8(c)) | 192,378 | 305,942 | 982,641 | 2,428,555 | ||||||||
Transfer agent | 13,673 | 9,295 | 28,813 | 22,475 | ||||||||
Travel and promotion | 14,036 | 60,625 | 33,789 | 123,458 | ||||||||
Operating Expenses | (819,879 | ) | (1,151,954 | ) | (2,882,215 | ) | (5,154,094 | ) | ||||
Other | ||||||||||||
General exploration costs | (165,668 | ) | (267,439 | ) | (327,791 | ) | (455,274 | ) | ||||
Foreign exchange gain/(loss) | 505,089 | 432,199 | 688,304 | 432,518 | ||||||||
Interest income | 522 | 17,572 | 875 | 53,169 | ||||||||
Interest and financing charges | (150,128 | ) | (1,569 | ) | (485,188 | ) | (7,374 | ) | ||||
Joint venture administration fee | 3,604 | 33,570 | 10,970 | 58,971 | ||||||||
Fair value of warrant re–pricing (Note 8(b)) | – | – | (84,115 | ) | – | |||||||
193,419 | 214,333 | (196,945 | ) | 82,010 | ||||||||
Loss and comprehensive loss for the period | (626,460 | ) | (937,621 | ) | (3,079,160 | ) | (5,072,084 | ) | ||||
Loss per share – basic and diluted | $ | (0.01 | ) | $ | (0.01 | ) | $ | (0.04 | ) | $ | (0.06 | ) |
Weighted average number of shares outstanding | 88,165,444 | 87,402,435 | 87,778,707 | 85,922,462 |
(See accompanying notes to consolidated financial statements)
Page 3 of 27
Quaterra Resources Inc. |
(An Exploration Stage Company) |
Consolidated Statements of Cash Flows |
(Unaudited and Expressed in Canadian Dollars) |
Three months ended September 30, | Nine months ended September 30, | |||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||
Operating Activities | ||||||||||||
Net loss for the period | $ | (626,460 | ) | $ | (937,621 | ) | $ | (3,079,160 | ) | $ | (5,072,084 | ) |
Items not involving cash: | ||||||||||||
Amortization | 17,868 | 20,476 | 53,601 | 57,547 | ||||||||
Commitment to issue shares for services | 37,500 | (22,500 | ) | 37,500 | 15,000 | |||||||
Stock based compensation | 192,378 | 305,942 | 982,641 | 2,428,555 | ||||||||
Shares issued for services | – | 45,000 | 45,000 | 67,500 | ||||||||
Fair value of warrant re–pricing | – | – | 84,115 | – | ||||||||
Interest expense on convertible notes | 141,385 | – | 452,731 | – | ||||||||
Deferred financing fees | 7,539 | – | 22,616 | – | ||||||||
Unrealized foreign exchange loss (gain) | (266,647 | ) | 1,869 | (473,555 | ) | 22,603 | ||||||
(496,437 | ) | (586,834 | ) | (1,874,511 | ) | (2,480,879 | ) | |||||
Changes in non–cash working capital | ||||||||||||
Accounts receivable | 11,229 | (38,612 | ) | 115,128 | (163,481 | ) | ||||||
Prepaid and deposits | 13,025 | 25,613 | 120,164 | (186,626 | ) | |||||||
Accounts payable and accrued liabilities | (243,691 | ) | (101,156 | ) | 70,166 | (35,797 | ) | |||||
Due to related parties | (39,222 | ) | (21,804 | ) | 689,577 | (47,797 | ) | |||||
Cash provided by (used in) operating activities | (755,096 | ) | (722,793 | ) | (879,476 | ) | (2,914,580 | ) | ||||
Financing Activities | ||||||||||||
Shares issued for cash | 6,666,847 | 54,581 | 6,700,067 | 10,970,546 | ||||||||
Net proceeds from convertible notes | – | (270,050 | ) | 1,410,260 | (270,050 | ) | ||||||
Cash provided by financing activities | 6,666,847 | (215,469 | ) | 8,110,327 | 10,700,496 | |||||||
Investing Activities | ||||||||||||
Expenditures on mineral properties | (1,150,372 | ) | (3,887,813 | ) | (3,168,455 | ) | (10,538,816 | ) | ||||
Due from Joint Venture partner | 919 | (9,904 | ) | 71,519 | 198,568 | |||||||
Purchase of equipment | – | – | – | (105,592 | ) | |||||||
Purchase of reclamation bonds | (50,908 | ) | (100,587 | ) | 41,911 | (120,302 | ) | |||||
Restricted cash | – | – | 56,028 | – | ||||||||
Cash used in investing activities | (1,200,361 | ) | (3,998,304 | ) | (2,998,997 | ) | (10,566,142 | ) | ||||
(Decrease) increase in cash during the period | 4,711,390 | (4,936,566 | ) | 4,231,854 | (2,780,226 | ) | ||||||
Cash and cash equivalents, beginning of period | 45,054 | 5,546,240 | 524,590 | 3,389,900 | ||||||||
Cash and cash equivalents, end of period | 4,756,444 | 609,674 | $ | 4,756,444 | $ | 609,674 | ||||||
Supplemental Cash Flow Information – Note 12 |
(See accompanying notes to consolidated financial statements)
Page 4 of 27
Quaterra Resources Inc. |
(An Exploration Stage Company) |
Consolidated Statements of Shareholders’ Equity |
(Unaudited and Expressed in Canadian Dollars) |
Common Shares | Convertible | Contributed | ||||||||||||||||
Shares | Amount | Notes | Surplus | Deficit | Total | |||||||||||||
Balance at December 31, 2007 | 83,167,005 | $ | 36,875,448 | $ | – | $ | 7,409,795 | $ | (21,793,302 | ) | $ | 22,491,941 | ||||||
Common shares issued during the period: | ||||||||||||||||||
Shares issued for cash, net of issue cost | 3,482,500 | 10,414,556 | 10,414,556 | |||||||||||||||
Exercise of options | 749,000 | 557,690 | 557,690 | |||||||||||||||
Shares issued for services | 64,978 | 90,000 | 90,000 | |||||||||||||||
Commitment to issue shares for services | 15,000 | 15,000 | ||||||||||||||||
Equity portion of convertible note | 259,164 | 259,164 | ||||||||||||||||
Fair value of options exercised | 381,300 | (381,300 | ) | – | ||||||||||||||
Stock–based compensation | 2,958,838 | 2,958,838 | ||||||||||||||||
Net loss for the year | (6,834,181 | ) | (6,834,181 | ) | ||||||||||||||
Balance at December 31, 2008 | 87,463,483 | 48,318,994 | 259,164 | 10,002,333 | (28,627,483 | ) | 29,953,008 | |||||||||||
Common shares issued during the period: | ||||||||||||||||||
Shares issued for cash, net of issue cost | 9,624,206 | 5,621,407 | 5,621,407 | |||||||||||||||
Exercise of options | 60,200 | 33,220 | 33,220 | |||||||||||||||
Exercise of warrants | 1,600,000 | 1,045,440 | 1,045,440 | |||||||||||||||
Shares issued for services | 103,462 | 45,000 | 45,000 | |||||||||||||||
Share issued for finders fees | 42,000 | 19,956 | 18,187 | 38,143 | ||||||||||||||
Shares issued for convertible notes | 137,947 | 95,165 | (7,338 | ) | 87,827 | |||||||||||||
Shares issued for property | 100,000 | 50,000 | 50,000 | |||||||||||||||
Commitment to issue shares – Note 8 (a) & 10(c) | 158,568 | 158,568 | ||||||||||||||||
Equity portion of convertible note | 119,986 | 119,986 | ||||||||||||||||
Fair value of options & warrants exercised | 99,246 | (99,246 | ) | – | ||||||||||||||
Stock–based compensation | 982,641 | 982,641 | ||||||||||||||||
Fair value of warrant re–pricing | 84,115 | 84,115 | ||||||||||||||||
Net loss for the period | (3,079,160 | ) | (3,079,160 | ) | ||||||||||||||
Balance at September 30, 2009 | 99,131,298 | $ | 55,328,428 | $ | 371,812 | $ | 11,146,598 | $ | (31,706,643 | ) | $ | 35,140,195 |
(See accompanying notes to consolidated financial statements)
Page 5 of 27
Quaterra Resources Inc. |
(An Exploration Stage Company) |
Consolidated Statements of Shareholders’ Equity |
(Unaudited and Expressed in Canadian Dollars) |
1. | NATURE OF OPERATIONS AND GOING CONCERN |
Quaterra Resources Inc. (the “Company”), an exploration stage company, was incorporated under the laws of British Columbia on May 11, 1993. The Company and its subsidiaries are engaged in the acquisition and exploration of mineral properties in the United States and Mexico. | |
The Company’s financial statements have been prepared on a going concern basis, which presumes that the Company will be able to realize its assets and discharge its liabilities in the normal course of business for the foreseeable future. As at September 30, 2009, the Company had an accumulated deficit $31,706,643 (December 31, 2008 - $28, 627, 483) with a working capital of $3,598,060. | |
The business of mining exploration involves a high degree of risk and there is no assurance that current exploration projects will result in future profitable mining operations. The Company has no source of revenue, and has significant cash requirements to meet its administrative overhead, pay its debts and liabilities, and maintain its mineral interests. The recoverability of amounts shown for mineral properties is dependent on several factors. These include the discovery of economically recoverable reserves, the ability of the Company to obtain the necessary financing, and / or proceeds from disposition of mineral properties. The carrying value of the Company’s mineral properties does not reflect current or future values. | |
2. | SIGNIFICANT ACCOUNTING POLICIES CHANGES |
These unaudited interim consolidated financial statements are prepared in accordance with Canadian generally accepted accounting principles (“GAAP”) and are consistent with the policies outlined in the Company’s audited consolidated financial statements for the year ended December 31, 2008 except the Company has adopted the following CICA standard effective January 1, 2009. These unaudited interim consolidated financial statements do not conform in all respects with disclosures required for annual financial statements and should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2008. | |
Goodwill and Intangible Assets | |
The CICA issued Handbook Section 3064, “Goodwill and Intangible Assets”, which establishes standards for the recognition, measurement, presentation and disclosure of goodwill subsequent to its initial recognition, and for intangible assets, subject to certain exceptions. Section 1000, “Financial Statements Concepts” was also amended to provide consistency with this new standard. On January 1, 2009, the Company adopted this change prospectively, with no impact on its consolidated financial statements. |
Page 6 of 27
Quaterra Resources Inc. |
(An Exploration Stage Company) |
Consolidated Statements of Shareholders’ Equity |
(Unaudited and Expressed in Canadian Dollars) |
2. | SIGNIFICANT ACCOUNTING POLICIES (Continued) Recent Accounting Pronouncements |
a) International Financial Reporting Standards (“IFRS”)
In February 2008, the CICA Accounting Standards Board (“AcSB”) confirmed that Canadian GAAP for publicly accountable enterprises will be converged with IFRS effective for fiscal years beginning on or after January 1, 2011. The official changeover date will apply for interim and annual financial statements relating to fiscal years beginning on or after January 1, 2011. IFRS uses a conceptual framework similar to Canadian GAAP, but there are some significant differences on recognition, measurement and disclosures. While the Company has begun assessing the adoption of IFRS, the financial reporting impact of the transition to IFRS cannot be reasonably estimated at this time.
b) Business Combinations, Consolidations, Non-Controlling Interests
In January 2009, the AcSB issued new Handbook sections: 1582, “Business Combinations”, 1601, “Consolidations”, and 1602, “Non-Controlling Interests”. These new standards will apply to fiscal years beginning on or after January 1, 2011. The Company has not yet determined the impact of the adoption of these standards on its consolidated financial statements.
3. | RISK MANAGEMENT AND FINANCIAL INSTRUMENTS |
The Company has classified cash and cash equivalents as held-for-trading; other receivables and amount due from Joint Venture Partner as loans and receivables; accounts payable and accrued liabilities and due to related parties as other financial liabilities; promissory note and convertible notes as held-to-maturity. | |
The Company’s risk exposure and the impact on the Company’s financial instruments are summarized below: |
a) | Fair Value | |
As at September 30, 2009, the recorded amounts for cash and cash equivalents, other receivables, accounts payable and accrued liabilities, and due to related party approximate their fair value due to their short-term nature. | ||
The fair value of the convertible notes was estimated using the discounted cash flow analysis based on the Company’s incremental borrowing rates at that time for similar types of arrangements. |
Page 7 of 27
Quaterra Resources Inc. |
(An Exploration Stage Company) |
Consolidated Statements of Shareholders’ Equity |
(Unaudited and Expressed in Canadian Dollars) |
3. | RISK MANAGEMENT AND FINANCIAL INSTRUMENTS (Continued) |
b) | Currency Risk | |
The Company operates internationally and is exposed to foreign exchange risk from fluctuations in exchange rates between the Canadian dollar and various currencies, primarily US dollars and Mexican pesos. The Company has not hedged its exposure to foreign currency fluctuations. As at September 30, 2009, the Company is exposed to currency risk as follows: |
US$ | Pesos | ||||||
Cash | 1,425,718 | 43,352 | |||||
Other receivable – IVA | 113,102 | ||||||
Joint Venture due | 15,494 | ||||||
Reclamation Bond | 257,582 | ||||||
Accounts payable and accrued liabilities | (395,793 | ) | |||||
Due to related parties | (400,000 | ) | |||||
Convertible notes | (3,800,528 | ) | |||||
Net foreign exposure | (2,897,527 | ) | 156,454 |
Based on the above net foreign currency exposures as at September 30, 2009, and assuming all other variables remain constant, a 10% weakening or strengthening of the Canadian dollar against a) the US dollar would result in an increase/decrease of $332,172 in the Company’s loss; and b) the Mexican peso would have no material impact in the Company’s loss for the period. | ||
c) | Interest Rate Risk | |
The Company’s cash held in bank accounts earns interest at variable interest rates. Due to the short-term nature of this financial instrument, fluctuations in market rates do not have a significant impact on estimated fair value as of September 30, 2009. The convertible notes are not subject to interest rate risk as the interest is at a fixed rate, but are subject to interest rate price risk as the market rate of interest changes. | ||
d) | Credit Risk | |
Credit risk is the risk of a financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its contractual obligations. Financial instruments that potentially subject the Company to credit risk consist of due from its Joint Venture Partner for shared exploration costs and cash and cash equivalents. The Company has mitigated the risks by holding the property as collateral for amount due from Joint Venture Partner and placing its cash and cash equivalents or short-term investments with Canadian chartered banks and U.S. commercial banks with a Dominion Bond Rating Service, Standard and Poor’s and/or Moody’s rating of single A or better. |
Page 8 of 27
Quaterra Resources Inc. |
(An Exploration Stage Company) |
Consolidated Statements of Shareholders’ Equity |
(Unaudited and Expressed in Canadian Dollars) |
3. | RISK MANAGEMENT AND FINANCIAL INSTRUMENTS (Continued) |
e) | Liquidity Risk | |
Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due. The Company manages liquidity risk by forecasting cash flows from operations and anticipated investing and financing activities and through the management of its capital structure. Accrued liabilities are due within the current operating period. |
4. | RESTRICTED CASH |
The Company had US$46,000 ($56,028) of cash on hand which was restricted as collateral for corporate credit cards with the Bank of Montreal. On June 12, 2009, the Company cancelled the corporate credit cards and received US$46,000 plus interest earned. | |
5. | EQUIPMENT |
Equipment is carried at cost less accumulated amortization. Details of equipment are as follows: |
Accumulated | ||||||||||
Cost | Amortization | Net Book Value | ||||||||
Computer | $ | 37,482 | $ | 24,406 | $ | 13,076 | ||||
Equipment | 42,327 | 25,839 | 16,488 | |||||||
Furniture | 39,387 | 17,354 | 22,033 | |||||||
Software | 52,452 | 46,279 | 6,173 | |||||||
Vehicles | 195,140 | 98,489 | 96,651 | |||||||
September 30, 2009 | $ | 366,788 | $ | 212,367 | $ | 154,421 |
Accumulated | ||||||||||
Cost | Amortization | Net Book Value | ||||||||
Computer | $ | 37,482 | $ | 17,568 | $ | 19,914 | ||||
Equipment | 42,327 | 21,242 | 21,085 | |||||||
Furniture | 39,387 | 11,166 | 28,221 | |||||||
Software | 52,452 | 37,313 | 15,139 | |||||||
Vehicles | 195,140 | 71,477 | 123,663 | |||||||
December 31, 2008 | $ | 366,788 | $ | 158,766 | $ | 208,022 |
Page 9 of 27
Quaterra Resources Inc. |
(An Exploration Stage Company) |
Consolidated Statements of Shareholders’ Equity |
(Unaudited and Expressed in Canadian Dollars) |
6. | MINERAL PROPERTIES |
The Company has interests in several mineral resources properties in Mexico and the United States. The total capitalized deferred exploration and acquisition costs of mineral properties for September 30, 2009 and December 31, 2008 were as follows. With the exception of Nieves which is owned 50%, all properties are owned 100% by the Company: |
Mexico | United States | ||||||||||||||||||||||||||
Nieves | Mirasol – | Crestones | MacArthur | Yerington | Alaska | Uranium | Other | Total | |||||||||||||||||||
Mineral Properties | Americas | Copper | Properties | Properties | |||||||||||||||||||||||
Acquisition | |||||||||||||||||||||||||||
Balance, December 31, 2008 | $ | 1,355,726 | $ | 349,961 | $ | 84,334 | $ | 812,380 | $ | 1,338,894 | $ | 254,772 | $ | 3,534,618 | $ | 1,827,174 | $ | 9,557,859 | |||||||||
Additions during the period | 43,786 | 17,640 | 2,808 | 252,546 | 270,254 | 46,352 | 218,13 | 302,135 | 1,153,652 | ||||||||||||||||||
Balance, September 30, 2009 | 1,399,512 | 367,601 | 87,142 | 1,064,926 | 1,609,148 | 301,124 | 3,752,749 | 2,129,309 | 10,711,511 | ||||||||||||||||||
Exploration | |||||||||||||||||||||||||||
Balance, December 31, 2008 | 1,734,890 | 1,679,42 | 1,392,870 | 7,452,228 | 689,125 | 2,357,173 | 6,982,347 | 1,039,153 | 23,327,212 | ||||||||||||||||||
Assays and surveys | 690 | 21,230 | 52,002 | 73,922 | |||||||||||||||||||||||
Camp costs | 5,530 | 11,216 | 87 | 70,534 | 1,787 | 25,200 | 2,766 | 117,120 | |||||||||||||||||||
Drilling services | 6,773 | 33,852 | 40,625 | ||||||||||||||||||||||||
Equipment rental | 9,519 | 1,776 | 11,295 | ||||||||||||||||||||||||
Exploration support | 1,550 | 10,781 | 125 | 117,912 | 182 | 5,759 | 35,988 | 3,221 | 175,518 | ||||||||||||||||||
Field supplies | 84 | 1,535 | – | 4,199 | 1,067 | 6,886 | |||||||||||||||||||||
Geological services | 27,168 | 14,625 | – | 204,298 | 22,482 | 40,808 | 120,424 | 29,647 | 459,452 | ||||||||||||||||||
Project management | 21,368 | 24,281 | 392 | 34,305 | 13,779 | 2,500 | 38,662 | 4,064 | 139,351 | ||||||||||||||||||
Travel | 2,128 | 1,088 | 29 | 1,396 | 141 | 1,658 | 10,662 | 334 | 17,436 | ||||||||||||||||||
Vehicle expenses | 7,392 | 6,294 | 36 | 28,125 | 537 | 20,155 | 591 | 63,130 | |||||||||||||||||||
Additions during the period | 65,910 | 97,823 | 669 | 522,290 | 37,121 | 52,512 | 287,786 | 40,623 | 1,104,734 | ||||||||||||||||||
Balance, September 30, 2009 | 1,800,800 | 1,777,249 | 1,393,539 | 7,974,518 | 726,246 | 2,409,685 | 7,270,133 | 1,079,776 | 24,431,946 | ||||||||||||||||||
Total acquisition and exploration | |||||||||||||||||||||||||||
at September 30, 2009 | $ | 3,200,312 | $ | 2,144,850 | $ | 1,480,681 | $ | 9,039,444 | $ | 2,335,394 | $ | 2,710,809 | $ | 11,022,882 | $ | 3,209,085 | $ | 35,143,457 |
1) Other properties include Willow Creek, Cave Peak, Wassuk Copper, Copper Canyon, Gray Hills, Big Bar, Carbon County, SW Tintic, Peg Leg, Jaboncillos, Cerro Blanco, East Durango, Inde, La Reforma, Carolina, and Azafranes.
Page 10 of 27
Quaterra Resources Inc. |
(An Exploration Stage Company) |
Consolidated Statements of Shareholders’ Equity |
(Unaudited and Expressed in Canadian Dollars) |
6. | MINERAL PROPERTIES (Continued) |
Mexico | United States | ||||||||||||||||||||||||||
Mineral Properties | Nieves | Mirasol – | Crestones | MacArthur | Yerington | Alaska | Uranium | Other | Total | ||||||||||||||||||
Acquisition | Americas | Properties | |||||||||||||||||||||||||
Balance, December 31, 2007 | $ | 1,302,933 | $ | 314,742 | $ | 78,097 | $ | 525,713 | $ | 979,078 | $ | 185,344 | $ | 2,956,192 | $ | 1,495,339 | $ | 7,837,438 | |||||||||
Additions during the year | 52,793 | 35,219 | 6,237 | 286,667 | 359,816 | 69,428 | 578,426 | 331,835 | 1,720,421 | ||||||||||||||||||
Balance, December 31, 2008 | 1,355,726 | 349,961 | 84,334 | 812,380 | 1,338,894 | 254,772 | 3,534,618 | 1,827,174 | 9,557,859 | ||||||||||||||||||
Exploration | |||||||||||||||||||||||||||
Balance, December 31, 2007 | 1,102,956 | 367,322 | 1,368,426 | 2,407,015 | 277,000 | 1,833,592 | 3,519,528 | 841,429 | 11,717,268 | ||||||||||||||||||
Assays and surveys | 89,906 | 226,481 | – | 700,550 | 127,130 | 183,892 | 45,677 | 38,930 | 1,412,566 | ||||||||||||||||||
Camp costs | 19,963 | 45,951 | 3,504 | 226,979 | 5,924 | 11,807 | 99,797 | 8,274 | 422,199 | ||||||||||||||||||
Drilling services | 351,521 | 676,870 | – | 2,081,016 | – | 36,549 | 2,086,088 | – | 5,232,044 | ||||||||||||||||||
Equipment rental | – | 8,104 | – | 187,446 | – | 839 | 12,774 | 33 | 209,196 | ||||||||||||||||||
Exploration support | 15,982 | 136,315 | 1,375 | 307,150 | 4,932 | 78,510 | 107,750 | 4,380 | 656,394 | ||||||||||||||||||
Field supplies | 16,421 | 2,777 | 1,520 | 117,603 | – | 2,366 | 17,207 | 33,201 | 191,095 | ||||||||||||||||||
Geological services | 33,869 | 24,516 | 3,321 | 1,146,140 | 258,363 | 191,304 | 860,505 | 75,728 | 2,593,746 | ||||||||||||||||||
Project management | 91,204 | 147,262 | 9,089 | 93,749 | 1,362 | 3,913 | 90,845 | 26,707 | 464,131 | ||||||||||||||||||
Travel | 2,878 | 20,547 | 55 | 37,875 | 2,766 | 12,679 | 41,054 | 2,888 | 120,742 | ||||||||||||||||||
Vehicle expneses | 10,190 | 23,281 | 5,580 | 146,705 | 11,648 | 1,722 | 101,122 | 7,583 | 307,831 | ||||||||||||||||||
Additions during the year | 631,934 | 1,312,104 | 24,444 | 5,045,213 | 412,125 | 523,581 | 3,462,819 | 197,724 | 11,609,944 | ||||||||||||||||||
Balance, December 31, 2008 | 1,734,890 | 1,679,426 | 1,392,870 | 7,452,228 | 689,125 | 2,357,173 | 6,982,347 | 1,039,153 | 23,327,212 | ||||||||||||||||||
Total acquisition and exploration | |||||||||||||||||||||||||||
at December 31, 2008 | 3,090,616 | 2,029,387 | 1,477,204 | 8,264,608 | 2,028,019 | 2,611,945 | 10,516,965 | 2,866,327 | 32,885,071 |
1) Other properties include Willow Creek, Cave Peak, Wassuk Copper, Copper Canyon, Gray Hills, Big Bar, Carbon County, SW Tintic, Peg Leg, Jaboncillos, Cerro Blanco, East Durango, Inde, La Reforma, Carolina, and Azafranes.
Page 11 of 27
Quaterra Resources Inc. |
(An Exploration Stage Company) |
Consolidated Statements of Shareholders’ Equity |
(Unaudited and Expressed in Canadian Dollars) |
6. | MINERAL PROPERTIES (Continued) | ||
(a) | Nieves Concessions, Mexico | ||
The Company originally owned a 100% interest in the Nieves silver property located in northern Zacatecas, Mexico. In 2003 the Company entered into an agreement with the US-based Blackberry Ventures 1, LLC (“Blackberry”). Pursuant to the terms of the agreement, Blackberry advanced US$1,500,000 to the Company and earned 50% interest in the property. Accordingly, the Company owns the remaining 50% interest. All work plans are made in consultation with the Joint Venture Partner Blackberry, which will continue to contribute its share of ongoing exploration costs and 10% administration fees on its portion of exploration costs. | |||
The Nieves concessions are subject to a maximum 3% net smelter return royalty (“NSR”) to the original concession holders, which the Company may purchase at any time for US$2,000,000. In addition, Kennecott Exploration Company, the optionor in the initial Underlying Agreement, retains NSR royalties of 2% on certain core claims and 1% on certain peripheral claims. Commencing January 26, 2004, an annual advance minimum royalty payment (“AMR”) of US$75,000 is due to the concession holders until the commencement of commercial production. On January 24, 2007, this NSR was purchased by Royal Gold Inc. | |||
During the period ended September 30, 2009, the Company received US$159,609 from Blackberry in respect to its share of ongoing exploration costs that were incurred on the property. As of September 30, 2009, $16,591 (December 31, 2008 - $88,110) was due from Blackberry. | |||
(b) | Mirasol and Americas, Mexico | ||
The Mirasol and Americas projects are located in the Municipality of Simon Bolivar, Durango, Mexico. The two projects consist of 13 exploration concessions that total 82,926 hectares. | |||
(c) | Crestones Property, Mexico | ||
Crestones is composed of three concessions. The Company holds a 100% interest in a certain mineral concession located in northern Durango, Mexico. Title is pending on two concessions. | |||
(d) | MacArthur Claim, United States | ||
Pursuant to an agreement entered into in October 2005 with North Exploration LLC, the Company acquired the right to earn an interest in certain unpatented mining claims covering the former MacArthur copper-oxide mine, in the Yerington district of Lyon County, Nevada. The Company may elect to acquire the property by making the following: | |||
(i) | US$210,000 previously paid | ||
(ii) | US$125,000 on or before January 15, 2009 (paid) | ||
(iii) | US$2,070,000 on or before January 15, 2010 | ||
The property is subject to a 2% NSR, 1% of which can be purchased for US$1,000,000. |
Page 12 of 27
Quaterra Resources Inc. |
(An Exploration Stage Company) |
Consolidated Statements of Shareholders’ Equity |
(Unaudited and Expressed in Canadian Dollars) |
6. | MINERAL PROPERTIES (Continued) | ||
(e) | Yerington, United States | ||
On May 1, 2007, the Company received approval from the appropriate US court for the acquisition of all Arimetco assets in the Yerington Mining District. The purchase price comprises US$500,000 cash and 250,000 common shares of the Company. The original 180-day review period which began on July 13, 2007 was extended up to February 12, 2010. Up to September 30, 2009, the Company had paid a US$225,000 non-refundable deposit and issued 250,000 common shares (allotted from treasury but not distributed), and may elect to acquire a 100% interest in the property by making a further payment of US$275,000. | |||
The property is subject to a 2% NSR capped at US$7,500,000 on commencement of commercial production. | |||
(f) | Alaska Properties (Duke Island and Herbert Glacier), United States | ||
The Company owns a 100% interest in the Duke Island property located in southeast Alaska. On September 29, 2009, the Company signed an option agreement with Copper Ridge Exploration Inc. (“Copper Ridge”) for this property. The agreement provides that Copper Ridge can earn up to a 51% interest by issuing one million pre-consolidation shares (issued) and spending $3.0 million on exploration by December 31, 2012. The amount of $750,000 of the $3.0 million is a firm commitment to be spent by December 31, 2012. Copper Ridge may increase its interest in the property to 65% by spending an additional $ 2.0 million on exploration by December 31, 2013. | |||
Pursuant to an agreement made in November 2007, the Company acquired the right to earn an interest in certain mining claims, known as the Herbert Glacier. To earn a 100% interest, the Company is required to make the following advance royalty payments: | |||
(i) | US$24,000 previously paid | ||
(ii) | US$12,000 on or before November 19, 2009 (paid) | ||
(iii) | US$12,000 on or before November 19, 2010 | ||
(iv) | US$12,000 on or before November 19, 2011 | ||
(v) | US$20,000 on or before November 19, 2012 | ||
(vi) | US$20,000 on or before November 19, 2013 | ||
(vii) | US$20,000 on or before November 19, 2014 | ||
(viii) | US$20,000 on or before November 19, 2015 | ||
(ix) | US$20,000 on or before November 19, 2016 | ||
(x) | US$20,000 on or before November 19, 2017 | ||
(xi) | US$30,000 on or before November 19, 2018 and every consecutive anniversary thereafter | ||
The property is subject to NSR as follows: | |||
(i) | 3.0% on gold price less than US$400 | ||
(ii) | 3.5% on gold price between US$401 and US$500 | ||
(iii) | 4.0% on gold price between US$501 and US$600 | ||
(iv) | 5.0% on gold price above US$601 |
Page 13 of 27
Quaterra Resources Inc. |
(An Exploration Stage Company) |
Consolidated Statements of Shareholders’ Equity |
(Unaudited and Expressed in Canadian Dollars) |
6. | MINERAL PROPERTIES (Continued) | ||
(g) | Uranium Properties (Arizona, Utah and Wyoming), United States | ||
Pursuant to a June 2005 agreement with North Exploration LLC, the Company acquired an option to purchase mining claims situated in Arizona, Utah and Wyoming. The Company is required to pay following: | |||
(i) | US$165,000 and 600,000 common shares previously paid and issued | ||
(ii) | US$135,000 on or before September 6, 2009 (paid) | ||
(iii) | US$200,000 on or before September 6, 2010 | ||
The agreement is subject to a 2% NSR payable upon commencement of commercial production, which can be reduced to 1% for US$1,000,000. | |||
Pursuant to an August 2006 agreement with Nustar Exploration LLC, the Company leased 18 claims in the Arizona strip district. The Company is required to pay the following: | |||
(i) | US$90,000 previously paid | ||
(ii) | US$100,000 on or before August 10, 2009 (renegotiated to August 11, 2011). | ||
This agreement is subject to a 4% royalty of which 3% royalty can be bought back for US$500,000. | |||
In September 2008, three anti mining groups filed a lawsuit against the U.S. Secretary of Interior, the U.S. Department of Interior and U.S. Bureau of Land Management for authorizing uranium exploration on one million acres of public land near Grand Canyon. If successful, this legal action could affect the Company’s rights to explore and develop its uranium claims on Arizona strip and economic viability of the Company’s Arizona uranium project. While the Company is not a defendant in the lawsuit, it believes the lawsuit is without legal merit and is pursuing other procedures to protect its interests. The Company is seeking intervener status in any law suit brought forward by these environmental groups. | |||
(h) | Other Properties |
i. | East Durango, Mexico | ||
On September 30, 2008, the Company and EXMIN Resources Inc. entered an agreement allowing the Company to earn a 75% interest in EXMIN’s East Durango Property, Mexico. | |||
Under the terms of the agreement, the Company can earn 75% interest in the East Durango property by spending US$500,000 in exploration before September 30, 2012 plus the following payments: | |||
(i) | US$20,000 previously paid | ||
(ii) | US$20,000 in September 30, 2009 (paid) | ||
(iii) | US$20,000 in September 30, 2010 | ||
(iv) | US$40,000 in September 30, 2011 |
Page 14 of 27
Quaterra Resources Inc. |
(An Exploration Stage Company) |
Consolidated Statements of Shareholders’ Equity |
(Unaudited and Expressed in Canadian Dollars) |
6. | MINERAL PROPERTIES (Continued) | |||
(h) | Other Properties (Continued) | |||
ii. | Cave Peak Molybdenum Prospect, United States | |||
Pursuant to an option agreement made in March 2007, the Company may acquire a 100% interest in certain prospect permits. The option payments are as follows: | ||||
(i) | US$160,000 previously paid | |||
(ii) | US$70,000 on or before March 27, 2010 | |||
(iii) | US$150,000 on or before March 27, 2011 | |||
(iv) | US$220,000 on or before March 27, 2012 |
This property is subject to a production royalty of 6.5% .
iii. | Willow Creek Molybdenum Prospect, United States | ||
On November 24, 2008, the Company secured an option with the Willow Creek Discovery Group, LLC to acquire 100% of the Willow Creek porphyry molybdenum prospect in south-western Montana. The Company has the right to earn a 100% interest in the property by making the following AMR payments to the Willow Creek Discovery Group totalling US$2,605,000 over a six-year period and issuing 200,000 common shares of the Company: | |||
(i) | US$75,000 paid and 100,000 shares issued previously | ||
(ii) | US$30,000 on October 11, 2009 (renegotiated and paid) | ||
(iii) | US$150,000 or US$50,000 and additional 100,000 shares on October 11, 2010 | ||
(iv) | US$150,000 on October 11, 2011 | ||
(v) | US$350,000 on October 11, 2012 | ||
(vi) | US$750,000 October 11, 2013 | ||
(vii) | US$1,000,000 October 11, 2014 | ||
iv. | Copper Canyon Project, United States | ||
Pursuant to an agreement made in November 2007, the Company acquired the right to earn an interest in certain mining claims, known as the Copper Canyon Project in Mineral County, Nevada. To earn a 100% interest, the Company is required to make staged payments by November 6, 2011 as follows: | |||
(i) | US$50,000 previously paid | ||
(ii) | US$35,000 on or before November 6, 2009 (renegotiated and paid) | ||
(iii)) | US$190,000 on or before November 6, 2010 | ||
(iv) | US$350,000 on or before November 6, 2011 | ||
The property is subject to a 2.5% NSR, 0.5% of which may be purchased by the Company for US$500,000. Should the Company decide to commence commercial production, a payment of US$750,000 is due within five business days from the date the decision is made. |
Page 15 of 27
Quaterra Resources Inc. |
(An Exploration Stage Company) |
Consolidated Statements of Shareholders’ Equity |
(Unaudited and Expressed in Canadian Dollars) |
6. | MINERAL PROPERTIES (Continued) | |||
(h) | Other Properties (Continued) | |||
v. | Gray Hills, United States | |||
Pursuant to an agreement made in July 2007, the Company entered into a lease with an option to purchase certain mining claims, known as the Gray Hills claims in Lyon County, Nevada. To earn a 100% interest, the Company is required to make staged payments as follows: | ||||
(i) | US$60,000 previously paid | |||
(ii) | US$15,000 on or before December 31, 2009 | |||
(iii) | US$35,000 on or before July 11, 2010 | |||
(iv) | US$40,000 on or before July 11, 2011 and each anniversary until such time the option to purchase the | |||
properties is exercised by the Company or the optionee chooses to withdraw from the lease | ||||
The Company may exercise its option to purchase at any time, for US$500,000. The property is subject to a 3% NSR, up to 2% of which may purchased by the Company for US$500,000 per 1%. | ||||
vi. | South West Tintic, United States | |||
Pursuant to an agreement made in March 2007, the Company acquired the right to earn an interest in certain unpatented mining claims, which forms part of the S.W. Tintic Claims in Juab County, Utah. To earn a 100% interest, the Company is required to make staged payments totaling US$1,000,000 by February 16, 2018 as follows: | ||||
(i) | US$60,000 previously paid | |||
(ii) | US$40,000 on or before February 15, 2010 | |||
(iii) | US$50,000 on or before February 15, 2011 | |||
(iv) | US$50,000 on or before February 15, 2012 | |||
(v) | US$100,000 on or before February 15, 2013 | |||
(vi) | US$100,000 on or before February 15, 2014 | |||
(vii) | US$100,000 on or before February 15, 2015 | |||
(viii) | US$250,000 on or before February 15, 2016 | |||
(iv) | US$250,000 on or before February 15, 2017 | |||
Alternatively, the Company may acquire the property at any time by paying US$1,000,000 less any previously paid amounts. The property is subject to a 2% NSR, 1% of which the Company may purchased for US $1,000,000. |
Page 16 of 27
Quaterra Resources Inc. |
(An Exploration Stage Company) |
Consolidated Statements of Shareholders’ Equity |
(Unaudited and Expressed in Canadian Dollars) |
6. | MINERAL PROPERTIES (Continued) |
(h) Other Properties (Continued)
vi. South West Tintic, United States (Continued)
Pursuant to another agreement made in August 2007, the Company acquired the right to earn an interest in further unpatented mining claims, which also form part of the S.W. Tintic Claims in Juab County, Utah. To earn a 100% interest, the Company is required to make following payments:
(i) | US$534,410 previously paid | |
(ii) | US$275,000 promissory note on or before August 29, 2009 (paid). |
The US$550,000 promissory note has a term of two years, with no interest. The Company has guaranteed full payment of this note. The Company repaid US$275,000 on August 29, 2008. In July 2009, the Company entered into an agreement with Freeport McMoRan Exploration Corporation (“Freeport”) for this property. In the terms of the agreement, Freeport has the exclusive right and option to acquire a 70% ownership interest in this property by making the remaining US$275,000 property payment (paid) and spending US$4.725 million on the exploration over four years.
vii. Wassuk Copper Project (formerly Majuba Hill), United States
Pursuant to an agreement made in December 2007, the Company acquired the right to earn an interest in certain mining claims, known as the Majuba Hill in Mineral County, Nevada. To earn a 100% interest, the Company is required to make staged payments totaling US $3,000,000 by December 10, 2015 as follows:
(i) | US$200,000 previously paid | |
(ii) | US$100,000 on or before December 10, 2009 | |
(iii) | US$250,000 on or before December 10, 2010 | |
(iv) | US$250,000 on or before December 10, 2011 | |
(v) | US$500,000 on or before December 10, 2012 | |
(vi) | US$500,000 on or before December 10, 2013 | |
(vii) | US$500,000 on or before December 10, 2014 | |
(vii) | US$700,000 on or before December 10, 2015 |
The Company must also incur cumulative US$1,000,000 in exploration expenditures by December 10, 2012. Should the Company incur less than US$1,000,000 the Company must pay the shortfall to the vendor by December 10, 2012.
On commencement of mining operations the property is subject to a 3% NSR, 1% of which the Company may purchase for US$1,000,000.
In addition, other properties include Big Bar, Carbon County, and Peg Leg properties in the United States, and Jaboncillos, Cerro Blanco, Inde Durango, La Reforma, Carolina, and Azafranes properties in Mexico. All these properties are in the initial stages of exploration.
Page 17 of 27
Quaterra Resources Inc. |
(An Exploration Stage Company) |
Consolidated Statements of Shareholders’ Equity |
(Unaudited and Expressed in Canadian Dollars) |
6. | MINERAL PROPERTIES (Continued) |
(i) Realization
The Company’s investment in and expenditures on mineral property interests comprise a significant portion of the Company’s assets. Realization of the Company’s investment in the assets is dependent on establishing legal ownership of the property interest, on the attainment of permitting and then successful commercial production or from the proceeds of its disposal. The recoverability of the amounts shown for the mineral property interest is dependent upon the existence of economically recoverable reserves, the ability of the Company to obtain necessary financing to complete the development of the property interest, and upon future profitable production or proceeds from the disposition thereof.
(j) Title
Although the Company has taken steps to ensure the title to the mineral property in which it has an interest, in accordance with industry standards for the current stage of exploration of such properties, these procedures may not guarantee the Company’s title. Property title may be subject to unregistered prior agreements or transfers and title may be affected by undetected defects.
(k) Environmental
Environmental legislation is becoming increasingly stringent and costs and expenses of regulatory compliance are increasing. The impact of new and future environmental legislation on the Company’s operations may cause additional expenses and restrictions. If the restrictions adversely affect the scope of exploration and development on the mineral property interest, the potential for production on the property may be diminished or negated.
7. | CONVERTIBLE NOTES |
In January 2009, the Company completed a private placement raising total gross proceeds of US$3,787,973 (December 31, 2008 US$2,619,673). Pursuant to the terms of the private placement, the Company issued 6,313,291 units; each unit comprises one convertible promissory note (“Notes”) and one common share purchase warrant maturing 24 months from date of issuance or upon conversion or redemption. Interest is payable in cash or in common shares at maturity (November 27, 2010, December 18, 2010, and January 15, 2011) or conversion dates at a rate of 10%. US$52,200 financing costs were paid in January 2009.
The Notes provide the following terms as to conversion or redemption:
Conversion by Holder
At any time after four months from the date of issue, the Notes are convertible by the holder into common shares in the ratio of US$0.60 of Note converted into one common share. Any interest payable will be converted into common shares of the Company at a rate equal to the US dollar equivalent of the market price for such shares on the date of such conversion.
Page 18 of 27
Quaterra Resources Inc. |
(An Exploration Stage Company) |
Consolidated Statements of Shareholders’ Equity |
(Unaudited and Expressed in Canadian Dollars) |
7. | CONVERTIBLE NOTES (Continued) |
Redemption by Company |
(a) | If at any time starting four months after the issuance of the Notes and prior to the date of redemption or conversion, the Company’s common shares shall have achieved or exceeded a closing price of US$0.75 for a 10-day consecutive trading period, the Notes outstanding shall automatically be deemed to have been redeemed and converted into common shares in the ratio of US$0.60 of Note redeemed to one common share. Any interest payable will be converted into common shares of the Company at market price for such shares on the date of such redemption; or | |
(b) | The Company may at any time prior to conversion redeem the Notes by paying to the holders the principal amount of a Note together with interest at 15% to the date of such redemption. |
One whole non-transferable warrant allows the holder the right to purchase one common share at a price of US$0.75. The warrants expire 24 months from date of issuance. The warrants contain a provision that in the event the Company’s common shares trade at a closing price of greater than US$1.00 per share for a period of 10 consecutive days at any time after issue of the warrant, the Company may accelerate the expiry date of the warrants by providing notice to the holders thereof and in such case the warrants will expire on the thirtieth day after notice.
The Notes are classified as a liability, less the portion relating to the conversion feature which is classified as a component of shareholders’ equity. Financing costs associated with the Notes were prorated between the liability and equity components of the Notes. Financing costs allocated to the liability portion of the Notes were deferred and are being expensed over the term of the Notes. The financing costs relating to the equity portion have been recorded as a cost of issue against the value of equity portion of the Notes.
During the period end, US$80,000 notes were converted and US$4,562 interest was paid. As of September 30, 2009, the net value assigned to the liability component of the Notes was $4,069,229, using an effective interest rate of 15%:
September 30, 2009 | December 31, 2008 | ||||||
Liability component of convertible notes – beginning of period | $ | 2,953,370 | $ | – | |||
Present value of convertible notes on issue | 1,356,114 | 2,929,161 | |||||
Interest on debt | 296,911 | 24,209 | |||||
Additional debt accretion | 131,865 | – | |||||
Conversion of convertible notes | (88,787 | ) | – | ||||
Foreign exchange revaluation | (580,244 | ) | – | ||||
Liability component of convertible notes – end of period | $ | 4,069,229 | $ | 2,953,370 | |||
Equity component of convertible notes – beginning of period | $ | 259,164 | $ | – | |||
Equity component of convertible notes on issue | 119,986 | 259,164 | |||||
Conversion of equity component of convertible notes | (7,338 | ) | – | ||||
Equity component of convertible notes – end of period | $ | 371,812 | $ | 259,164 |
Page 19 of 27
Quaterra Resources Inc. |
(An Exploration Stage Company) |
Consolidated Statements of Shareholders’ Equity |
(Unaudited and Expressed in Canadian Dollars) |
8. | SHARE CAPITAL | |
(a) | Common stock: authorized - unlimited common shares without par value. | |
During the nine months ended September 30, 2009, the Company issued 9,666,206 units at $0.60 per unit pursuit a private placement closed on September 29, 2009. Each unit is comprised of one common share and one non- transferable share warrant at an exercise price of $0.75 for a period of two years. 42,000 units and $60,292 cash payment are made for the finders’ fees related to this private placement. | ||
On September 30, 200, the Company announced another non-brokered private placement consisting of up to 5,000,000 units, subsequently increased to 6,000,000 units, at $0.60 per unit. $136,068 funds received related to this private placement was recorded as commitment to issue shares. See Note 15 Subsequent Events. | ||
(b) | Share Purchase Warrants |
September 30, 2009 | December 31, 2008 | ||||||||||||
Weighted | Weighted | ||||||||||||
Number of | Average | Number of | Average | ||||||||||
Warrants | Exercise Price | Warrants | Exercise Price | ||||||||||
Outstanding, beginning of the year | 6,104,041 | $ | 1.83 | – | $ | – | |||||||
Issued: | |||||||||||||
Private placement | 9,666,206 | $ | 0.75 | 1,741,250 | $ | 4.13 | |||||||
Convertible notes | 1,950,500 | $ | 0.80 | 4,362,791 | $ | 0.91 | |||||||
Exercised | (1,600,000 | ) | $ | 0.65 | – | $ | – | ||||||
Expired | (141,250 | ) | $ | 0.65 | – | $ | – | ||||||
Outstanding, end of the period | 15,979,497 | $ | 0.77 | 6,104,041 | $ | 1.83 |
On June 15, 2009, the Company amended the exercise price of 1,741,250 warrants issued in April 2008 from US$4.20 to US$0.60. A notice was given to the holders in August 2009 due to the market price of the shares being above $0.75 for the prescribed period. 1,600,000 warrants were exercised (US$960,000) and the balance expired. As a result of the re-pricing, $84,115 expense was recorded to contributed surplus using the Black-Scholes option pricing model with the following weighted average assumptions: volatility 60.4%, risk-free interest rate 1.05%, expected life 0.33 years, and expected dividend yield 0%.
(c) | Stock Options | |
As at September 30, 2009, the Company had a stock option plan (the “Plan”) allowing for the reservation of common shares issuable under the Plan to a maximum 10% of the number of issued and outstanding common shares of the Company at any given time. The term of any stock option granted under the Plan may not exceed five years and the exercise price may not be less than the closing price of the Company’s shares on the last business day immediately preceding the date of grant, less any permitted discount. |
Page 20 of 27
Quaterra Resources Inc. |
(An Exploration Stage Company) |
Consolidated Statements of Shareholders’ Equity |
(Unaudited and Expressed in Canadian Dollars) |
8. | SHARE CAPITAL (Continued) | |
(c) | Stock Option (Continued) | |
On an annual basis, the Plan requires approval by the Company’s shareholders and submission for regulatory review and acceptance. Stock options are exercisable once they have vested under the terms of the grant. A summary of the Company’s options is presented below: |
September 30, 2009 | December 31, 2008 | ||||||||||||
Weighted | Weighted | ||||||||||||
Number of | Average | Number of | Average | ||||||||||
Options | Exercise Price | Options | Exercise Price | ||||||||||
Outstanding, beginning of the year | 7,200,500 | $ | 2.56 | 5,559,500 | $ | 1.99 | |||||||
Granted | – | $ | – | 2,390,000 | $ | 3.31 | |||||||
Expired | (108,300 | ) | $ | 1.94 | – | $ | – | ||||||
Exercised | (60,200 | ) | $ | 0.55 | (749,000 | ) | $ | 4.00 | |||||
Forfeited | (10,000 | ) | $ | 3.30 | – | $ | – | ||||||
Outstanding, end of period | 7,022,000 | $ | 2.59 | 7,200,500 | $ | 2.56 |
The following summarizes information about the stock options outstanding and exercisable at September 30, 2009:
Options Outstanding | Options Exercisable | ||||||||||||||||||
Weighted | Weighted | Average | |||||||||||||||||
Weighted | Average | Average | Remaining | ||||||||||||||||
Average | Remaining | Exercise | Contractual | ||||||||||||||||
Number | Exercise Price | Contractual Life | Expiry Date | Number | Price | Life | |||||||||||||
270,000 | $ | 0.35 | 0.85 | August 9, 2010 | 270,000 | $ | 0.35 | 0.85 | |||||||||||
200,000 | $ | 0.40 | 1.27 | January 9, 2011 | 200,000 | $ | 0.40 | 1.27 | |||||||||||
125,000 | $ | 1.04 | 1.48 | March 27, 2011 | 125,000 | $ | 1.04 | 1.48 | |||||||||||
75,000 | $ | 1.00 | 1.63 | May 19, 2011 | 75,000 | $ | 1.00 | 1.63 | |||||||||||
100,000 | $ | 1.12 | 1.69 | June 12, 2011 | 100,000 | $ | 1.12 | 1.69 | |||||||||||
1,431,000 | $ | 1.55 | 1.82 | July 28, 2011 | 1,431,000 | $ | 1.55 | 1.82 | |||||||||||
100,000 | $ | 1.55 | 1.89 | August 23, 2011 | 100,000 | $ | 1.55 | 1.89 | |||||||||||
100,000 | $ | 1.50 | 1.98 | September 25, 2011 | 100,000 | $ | 1.50 | 1.98 | |||||||||||
100,000 | $ | 2.05 | 2.21 | December 18, 2011 | 100,000 | $ | 2.05 | 2.21 | |||||||||||
75,000 | $ | 2.65 | 2.22 | January 11, 2012 | 75,000 | $ | 2.65 | 2.22 | |||||||||||
25,000 | $ | 2.70 | 2.39 | February 21, 2012 | 25,000 | $ | 2.70 | 2.39 | |||||||||||
1,971,000 | $ | 3.33 | 2.80 | July 20, 2012 | 1,971,000 | $ | 3.33 | 2.80 | |||||||||||
80,000 | $ | 3.33 | 2.85 | August 7, 2012 | 80,000 | $ | 3.33 | 2.85 | |||||||||||
200,000 | $ | 3.45 | 3.49 | March 31, 2013 | 200,000 | $ | 3.45 | 3.49 | |||||||||||
2,170,000 | $ | 3.30 | 3.71 | June 19, 2013 | 1,761,650 | $ | 3.30 | 3.71 | |||||||||||
7,022,000 | $ | 2.59 | 2.69 | 6,613,650 | $ | 2.54 | 2.63 |
Page 21 of 27
Quaterra Resources Inc. |
(An Exploration Stage Company) |
Consolidated Statements of Shareholders’ Equity |
(Unaudited and Expressed in Canadian Dollars) |
8. | SHARE CAPITAL (Continued) |
(c) | Stock Option (Continued) |
The number of options granted and the fair value of options expensed included in the statements of operations are as follows:
September 30, 2009 | September 30, 2008 | ||||||||||||
Number | Number | ||||||||||||
of Options | Stock–based | of Options | Stock–based | ||||||||||
Granted | Compensation | Granted | Compensation | ||||||||||
Consulting | – | $ | 449,464 | 975,000 | $ | 668,346 | |||||||
Directors and officers | – | 363,059 | 1,095,000 | 1,357,682 | |||||||||
Employees | – | 170,118 | 320,000 | 402,527 | |||||||||
Total | – | $ | 982,641 | 2,390,000 | $ | 2,428,555 |
The fair value of options granted was calculated using the Black-Scholes option pricing model with the following weighted average assumptions:
September 30, 2009 | December 31, 2008 | September 30, 2008 | ||||||||
Risk–free interest rate | – | 3.84% | 3.84% | |||||||
Expected share price volatility | – | 85.79% | 85.79% | |||||||
Expected option life in years | – | 3.0 | 3.0 | |||||||
Forfeiture rate | – | 0% | 0% | |||||||
Expected dividend yield | – | 0% | 0% |
9. | RELATED PARTY TRANSACTIONS | |
The Company had the following related party transactions during the period ended September 30, 2009: | ||
(a) | $365,711 service fees (September 30, 2008 - $442,468) were charged by a private firm of which a director is the principal for administration, accounting, office space, and corporate secretarial services. As of September 30, 2009, $87,280 (December 31, 2008 - $47,218) was still owing (Note 10 (b)). | |
(b) | $34,927 CFO fees (2008 - $42,833) were charged by a company of which the CFO is the principal. As of September 30, 2009, $3, 828 (December 31, 2008 - $nil) was still owing. | |
(c) | $9,456 legal fees (2008 - $9,707) were charged by a law firm of which a director is the principal. As of September 30, 2009, $nil (December 31, 2008 - $1,960) was still owing. |
Page 22 of 27
Quaterra Resources Inc. |
(An Exploration Stage Company) |
Consolidated Statements of Shareholders’ Equity |
(Unaudited and Expressed in Canadian Dollars) |
9. | RELATED PARTY TRANSACTIONS (Continued) | |
(d) | On March 17, 2009, the Company borrowed US$200,000 from the CEO at an annual interest rate of 4.5% due within one year. As of September 30, 2009, the principal and interest owing was $219,367. In addition, the CEO also advanced US$400,000 ($428,280) to the Company without any interest. | |
The above transactions are conducted in the normal course of business and were measured at the amount of consideration established and agreed by the parties. | ||
10. | COMMITMENTS | |
The Company has the following commitments in respect to mineral option payments and office leases: |
Mineral Property | Office | |||||||||
(cash payment) (a) | Lease (b) | |||||||||
Total | ||||||||||
Year ending December 31, 2009 | 418,376 | 37,500 | 455,876 | |||||||
Year ending December 31, 2010 | 3,642,521 | 150,000 | 3,792,521 | |||||||
Year ending December 31, 2011 | 1,356,577 | 150,000 | 1,506,577 | |||||||
Year ending December 31, 2012 | 1,370,496 | 75,000 | 1,445,496 | |||||||
Year ending December 31, 2013 | 1,632,818 | – | 1,632,818 | |||||||
Year ending December 31, 2014 | 1,921,907 | – | 1,921,907 | |||||||
Year ending December 31, 2015 | 958,277 | – | 958,277 | |||||||
Year ending December 31, 2016 | 369,392 | – | 369,392 | |||||||
Year ending December 31, 2017 | 369,392 | – | 369,392 | |||||||
Year ending December 31, 2018 | 112,424 | – | 112,424 | |||||||
$ | 12,152,180 | $ | 412,500 | $ | 12,564,680 |
(a) | The Company is required to make option payments and other expenditure commitments to maintain the properties and earn its interest. In addition to the cash payment, the Company is required to issue 100,000 common shares for the Willow Creek property in each of 2009 (issued) and 2010. | |
(b) | During 2007, the Company entered into a service agreement with Manex Resource Group (“Manex”) for its Vancouver office space, administration, and corporate development. The agreement can be cancelled at anytime upon one year’s notice. The current expiry date is June 30, 2012 (Note 9(a)). The Company also had one office lease in Kanab, Utah, and Yerington, Nevada, United States. | |
(c) | In January 2007, the Company engaged Roman Friedrich & Company Ltd. (“Roman”) to provide financial and advisory services to the Company. The retainer fee was $15,000 per month of which 50% was paid in cash and 50% was payable in common shares of the Company. The agreement was amended to $7,500 per month commencing September 1, 2009 payable solely in shares of the Company. As of September 30, 2009, $37,500 was due in shares of the Company. |
Page 23 of 27
Quaterra Resources Inc. |
(An Exploration Stage Company) |
Consolidated Statements of Shareholders’ Equity |
(Unaudited and Expressed in Canadian Dollars) |
11. | CAPITAL MANAGEMENT |
The Company’s objective in managing its capital is to maintain the ability to continue as a going concern and to continue to explore on various properties for the benefits of its stakeholders. | |
The Company’s capital includes the component of shareholders’ equity and convertible notes. Capital requirements are driven by the Company’s exploration activities on its mineral property interests. To effectively manage the Company’s capital requirements, the Company has a planning and budgeting process in place setting out the expenditures required to meet its strategic goals. The Company compares actual expenses to budget on all exploration projects and overhead to manage costs, commitments and exploration activities. | |
12. | SUPPLEMENTAL CASH FLOW INFORMATION |
Three months ended September 30, | Nine months ended September 30, | ||||||||||||
2009 | 2008 | 2009 | 2008 | ||||||||||
Cash Items | |||||||||||||
Interest received | $ | 572 | $ | 17,572 | $ | 925 | $ | 53,169 | |||||
Interest paid | $ | – | $ | – | $ | – | $ | – | |||||
Income tax paid | $ | – | $ | – | $ | – | $ | – | |||||
Non–Cash Items | |||||||||||||
Mineral property cost included in accounts payable | $ | 206,257 | $ | 942,370 | $ | 206,257 | $ | 942,370 | |||||
Share issue costs | $ | 48,631 | $ | – | $ | 48,631 | $ | – | |||||
Shares issued for services | $ | – | $ | 7,500 | $ | 45,000 | $ | 67,500 | |||||
Shares issued for mineral property | $ | – | $ | – | $ | 50,000 | $ | – | |||||
13. | SEGMENT INFORMATION |
The Company has one business segment, the exploration of mineral properties. The Company’s major non-current assets are distributed by geographic locations as follows: |
September 30, 2009 | December 31, 2008 | |||||||||||||||||||||||
Mineral | Reclamation | Mineral | Reclamation | |||||||||||||||||||||
Equipment | Property | Bond | Total | Equipment | Property | Bond | Total | |||||||||||||||||
Canada | $ | 6,273 | $ | – | $ | – | $ | 6,273 | $ | 9,563 | $ | – | $ | – | $ | 9,563 | ||||||||
Mexico | 45,785 | 7,177,348 | – | 7,223,133 | 59,875 | 6,873,055 | – | 6,932,930 | ||||||||||||||||
U.S.A | 102,363 | 27,966,109 | 275,793 | 28,344,266 | 138,584 | 26,012,016 | 317,704 | 26,468,304 | ||||||||||||||||
Total | $ | 154,421 | $ | 35,143,457 | $ | 275,793 | $ | 35,573,672 | $ | 208,022 | $ | 32,885,071 | $ | 317,704 | $ | 33,410,797 |
Page 24 of 27
Quaterra Resources Inc. |
(An Exploration Stage Company) |
Consolidated Statements of Shareholders’ Equity |
(Unaudited and Expressed in Canadian Dollars) |
14. | RECONCILIATION OF CANADIAN AND UNITED STATES GAAP | |
These consolidated financial statements have been prepared in accordance with Canadian GAAP, which differ from United States GAAP, as described below: | ||
(a) | Under US GAAP, exploration costs incurred in locating areas of potential mineralization are expensed as incurred. Commercial feasibility is established in compliance with SEC Industry Guide 7, which consists of identifying that part of a mineral deposit that could be economically and legally extracted or produced at the time of the reserve determination. After an area of interest has been assessed as commercially feasible, expenditures specific to the area of interest for further development are capitalized. In deciding when an area of interest is likely to be commercially feasible, management may consider, among other factors, the results of pre- feasibility studies, detailed analysis of drilling results, the supply and cost of required labour and equipment, and whether necessary mining and environmental permits can be obtained. To date no exploration expenses have been capitalized under US GAAP. | |
The Company has adopted EITF 04-02 and separately reports the aggregate carrying amount of mineral rights. Mineral rights include an option for the Company to acquire the rights to extract and retain at least a portion of the benefits from the mineral deposits. Acquisition costs include cash and the fair market value of common shares for the mineral rights. These capitalized costs will be amortized over the estimated life of the property following commencement of commercial production or written off if the property is sold, allowed to lapse or abandoned, or when an impairment of value has occurred. | ||
(b) | Under US GAAP, convertible debt instruments are classified as debt until converted to equity, whereas under Canadian GAAP, the proceeds of the convertible debt instrument have been allocated to both debt and equity components. In addition, under US GAAP, debt instruments issued with detachable warrants are allocated between a debt and equity component based on the relative fair value of each component, whereas under Canadian GAAP the residual method has been adopted. Any resulting debt component is accreted over time to its face value with the interest and accretion expense charged to the statement of operations. | |
Under US GAAP, a value is assigned to the conversion feature only if the effective conversion rate is less than the market price of the common stock at the commitment date. Under US GAAP no value has been assigned to the conversion feature of the convertible note although a value has been assigned to the detachable warrants and thus, there is a difference in values assigned to the debt and equity components between Canadian and US GAAP which amount is accreted over the life of the convertible notes. | ||
The effect of the principle measurement differences on the Company’s consolidated financial statements is quantified below: |
Page 25 of 27
Quaterra Resources Inc. |
(An Exploration Stage Company) |
Consolidated Statements of Shareholders’ Equity |
(Unaudited and Expressed in Canadian Dollars) |
14. | RECONCILIATION OF CANADIAN AND UNITED STATES GAAP (Continued) |
Reconciliation of consolidated balance sheets:
September 30, 2009 | December 31, 2008 | |||||
Total assets – Canadian GAAP | $ | 40,466,871 | $ | 34,397,289 | ||
Expensed expenditures on mineral properties | (27,375,777 | ) | (25,509,673 | ) | ||
Total assets – US GAAP | $ | 13,091,094 | $ | 8,887,616 | ||
Total liabilities – Canadian GAAP | $ | 5,326,676 | $ | 4,444,281 | ||
Less the equity component of warrants attached to | ||||||
convertible notes | (232,237 | ) | (176,961 | ) | ||
Total liabilities – US GAAP | 5,094,439 | 4,267,320 | ||||
Total shareholders equity – Canadian GAAP | 35,140,195 | 29,953,008 | ||||
Equity component of warrants attached to convertible | ||||||
notes, less interest | 282,974 | 176,961 | ||||
Foreign exchange on convertible notes | (50,737 | ) | – | |||
Expenditures on mineral properties | (27,375,777 | ) | (25,509,673 | ) | ||
Total equity under US GAAP | 7,996,655 | 4,620,296 | ||||
Total Liability and Shareholders Equity per US GAAP | $ | 13,091,094 | $ | 8,887,616 |
Reconciliation of consolidated statements of operations and deficit:
Three months ended | Nine months ended | ||||||||||||
September 30, | September 30, | ||||||||||||
2009 | 2008 | 2009 | 2008 | ||||||||||
Loss for the period – Canadian GAAP | $ | (626,460 | ) | $ | (937,621 | ) | $ | (3,079,160 | ) | $ | (5,072,084 | ) | |
Expenditures on mineral properties | (737,990 | ) | (3,898,251 | ) | (1,866,104 | ) | (9,780,160 | ) | |||||
Interest expense on convertible notes | (55,643 | ) | – | (149,420 | ) | – | |||||||
Net loss for the period – US GAAP | (1,420,093 | ) | (4,835,872 | ) | (5,094,684 | ) | (14,852,244 | ) | |||||
Deficit, Beginning of period – US GAAP | (57,816,709 | ) | (44,920,423 | ) | (54,142,118 | ) | (34,904,051 | ) | |||||
Deficit, end of period – US GAAP | $ | (59,236,802 | ) | $ | (49,756,295 | ) | $ | (59,236,802 | ) | $ | (49,756,295 | ) | |
Net loss per common share – Canadian GAAP | $ | (0.01 | ) | $ | (0.01 | ) | $ | (0.04 | ) | $ | (0.06 | ) | |
Net loss per common share – U.S. GAAP | $ | (0.02 | ) | $ | (0.06 | ) | $ | (0.06 | ) | $ | (0.17 | ) | |
Weighted average number of shares outstanding | 88,165,444 | 86,649,405 | 87,778,707 | 85,922,462 |
Page 26 of 27
Quaterra Resources Inc. |
(An Exploration Stage Company) |
Consolidated Statements of Shareholders’ Equity |
(Unaudited and Expressed in Canadian Dollars) |
14. | RECONCILIATION OF CANADIAN AND UNITED STATES GAAP (Continued) |
Reconciliation of statements of cash flows:
Three months ended | Nine months ended | ||||||||||||
September 30, | September 30, | ||||||||||||
2009 | 2008 | 2009 | 2008 | ||||||||||
Operating activities – Canadian GAAP | $ | (755,096 | ) | $ | (722,793 | ) | $ | (879,476 | ) | $ | (2,914,580 | ) | |
Adjustments for mineral expenditures | (58,418 | ) | (3,898,251 | ) | (1,866,104 | ) | (9,780,160 | ) | |||||
Cash used in operating activities – US GAAP | (813,514 | ) | (4,621,044 | ) | (2,745,580 | ) | (12,694,740 | ) | |||||
Investing activities – Canadian GAAP | (1,200,361 | ) | (3,998,304 | ) | (2,998,997 | ) | (10,566,142 | ) | |||||
Reclassification of expenditures on mineral | |||||||||||||
properties | 58,418 | 3,898,251 | 1,866,104 | 9,780,160 | |||||||||
Cash used in investing activities – US GAAP | (1,141,943 | ) | (100,053 | ) | (1,132,893 | ) | (785,982 | ) | |||||
Cash provided by financing activities – Canadian | |||||||||||||
& US GAAP | 6,666,847 | (215,469 | ) | 8,110,327 | 10,700,496 | ||||||||
(Decrease) increase in cash during the period | 4,711,390 | (4,936,566 | ) | 4,231,854 | (2,780,226 | ) | |||||||
Cash, beginning of period | 45,054 | 5,546,240 | 524,590 | 3,389,900 | |||||||||
Cash, end of period – US GAAP | $ | 4,756,444 | $ | 609,674 | $ | 4,756,444 | $ | 609,674 |
15. | SUBSEQUENT EVENTS |
The following events occurred subsequent to September 30, 2009:
a) | On October 28, 2009, the Company closed its non-brokered private placement announced on September 30, 2009 and updated on October 8, 2009 by issuing 5,603,204 units (including 72,000 units for finders’ fees) at a price of $0.60 for gross proceeds of $3,361,922. Each unit is comprised of one common share and one non-transferable share warrant at exercisable at a price of $0.75 for a period of two years. $80,928 finders’ fees were paid. | |
b) | The NYSE Amex staff has informed the Company that it has resolved certain of the NYSE Amex listing deficiencies reported via news release on May 21, 2009. However, the Company will need to demonstrate conformance with continued listing standards for two consecutive quarters before November 18, 2010. | |
c) | The Company received one million share certificate of Copper Ridge Exploration Ltd. in relation to the Company’s Duke Island property in Alaska, United States. | |
d) | US$225,000 property option payments were made. | |
e) | The US$400,000 advance from the President and CEO was repaid. |
16. | COMPARATIVE FIGURES |
Certain 2008 comparative figures have been reclassified to conform to the current period’s presentation. |
Page 27 of 27