SUTCLIFFE RESOURCES LTD. | |
INTERIM FINANCIAL STATEMENTS | |
FOR THE SECOND QUARTER ENDED | |
JUNE 30, 2005 and JUNE 30, 2004 | |
(Unaudited – Prepared by Management) | |
To the Shareholders of Sutcliffe Resources Ltd.
These financial statements for the second quarter ended June 30, 2005, comprised of the balance sheet and the statements of operations and deficit as well as changes in cash flows, have been compiled by management. These financial statements, along with the accompanying notes have been reviewed and approved by the members of the Company’s audit committee. In accordance with Canadian Securities Administrators National Instrument 51-102, the Company discloses that these unaudited financial statements have not been reviewed by the Company’s auditors.
Vancouver, B.C. | |
22 August 2005 | MANAGEMENT |
SUTCLIFFE RESOURCES LTD.
INTERIM BALANCE SHEET
JUNE 30, 2005
(Unaudited – Prepared by Management)
(Unaudited) | (Audited) | |||||
June 30, 2005 $ | Dec 31, 2004 $ | |||||
ASSETS | ||||||
CURRENT | ||||||
Cash | 1,677,817 | 50,248 | ||||
Accounts receivable | 14,821 | 14,438 | ||||
Prepaid expenses | 136,000 | 50,000 | ||||
1,828,638 | 114,686 | |||||
MINERAL INTERESTS(Note 3) | 473,779 | 357,680 | ||||
2,302,417 | 472,366 | |||||
LIABILITIES | ||||||
CURRENT | ||||||
Accounts payable and accrued liabilities | 232,482 | 115,095 | ||||
Loans payable (Note 4) | 191,844 | 336,843 | ||||
424,326 | 451,938 | |||||
SHAREHOLDERS' EQUITY | ||||||
SHARE CAPITAL(Note 5) | 7,840,117 | 5,753,710 | ||||
CONTRIBUTED SURPLUS | 117,396 | 122,500 | ||||
DEFICIT | (6,079,422 | ) | (5,855,782 | ) | ||
1,878,091 | 20,428 | |||||
2,302,417 | 472,366 |
(See accompanying notes to the interim financial statements)
APPROVED BY THE DIRECTORS:
“Laurence Stephenson” | Director | “Glen Indra” | Director |
SUTCLIFFE RESOURCES LTD.
INTERIM STATEMENT OF OPERATIONS AND DEFICIT
FOR THE SECOND QUARTER ENDED JUNE 30
(Unaudited – Prepared by Management)
Second Quarter ended | Six months ended | |||||||||||
June 30 | June 30 | June 30 | June 30 | |||||||||
2005 $ | 2004 $ | 2005 $ | 2004 $ | |||||||||
GENERAL AND ADMINISTRATIVE EXPENSES | ||||||||||||
Professional fees | 31,249 | - | 40,999 | - | ||||||||
Consulting fees | 16,308 | - | 16,308 | - | ||||||||
Management fees | 7,500 | 7,500 | 15,000 | 15,000 | ||||||||
Financing fees | 53,874 | - | 53,874 | - | ||||||||
Office and rent | 9,717 | - | 12,717 | 1,216 | ||||||||
Investor relations and communications | 324 | - | 324 | - | ||||||||
Regulatory and transfer agent fees | 29,830 | 2,557 | 36,663 | 8,733 | ||||||||
Automotive | 450 | 564 | 913 | 1,128 | ||||||||
Bank charges and interest | 398 | 67 | 1,256 | 138 | ||||||||
Interest on demand loans | 27,647 | - | 45,772 | - | ||||||||
Interest income | (109 | ) | - | (186 | ) | - | ||||||
NET LOSS FOR THE PERIOD | 177,188 | 10,688 | 223,640 | 26,215 | ||||||||
DEFICIT, beginning of period | 5,902,234 | 5,765,466 | 5,855,782 | 5,749,939 | ||||||||
DEFICIT, end of period | 6,079,422 | 5,776,154 | 6,079,422 | 5,776,154 | ||||||||
Loss per share | 0.0137 | 0.0009 | 0.0182 | 0.0037 | ||||||||
Weighted average number of shares | 12,920,264 | 11,633,900 | 12,299,470 | 7,074,165 |
(See accompanying notes to the interim financial statements)
SUTCLIFFE RESOURCES LTD.
INTERIM STATEMENT OF CHANGES IN CASH FLOWS
FOR THE SECOND QUARTER ENDED JUNE 30
(Unaudited – Prepared by Management)
Second Quarter ended | Six months ended | |||||||||||
June 30 | June 30 | June 30 | June 30 | |||||||||
2005 $ | 2004 $ | 2005 $ | 2004 $ | |||||||||
OPERATING ACTIVITIES | ||||||||||||
Net Loss | (177,188 | ) | (10,688 | ) | (223,640 | ) | (26,215 | ) | ||||
Increase (Decrease) in non-cash working | ||||||||||||
capital items | ||||||||||||
Accounts receivable | (12,685 | ) | (1,285 | ) | (383 | ) | (27,472 | ) | ||||
Prepaid expenses | (86,000 | ) | - | (86,000 | ) | (40,000 | ) | |||||
Related party transactions | - | 26,500 | - | 59,409 | ||||||||
Accounts payable and accrued liabilities | 83,020 | (51,871 | ) | 117,387 | 24,469 | |||||||
(192,853 | ) | (37,344 | ) | (192,636 | ) | (9,809 | ) | |||||
FINANCING ACTIVITIES | ||||||||||||
Subscriptions payable | - | (1,000,710 | ) | |||||||||
Issuance of shares net of issue costs | 2,051,303 | - | 2,081,303 | 1,122,310 | ||||||||
Loans payable | (144,999 | ) | 105,000 | (144,999 | ) | (75,000 | ) | |||||
1,906,304 | 105,000 | 1,936,304 | 46,600 | |||||||||
INVESTING ACTIVITIES | ||||||||||||
Mineral interests (Note 3) | (72,588 | ) | (37,098 | ) | (116,099 | ) | (55,548 | ) | ||||
(72,588 | ) | (37,089 | ) | (116,099 | ) | (55,548 | ) | |||||
INCREASE (DECREASE) IN CASH | 1,640,863 | 30,558 | 1,627,569 | (18,757 | ) | |||||||
CASH, beginning of period | 36,954 | 444 | 50,248 | 49,759 | ||||||||
CASH, end of period | 1,677,817 | 31,002 | 1,677,817 | 31,002 |
(See accompanying notes to the interim financial statements)
SUTCLIFFE RESOURCES LTD. |
NOTES TO THE INTERIM FINANCIAL STATEMENTS |
FOR THE SECOND QUARTER ENDED JUNE 30, 2005 and 2004 |
(Unaudited – Prepared by Management) |
1. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
a) Foreign Currency Translation
Monetary assets and liabilities denominated in foreign currencies are translated into Canadian dollars at the period end exchange rate, non-monetary assets are translated at historical exchange rates and all income and expenses are translated at average exchange rates prevailing during the period. Foreign currency translation adjustments are included in income.
b) Loss Per Share
Loss per share has been calculated based on the weighted average number of shares outstanding.
c) Fair Value of Financial Instruments
The respective carrying value of certain on-balance sheet financial instruments approximate their fair values. These financial statements include cash, receivables, advances receivable, cheques issued in excess of cash, accounts payable and property obligations payable. Unless otherwise noted, it is management's opinion that the Company is not exposed to significant interest, currency or credit risks arising from these financial instruments. Unless otherwise noted, fair values were assumed to approximate carrying values for these financial instruments since they are short term in nature and their carrying amounts approximate fair values or they are receivable or payable on demand.
d) Deferred Costs
The company follows the practice of capitalizing all costs related to exploration projects, until such time as the project is put into commercial production, sold or abandoned. If commercial production commences, capitalized costs will be amortized on a unit-of-production basis. When mineral properties are abandoned, the related capitalized costs are expensed.
e) Future Income Taxes
The company recognizes income taxes using an asset and liability approach. Future income tax assets and liabilities are computed annually for differences between the financial statements and tax bases using enacted tax laws and rates applicable to the periods in which the differences are expressed to affect taxable income, and where there is relative certainty the losses will be realized.
f) Use of Estimates
The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could materially differ from these estimates. The assets which required management to make significant estimates and assumptions in determining carrying values included interests in mineral properties.
g) Stock-based Compensation
The Company recognizes and values stock-based compensation on the Black-Scholes model of option pricing, as recommended by the CICA Handbook Section 3870.
SUTCLIFFE RESOURCES LTD. | Page 2 |
NOTES TO THE INTERIM FINANCIAL STATEMENTS | |
FOR THE SECOND QUARTER ENDED JUNE 30, 2005 and 2004 | |
(Unaudited – Prepared by Management) | |
2. | NATURE OF OPERATIONS AND CONTINUANCE OF OPERATIONS |
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The Company was incorporated in British Columbia on February 6, 1996. By Articles of Continuances effective June 3, 1996, the Company was continued in Ontario under the Business Corporation Act (Ontario). On November 4, 1996, the Company was continued in Alberta under the name Latin American Mining Investment Corporation. On February 18, 1997, the Company was extra-provincially registered in British Columbia. Through Articles of Amendment dated effective January 5, 1999, the Company effected a consolidation of its issued and outstanding share capital on the basis of one (1) new common share for each ten (10) common shares formerly issued and outstanding and changed its name to “Sutcliffe Resources Ltd.” | |
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The continued operation of the Company is dependent upon continued creditor support, the acquisition and discovery of economically recoverable mineral properties and reserves, confirmation of the Company's interest in underlying mineral claims, the ability of the Company to obtain necessary financing to complete property development and upon further profitable production. | |
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3. | MINERAL INTERESTS |
a) Beale Lake Property, Liard Mining District, British Columbia
By a Letter of Intent dated February 5, 2003, and amended by addendum on September 15, 2004, the Company received an option to acquire a 100% undivided interest in 2 mineral claims known as the Beale Lake property located in the Liard Mining District of British Columbia, subject to a 2 ½% net smelter return royalty payable to the vendor, and for the following payments and share issuances:
Date | Payment | Share Issuance | ||
On signing Letter of Intent | $ 7,500 (paid) | nil | ||
September 30, 2003 | $15,000 (paid) | nil | ||
June 30, 2004 | $17,500 (paid) | nil | ||
Closing of Prospectus Offering | nil | 150,000 common shares (issued) | ||
June 30, 2005 | $30,000 (paid) | 100,000 “ “ (issued) | ||
June 30, 2006 | $50,000 | 100,000 “ “ (issued) | ||
An exploration program totaling $1,550,000 is to be completed as follows: | ||||
Date | Expenditure | Expended todate | ||
October 31, 2005 | $300,000 | $ 74,696 | ||
October 31, 2006 | $350,000 | |||
October 31, 2007 | $400,000 | |||
October 31, 2008 | $500,000 |
A bonus of 650,000 common shares are payable to the vendor in the event that a positive feasibility study is completed and/or commercial production is attained. The 2 ½% net smelter return royalty is payable with a buyout for 1% (40% of the total net smelter return royalty) upon the payment of $1,000,000.
SUTCLIFFE RESOURCES LTD. | Page 3 |
NOTES TO THE INTERIM FINANCIAL STATEMENTS | |
FOR THE SECOND QUARTER ENDED JUNE 30, 2005 and 2004 | |
(Unaudited – Prepared by Management) | |
3. | MINERAL INTERESTS (continued) |
b) Harrison Property
By a Sale, Purchase and Assignment Agreement dated March 7, 2003 and amended on November 5, 2004, the Company received the exclusive right to purchase a 50% interest in 92 contiguous mineral claims comprising 906 claim units, situated in the New Westminster Mining District near Harrison Lake, British Columbia, subject to a 2% net smelter royalty as well as other royalties to the vendor. The terms required an initial payment of $5,000 by September 5, 2003 (paid), additional payment of $20,000 by November 30, 2004 (paid), the issuance of 200,000 common shares by March 15, 2005 (issued) and a minimum work program of $300,000 plus filing fees for assessment purposes to be completed by December 31, 2005.
c) Mineral Interest expenditure breakdown:
Beale Lake $ | Harrison $ | Total $ | ||||||||
Balance, December 31, 2004 | 112,673 | 245,007 | 357,680 | |||||||
Property Acquisition Costs (cash) | 30,000 | - | 30,000 | |||||||
Property Acquisition Costs (shares) | 37,500 | 30,000 | 67,500 | |||||||
Assays and Reports | 2,023 | 300 | 2,323 | |||||||
Equipment Rental and Supplies | - | 5,573 | 5,573 | |||||||
Field Personnel | - | 2,520 | 2,520 | |||||||
Geophysical Survey | - | 8,183 | 8,183 | |||||||
Net Mineral Interest Costs for the Period | 69,523 | 46,576 | 116,099 | |||||||
Balance, June 30, 2005 | 182,196 | 291,583 | 473,779 |
4. | LOANS PAYABLE |
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The loans payable are unsecured amounts owing to unrelated parties with variable interest rates and are due on demand. |
SUTCLIFFE RESOURCES LTD. | Page 4 |
NOTES TO THE INTERIM FINANCIAL STATEMENTS | |
FOR THE SECOND QUARTER ENDED JUNE 30, 2005 and 2004 | |
(Unaudited – Prepared by Management) | |
5. | SHARE CAPITAL | |
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a) | Authorized - Unlimited common shares without par value | |
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b) | Issued - 21,833,900 common shares as follows: |
SHARES | |||||||
# | $ | ||||||
Balance, December 31, 2004 | 11,633,900 | 5,753,710 | |||||
Issued pursuant to Initial Public Offering | 9,700,000 | 2,425,000 | |||||
(less share issuance costs) | - | (423,697 | ) | ||||
Issued for cash, exercise of options | 50,000 | 12,500 | |||||
Issued pursuant to property agreements | 450,000 | 67,500 | |||||
Reclassification of contributed surplus due | |||||||
to exercise of stock options | - | 5,104 | |||||
Balance, June 30, 2005 | 21,833,900 | 7,840,117 | |||||
c) Shares Held In Escrow
A total of 2,100,000 common shares issued at nominal cost to the directors of the Company and, an additional 1,572,000 common shares beneficially owned, directly or indirectly, by directors and officers are subject to escrow agreements. As of June 30, 2005, 367,200 shares of the total 3,672,000 shares have been released from escrow and 3,304,800 shares remain in escrow.
d) Stock Options
There are 1,150,000 director and employee stock options available which may be exercised to purchase one common share at $0.25 per share until December 30, 2008.
The Company accounts for its stock option plan under the fair value method and uses the Black-Scholes Model for calculating the fair value of the options based on the following;
- Risk-free interest rate | 5% |
- Expected life of options | 5 years |
- Expected volatility | 33.3% |
Contributed Surplus
Jun 30, | Dec 31, | ||||||
2005 $ | 2004 $ | ||||||
Balance – beginning | 122,500 | 122,500 | |||||
• Stock options – granted and vested | - | - | |||||
• Stock options – exercised | (5,104 | ) | - | ||||
(5,104 | ) | - | |||||
Balance – ending | 117,396 | 122,500 |
SUTCLIFFE RESOURCES LTD. | Page 5 |
NOTES TO THE INTERIM FINANCIAL STATEMENTS | |
FOR THE SECOND QUARTER ENDED JUNE 30, 2005 and 2004 | |
(Unaudited – Prepared by Management) | |
5. | SHARE CAPITAL (continued) |
e) Warrants
There are 6,771,400 warrants outstanding from the non-brokered private placement of 6,771,400 units which were issued March 31, 2004. Each warrant is exercisable to purchase one common share at a price of $0.25 for a period of two years from the date of issuance.
There are 4,600,000 warrants outstanding from the units sold pursuant to the initial public offering and an additional 250,000 warrants outstanding from the Corporate Finance Units which were paid to the agents at the closing of the offering, each warrant is exercisable to purchase one common share at a price of $0.35 until June 21, 2007. There are also 1,104,000 agent’s warrants outstanding which were issued pursuant to the offering, each agent’s warrant is exercisable to purchase one common share at a price of $0.25 until June 21, 2007.
f) Flow-through Shares
As part of the initial public offering, the Company issued 3,000,000 flow-through shares to finance some of its exploration activities. The Company will renounce the tax deductions arising from these flow-through expenditures to the flow-through subscribers.
6. | INCOME TAXES |
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The Company has non-capital income tax losses which may be applied against future taxable income. The potential income tax benefits arising from these losses carry forward and expire between 2005 and 2009 and have not been reflected as future income tax assets on these financial statements. | |
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7. | RELATED PARTY TRANSACTIONS |
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For the year to date ended June 30, 2005, the Company paid $15,000 for management fees to a company controlled by a director. | |
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8. | FINANCIAL INSTRUMENTS |
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The Company’s financial instruments consist of cash, receivables, refundable deposits, accounts payable and accrued liabilities, and loans payable. Unless otherwise noted, it is management’s opinion that the Company is not exposed to significant interest, currency or credit risks arising from these financial instruments. The fair value of these financial instruments approximate their carrying value, unless otherwise noted. | |
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9. | SUBSEQUENT EVENTS |
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In July, 2005, the Company granted 3,200,000 share purchase options at an exercise price of $0.25 per share to directors, officers and consultants. In August, 2005, the Company received $41,750 pursuant to the exercise of 167,000 share purchase warrants with a March 31, 2006 expiry date. |
SUTCLIFFE RESOURCES LTD. | Page 6 |
NOTES TO THE INTERIM FINANCIAL STATEMENTS | |
FOR THE SECOND QUARTER ENDED JUNE 30, 2005 and 2004 | |
(Unaudited – Prepared by Management) | |
10. | UNITED STATES ACCOUNTING PRINCIPLES | |
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These financial statements have been prepared in accordance with generally accepted accounting principles in Canada (CDN GAAP) which, in these financial statements, conform in all material respects with those in the United States (US GAAP), except as follows: | ||
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a) | Exploration Expenditures | |
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Under CDN GAAP, exploration expenditures are capitalized until the property is sold or abandoned. If developed, the deferred expenditures are amortized over the expected benefit period. If there can be no assurance of the commencement of operations, US GAAP requires that exploration expenditures be expensed as incurred until it is determined that commercially viable operations exist and the expenditures then incurred are recoverable. | ||
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b) | Flow-through Shares and Future Income Tax Recovery | |
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Under Canadian GAAP flow-through shares are recorded at the value of compensation received less an amount equal to future income tax liability resulting from the related renunciation of qualified exploration expenditures as a reduction in share capital. The Company also recognizes in operations the realization of future income tax benefits of previously unrecorded future income tax assets on the date of renouncement of the expenditures to the flow-through share investors. Under US GAAP flow-through shares have a carrying value equal to that of non flow-through shares and the difference between the fair value of the shares and the value of compensation received is reported as a recovery of deferred tax benefit on the statement of operations. As the value of the compensation received for flow-through shares issued during the year was equal to the fair value of non flow-through shares on the date issued, no recovery of deferred tax benefit is required for US GAAP purposes. | ||
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c) | Comprehensive Income | |
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Under US GAAP, SFAS No. 130 requires that companies report comprehensive income as a measure of overall performance. Comprehensive income includes all changes in equity during a year expect those resulting from investments by owners and distribution to owners. There is no similar concept under Canadian GAAP. The Company has determined that it had no comprehensive income other than the loss in any of the years presented. | ||
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d) | Interest expense on related party debt | |
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Under US GAAP, in the absence of an established interest rate, the present value of the loan is determined by discounting the loan using an imputed rate of interest. The imputed interest rate used is one that approximates the rate that an independent borrower and lender would have negotiated in a similar transaction. Any difference between the face amount of the loan and its present value is accounted for as a discount or premium and amortized over the term of the loan. The Company had no interest expense on related party debt in any of the years presented. |
SUTCLIFFE RESOURCES LTD. | Page 7 |
NOTES TO THE INTERIM FINANCIAL STATEMENTS | |
FOR THE SECOND QUARTER ENDED JUNE 30, 2005 and 2004 | |
(Unaudited – Prepared by Management) | |
10. | UNITED STATES ACCOUNTING PRINCIPLES (continued) | |
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e) | Escrow Shares | |
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Under CDN GAAP shares issued with escrow restrictions are recorded at their issued price and are not revalued upon release from escrow. Under US GAAP escrow shares which are released upon the Company meeting certain criteria (performance-based) are considered to be contingently issuable. These shares are excluded from the weighted average shares calculation and the difference between the fair market value of the shares at the time of their release from escrow and the shares’ original issue price (being the market price at that time) is accounted for as a compensation expense and share capital at the time shares are released from escrow. The Company’s escrow shares are not performance-based and therefore no adjustments have been made to the calculation of loss per share. | ||
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f) | The following summarizes the balance sheet items with material variations under US GAAP: |
June 30 | December 31 | |||||
2005 $ | 2004 $ | |||||
Share capital | 7,840,117 | 5,753,710 | ||||
Additional paid-in capital | 117,396 | 122,500 | ||||
Deficit | (6,553,201 | ) | (6,213,462 | ) |
g) | The following table summarizes the effect on net loss after considering the US GAAP adjustments: |
Six months ended | ||||||
June 30 | June 30 | |||||
2005 $ | 2004 $ | |||||
Net loss under CDN GAAP | (223,640 | ) | (26,215 | ) | ||
US GAAP material adjustments: | ||||||
• Resource property expenditures | (18,599 | ) | (38,048 | ) | ||
• Shares for resource property | (67,500 | ) | - | |||
• Cash payments for resource property | (30,000 | ) | (17,500 | ) | ||
Net Loss under US GAAP | (339,739 | ) | (81,763 | ) | ||
Loss per share under US GAAP | (0.0276 | ) | (0.0116 | ) |
h) | The following table summarizes the effect on shareholders’ equity (deficiency) after considering the US GAAP adjustments: |
Share | Additional | Accumulated | Total Shareholders’ | ||||||||||
Capital | paid-in | Deficit | equity (Deficiency) | ||||||||||
$ | Capital $ | $ | $ | ||||||||||
Balance – December 31, 2004 | 5,753,710 | 122,500 | (6,213,462 | ) | (337,252 | ) | |||||||
Share capital issued under CDN GAAP | 2,081,303 | - | - | 2,081,303 | |||||||||
Reduction in contributed surplus due to | |||||||||||||
exercise of stock options under CDN | |||||||||||||
GAAP | 5,104 | (5,104 | ) | - | - | ||||||||
Net loss under CDN GAAP | - | - | (223,640 | ) | (223,640 | ) | |||||||
US GAAP material adjustments: | |||||||||||||
• Resource property costs expensed | - | - | (116,099 | ) | (116,099 | ) | |||||||
Balance – June 30, 2005 | 7,840,117 | 117,396 | (6,553,201 | ) | 1,404,312 |