UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER PURSUANT TO RULE 13a-16 OR 15d-16 UNDER
THE SECURITIES EXCHANGE ACT OF 1934
For the month of DECEMBER, 2006.
Commission File Number: 0-30196
HALO RESOURCES LTD
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(Translation of registrant's name into English)
#1305 - 1090 West Georgia Street, Vancouver, British Columbia, V6E 3V7, Canada
- --------------------------------------------------------------------------------
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual reports
under cover of Form 20-F or Form 40-F: FORM 20-F [X] FORM 40-F [ ]
Indicate by check mark if the registrant is submitting the Form 6-K in paper as
permitted by Regulation S-T Rule 101(b)(1): _______
Indicate by check mark if the registrant is submitting the Form 6-K in paper as
permitted by Regulation S-T Rule 101(b)(7): _______
Indicate by check mark whether the registrant by furnishing the information
contained in this Form, is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
YES [ ] NO [X]
If "Yes" is marked, indicate below the file number assigned to the registrant in
connection with Rule 12g3- 2(b): 82-_____________
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf of the
undersigned, thereunto duly authorized.
HALO RESOURCES LTD.
-------------------------------------
Date: December 21, 2006 /s/ Marc Cernovitch
----------------------------- -------------------------------------
Marc Cernovitch
President and CEO
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HALO RESOURCES LTD.
FINANCIAL STATEMENTS
FOR THE YEARS ENDED
AUGUST 31, 2006 AND 2005
- --------------------------------------------------------------------------------
D & H
group
Chartered
Accountants
AUDITORS' REPORT
To the Shareholders of
Halo Resources Ltd.
We have audited the balance sheets of Halo Resources Ltd. as at August 31, 2006
and 2005 and the statements of loss and deficit and cash flows for the years
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these financial statements present fairly, in all material
respects, the financial position of the Company as at August 31, 2006 and 2005
and the results of its operations and cash flows for the years then ended in
accordance with Canadian generally accepted accounting principles.
On December 11, 2006, we reported separately to the shareholders of Halo
Resources Ltd. on financial statements as at August 31, 2006 and 2005 and for
the years ended August 31, 2006, 2005 and 2004 audited in accordance with
Canadian generally accepted auditing standards and the standards of the Public
Company Accounting Oversight Board (United States) which include a
reconciliation to United States generally accepted accounting principles.
Vancouver, B.C. /s/ D&H GROUP LLP
December 11, 2006 CHARTERED ACCOUNTANTS
D&H Group LLP
a BC Limited Liability Partnership of Corporations
member of BHD Association with affiliated offices
across Canada and Internationally
10th Floor, 1333 West Broadway, Vancouver, B.C. V6H 4C1
www.dhgroup.ca F (604) 731-9923 T (604) 731-5881
HALO RESOURCES LTD.
BALANCE SHEETS
AS AT AUGUST 31
2006 2005
$ $
ASSETS
CURRENT ASSETS
Cash 271,935 893,525
Amounts receivable and prepaids (Note 3) 136,275 197,507
------------ ------------
408,210 1,091,032
CAPITAL ASSETS (Note 4) 298,630 32,761
UNPROVEN MINERAL INTERESTS (Note 5) 23,845,828 22,759,333
DEFERRED SHARE ISSUE COSTS (Note 7(a)) - 45,556
------------ ------------
24,552,668 23,928,682
============ ============
LIABILITIES
CURRENT LIABILITIES
Accounts payable and accrued liabilities 256,688 584,221
REDEEMABLE PREFERRED SHARES (Note 6) 8,000,000 8,000,000
ASSET RETIREMENT OBLIGATION (Note 16) 1,014,500 938,500
FUTURE INCOME TAX LIABILITY (Note 10) 4,832,000 5,328,000
------------ ------------
14,103,188 14,850,721
------------ ------------
LEASE COMMITMENTS (Note 15)
SHAREHOLDERS'EQUITY
SHARE CAPITAL (Note 7) 32,395,855 28,487,576
CONTRIBUTED SURPLUS (Note 9) 1,360,767 738,642
SHARE SUBSCRIPTIONS RECEIVED (Note 7(a)) - 958,950
DEFICIT (23,307,142) (21,107,207)
------------ ------------
10,449,480 9,077,961
------------ ------------
24,552,668 23,928,682
============ ============
SUBSEQUENT EVENTS (Note 17)
APPROVED BY THE BOARD
/s/ MARC CERNOVITCH , Director
- ---------------------
/s/ NICK DEMARE , Director
- ---------------------
The accompanying notes are an integral part of these
financial statements.
HALO RESOURCES LTD.
STATEMENTS OF LOSS AND DEFICIT
FOR THE YEARS ENDED AUGUST 31
2006 2005
$ $
EXPENSES
Accretion (Note 16) 76,000 38,000
Depreciation 39,373 4,132
General and administrative 1,267,825 1,060,276
General exploration 17,627 27,002
Stock-based compensation (Note 8) 550,817 559,031
Part XII.6 tax expense (Note 10) 43,000 40,000
Write-down of unproven mineral interest (Note 5(b)) 1,538,655 -
------------ ------------
3,533,297 1,728,441
------------ ------------
LOSS BEFORE OTHER ITEM (3,533,297) (1,728,441)
------------ ------------
OTHER ITEM
Interest income 16,729 31,331
------------ ------------
LOSS BEFORE INCOME TAXES (3,516,568) (1,697,110)
FUTURE INCOME TAX RECOVERY (Note 10) 1,316,633 1,329,000
------------ ------------
NET LOSS FOR THE YEAR (2,199,935) (368,110)
DEFICIT - BEGINNING OF YEAR (21,107,207) (20,739,097)
------------ ------------
DEFICIT - END OF YEAR (23,307,142) (21,107,207)
============ ============
LOSS PER COMMON SHARE
- BASIC AND DILUTED $(0.08) $(0.02)
============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 28,447,710 16,049,812
============ ============
The accompanying notes are an integral part of these
financial statements.
HALO RESOURCES LTD.
STATEMENTS OF CASH FLOW
FOR THE YEARS ENDED AUGUST 31
2006 2005
$ $
CASH PROVIDED FROM (USED FOR)
OPERATING ACTIVITIES
Net loss for the year (2,199,935) (368,110)
Items not involving cash
Accretion 76,000 38,000
Depreciation 39,373 4,132
Stock-based compensation 550,817 559,031
Write-down of unproven mineral interests 1,538,655 -
Future income tax recovery (1,316,633) (1,329,000)
Decrease (increase) in amounts receivable
and prepaids 61,232 (184,897)
Increase (decrease) in accounts payable and
accrued liabilities (495,278) 517,089
------------ ------------
(1,745,769) (763,755)
------------ ------------
FINANCING ACTIVITIES
Common shares issued for cash 4,125,749 6,941,897
Common share subscriptions received - 958,950
Common share issue costs (257,173) (692,979)
------------ ------------
3,868,576 7,207,868
------------ ------------
INVESTING ACTIVITIES
Additions to unproven mineral interests (2,469,647) (5,842,760)
Purchase of capital assets (274,750) (36,893)
------------ ------------
(2,744,397) (5,879,653)
------------ ------------
INCREASE (DECREASE) IN CASH DURING THE YEAR (621,590) 564,460
CASH - BEGINNING OF YEAR 893,525 329,065
------------ ------------
CASH - END OF YEAR 271,935 893,525
============ ============
SUPPLEMENTARY CASH FLOW INFORMATION - See Note 14.
The accompanying notes are an integral part of these
financial statements.
HALO RESOURCES LTD.
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED AUGUST 31, 2006 AND 2005
1. NATURE OF OPERATIONS
Halo Resources Ltd. (the "Company") is a resource exploration company
which is engaged in the acquisition, exploration and development of
unproven mineral interests in Canada. The Company presently has no
proven or probable reserves and on the basis of information to date, it
has not yet determined whether these unproven mineral interests contain
economically recoverable ore reserves. The amounts shown as unproven
mineral interests and deferred costs represent costs incurred to date,
less amounts amortized and/or written off, and do not necessarily
represent present or future values. The underlying value of the
unproven mineral interests is entirely dependent on the existence of
economically recoverable reserves, securing and maintaining title and
beneficial interest, the ability of the Company to obtain the necessary
financing to complete development, and future profitable production.
2. SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with Canadian
GAAP requires management to make estimates and assumptions that affect
the reported amount of assets and liabilities and disclosure of
contingent liabilities at the date of the financial statements, and the
reported amounts of revenues and expenditures during the year. Examples
of significant estimates made by management include depreciation, the
provision for future income tax recoveries and composition of future
income tax assets and future income tax liabilities, valuations of
mineral interests, capital assets, asset retirement obligations and
stock-based compensation. Actual results may differ from those
estimates.
UNPROVEN MINERAL INTERESTS
Unproven mineral interests costs and exploration, development and field
support costs directly relating to mineral interests are deferred until
the interests to which they relate are placed into production, sold or
abandoned. The deferred costs will be amortized over the life of the
orebody following commencement of production or written off if the
mineral interest is sold or abandoned. Administration costs and other
exploration costs that do not relate to any specific mineral interest
are expensed as incurred.
On a periodic basis, management reviews the carrying values of deferred
unproven mineral interest acquisition and exploration expenditures with
a view to assessing whether there has been any impairment in value.
Management takes into consideration various information including, but
not limited to, results of exploration activities conducted to date,
estimated future metal prices, and reports and opinions of outside
geologists, mine engineers and consultants. When it is determined that
a project or interest will be abandoned or its carrying value has been
impaired, a provision is made for any expected loss on the project or
interest.
Although the Company has taken steps to verify title to mineral
properties in which it has an interest, according to the usual industry
standards for the stage of exploration of such properties, these
procedures do not guarantee the Company's title. Such properties may be
subject to prior agreements or transfers and title may be affected by
undetected defects.
From time to time, the Company acquires or disposes of mineral
interests pursuant to the terms of option agreements. Options are
exercisable entirely at the discretion of the optionee and,
accordingly, are recorded as mineral interest costs or recoveries when
the payments are made or received.
HALO RESOURCES LTD.
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED AUGUST 31, 2006 AND 2005
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
CAPITAL ASSETS
Capital assets are recorded at cost. Depreciation is calculated using
the straight-line method over the estimated useful life of the assets,
as follows:
Office furniture and equipment 20%
Computer and telephone equipment 25%
Field equipment and facility 20%
Leasehold improvements 50%
ASSET RETIREMENT OBLIGATIONS
Future obligations to retire an asset, including dismantling,
remediation and ongoing treatment and monitoring of the site, are
recognized and recorded as a liability at fair value as at the time in
which they are incurred or the event occurs giving rise to such an
obligation. The liability is increased (accreted) over time through
periodic charges to earnings. The corresponding asset retirement cost
is capitalized as part of the asset's carrying value, and is amortized
over the asset's estimated useful life. The amount of the liability
will be subject to re-measurement at each reporting period.
Where possible, the Company has estimated asset retirement obligations
based on current best practice. These estimates are subject to change
as a result of changes in regulations, the extent of environmental
remediation required, the means of reclamation, or cost estimates.
Changes in estimates are accounted for prospectively from the period
the estimate is revised.
IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets are assessed for impairment when events and
circumstances warrant. The carrying value of a long-lived asset is
impaired when the carrying amount exceeds the estimated undiscounted
net cash flow from use and fair value. In that event, the amount by
which the carrying value of an impaired long-lived asset exceeds its
fair value is charged to earnings.
STOCK-BASED COMPENSATION
Stock-based compensation is accounted for at fair value as determined
by the Black-Scholes option pricing model using amounts that are
believed to approximate the volatility of the trading price of the
Company's stock, the expected lives of awards of stock-based
compensation, the fair value of the Company's stock and the risk- free
interest rate. The estimated fair value of awards of stock-based
compensation are charged to expense as awards vest, with offsetting
amounts recognized as contributed surplus.
INCOME TAXES
Income tax liabilities and assets are recognized for the estimated
income tax consequences attributable to differences between the amounts
reported in the financial statements and their respective tax bases,
using enacted income tax rates. The effect of a change in income tax
rates on future income tax liabilities and assets is recognized in
income in the period that the change occurs. Future income tax assets
are recognized to the extent that they are considered more likely than
not to be realized.
HALO RESOURCES LTD.
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED AUGUST 31, 2006 AND 2005
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
EARNINGS (LOSS) PER SHARE
Basic earnings per share is computed by dividing income available to
common shareholders by the weighted average number of common shares
outstanding during the period. The computation of diluted earnings per
share assumes the conversion, exercise or contingent issuance of
securities only when such conversion, exercise or issuance would have a
dilutive effect on earnings per share. The dilutive effect of
convertible securities is reflected in diluted earnings per share by
application of the "if converted" method. The dilutive effect of
outstanding options and warrants and their equivalents is reflected in
diluted earnings per share by application of the treasury stock method.
3. AMOUNTS RECEIVABLE AND PREPAIDS
2006 2005
$ $
Commodity taxes receivable 43,424 146,162
Prepaids 55,011 25,302
Other 37,840 26,043
------------ ------------
136,275 197,507
============ ============
4. CAPITAL ASSETS
---------------------------------------------- ------------
2006 2005
---------------------------------------------- ------------
ACCUMULATED NET BOOK NET BOOK
COSTS DEPRECIATION VALUE VALUE
$ $ $ $
Office furniture and equipment 46,313 5,896 40,417 5,693
Computer and telephone equipment 29,557 8,127 21,430 15,512
Field equipment and facility 254,741 28,041 226,700 11,556
Leasehold improvements 11,524 1,441 10,083 -
------------ ------------ ------------ ------------
342,135 43,505 298,630 32,761
============ ============ ============ ============
5. UNPROVEN MINERAL INTERESTS
---------------------------------------------- ----------------------------------------------
2006 2005
---------------------------------------------- ----------------------------------------------
DEFERRED DEFERRED
ACQUISITION EXPLORATION TOTAL ACQUISITION EXPLORATION TOTAL
COSTS COSTS COSTS COSTS COSTS COSTS
$ $ $ $ $ $
Duport 14,957,409 2,241,773 17,199,182 14,902,244 1,932,540 16,834,784
Bachelor Lake 1,399,289 3,647,500 5,046,789 2,756,880 2,829,076 5,585,956
Sherridon 423,519 1,127,370 1,550,889 107,614 230,979 338,593
Red Lake 38,952 10,016 48,968 - - -
------------ ------------ ------------ ------------ ------------ ------------
16,819,169 7,026,659 23,845,828 17,766,738 4,992,595 22,759,333
============ ============ ============ ============ ============ ============
HALO RESOURCES LTD.
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED AUGUST 31, 2006 AND 2005
5. UNPROVEN MINERAL INTERESTS (continued)
(a) Duport Property, Ontario
Pursuant to an agreement dated February 18, 2005, the Company
acquired from The Sheridan Platinum Group Ltd. ("Sheridan") a
100% interest in 93 mineral claims (the "Duport Property")
covering an area of approximately 3,800 hectares, located near
Kenora, Ontario. The Company paid $250,000 cash and issued one
million common shares, at a fair value of $1,210,000, and $8
million in redeemable preferred shares (see Note 6). The
purchase of the Duport Property was conducted on a tax-free
roll-over basis to Sheridan and, accordingly, $9,210,000 of
costs have no tax value.
The Company has agreed to pay a 2.5% net smelter return
royalty ("NSR") on the first 1.5 million ounces of gold
produced and a 5% NSR on the excess. The Company will have the
right to buy back a 1% NSR for $2.5 million cash.
The Company has also acquired, through staking, 10 mineral
claims in the area of the Duport property, covering an area of
approximately 1,744 hectares.
(b) Bachelor Lake Property, Quebec
On November 12, 2004, the Company entered into a heads of
agreement with Wolfden Resources Inc. ("Wolfden"), whereby
Wolfden would assign to the Company, Wolfden's option from
Metanor Resources Inc. ("Metanor"), to earn a 50% undivided
interest in two mining concessions and 51 mineral claims for a
total of 1,851 hectares (the "Bachelor Lake Property"),
located in the La Sueur Township, Quebec. On April 15, 2005,
the Company and Wolfden signed the final agreement (the
"Assignment and Assumption Agreement"). Under the agreed
terms, the Company acquired Wolfden's option by paying
$650,000 cash and issuing 1,400,000 common shares, at a value
of $1,050,000. The Company was also responsible for all
exploration costs incurred on the Bachelor Lake Property by
Wolfden from the date of signing the heads of agreement and
accordingly, reimbursed Wolfden $1,818,123 by paying
$1,293,123 cash and issuing 700,000 common shares, at a value
of $525,000. Upon exercising the option and after 50,000
ounces of gold or gold equivalent have been produced from the
Bachelor Lake Property, the Company will be required to pay to
Wolfden a bonus payment of $250,000 cash and issue a further
250,000 common shares. The Company also agreed to pay a 0.5%
royalty on the Company's share of the NSR. A director of the
Company is also a director and officer of Wolfden.
Effective May 18, 2005, the Company and Metanor entered an
agreement whereby Metanor acknowledged the Assignment and
Assumption Agreement and the terms of the underlying option
agreement on the Bachelor Lake Property were amended. Under
the amendment, the Company could exercise its option to earn
the 50% interest in the Bachelor Lake Property by spending a
minimum of $500,000 of exploration on the Bachelor Lake
Property and paying $100,000 to Metanor. On September 21,
2005, the Company exercised its option and paid the $100,000.
The Bachelor Lake Property was then operated under a joint
venture agreement (the "Bachelor Lake JV").
On May 2, 2006, as amended August 28, 2006, the Company and
Metanor entered into a purchase agreement (the "Metanor
Purchase") whereby Metanor agreed to purchase the Company's
50% interest in the Bachelor Lake JV in consideration of $3.5
million cash, $750,000 in common shares of Metanor and a 1%
NSR in favour of the Company.
HALO RESOURCES LTD.
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED AUGUST 31, 2006 AND 2005
5. UNPROVEN MINERAL INTERESTS (continued)
Closing of the Metanor Purchase (the "Closing") is scheduled
to occur (the "Completion Date") on the earlier of:
i) 30 days after Metanor completes a $5 million financing; or
ii) November 10, 2006.
Until Closing occurs, Metanor assumes all costs, expenses and
obligations relating to maintaining the Bachelor Lake Property
in good standing until the Completion Date.
In the event the Closing does not occur within the Completion
Date, the Company may elect to purchase Metanor's 50% interest
in the Bachelor Lake Property under the same terms as the
Metanor Purchase. The Company will then have four months to
complete its acquisition. The Company would also assume all
costs, expenses and obligations of the Bachelor Lake Property
from its election until closing of the Company's purchase. If
the Company does not elect to purchase Metanor's 50% interest
then both parties will retain their respective 50% interests
in the Bachelor Lake Property and operations would continue
under the Bachelor Lake JV.
The Metanor Purchase contemplates for total consideration of a
minimum of $4.25 million. Accordingly, during fiscal 2006, the
Company recognized an impairment of $1,538,655 to reflect the
difference between the Company's recorded costs and the
anticipated proceeds.
Subsequent to August 31, 2006, the Company and Metanor
negotiated a new agreement, as described in Note 17(b).
(c) Sherridon VMS Project, Manitoba
The Company has acquired, through staking and various
acquisition agreements, an interest in 15,025 hectares located
in the Sherridon area, north-central Manitoba. Details of the
acquisitions are as follows:
i) 66 unproven claims covering approximately 12,755 hectares,
staked by the Company;
ii) on February 9, 2005, as amended February 9, 2006, the
Company entered into a letter of intent ("Quarter Moon
LOI") with Endowment Lakes (2002) Limited Partnership
("EL") regarding the option to earn up to an 80% interest
in the Quarter Moon Lake Property, Manitoba. The Quarter
Moon Lake Property comprises five mining claims covering a
total of 1,072 hectares and is located 75 kilometres
northeast of Flin Flon and 61 kilometres northwest of Snow
Lake. Under the terms of the Quarter Moon LOI, the Company
had the right to acquire an initial 51% interest in the
Quarter Moon Lake Property in which the Company has paid
$40,000 cash, issued 50,000 common shares of the Company,
at a value of $60,000, and was required to complete a
$500,000 work commitment, pay a further $40,000 cash and
issue 50,000 common shares. See also Note 17(c).
iii)heads of agreement (the "Dunlop HOA") dated February 9,
2006, entered into by the Company and W. Bruce Dunlop
Limited NPL, whereby the Company was granted the option to
earn a 100% undivided interest in three unproven mineral
claims, covering 536 hectares, for $90,000 cash ($15,000
paid), issuance of 250,000 common shares of the Company
(25,000 shares issued) and expending a total of $170,000
in work expenditures over a four year period; and
HALO RESOURCES LTD.
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED AUGUST 31, 2006 AND 2005
5. UNPROVEN MINERAL INTERESTS (continued)
iv) three option agreements (the "HBED Options"), dated March
19, 2006, entered into by the Company and Hudson Bay
Exploration and Development Company Limited ("HBED"),
whereby the Company was granted options to acquire 100%
interests in 24 unproven mineral claims and one mining
lease covering approximately 3,226 hectares. In order to
earn 100% interests in all of the mineral claims and the
mining lease the Company will be required to make option
payments totalling $650,000 and incur expenditures
totalling $4,300,000, as follows:
OPTION WORK
DATE PAYMENTS EXPENDITURES
$ $
On signing 30,000(paid) -
First Anniversary 70,000 30,000
Second Anniversary 120,000 100,000
Third Anniversary 80,000 790,000
Fourth Anniversary 350,000 3,380,000
---------- ------------
650,000 4,300,000
========== ============
Upon agreement by both the Company and HBED, up to
$187,500 of the option payments may be paid in common
shares of the Company.
Should the Company acquire a 100% interest in any of the
claim groups under the HBED Options, HBED has the option
to back-in for a 51% interest in the subject claims group
by paying 135% of the expenditures incurred by the
Company. HBED will also hold a 2% NSR.
(d) Red Lake Property, Ontario
On April 18, 2006, the Company entered into a letter of intent
(the "Red Lake LOI") with Goldcorp. Inc. ("Goldcorp")
regarding the option to earn a 60% interest in 67 mining
claims, a 45% interest in two mining claims, and a 30%
interest in ten mining claims (collectively the "Red Lake
Property") located in Ball Township, Red Lake, Ontario. On
June 20, 2006, the Company and Goldcorp completed a formal
option agreement (the "Red Lake Option") on the Red Lake
Property. Under the terms of the Red Lake Option, the Company
is required to perform minimum exploration programs totalling
$3 million on or before December 31, 2008. Upon spending the
$3.0 million, the Company is entitled to elect to exercise the
option of its interests. Upon notification of the Company's
election, Goldcorp has 90 days to back-in and reacquire a 25%
interest in the 67 mining claims, a 18.75% interest in two
mining claims and a 12.5% interest in the ten mining claims by
paying $6 million to the Company. If Goldcorp does not
exercise its back-in right, the Company will then be required
to issue one million common shares of its share capital to
Goldcorp.
HALO RESOURCES LTD.
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED AUGUST 31, 2006 AND 2005
6. REDEEMABLE PREFERRED SHARES
The series 1 redeemable preferred shares (the "Redeemable Preferred
Shares") were issued by the Company as partial consideration of its
purchase of the Duport Property described in Note 5(a). The Redeemable
Preferred Shares have a term of five years with payment of cumulative
cash dividends, at the following rates:
i) for each of the two years commencing November 1, 2004, an annual
dividend of $50,000, payable in quarterly instalments, commencing
on February 1, 2005 and ending on November 1, 2006; and
ii) for each of the three years commencing November 1, 2006, an annual
dividend of 4% of the Redeemable Preferred Shares outstanding,
payable in quarterly instalments, commencing on February 1, 2007
and ending on November 1, 2009.
The Company may elect to pay any of its dividends in common shares of
its capital stock based on a 15 day average price prior to the date the
dividend is due.
The Redeemable Preferred Shares are non-voting, non-convertible and can
be redeemed in whole or in part by the Company at any time prior to
November 1, 2009, as follows:
i) make a cash payment of $8 million plus a $400,000 bonus, together
with any accrued and unpaid dividends; or
ii) provided all dividends payable pursuant to the terms of the
Redeemable Preferred Shares have been paid, the Company may return
the Duport Property to Sheridan.
The Company may elect to redeem the Redeemable Preferred Shares through
the issuance of common shares in its capital stock based on a 15 day
average price prior to the date of redemption.
If the Redeemable Preferred Shares have not been redeemed the Company
will, effective November 1, 2009, retract the Redeemable Preferred
Shares in consideration of $8 million plus accrued unpaid dividends
(collectively the "Retraction Amount"), payable in cash or common
shares of the Company based on a 15 trading day average price prior to
the date of retraction.
During fiscal 2006, the Company recorded $50,000 of dividends on the
Redeemable Preferred Shares, which have been capitalized as part of
resource interests. As at August 31, 2006, $4,167 of accrued dividends
were included as part of accounts payable and accrued liabilities.
HALO RESOURCES LTD.
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED AUGUST 31, 2006 AND 2005
7. SHARE CAPITAL
Authorized: unlimited common shares without par value
unlimited preferred shares (Note 6)
----------------------------- -----------------------------
Issued common shares: 2006 2005
----------------------------- -----------------------------
SHARES AMOUNT SHARES AMOUNT
$ $
Balance, beginning of year 21,005,765 28,487,576 9,443,859 20,914,102
------------ ------------ ------------ ------------
Issued during the year
For cash
Private placements 5,273,236 3,493,249 7,324,894 6,688,797
Exercise of options 150,000 67,500 - -
Exercise of warrants 4,598,500 1,523,950 1,048,500 253,100
For fiscal advisory services 85,715 32,458 - -
For corporate finance fee - - 40,000 34,000
For unproven mineral interests 25,000 18,250 3,150,000 2,845,000
Cancellation of escrow shares - - (1,488) -
Reallocation from contributed surplus on
exercise of options - 69,413 - -
------------ ------------ ------------ ------------
10,132,451 5,204,820 11,561,906 9,820,897
Less: flow-through share renunciation - (820,633) - (1,566,000)
share issue costs - (475,908) - (681,423)
------------ ------------ ------------ ------------
10,132,451 3,908,279 11,561,906 7,573,474
------------ ------------ ------------ ------------
Balance, end of year 31,138,216 32,395,855 21,005,765 28,487,576
============ ============ ============ ============
(a) During fiscal 2006, the Company completed a private placement
of 3,293,070 flow-through common shares, at a price of $0.70
per flow-through share, and 1,980,166 non-flow-through units,
at a price of $0.60 per non-flow-through unit, for total gross
proceeds of $3,493,249. Each non-flow-through unit consisted
of one common share and one share purchase warrant entitling
the holder to purchase one further share for a period of two
years at a price of $0.70 per share. The Company paid a
finder's fee of $262,194 and issued 523,323 warrants (the
"Finders' Warrants") to the finder. The Company also issued
85,715 units (the "Finder's Units") in settlement of $60,000
billed by the finder for fiscal advisory services rendered.
The Finder's Warrants have the same terms as the private
placement warrants. The fair value of the Finder's Warrants
has been estimated using the Black-Scholes option price model.
The assumptions used were: dividend yield of 0%; expected
volatility of 61.41%; a risk-free interest rate of 3.09% -
3.30%; and an expected life of two years. The value assigned
to the Finder's Warrants was $113,179.
Each Finder's Unit consisted of one common share and one
purchase warrant entitling the finder to purchase one further
share, for a period of two years at a price of $0.75 per
share. The fair value of the warrants has been estimated using
the Black-Scholes option price model. The assumptions used
were: dividend yield of 0%; expected volatility of 62.05%; a
risk-free interest rate of 3.39%; and an expected life of two
years. The value assigned to the warrants was $27,542.
HALO RESOURCES LTD.
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED AUGUST 31, 2006 AND 2005
7. SHARE CAPITAL (continued)
The Company incurred a total of $40,535 for legal, filing and
other share issue costs relating to the private placement. As
at August 31, 2005, the Company had received $958,950 in
common share subscriptions and incurred $45,556 of share issue
costs with respect to this private placement. A director of
the Company purchased 20,000 flow-through shares for $14,000.
(b) During fiscal 2005, the Company completed private placements,
as follows:
i) on December 23, 2004, the Company issued 4,342,951
flow-through units, at a price of $0.95 per flow-through
unit, and 2,673,530 non-flow-through units, at a price of
$0.85 per non-flow- through unit, for total gross proceeds
of $6,398,304. Each flow-through unit consisted of one
common share and one-half share purchase warrant with each
full warrant entitling the holder to purchase one further
share for a period of two years, at a price of $1.25 on or
before December 23, 2005 and, thereafter, at a price of
$1.50 on or before December 23, 2006. Each non-flow-
through unit consisted of one common share and one share
purchase warrant entitling the holder to purchase one
further share for a period of two years, at a price of
$1.10 on or before December 23, 2005 and, thereafter, at a
price of $1.35 on or before December 23, 2006. Certain
directors and officers of the Company and their immediate
family members purchased 121,435 flow- through units for
$115,363.
The Company paid the agents a cash commission of $510,643
and issued 701,647 warrants (the "Agents' Warrants") and
incurred $107,731 of costs relating to the financing. Each
Agents' Warrant is exercisable to purchase one common
share at a price of $1.05 on or before December 23, 2006.
The Company also issued 40,000 units at a fair value of
$0.85 per unit, each unit comprising of one common share
and one-half share purchase warrant having the same terms
as the non-flow-through units;
ii) on January 20, 2005, the Company issued 151,834
flow-through units, at a price of $0.95 per flow-through
unit, and 25,000 non-flow-through units, at a price of
$0.85 per non-flow-through unit, for total gross proceeds
of $165,492. Each flow-through unit consisted of one
common share and one-half share purchase warrant with each
full warrant entitling the holder to purchase one further
share for a period of two years, at a price of $1.25 on or
before January 20, 2006 and, thereafter, at a price of
$1.50 on or before January 20, 2007. Each non-flow-through
unit consisted of one common share and one share purchase
warrant with each full warrant entitling the holder to
purchase one further share for a period of two years, at a
price of $1.10 on or before January 20, 2006 and,
thereafter, at a price of $1.35 on or before January 20,
2007. The Company paid a cash finder's fee of $16,549. A
director of the Company purchased 5,300 flow- through
units for $5,305; and
iii)on February 3, 2005, the Company issued 131,579
flow-through units at a price of $0.95 per flow-through
unit for total gross proceeds of $125,000. Each
flow-through unit consisted of one common share and
one-half share purchase warrant with each full warrant
entitling the holder to purchase one further share for a
period of two years, at a price of $1.25 on or before
February 3, 2006 and, thereafter, at a price of $1.50 on
or before February 3, 2007. The Company paid a cash
finder's fee of $12,500.
HALO RESOURCES LTD.
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED AUGUST 31, 2006 AND 2005
7. SHARE CAPITAL (continued)
(c) A summary of the number of common shares reserved pursuant to
the Company's warrants outstanding at August 31, 2006 and 2005
and the changes for the years ending on those dates is as
follows:
2006 2005
Balance, beginning of year 10,331,859 5,647,000
Pursuant to private placements 2,589,204 5,733,359
Exercised (4,598,500) (1,048,500)
------------ ------------
Balance, end of year 8,322,563 10,331,859
============ ============
Common shares reserved pursuant to warrants outstanding at
August 31, 2006, are as follows:
NUMBER EXERCISE PRICE EXPIRY DATE
$
2,313,182 1.50 December 23, 2006
2,718,530 1.35 December 23, 2006
701,647 1.05 December 23, 2006
2,071,015 0.70 September 14, 2007
432,474 0.70 September 29, 2007
85,715 0.75 October 14, 2007
------------
8,322,563
============
(d) See also Note 17.
8. STOCK OPTIONS AND STOCK-BASED COMPENSATION
The Company has established a rolling stock option plan (the "Plan"),
in which the maximum number of common shares which can be reserved for
issuance under the Plan is 10% of the issued and outstanding shares of
the Company. The exercise price of the options is set at the Company's
closing share price on the day before the grant date, less allowable
discounts in accordance with the policies of the TSX Venture Exchange.
During fiscal 2006, the Company granted 2,168,000 stock options (2005 -
1,078,000) to its employees, directors and consultants and recorded
compensation expense of $550,817 (2005 - $559,031).
The fair value of stock options granted to employees, directors and
consultants is estimated on the dates of grants using the Black-Scholes
option pricing model with the following assumptions used for the grants
made during fiscal 2006 and 2005:
2006 2005
------------------ ------------------
Risk-free interest rate 3.38% - 4.11% 2.28% - 2.92%
Estimated volatility 61.41% - 85.48% 52.44% - 105%
Expected life 3 years - 5 years 1.5 years
Expected dividend yield 0% 0%
HALO RESOURCES LTD.
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED AUGUST 31, 2006 AND 2005
8. STOCK OPTIONS AND STOCK-BASED COMPENSATION (continued)
The weighted average fair value of all stock options, calculated using
the Black-Scholes option pricing model, granted during the year to the
Company's employees, directors and consultants was $0.25 (2005 - $0.43)
per share.
Option-pricing models require the use of estimates and assumptions
including the expected volatility. Changes in the underlying
assumptions can materially affect the fair value estimates and,
therefore, existing models do not necessarily provide reliable measure
of the fair value of the Company's stock options.
A summary of the Company's stock options at August 31, 2006 and 2005,
and the changes for the fiscal years ending on those dates is presented
below:
----------------------------- -----------------------------
2006 2005
----------------------------- -----------------------------
WEIGHTED WEIGHTED
NUMBER AVERAGE NUMBER AVERAGE
OF OPTIONS EXERCISE PRICE OF OPTIONS EXERCISE PRICE
$ $
Balance, beginning of year 1,688,000 0.80 810,000 0.61
Granted 2,168,000 0.54 1,078,000 0.92
Exercised (150,000) 0.75 - -
Expired (803,000) 0.95 (200,000) 0.66
------------ ------------
Balance, end of year 2,903,000 0.56 1,688,000 0.80
============ ============
The following table summarizes information about the stock options
outstanding and exercisable at August 31, 2006:
OPTIONS OPTIONS EXERCISE
OUTSTANDING EXERCISABLE PRICE EXPIRY DATE
$
600,000 600,000 0.60 May 31, 2007
60,000 60,000 0.75 July 22, 2007
150,000 150,000 0.70 September 27, 2007
200,000 200,000 0.45 September 28, 2008
580,000 580,000 0.75 September 29, 2008
913,000 913,000 0.45 February 2, 2009
400,000 100,000 0.45 March 10, 2011
----------- -----------
2,903,000 2,603,000
=========== ===========
See also Note 17 (d).
HALO RESOURCES LTD.
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED AUGUST 31, 2006 AND 2005
9. CONTRIBUTED SURPLUS
Contributed surplus for fiscal 2006 and 2005 is comprised of the
following:
2006 2005
$ $
Balance, beginning of year 738,642 179,611
Stock options exercised (69,413) -
Stock-based compensation on stock
options (Note 8) 550,817 -
Stock-based compensation on
warrants (Note 7) 140,721 559,031
------------ ------------
Balance, end of year 1,360,767 738,642
============ ============
10. INCOME TAXES
The income tax effects of temporary differences that give rise to
significant components of future income tax assets and liabilities are
as follows:
2006 2005
$ $
Future income tax assets:
Financing costs 272,000 200,000
Capital assets 15,000 -
Losses available for future periods 1,630,000 1,129,000
------------ ------------
1,917,000 1,329,000
Future income tax liabilities:
Difference between book value and
income tax costs of unproven
mineral interests (6,749,000) (6,657,000)
------------ ------------
Net future income tax liabilities (4,832,000) (5,328,000)
============ ============
The recovery of income taxes shown in the statements of loss and
deficit differ from the amounts obtained by applying statutory rates to
the loss before income taxes due to the following:
2006 2005
$ $
Combined federal and provincial
income tax rate 34.12% 35.36%
============ ============
Expected income tax recovery 1,205,600 600,100
Non-deductible stock-based compensation (188,000) (197,700)
Write-down of unproven mineral interest (525,000) -
Effect of change in tax rates (48,000) -
Unrecognized tax losses (497,900) (381,900)
Recovery of valuation allowance 1,316,633 1,329,000
Other 53,300 (20,500)
------------ ------------
Future income tax recovery 1,316,633 1,329,000
============ ============
HALO RESOURCES LTD.
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED AUGUST 31, 2006 AND 2005
10. INCOME TAXES (continued)
As at August 31, 2006, the Company has accumulated non-capital losses
of approximately $4.8 million and cumulative resource and other tax
pools of approximately $5.2 million carried forward for Canadian income
tax purposes and are available to reduce taxable income of future
years. The non-capital losses expire commencing in 2007 through 2016.
The cumulative resource and other tax pools can be carried forward
indefinitely.
In fiscal 2006, the Company issued 3,293,070 flow-through common shares
for gross proceeds of $2,305,149 (see Note 7(a)). Resource expenditure
deductions for income tax purposes related to exploration and
development activities funded by flow-through share arrangements are
renounced to investors in accordance with Canadian income tax
legislation. The renunciation of such expenditures is accounted for as
a financing cost related to the flow-through issuance and results in a
reduction in share capital with a corresponding increase in the
Company's future income tax liability.
The Company is permitted under Canadian income tax legislation to
renounce flow-through related resource expenditures to investors in
advance of the Company incurring the expenditure. In accordance with
this legislation the Company has twelve months following the effective
date of renunciation to incur the expenditures. The Company begins
incurring interest charges for unspent funds after one month and fees
for unspent funds at the end of the calendar year following the
effective date of renunciation, and until such time as funds are fully
expended. During fiscal 2006 the Company incurred a $43,000 Part XII.6
tax expense on the monthly unspent balance of flow-through funds. All
of the flow-through funds were spent by September 2006.
11. RELATED PARTY TRANSACTIONS
(a) The Company was charged for various services provided by
companies controlled by directors and officers of the Company,
as follows:
2006 2005
$ $
Accounting and administration 99,700 90,450
Professional and consulting 116,400 67,900
Compensation and benefits 93,000 51,500
------------ -------------
309,100 209,850
============ =============
These fees have been either expensed to operations or
capitalized to unproven mineral interests, based on the nature
of the expenditures.
As at August 31, 2006, accounts payable and accrued
liabilities include $4,637 (2005 - $24,369) due to these
related parties.
These transactions were measured at the exchange amount, which
was the amount of consideration established and agreed to by
related parties.
(b) Other related party transactions are disclosed elsewhere in
these financial statements.
HALO RESOURCES LTD.
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED AUGUST 31, 2006 AND 2005
12. SEGMENTED INFORMATION
As at August 31, 2006 and 2005, the Company had only recorded deferred
costs relating to its agreements on unproven mineral interests. The
unproven mineral interest and the Company's corporate assets are
located in Canada. Identifiable assets, revenues and net loss in each
of these areas are as follows:
----------------------------------------------
2006
----------------------------------------------
IDENTIFIABLE NET
ASSETS REVENUES LOSS
$ $ $
Canada
Mineral operations 23,845,828 - (1,538,655)
Corporate 706,840 16,729 (661,280)
------------ ------------ ------------
24,552,668 16,729 (2,199,935)
============ ============ ============
----------------------------------------------
2005
----------------------------------------------
IDENTIFIABLE NET
ASSETS REVENUES LOSS
$ $ $
Canada
Mineral operations 22,759,333 - -
Corporate 1,169,349 31,331 (368,110)
------------ ------------ ------------
23,928,682 31,331 (368,110)
============ ============ ============
13. FINANCIAL INSTRUMENTS
The fair values of financial instruments at August 31, 2006 and 2005,
were estimated based on relevant market information and the nature and
terms of financial instruments. Management is not aware of any factors
which would significantly affect the estimated fair market amounts,
however, such amounts have not been comprehensively revalued for
purposes of these financial statements. Disclosure subsequent to the
balance sheet dates and estimates of fair value at dates subsequent to
August 31, 2006 and 2005, may differ significantly from that presented.
Fair value approximates the amounts reflected in the financial
statements for cash, amounts receivable and accounts payable and
accrued liabilities. It is not practicable to estimate the fair value
of the Redeemable Preferred Shares.
HALO RESOURCES LTD.
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED AUGUST 31, 2006 AND 2005
14. SUPPLEMENTARY CASH FLOW INFORMATION
Non-cash operating, financing and investing activities were conducted
by the Company during fiscal 2006 and 2005 as follows:
2006 2005
$ $
Operating activities
Accounts payable for unproven mineral interests 137,253 4,167
Accounts payable for capital assets 30,492 -
------------ ------------
167,745 4,167
============ ============
Financing activities
Issuance of common shares for unproven mineral interests 18,250 2,845,000
Issuance of common shares for fiscal advisory services 60,000 -
Issuance of common shares for corporate finance fee - 34,000
Common share issue costs (60,000) (34,000)
Issuance of Redeemable Preferred Shares for
unproven mineral interests - 8,000,000
Share capital - future income tax adjustment (820,633) (1,566,000)
Future tax liability 820,633 6,657,000
------------ ------------
18,250 15,936,000
============ ============
Investing activities
Accounts payable for unproven mineral interest (137,253) (4,167)
Accounts payable for capital assets (30,492) -
Common shares issued for unproven mineral interests (18,250) (2,845,000)
Redeemable Preferred Shares issued for unproven mineral interests - (8,000,000)
Unproven mineral interests - future income tax adjustment - (5,091,000)
------------ ------------
(185,995) (15,940,167)
============ ============
Other supplementary cash flow information:
2006 2005
$ $
Interest paid in cash - -
============ ============
Dividends paid in cash 50,000 37,500
============ ============
Income taxes paid in cash - -
============ ============
HALO RESOURCES LTD.
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED AUGUST 31, 2006 AND 2005
15. LEASE COMMITMENTS
The Company has entered into lease agreements for its offices and
certain vehicles under operating leases. Minimum payments under these
leases are as follows:
YEAR $
2007 87,124
2008 39,077
2009 11,396
------------
137,597
============
16. ASSET RETIREMENT OBLIGATION
2006 2005
$ $
Balance, beginning of year 938,500 -
Liabilities assumed on acquisition - 900,500
Accretion expense 76,000 38,000
------------ ------------
1,014,500 938,500
============ ============
The total undiscounted amount of estimated cash flows required to
settle the Company's estimated obligation is $1,018,567 which has been
discounted using a credit adjusted risk free rate of 8.5%. The
reclamation obligation relates to the Bachelor Lake Property. The
present value of the reclamation liability may be subject to change
based on management's current estimates, changes in remediation
technology or changes to the applicable laws and regulations. Such
changes will be recorded in the accounts of the Company as they occur.
See also Notes 5(b) and 17(b).
17. SUBSEQUENT EVENTS
(a) In October 2006, the Company completed a brokered private
placement and issued 3,416,333 flow- through units at a price
of $0.45 per flow-through unit, for total gross proceeds of
$1,537,350. Each flow-through unit consisted of one common
share and one-half share purchase warrant with each full
warrant entitling the holder to purchase one further common
share of the Company, for a period of two years at a price of
$0.60 on or before April 12, 2008. A director of the Company
purchased 20,000 flow-through units for $9,000.
The Company paid an agent a cash commission of $115,301 and
issued 341,633 warrants (the "Agent Warrants") and incurred
$67,067 of costs relating to the financing. Each Agent's
Warrant is exercisable to purchase one common share at a price
of $0.45 on or before April 12, 2008. The Company also issued
62,500 units, at a fair value of $0.45 per unit, for corporate
finance fees (the "Corporate Finance Units"). Each Corporate
Finance Unit, comprising of one common share and one share
purchase warrant, having the same terms as the Agent's
Warrants; and
HALO RESOURCES LTD.
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED AUGUST 31, 2006 AND 2005
17. SUBSEQUENT EVENTS (continued)
(b) On November 17, 2006, Metanor and the Company agreed to a new
agreement (the "Revised Metanor Purchase") under which Metanor
has now agreed to purchase the Company's 50% interest in the
Bachelor Lake JV for total consideration of $4 million, as
follows:
i) $2 million cash (received);
ii) $500,000 cash on or before March 30, 2007; and
iii) $500,000 in cash or common shares of Metanor each on
or before May 31, 2007, August 31, 2007 and November
30, 2007.
Metanor continues to be responsible for all on-going costs,
expenses and obligations of the Bachelor Lake JV. In addition
Metanor has granted the Company a 1% NSR and the Company will
retain its beneficial interest in the Bachelor Lake JV until
completion of the sale.
The Company will recognize a further write-down of
approximately $225,000 in fiscal 2007 to reflect the terms of
the Revised Metanor Agreement.
(c) On December 3, 2006, the Company and EL entered into a formal
purchase agreement (the "Quarter Moon Purchase Agreement")
under which the Company has agreed to purchase a 100% interest
in ten mining claims, including the original five mining
claims under the Quarter Moon LOI, in north- central Manitoba,
for $90,000 cash and the issuance of 160,000 common shares of
the Company. EL will hold a 1% NSR, of which a 0.5% NSR can be
purchased at any time for $500,000. Closing of the Quarter
Moon Purchase Agreement is scheduled to occur on January 12,
2007.
(d) On November 27, 2006, the Company cancelled 790,000 stock
options with an exercise price of $0.70 per share, 150,000
stock options with an exercise price of $0.65 per share and
50,000 stock options with an exercise price of $0.45 per
share. The Company also extended the expiry date of 450,000
stock options with an exercise price of $0.60 per share, from
May 31, 2007 to May 31, 2009. In addition, the Company granted
1,547,000 stock options with an exercise price of $0.45 per
share, expiring November 27, 2009.
SCHEDULE I
HALO RESOURCES LTD.
SCHEDULE OF UNPROVEN MINERAL INTERESTS
FOR THE YEARS ENDED AUGUST 31
-------------------------------------------------------------------------------- ------------
2006 2005
-------------------------------------------------------------------------------- ------------
BACHELOR RED
DUPORT LAKE SHERRIDON LAKE
PROPERTY PROPERTY VMS PROJECT PROPERTY TOTAL TOTAL
$ $ $ $ $ $
BALANCE - BEGINNING OF YEAR 16,834,784 5,585,956 338,593 - 22,759,333 75,906
------------ ------------ ------------ ------------ ------------ ------------
AMOUNTS INCURRED DURING
THE YEAR
EXPLORATION EXPENDITURES
Accounting - 13,272 - - 13,272 -
Airborne surveying - - 350,270 - 350,270 250,268
Assays - 23,065 9,445 - 32,510 56,036
Camp and equipment costs 110,727 115,474 13,050 - 239,251 209,549
Consulting 63,114 211,082 420,284 3,201 697,681 301,200
Data - - 25,000 - 25,000 -
Drilling - 296,768 - - 296,768 1,373,524
Due diligence 6,054 - 8,160 - 14,214 23,296
Engineering 26,856 23,020 - - 49,876 -
Exploration office costs 27,843 16,545 19,595 - 63,983 25,018
Field personnel 41,252 126,517 - - 167,769 179,253
Field supplies - - 4,456 2,103 6,559 41,332
Filing - 2,250 1,000 - 3,250 14,035
Geological - - - - - 199,030
Insurance - 16,719 - - 16,719 -
Maintenance - 16,388 - - 16,388 -
Mobilization,
demobilization - 6,132 - - 6,132 88,766
Rent and utilities - 106,577 - - 106,577 30,669
Site preparation - - - - - 232,706
Surveying 3,573 - - - 3,573 16,223
Technical report - - 10,859 - 10,859 10,000
Telephone 949 7,176 1,455 - 9,580 4,847
Travel 28,865 49,389 49,575 4,712 132,541 118,720
Reimbursement/Recoveries - (211,950) (16,758) - (228,708) 1,818,123
------------ ------------ ------------ ------------ ------------ ------------
309,233 818,424 896,391 10,016 2,034,064 4,992,595
------------ ------------ ------------ ------------ ------------ ------------
OTHER ITEMS
Acquisition costs and
payments - 165,782 66,462 - 232,244 11,260,000
Claims staking and lease
rental cost 5,165 - 142,237 - 147,402 12,458
Legal - 15,282 107,206 38,952 161,440 385,207
Capitalized dividend 50,000 - - - 50,000 41,667
Future income tax
adjustment - - - - - 5,091,000
Asset retirement
obligation - - - - - 900,500
------------ ------------ ------------ ------------ ------------ ------------
55,165 181,064 315,905 38,952 591,086 17,690,832
------------ ------------ ------------ ------------ ------------ ------------
BALANCE BEFORE WRITE-DOWN 17,199,182 6,585,444 1,550,889 48,968 25,384,483 22,759,333
WRITE-DOWN (Note 5(b)) - (1,538,655) - - (1,538,655) -
------------ ------------ ------------ ------------ ------------ ------------
BALANCE - END OF YEAR 17,199,182 5,046,789 1,550,889 48,968 23,845,828 22,759,333
============ ============ ============ ============ ============ ============
HALO RESOURCES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
FOR THE YEAR ENDED AUGUST 31, 2006
BACKGROUND
This discussion and analysis of financial position and results of operation is
prepared as at December 18, 2006 and should be read in conjunction with the
audited annual financial statements and the accompanying notes for the years
ended August 31, 2006 and 2005 of Halo Resources Ltd. (the "Company") that have
been prepared in accordance with Canadian generally accepted accounting
principles ("GAAP"). Except as otherwise disclosed, all dollar figures included
therein and in the following management discussion and analysis ("MD&A") are
quoted in Canadian dollars. Additional information relevant to the Company's
activities, can be found on SEDAR at WWW.SEDAR.COM .
COMPANY OVERVIEW
The Company is a resource exploration company which historically was engaged in
the acquisition, exploration and development of crude oil and natural gas
properties in the United States. In 2004, the Company reorganized its corporate
structure and business objectives. Effective March 1, 2004, the Company sold its
remaining oil and natural gas property interest. The Company subsequently
acquired a number of mineral property interests. The Company is now considered
to be engaged in the acquisition and exploration of precious and base metals on
mineral interests located in Canada. Current activities are in the provinces of
Manitoba, Ontario and Quebec. As of the date of this MD&A, the Company has not
earned any production revenue, nor found any proved reserves on any of its
mineral interests.
As of the date of this MD&A the Company is a reporting issuer in British
Columbia, Alberta and Quebec. The Company trades on the TSX Venture Exchange
("TSXV") under the symbol "HLO", on the OTCBB under the symbol "HLOSF" and on
the Frankfurt Stock Exchange ("FSE") under the symbol "HRL". The Company is also
registered with the U.S. Securities and Exchange Commission ("SEC") as a foreign
private issuer under the Securities Act of 1934.
FORWARD LOOKING STATEMENTS
Certain information included in this discussion may constitute forward-looking
statements. Forward-looking statements are based on current expectations and
entail various risks and uncertainties. These risks and uncertainties could
cause or contribute to actual results that are materially different than those
expressed or implied. The Company disclaims any obligation or intention to
update or revise any forward-looking statement, whether as a result of new
information, future events, or otherwise.
EXPLORATION PROJECTS
DUPORT PROPERTY, ONTARIO, CANADA
During October 2006, a reconnaissance mapping and sampling program was completed
over a portion of the East Group of claims held by the Company on the Duport
property. Anomalous gold values were returned from limited sampling of
sulphide-bearing intrusive rocks collected on claim 3007334 which is underlain
by quartz diorite rocks of the Canoe Lake Stock. The stock is host to gold
mineralization near the contact with mafic volcanic rocks of the Cedar Island
Formation. The altered margin of the Canoe Lake Stock is a new target area for
the Company and additional work will be directed towards the evaluation and
further definition of high priority targets in this area.
In addition to the East Group, the Duport property covers the advanced-stage
Duport resource located on the West Group of claims. This resource has been
defined over a strike length of 760 meters to a vertical depth of 450 meters and
contains 424,000 tonnes grading 13.4 grams per tonne gold for 183,000 ounces in
the indicated category as well as 387,000 tonnes grading 10.7 grams per tonne
gold for 133,000 ounces in the inferred category.
-1-
A scoping study and cost estimate is planned for early 2007 to determine the
requirements for bringing the Duport project to feasibility level by carrying
out an extensive underground exploration and bulk sampling program at Duport.
The Company believes that there is a high potential to expand the existing
resource, both laterally and along strike of the deposit, and discover
additional ounces within prospective satellite geophysical targets associated
with gold in historic drill holes in close proximity to the Duport deposit.
Results of the study will be shared with potential mining partners.
BACHELOR LAKE PROPERTY, QUEBEC
On August 31, 2006, the Company and Metanor Resources Inc. ("Metanor") agreed to
extend the Purchase Agreement signed in May whereby Metanor agreed to purchase
from the Company its 50% undivided ownership interest in the Bachelor Lake
Property, the Hewfran Property and the MJL-Hansen Property (collectively, the
"Bachelor Lake Property") located in Quebec. It was agreed that the transaction
would be completed on or before November 10, 2006.
On November 13, 2006, the Company announced that Metanor did not complete its
acquisition of the Company's 50% undivided ownership interest in the Bachelor
Lake Property. As a result, the Company had the option to purchase Metanor's 50%
undivided ownership interest in the Bachelor Property, together with Metanor's
50% participating interest therein, on the same terms and for the same
consideration as was applicable to the purchase by Metanor of the Company's 50%
interest in such properties.
Pursuant to the Purchase Agreement, the Company had ten (10) days, commencing on
November 10, 2006, to either exercise such option or to continue negotiations
with Metanor concerning a restructured sale arrangement or a restructured joint
venture agreement.
On November 17, 2006, the Company and Metanor agreed to a new agreement under
which Metanor has now agreed to purchase the Company's 50% undivided ownership
interest in the Bachelor Lake Property for a total consideration of $4 million,
as follows:
- - Metanor paid $2 million to the Company. The $2 million shall be applied
to the purchase price for the Bachelor Lake Property and is freely
transferable by the Company and is non-refundable.
- - Metanor will pay $500,000 to the Company on or before March 30, 2007.
- - Metanor will pay $500,000 to the Company in cash or, at the sole
discretion of Metanor, in common voting shares of Metanor on or before
each of the following dates (for a total of $1.5 million): (a) May 31,
2007, (b) August 31, 2007 and (c) November 30, 2007.
- - On or before Friday, November 30, 2007, Metanor shall enter into a
binding net smelter returns royalty agreement with the Company, on
terms satisfactory to the Company, granting to the Company a 1% net
smelter returns royalty on all mineral production (in any form
whatsoever) from the Bachelor Lake Property.
- - If Metanor fully satisfies each of the foregoing obligations in
accordance with the respective timeframes, then the Company shall
complete the transfer of its 50% undivided ownership interest in the
Bachelor Property, together with the Company's 50% participating
interest therein, to Metanor with effect on November 30, 2007.
- - If Metanor fails to complete any one of the foregoing obligations, then
the extension of time for the completion of the acquisition by Metanor
of the Company's 50% undivided interest in the Bachelor Lake Property
shall terminate immediately and the Company shall have the option to
acquire Metanor's 50% undivided ownership interest in the Bachelor lake
Property, together with Metanor's 50% participating interest therein.
- - All other terms of the Purchase Agreement remain in force and effect as
previously disclosed by the Company on May 5, 2006 (including the
obligation of Metanor to pay all costs and expenses of the Bachelor
Lake Joint Venture until completion by Metanor of the purchase of the
Company's 50% undivided ownership interest in the Bachelor Lake
Property, together with the Company's 50% participating interest
therein).
Metanor has paid all costs and expenses of the Bachelor Lake Joint Venture since
May 2006.
-2-
QUARTER MOON LAKE PROPERTY, MANITOBA
On November 3, 2006, the Company signed a letter of intent with Endowment Lakes
(2002) Limited Partnership ("EL") wherein EL agreed to sell to Halo a 100%
interest in the five Quartermoon Lake claims (the "EL Claims") and five
additional and contiguous mineral claims located in the Eagle's Nest Lake, Meat
Lake and QM Lake areas of the Company's Sherridon VMS project area of Manitoba.
The terms of the letter of intent were formalized in a purchase agreement dated
December 3, 2006. The claims are strategically located within the Sherridon dome
structure and Meat Lake basin structure respectively and will play an important
role in the Company's plans to explore for high-grade volcanogenic massive
sulphide deposits.
Under the terms of the purchase agreement, the Company has the right to acquire
a 100% interest in the EL Claims by paying $90,000 cash and 160,000 common
shares. EL will hold a 1% NSR in the EL Claims of which a 0.5% NSR can be
purchased at any time by the Company for $500,000. The Company will also acquire
the right to acquire any rights acquired by EL in and to any mining claims
within a one kilometer area from the perimeter boundaries of the EL Claims.
Upon the completion of this transaction, the Quarter Moon Lake Property will be
included with the Sherridon VMS Property.
SHERRIDON VMS PROPERTY, MANITOBA
It is the Company's vision to see a copper and zinc concentrate production
capability established at its Sherridon VMS Property within the next four years
and at the same time develop an ongoing exploration program capable of
sustaining this production for a minimum of ten years.
The Sherridon VMS Property comprises a large land package in the Sherridon
volcanogenic massive sulphide district. The property includes the site of the
former Sherritt Gordon Mines' copper-zinc mine that operated from 1933 to 1950
and produced 7.7 million tonnes of copper-zinc ore. The property is considered
by the Company to be highly prospective for new VMS discoveries and to have a
largely untested gold potential. Possible developments in the future are greatly
facilitated by the existing rail link to Hudson Bay Mining and Smelting Co.
Ltd.'s ("HBMS") mining/metallurgical complex approximately 70 km to the
southwest and also by the presence of an all-weather 78 km road to provincial
hwy 10, a power line and a communication tower.
The Company has now staked a total of 74 claims (approximately 14,750 ha) and
together with the purchase of the 2,072 ha land package from EL (see Quarter
Moon Lake Property above), the Company held ground is now 16,822 hectares.
Through four option agreements the Company also has the right to acquire a 100%
interest in 30 other mining claims and one mineral lease in the Sherridon area
bringing the total land package to approximately 20,836 hectare. The most
significant of these agreements are those with Hudson Bay Exploration and
Development Company Limited ("HBED") which allow the Company to acquire 100% of
the substantial Jungle and Park copper-zinc deposits. In total, the property
currently hosts approximately 11 mt of historic copper-zinc resources.
An exploration team was assembled and during the past year has completed the
following:
- - Compilation of a large body of government assessment data and also detailed
historic exploration data provided by HBED.
- - During July 2006, the completion of 2,684 line km of deep-penetrating and
high resolution helicopter-borne Versatile Time-Domain Electro-Magnetics
("VTEM") geophysical survey covering the entire property at a 100m line
spacing.
- - Reconnaissance geological mapping and prospecting within specific target
areas in the vicinity of the existing Cu-Zn deposits. The work is being
used to ground truth anomalies and features outlined from historical
exploration work.
-3-
- - Preliminary review was conducted on the gross controls of mineralization
that appear to favour contacts between contrasting lithologies, that being
primarily felsic and mafic assemblages. Late-stage pegmatite bodies are
intimately associated with Cu-Zn mineralization at the past-producing
Sherritt Gordon West Zone and the Bob Lake and Cold Lake deposits. The
pegmatite bodies appear to have intruded the same stratigraphic zones of
weakness that focused the mineralization facilitating in the redistribution
and/or concentration of the ore.
- - A lithogeochemical sampling program has been undertaken to "fingerprint"
primary types of hydrothermal alteration within areas of known
mineralization. It is anticipated that this program will be used in
conjunction with geophysical information to greatly increase the efficiency
of deposit discovery by developing more specific drilling targets.
- - A study of VMS camps in general show that clustering of massive sulfide
deposits can be found along specific stratigraphic marker horizons.
Relatively untested stratigraphy with respect to their stratigraphic
position and geochemical signature exist along strike of base metal
deposits covered by the Sherridon property.
- - Key historical drill hole information for the Bob, Jungle, Park and Cold
deposits has been recovered and preliminary geological modeling completed.
Preliminary model results are being used to assist in establishing
exploration targets adjacent to each of the known mineralized deposits.
- - During September and October, preliminary data processing of the airborne
geophysical data was carried out with early results revealing numerous new
EM conductors including a strong conductor 500 m east and at a depth of 250
to 400 m along the down plunge extension of the historic Sherritt Gordon
East Zone ore body.
- - In October, the Company agreed to conduct joint research in the Geological
Survey of Canada's Flin Flon Project, part of the Government of Canada's
national Targeted Geoscience Initiative III (TGI-3) Program. The Flin Flon
Project is a five year integrated geoscience study aimed at helping in the
discovery of new base metal deposits in established mining communities of
the Flin Flon-La Ronge-Lynn Lake district of northern Manitoba and
Saskatchewan. The Company places great importance on engaging its technical
staff collaboratively with technical experts from the provincial and
federal government, from academia and also HBMS.
- - In November, the Company commenced a drill program designed to test
numerous, previously untested VMS target areas identified by the recently
completed helicopter-borne deep penetration and high resolution VTEM
survey. The first drill location is within an area that covers the
postulated extension of the historic Sherritt Gordon East Zone ore body
(the Eastern Areas).
- - Work continues to develop specific drilling targets from approximately 120
new EM targets that have been identified by the geophysics program.
The final geophysical report detailing and prioritizing all EM anomalies
discovered during the VTEM program is expected to be issued during December
2006. This report will form the basis for ongoing exploration activities during
2007. Detailed planning of the Company's exploration program is currently
underway.
Over the next two years, using the best available technology, the Company will
apply a fully integrated and multi-disciplined approach to systematically and
efficiently complete the primary drill testing of all newly identified
exploration areas in the Sherridon VMS district. It will also complete a
thorough exploration program within and adjacent to all the existing historic
resource areas with a view to increase the quality and quantity of the resources
sufficiently to support a bankable feasibility study. Over the next 12 months,
all historic resources will be brought into NI 43-101 compatible resource
categories. A preliminary economic evaluation will also be conducted to define
the requirements for production feasibility. Geophysical modeling techniques
will continue to be used to generate primary exploration targets for drill
testing. Geochemical sampling and lithogeochemical and other sampling programs
will be conducted over all primary target areas as a means to better refine and
prioritize potential drill targets. Drill testing of all targets will continue.
-4-
WEST RED LAKE PROPERTY, ONTARIO
On June 20, 2006, the Company completed a formal option agreement with Goldcorp
Inc. ("Goldcorp") on its Middle Bay, Pipestone Bay and Biron Bay properties
(collectively the "West Red Lake Property") located in Ball Township, Red Lake,
Ontario.
Under the terms of the option agreement the Company can earn a 60% interest in
67 mining claims, a 45% interest in two mining claims, and a 30% interest in ten
mining claims by spending $3 million on exploration by December 31, 2008. Upon
spending the $3 million, the Company is entitled to elect to exercise the option
of its interests. Upon notification of the Company's election, Goldcorp has 90
days to back-in and reacquire a 25% interest in the 67 mining claims, a 18.75%
interest in two mining claims and a 12.5% interest in the ten mining claims by
paying $6 million to the Company. If Goldcorp does not exercise its back-in
right, the Company will then be required to issue one million common shares of
its share capital to Goldcorp.
The Red Lake greenstone belt is host to the richest gold deposit in the world.
The high-grade zone at the Red Lake Mine contains 4.6 million ounces at a grade
of 2.35 oz/ton gold. The Red Lake Camp has produced over 20 million ounces and
is currently being explored by a number of senior gold companies that include
AngloGold, Teck Cominco, Barrick and Goldcorp.
The West Red Lake Property is located about 32 km west of the prolific Campbell
and Red Lake Mines in the Red Lake Camp. The property covers widespread gold
mineralization from surface showings and small gold deposits. Previous
ploration by a number of companies, including Hemlo Gold Mines Ltd., Goldcorp,
Cochenour-Willans Gold Mines Ltd, Dumont Nickel and May-Spiers Gold Mines Ltd.
have carried out intermittent exploration in this area since 1935 and surface
trenching has returned significant surface gold values including up to1.87 opt
over 1.8 meters and 0.38 opt over 7.3 meters respectively. The property has now
been consolidated into a larger package of contiguous claims under one
ownership.
The Company has subdivided the project into four broad exploration target areas:
Biron Bay, Middle Bay-May Spiers, West Trout-Bridget Lake and Pipestone-Phillips
Channel. During October 2006, work commenced on a mapping, sampling and
prospecting program focused on the Middle Bay-May Spiers target with the
objective of developing an understanding of the geological setting and to
confirm the presence of gold mineralization west of Middle Bay.
A total of 97 rock samples were submitted for assay and whole rock analysis to
ALS Chemex in Thunder Bay. Sampling of old trenches located between the historic
Miles Red Lake showing and the May-Spiers deposit successfully confirmed the
presence of significant gold, silver and copper mineralization. Whole rock
geochemistry revealed that the underlying geology is certainly favourable for
these elements.
A series of old trenches exposing silicified shear zones containing pyrite
represents the North Zone. Trench 8-01, apparently undisturbed under brush for
several years returned up to 4.93 g/t Au, 75.5 g/t Ag and 3.63% Cu over 0.80 m.
This mineralized occurrence lies 125m south of the North Zone.
The South Zone, located 350m to the south, is exposed within a series of
trenches and steep-walled pits over a strike length of 100 meters. The
mineralization is hosted within intermediate to- felsic lapilli tuffs and is
concentrated in silicified, sulphidized shears up to 2 meters in width
containing pyrite and locally sphalerite, chalcopyrite, galena and arsenopyrite.
A sample collected near the 9-44 "shaft" returned 81 g/t Au, 100 g/t Ag and
4.61% Cu over a width of 0.70m. In addition, a sample taken from the 10-23 pit
located along strike about 82m west of the 9-44 location yielded 3.62 g/t Au,
100 g/t Ag and 8040 ppm As.
The program was suspended prematurely due to deteriorating weather conditions
that included heavy snow accumulation and below normal temperatures.
In early 2007, the Company plans to carry out 25 line km of grid work covering
both the North and South Zones, extending to the east to include the May-Spiers
deposit. This will be followed-up with detailed induced polarization (IP) and
magnetometer surveying and diamond drilling of the highest priority targets.
Work will also be carried out on the Biron Bay, West Trout-Bridget Lake and
Pipestone-Phillips Channel areas of the property in preparation for a
significant follow up exploration and diamond drilling program later in the year
and into 2008.
-5-
SELECTED FINANCIAL DATA
The following selected financial information is derived from the audited annual
financial statements of the Company prepared in accordance with Canadian GAAP.
----------------------------------------------
YEARS ENDED AUGUST 31,
----------------------------------------------
2006 2005 2004
$ $ $
OPERATIONS:
Revenues - interest income 16,729 31,331 82,042
Loss (2,199,935) (368,110) (257,022)
Basic and diluted loss per share (0.08) (0.02) (0.05)
Dividends per share Nil Nil Nil
BALANCE SHEET:
Working capital 151,522 506,811 278,710
Total assets 24,552,668 23,928,682 417,581
Total long-term liabilities 13,846,500 14,266,500 Nil
The following selected financial information is derived from the unaudited
interim financial statements of the Company prepared in accordance with Canadian
GAAP.
------------------------------------------------- ------------------------------------------------
FISCAL 2006 FISCAL 2005
------------------------------------------------- ------------------------------------------------
THREE MONTH PERIODS ENDING AUG 31 MAY 31 FEB 28 NOV 30 AUG 31 MAY 31 FEB 28 NOV 30
$ $ $ $ $ $ $ $
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------
OPERATIONS:
Revenues - interest income 4,068 4,513 3,498 4,650 5,549 13,016 12,323 443
Net income (loss) 178,880 (1,821,875) (246,430) (310,510) (343,202) (257,398) 485,859 (253,369)
Basic and diluted
income (loss) per share 0.01 (0.06) (0.01) (0.01) (0.01) (0.01) 0.03 (0.03)
Dividends per share Nil Nil Nil Nil Nil Nil Nil Nil
BALANCE SHEET:
Working capital 151,522 967,196 751,209 1,358,021 506,811 821,010 4,809,864 7,121
Total assets 24,522,668 24,663,418 25,487,480 25,971,467 23,928,682 22,474,879 6,346,291 318,900
Total long-term liabilities 13,846,500 14,399,133 14,560,133 14,756,133 14,266,500 13,314,000 Nil Nil
------------------------------------------------- ------------------------------------------------
RESULTS OF OPERATIONS
THREE MONTHS ENDED AUGUST 31, 2006 COMPARED TO THREE MONTHS AUGUST 31, 2005
During the three months ended August 31, 2006 ("August `06 Quarter") the Company
reported a net income of $178,880, compared to a loss of $343,202 for the three
months ended August 31, 2005 ("August '05 Quarter"). The $522,082 improvement in
results for August '06 Quarter compared to August '05 Quarter is primarily
attributed to a recognition of a future income tax recovery of $571,633 in
August '06 Quarter compared to a $14,000 future income tax expense recorded for
August '06 Quarter, a change of $585,633. Other significant variances noted in
August '06 Quarter was:
- recognition of $190,955 of stock-based compensation on stock options
granted. No stock options were granted or vested in August '05
Quarter.
- receipt of $126,730 in August '05 Quarter of Quebec Mining Tax Credits
relating to the Bachelor Lake Property.
YEAR ENDED AUGUST 31, 2006 COMPARED TO YEAR ENDED AUGUST 31, 2005
During the year ended August 31, 2006 ("Fiscal 2006"), the Company reported a
net loss of $2,199,935, an increase in loss of $1,831,825, from the $368,110
loss reported during the year ended August 31, 2005 ("Fiscal 2005"). The
increase in the net loss in Fiscal 2006 compared to Fiscal 2005, is primarily
attributed to a $266,201 increase in general and administrative expenses and
$1,538,655 write-down of the Bachelor Lake Property.
-6-
General and administrative costs increased from $1,060,276 in Fiscal 2005 to
$1,267,825 in Fiscal 2006, as follows:
2006 2005
$ $
Accounting and administration 99,700 81,450
Advertising and related 52,430 17,679
Compensation and benefits 95,288 89,864
Consulting and professional fees 208,056 192,534
Filing fees and transfer agent 39,827 38,220
Investment conferences 78,823 169,776
Investor relations and shareholder communications 124,908 162,259
Legal and audit 209,615 88,418
Office and general 137,728 71,477
Office rent and operating costs 19,052 29,760
Printing 13,558 18,036
Telephone 14,274 14,719
Travel and related costs 159,907 72,521
Website and internet costs 14,659 13,563
------------ ------------
1,267,825 1,060,276
============ ============
General and administration expenses increased during Fiscal 2006, due to
increased activities relating to the Company's property acquisitions, ongoing
financing activities and increased legal and audit fees. Significant
expenditures incurred during Fiscal 2006, include $159,060 for legal costs
incurred primarily for the preparation of the Company's AIF, general legal
advice on financings and a general increase in activities; $50,555 for
independent audit costs; $208,056 for incurred consulting and professional fees
provided for financing opportunities; $52,430 for advertising and related costs
for advertising made in industry trade magazine publications; $159,907 for
travel and related costs, primarily to attend investment conferences and
meetings with the investment communities in Canada and Europe; $137,728 for
office and miscellaneous. During Fiscal 2006 $93,000 was paid to the President
of the Company for compensation and benefits, and accounting and administration
expenses of $99,700 was billed by Chase Management Ltd. ("Chase"), a private
company owned by Nick DeMare, a director and the CFO of the Company for
bookkeeping, accounting, administration and corporate filing services provided
by Chase personnel.
The increase in general and administrative expenses partially offset by:
(i) a decrease of $90,953 for investment conferences; and
(ii) a decrease of $37,351 for investor relations and shareholder
communications.
The Company also recorded a stock-based compensation charge of $550,817 in
Fiscal 2006 on the granting of 2,168,000 stock options, compared to $559,031 in
Fiscal 2005, when the Company granted 1,078,000 stock options. The calculation
is based on the fair value of stock options granted by the Company using the
Black-Scholes option pricing model, which uses estimates and assumptions.
In September 2005, the Company completed a private placement financing whereby
it issued a total of 5,273,236 common shares for $3,493,249 cash proceeds. Of
the total financing, 3,293,070 common shares were issued on a flow-through share
basis, for $2,305,149 cash proceeds. The Company also received $1,591,450 in
2006 from the exercise of stock options and warrants to purchase 4,748,500
common shares.
During Fiscal 2006, the Company exercised its option on the Bachelor Lake
Property and subsequently acquired additional claims, for a total consideration
of $165,782. The Company also paid $15,282 for legal costs associated with
property acquisitions and documentation; $142,287 for claims staking, $66,462
for option payments and $107,206 legal costs on the Sherridon VMS Property,
$5,165 for lease rental costs, $50,000 for capitalized dividend on the Duport
Property and $38,952 legal costs associated with Red Lake Property acquisition.
The Company also recorded a total of $2,034,064 for exploration expenditures. As
a result of an agreement to sell its 50% interest in the Bachelor Lake Joint
Venture, the Company has written down the carrying value of the joint venture
interest by $1,538,655, reflecting its intrinsic fair value, as of August 31,
2006, of $4.25 million. On November 17, 2006, the Company entered into a new
agreement whereby Metanor has agreed to purchase the Company's 50% interest for
total consideration of $4.0 million. A further write-down of approximately
$225,000 will be made in Fiscal 2007.
-7-
Detailed discussion of the Company's proposed sale of its Bachelor Lake interest
and exploration activities conducted is discussed in "Exploration Projects".
As a result of the application of previously unrecognized losses in Fiscal 2006,
the Company recognized a future income tax recovery and a reduction of the
future income tax liability of $1,316,633.
FINANCIAL CONDITION / CAPITAL RESOURCES
The Company's practice is to proceed with staged exploration, where each stage
is dependent on the successful results of the preceding stage. To date the
Company has not received any revenues from its mining activities and has relied
on equity financing to fund its commitments and discharge its liabilities as
they come due. As at August 31, 2006, the Company had working capital of
$151,522. In October 2006, the Company raised $1,537,350 on the sale of common
shares on a flow-through basis. The Company also received a further $2.0
million, on a non-refundable basis from Metanor from the proposed sale of the
Company's 50% interest in the Bachelor Lake project. Although final budgets have
not been completed, the Company expects to continue exploration work on its
Sherridon, Duport and Red Lake Properties. The Company expects that it will
require additional financings to maintain its core operations, planned
exploration and current levels of corporate overhead. In addition, results from
its exploration programs and/or additional mineral property acquisitions may
result in additional financial requirements. There is no assurance that funding
will be available on terms acceptable to the Company or at all. If such funds
cannot be secured, the Company may be forced to curtail additional exploration
efforts to a level for which funding can be secured.
OFF-BALANCE SHEET ARRANGEMENTS
The Company has no off-balance sheet arrangements.
PROPOSED TRANSACTIONS
On November 17, 2006, the Company entered into a new agreement to sell its 50%
interest in the Bachelor Lake joint venture, as described in detail in
"Exploration Projects - Bachelor Lake Property, Quebec". Based on the new
agreement, the Company will make a further write-down of approximately $225,000
in Fiscal 2007.
CRITICAL ACCOUNTING ESTIMATES
A detailed summary of all the Company's significant accounting policies is
included in Note 2 to the August 31, 2006 audited financial statements.
CHANGES IN ACCOUNTING POLICIES
The Company has no changes in accounting policies.
TRANSACTIONS WITH RELATED PARTIES
During Fiscal 2006, the Company incurred $309,100 for consulting and
professional, compensation and benefits, and accounting and administrative
services provided by companies controlled by officers and directors of the
Company. As at August 31, 2006, accounts payable and accrued liabilities include
$4,637 due to these related parties.
RISKS AND UNCERTAINTIES
The Company competes with other mining companies, some of which have greater
financial resources and technical facilities, for the acquisition of mineral
concessions, claims and other interests, as well as for the recruitment and
retention of qualified employees.
The Company is in compliance in all material regulations applicable to its
exploration activities. Existing and possible future environmental legislation,
regulations and actions could cause additional expense, capital expenditures,
restrictions and delays in the activities of the Company, the extent of which
cannot be predicted. Before production can commence on any properties, the
Company must obtain regulatory and environmental approvals. There is no
assurance that such approvals can be obtained on a timely basis or at all. The
cost of compliance with changes in governmental regulations has the potential to
reduce the profitability of operations.
-8-
INVESTOR RELATIONS ACTIVITIES
The Company has retained, on a part time basis and on a contract basis, a number
of assistants during Fiscal 2006. A number of other consultants were also
retained during Fiscal 2006, on an interim trial basis but all were terminated
after short term engagements. The services provided by these consultants related
to assistance in co-ordinating Company road shows in Europe and North America.
On March 10, 2006, the Company entered into an investor relation agreement with
Clark Avenue Company Inc. ("Clark Avenue") to provide market awareness and
investor relations on behalf of the Company. The agreement is for a term of one
year. Clark Avenue is paid $5,000 per month, and the Company also granted Clark
Avenue an option to purchase 400,000 common shares of the Company exercisable at
a price of $0.45 per share on or before March 10, 2011. During Fiscal 2006, the
Company paid $30,000 to Clark Avenue.
During Fiscal 2006, the Company was active in providing corporate awareness of
its work programs. The Company was also active in attending and presenting at a
number of investment conferences and trade shows in Vancouver, Toronto,
Winnipeg, San Francisco, New York and Frankfurt. The Company is also using a
number of web based advertisers. During Fiscal 2006, the Company paid $52,430
for advertising, $78,823 for investment conferences, $124,908 for investor
relations and shareholder communications and $13,558 for printing costs
associated with investor materials and pamphlets.
On June 7, 2006, the Company entered into an investor relations agreement with
Value Relations GmbH ("Value Relations") to provide investor relations and
corporate financing activities in Europe. The Company agreed to pay Value
Relations US $5,000 per month for a period of five months. During Fiscal 2006,
the Company paid $16,964 (US$15,000) to Value Relations. Effective November 1,
2006, the Company renewed its arrangement with Value Relations, under which it
has agreed to pay Value Relations EUR(euro)5,000 per month for twelve months and
granted 250,000 stock options, at $0.45 per share, for a period of three years.
The Company maintains a web site at www.halores.com .
OUTSTANDING SHARE DATA
The Company's authorized share capital is unlimited common shares without par
value. As at December 18, 2006, there were 34,617,049 issued and outstanding
common shares, 3,460,000 stock options outstanding and 3,360,000 stock options
exercisable, at an exercise price ranging from $0.45 to $0.60 per share, and
10,434,862 warrants outstanding, with exercise prices ranging from $0.45 to
$1.50 per share.
DISCLOSURE CONTROLS
Disclosure controls and procedures are designed to provide reasonable assurance
that material information is gathered and reported to senior management,
including the Chief Executive Officer and Chief Financial Officer, as
appropriate to permit timely decisions regarding public disclosure.
Management including the Chief Executive Officer and Chief Financial Officer,
has evaluated the effectiveness of the design and operation of the Company's
disclosure controls and procedures. Based on this evaluation, the Chief
Executive Officer and Chief Financial Officer have concluded that the Company's
disclosure controls and procedures, as defined in Multilateral Instrument 52-109
- - Certification of Disclosure in Issuer's Annual and Interim Filings ("52-109"),
are effective to ensure that the information required to be disclosed in reports
that are filed or submitted under Canadian Securities legislation are recorded,
processed, summarized and reported within the time period specified in those
rules.
During the process of management's review and evaluation of the design of the
Company's internal control over financial reporting, it was determined that
certain weaknesses existed in internal controls over financial reporting. In
addition, the Company has not fully completed its review and evaluation of the
design of internal control over financial reporting as envisioned under 52-109.
The Company expects to complete its assessment in Fiscal 2007. As is indicative
of many small companies, the lack segregation of duties and effective risk
assessment were identified as areas where weaknesses existed. The existence of
these weaknesses is to be compensated for by senior management monitoring which
exists. The Company is taking steps to augment and improve the design of
procedure and controls impacting these areas of weakness over internal control
over financial reporting.
-9-
FORM 52-109F1 CERTIFICATION OF ANNUAL FILINGS
I, Marc Cernovitch, President and Chief Executive Officer of Halo Resources
Ltd., certify that:
1. I have reviewed the annual filings (as this term is defined in
Multilateral Instrument 52-109 Certification of Disclosure in Issuers'
Annual and Interim Filings) of Halo Resources Ltd. (the issuer) for the
period ending August 31, 2006;
2. Based on my knowledge, the annual filings do not contain any untrue
statement of a material fact or omit to state a material fact required
to be stated or that is necessary to make a statement not misleading in
light of the circumstances under which it was made, with respect to the
period covered by the annual filings;
3. Based on my knowledge, the annual financial statements together with
the other financial information included in the annual filings fairly
present in all material respects the financial condition, results of
operations and cash flows of the issuer, as of the date and for the
periods presented in the annual filings;
4. The issuer's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures and
internal control over financial reporting for the issuer, and we have:
(a) designed such disclosure controls and procedures, or caused
them to be designed under our supervision, to provide
reasonable assurance that material information relating to the
issuer, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the
period in which the annual filings are being prepared;
(b) designed such internal control over financial reporting, or
caused it to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for
external purposes in accordance with the issuer's GAAP; and
(c) evaluated the effectiveness of the issuer's disclosure
controls and procedures as of the end of the period covered by
the annual filings and have caused the issuer to disclose in
the annual MD&A our conclusions about the effectiveness of the
disclosure controls and procedures as of the end of the period
covered by the annual filings based on such evaluation; and
5. I have caused the issuer to disclose in the annual MD&A any change in
the issuer's internal control over financial reporting that occurred
during the issuer's most recent interim period that has materially
affected, or is reasonably likely to materially affect, the issuer's
internal control over financial reporting.
Date: December 21, 2006
/s/ MARC CERNOVITCH
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Marc Cernovitch,
President & CEO
FORM 52-109F1 CERTIFICATION OF ANNUAL FILINGS
I, Nick DeMare, Chief Financial Officer of Halo Resources Ltd., certify that:
1. I have reviewed the annual filings (as this term is defined in
Multilateral Instrument 52-109 Certification of Disclosure in Issuers'
Annual and Interim Filings) of Halo Resources Ltd. (the issuer) for the
period ending August 31, 2006;
2. Based on my knowledge, the annual filings do not contain any untrue
statement of a material fact or omit to state a material fact required
to be stated or that is necessary to make a statement not misleading in
light of the circumstances under which it was made, with respect to the
period covered by the annual filings;
3. Based on my knowledge, the annual financial statements together with
the other financial information included in the annual filings fairly
present in all material respects the financial condition, results of
operations and cash flows of the issuer, as of the date and for the
periods presented in the annual filings;
4. The issuer's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures and
internal control over financial reporting for the issuer, and we have:
(a) designed such disclosure controls and procedures, or caused
them to be designed under our supervision, to provide
reasonable assurance that material information relating to the
issuer, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the
period in which the annual filings are being prepared;
(b) designed such internal control over financial reporting, or
caused it to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for
external purposes in accordance with the issuer's GAAP; and
(c) evaluated the effectiveness of the issuer's disclosure
controls and procedures as of the end of the period covered by
the annual filings and have caused the issuer to disclose in
the annual MD&A our conclusions about the effectiveness of the
disclosure controls and procedures as of the end of the period
covered by the annual filings based on such evaluation; and
5. I have caused the issuer to disclose in the annual MD&A any change in
the issuer's internal control over financial reporting that occurred
during the issuer's most recent interim period that has materially
affected, or is reasonably likely to materially affect, the issuer's
internal control over financial reporting.
Date: December 21, 2006
/s/ NICK DEMARE
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Nick DeMare,
Chief Financial Officer