PUGET VENTURES INC. (an Exploration Stage Company)

Transcription

1 (an Exploration Stage Company) FINANCIAL STATEMENTS FOR THE YEARS ENDED APRIL 30, 2011 AND APRIL 30, 2010 Index Page Management s Responsibility for Financial Reporting 1 Independent Auditors' Report 2 Financial Statements Balance Sheets 3 Statements of Operations and Deficit 4 Statements of Cash Flows 5 Notes to the Financial Statements 6-25

2 MANAGEMENT S RESPONSIBILITY FOR FINANCIAL REPORTING The financial statements of Puget Ventures Inc. (an exploration stage company) are the responsibility of the Company s management. The financial statements are prepared in accordance with Canadian generally accepted accounting principles and reflect management s best estimates and judgment based on information currently available. Management has developed and is maintaining a system of internal controls to ensure that the Company s assets are safeguarded, transactions are authorized and properly recorded and financial information is reliable. The Board of Directors is responsible for ensuring management fulfills its responsibilities. The Audit Committee reviews the results of the audit and the annual financial statements prior to their submission to the Board of Directors for approval. The financial statements as at April 30, 2011 and 2010 and for the years then ended have been audited by Smythe Ratcliffe LLP, Chartered Accountants, and their report outlines the scope of their examination and gives their opinion on the financial statements. Erin Chutter Erin Chutter President Chris Couzelis Chris Couzelis CFO Vancouver, British Columbia August 19,

3 INDEPENDENT AUDITORS REPORT TO THE SHAREHOLDERS OF PUGET VENTURES INC. (an Exploration Stage Company) We have audited the accompanying financial statements of Puget Ventures Inc. (an exploration stage company), which comprise the balance sheets as at April 30, 2011 and 2010, and the statements of operations and deficit, and cash flows for the years then ended, and a summary of significant accounting policies and other explanatory information. Management's Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with Canadian generally accepted accounting principles and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Auditors Responsibility 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 comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements present fairly, in all material respects, the financial position of Puget Ventures Inc. as at April 30, 2011 and 2010, and the results of its operations and its cash flows for the years then ended in accordance with Canadian generally accepted accounting principles. Emphasis of Matter Without qualifying our opinion, we draw attention to Note 1 in the financial statements, which indicates that the Company incurred a net loss of $1,457,287 during the year ended April 30, 2011 and has an accumulated deficit of $4,101,049. These conditions, along with other matters set forth in Note 1, indicate the existence of a material uncertainty that may cast significant doubt about the Company s ability to continue as a going concern. Chartered Accountants Vancouver, British Columbia August 19,

4 BALANCE SHEETS AS AT APRIL ASSETS Current Cash and cash equivalents $ 490,829 $ 1,576,734 GST/HST receivable 53,474 65,009 Prepaid expenses 23,569 7, ,872 1,649,243 Deposits 30,048 5,523 Deferred expenses (Notes 5 and 10(e)) 290,691 - Advances on mineral properties (Notes 6 and 14) 135,000 - Equipment and leasehold (Note 4) 40,374 40,894 Mineral property interests (Note 7) 3,444,840 2,941,186 LIABILITIES AND SHAREHOLDERS' EQUITY $ 4,508,825 $ 4,636,846 Current Accounts payable and accrued liabilities (Note 10) $ 264,675 $ 671,016 Shareholders' equity Capital stock (Note 8) 7,429,178 5,786,600 Contributed surplus (Note 8(b)) 916, ,992 Deficit (4,101,049) (2,643,762) 4,244,150 3,965,830 $ 4,508,825 $ 4,636,846 Commitments (Note 11) Subsequent events (Note 14) On behalf of the Board: Erin Chutter Erin Chutter, Director Raymond Castelli, Director Raymond Castelli The accompanying notes are an integral part of these financial statements. 3

5 STATEMENTS OF OPERATIONS AND DEFICIT YEARS ENDED APRIL Expenses Consulting fees (Note 10) $ 503,901 $ 429,953 Professional fees (Note 10) 381, ,382 Travel 234,594 40,883 Wages 208,152 30,488 Shareholder relations 153, ,685 Stock-based compensation (Note 8(e)) 82, ,576 Office overhead 76,704 36,190 Advertising 48,961 45,697 Rent 39,307 15,502 Filing and registration fees 28,525 62,272 Amortization 15,802 7,874 1,772,944 1,175,502 Other items Interest income (3,940) (5,327) Write-off of mineral property interest (Note 7) - 1,096,104 Foreign exchange loss 3,283 - (657) 1,090,777 Loss before future income taxes 1,772,287 2,266,279 Recovery of future income taxes (Note 9) (315,000) (277,462) Net loss and comprehensive loss 1,457,287 1,988,817 Deficit, beginning of year 2,643, ,495 Warrants revaluation (Note 8(f)) - 180,450 Deficit, end of year $ 4,101,049 $ 2,643,762 Basic and diluted loss per share $ 0.05 $ 0.10 Weighted average number of common shares outstanding 31,525,376 20,775,453 The accompanying notes are an integral part of these financial statements. 4

6 STATEMENTS OF CASH FLOWS YEARS ENDED APRIL Operating activities Net loss from operations $ (1,457,287) $ (1,988,817) Items not involving cash: Amortization 15,802 7,874 Stock-based compensation 82, ,576 Write-off of mineral property interest - 1,096,104 Recovery of future income taxes (315,000) (277,462) Net change in non-cash working capital GST/HST receivable 11,535 (2,830) Prepaid expenses (16,069) (13,023) Accounts payable and accrued liabilities 167,134 43,799 Cash and cash equivalents used in operating activities (1,511,623) (928,779) Investing activities Equipment and leasehold (15,282) (48,768) Deferred expenses (Note 5) (290,691) - Advances on mineral properties (Note 6) (135,000) - Deposits (24,525) - Mineral property expenditures (1,077,129) (1,809,932) Cash and cash equivalents used in investing activities (1,542,627) (1,858,700) Cash flows from financing activities Share capital issued for cash, net of costs 1,968,345 4,175,885 Increase (decrease) in cash and cash equivalents (1,085,905) 1,388,406 Cash and cash equivalents, beginning 1,576, ,328 Cash and cash equivalents, ending $ 490,829 $ 1,576,734 Represented by: Cash (bank overdraft) $ (9,171) $ 173,727 Guaranteed investment certificate 500,000 1,403,007 Supplemental cash flow information (Note 12) $ 490,829 $ 1,576,734 The accompanying notes are an integral part of these financial statements. 5

7 1. NATURE OF OPERATIONS AND GOING CONCERN Puget Ventures Inc. (the Company ) is an exploration stage company incorporated under the Business Corporations Act of British Columbia on March 9, 2007, engaged in the exploration and development of mineral property interests. The Company began trading on the TSX Venture Exchange ( TSX-V ) as a capital pool company on October 31, 2007 and completed its qualifying transaction on May 15, The Company now trades on the TSX-V under the symbol PVS. These financial statements have been prepared on a going concern basis, which contemplates that the Company will continue in operation for the foreseeable future and will be able to realize its assets and discharge its liabilities in the normal course of business. At April 30, 2011, the Company reported working capital of $303,197 ( $978,227). The Company has an accumulated deficit of $4,101,049 ( $2,643,762). The ability of the Company to continue as a going concern and meet its commitments as they become due, including completion of the acquisition, exploration and development of its mineral properties, is dependent on the Company s ability to obtain the necessary financing. Management is planning to raise additional capital to finance operations and expected growth, if necessary, or alternatively to dispose of its interests in certain properties. The outcome of these matters cannot be predicted at this time. If the Company is unable to obtain additional financing, management will be required to curtail the Company s operations. The business of mining exploration involves a high degree of risk and there is no assurance that current exploration projects will result in future profitable mining operations. The Company has significant cash requirements to meet its administrative overhead, pay its liabilities and maintain its mineral interests. The recoverability of amounts shown for mineral property interests is dependent on several factors. These include the discovery of economically recoverable reserves, the ability of the Company to obtain the necessary financing to complete the development of these properties, and future profitable production or proceeds from disposition of mineral properties. The carrying value of the Company s mineral property interests does not reflect current or future values. These financial statements do not include any adjustments to the amounts and classifications of assets and liabilities that might be necessary should the Company be unable to continue operations. 2. SIGNIFICANT ACCOUNTING POLICIES (a) Basis of Presentation These financial statements are prepared in accordance with Canadian generally accepted accounting principles ( GAAP ) and are stated in Canadian dollars, which is the Company s functional and reporting currency. (b) Cash and Cash Equivalents Cash and cash equivalents includes cash and short-term investments with original maturities of less than three months. 6

8 2. SIGNIFICANT ACCOUNTING POLICIES (Continued) (c) Equipment and Leasehold Equipment and leasehold are recorded at cost. The Company provides for amortization using rates listed below to amortize the costs over their estimated lives: Computer equipment and software 3 years straight-line Office equipment 5 years straight-line Trucks 3 years straight-line Leasehold improvements Over term of lease (Note 11) Additions during the year are amortized at one-half the annual rates. (d) Mineral Property Interests The Company capitalizes all costs related to investments in mineral property interests on a property-by-property basis. Such costs include mineral property acquisition costs and exploration and development expenditures, net of any recoveries. Costs are deferred until such time as the extent of mineralization has been determined and mineral property interests are either developed or the Company s mineral rights are allowed to lapse. All capitalized mineral property expenditures are reviewed, on a property-by-property basis, to consider whether there are any conditions that may indicate impairment. When the carrying value of a property exceeds its net recoverable amount (as estimated by quantifiable evidence of an economic geological resource or reserve, or by reference to option or joint venture expenditure commitments) or when, in the Company s assessment, it will be unable to sell the property interest for an amount greater than the deferred costs, provision is made for the impairment in value. The amounts shown for acquisition costs and deferred exploration expenditures represent costs incurred to date and do not necessarily reflect present or future values. These costs will be depleted over the useful lives of the properties upon commencement of commercial production or written off if the property interests are abandoned or the claims allowed to lapse. From time to time, the Company may acquire or dispose of a mineral property interest pursuant to the terms of an option agreement. As the options are exercisable entirely at the discretion of the optionee, any amounts payable or receivable are not recorded until the payments are made or received and are then reflected as property costs or recoveries. When the amount of recoveries exceeds the total amount of capitalized costs of the property, the amount in excess of costs is recognized to income. (e) Stock-Based Compensation The Company accounts for stock-based compensation using a fair value based method with respect to all stock-based payments to directors, employees and non-employees. For directors and employees, the fair value of the options is measured at the date of grant. For non-employees, the fair value of the options or warrants is measured on the earlier of the date at which the counterparty performance is complete or the date the performance commitment is reached or the date at which the equity instruments are granted if they are fully vested and non-forfeitable. For directors, employees and non-employees, the fair value of the options and warrants is accrued and charged to operations, with the offset credit to contributed surplus, over the vesting period. If and when the stock options and warrants are ultimately exercised, the applicable amounts of contributed surplus are transferred to capital stock. The Company does not incorporate an estimated forfeiture rate for options that will not vest, but rather accounts for actual forfeitures as they occur. 7

9 2. SIGNIFICANT ACCOUNTING POLICIES (Continued) (f) Asset Retirement Obligation ( ARO ) The Company recognizes an estimate of the liability associated with an ARO in the financial statements at the time the liability is incurred. The estimated fair value of the ARO is recorded as a long-term liability, with a corresponding increase in the carrying amount of the related asset. The liability amount is increased each reporting period due to the passage of time and the amount of accretion is charged to earnings in the period. The ARO can also increase or decrease due to changes in the estimates of timing of cash flows or changes in the original estimated undiscounted cost. Actual costs incurred upon settlement of the ARO to the extent of the liability recorded are charged against the amount provided. The actual costs incurred in excess of the liability recorded are charged to operations in the period incurred. The Company assessed its mineral property interests, and based upon such assessments, there were no known material AROs as at April 30, 2011 or (g) Impairment of Long-Lived Assets Assets of the Company are reviewed annually or when changes in circumstances suggest their carrying value has become impaired. Management considers assets to be impaired if the carrying value exceeds the estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition. If impairment is deemed to exist, the assets will be written down to fair value. Fair value is generally determined using a discounted cash flow analysis. (h) Loss Per Share Basic earnings/loss per share is calculated using the weighted average number of common shares outstanding during the period. The Company uses the treasury stock method to compute the dilutive effect of options, warrants and similar instruments. Under this method the dilutive effect on earnings per share is calculated presuming the exercise of outstanding options, warrants and similar instruments. It assumes that the proceeds of such exercise would be used to repurchase common shares at the average market price during the period. However, the calculation of diluted loss per share excludes the effects of various conversions and exercise of options and warrants that would be anti-dilutive. (i) Flow-Through Shares Flow-through shares entitle a company that incurs certain resource expenditures in Canada to renounce them for tax purposes allowing the expenditures to be deducted for income tax purposes by the investors who purchased the shares. The income tax benefits foregone are considered to constitute share issue costs and are reflected in capital stock with an offsetting increase to future income tax liability. (j) Deferred Expenses Expenses pertaining to items or events occurring subsequent to year-end are deferred on the balance sheet to the extent that they are directly related to those events, and were incurred after the date on which management reasonably believed the transaction or event would be completed. 8

10 2. SIGNIFICANT ACCOUNTING POLICIES (Continued) (k) Future Income Taxes The Company follows the asset and liability method of accounting for future income taxes. Under this method, future tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis, and losses carried forward. Future tax assets and liabilities are measured using substantively enacted statutory rates that are expected to apply to taxable income in the years in which temporary differences are expected to be recovered or settled. The effect on future tax assets and liabilities of a change in tax rates is recognized in operations in the period the change is enacted or substantially enacted. The amount of future income tax assets is limited to the amount of the benefit that is more likely than not to be realized. (l) Capital Stock Capital stock issued for non-monetary consideration is recorded at fair market value pursuant to the agreement to issue shares as determined by the Board of Directors of the Company based on the trading price of the shares on the TSX-V. (m) Equity Units Proceeds received on the issuance of units, consisting of common shares and warrants, are allocated first to common shares based on the market trading price of the common shares at the time the units are issued, and any excess is allocated to warrants. (n) Use of Estimates The preparation of financial statements in accordance with Canadian GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reported period. Significant estimates include the determination of impairment of mineral property interests, amounts of reclamation and environmental obligations, amortization of equipment and leasehold, accrued liabilities, variables used in stock-based compensation and valuation allowance for future income tax assets. While management believes the estimates are reasonable, actual results could differ from these estimates and could impact future results of operations and cash flows. (o) Financial Instruments All financial instruments are classified as one of the following: held-to-maturity, loans and receivables, held-for-trading, available-for-sale or other financial liabilities. Financial assets and liabilities held-for-trading are measured at fair value with gains and losses recognized in net income. Financial assets held-to-maturity, loans and receivables, and other financial liabilities are measured at amortized cost. Available-for-sale financial instruments are measured at fair value with unrealized gains and losses recognized in other comprehensive income (loss) and reported in shareholders equity. Any financial instrument may be designated as held-for-trading upon initial recognition. Transaction costs that are directly attributable to the acquisition or issuance of financial instruments that are classified as other than held-for-trading, which are expensed as incurred, are included in the initial carrying value of such instruments. 9

11 2. SIGNIFICANT ACCOUNTING POLICIES (Continued) (p) Foreign Currency Translation Amounts recorded in foreign currency are translated into Canadian dollars as follows: (i) (ii) (iii) Monetary assets and liabilities, at the rate of exchange in effect as at the balance sheet date; Non-monetary assets and liabilities, at the exchange rates prevailing at the time of the acquisition of the assets or assumption of the liabilities; and Revenues and expenses, with the exception of amortization, at the rate of exchange prevailing at the time of the transaction. Gains and losses arising from the translation of foreign currency are included in net loss for the year. (q) Future Accounting Change International Financial Reporting Standards ( IFRS ) In 2008, the Canadian Accounting Standards Board confirmed that the transition to IFRS from Canadian GAAP will be effective for fiscal years beginning on or after January 1, 2011 for publicly accountable enterprises. The Company will therefore be required to present IFRS financial statements for its July 31, 2011 interim financial statements. The effective date will require the restatement for comparative purposes of amounts reported by the Company for the interim periods and for the year ended April 30, FINANCIAL INSTRUMENTS The Company classifies its cash and cash equivalents as held-for-trading; and accounts payable as other financial liabilities. The carrying value of cash and cash equivalents and accounts payable approximate their fair values due to the short-term maturity of these financial instruments. The Company s risk exposure and the impact on the Company s financial instruments are summarized below: (a) Credit Risk Credit risk is the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation. The Company s cash and cash equivalents are exposed to credit risk. Management considers credit risk on cash and cash equivalents to be low because the counterparties are highly rated Canadian banks. The Company s concentration of credit risk and maximum exposure thereto is as follows: Cash and cash equivalents $ 490,829 $ 1,576,734 10

12 3. FINANCIAL INSTRUMENTS (Continued) (b) Liquidity Risk Liquidity risk is the risk that the Company will encounter difficulty in satisfying financial obligations as they become due. The Company manages its liquidity risk by forecasting cash flows required by operations and anticipated investing and financing activities. At April 30, 2011, the Company had cash and cash equivalents of $490,829 ( $1,576,734) available to meet short-term business requirements and current liabilities of $264,675 ( $671,016). All of the Company s financial liabilities have contractual maturities of less than 30 days and are subject to normal trade terms. (c) Market Risk Market risk is the risk that the fair value of or future cash flows from the Company s financial instruments will significantly fluctuate due to changes in market prices. The value of financial instruments can be affected by changes in interest rates, foreign currency rates and equity prices. Management closely monitors commodity prices, individual equity movements and the stock market to determine the appropriate course of action to be taken by the Company. (i) Interest rate risk The Company s cash and cash equivalents consists of cash held in a bank and a guaranteed investment certificate that earns interest at a rate of 1.30% per annum with a maturity date of September 27, 2011, and can be redeemed at any time. The Company manages interest rate risk by maintaining an investment policy that focuses primarily on preservation of capital and liquidity. (ii) Foreign currency risk The Company is not exposed to significant foreign currency risk. (iii) Other price risk Other price risk is the risk that the fair market value or future cash flows of a financial instrument will fluctuate due to changes in market prices, other than those arising from interest rate risk or foreign currency risk. The Company is not exposed to significant other price risk. There were no changes in the Company s approach to risk management during the year ended April 30,

13 4. EQUIPMENT AND LEASEHOLD 2011 Accumulated Net Cost Amortization Book Value Computer equipment and software $ 9,599 $ 4,800 $ 4,799 Office equipment 4,370 1,201 3,169 Trucks 35,351 17,675 17,676 Leasehold improvements 14,730-14,730 $ 64,050 $ 23,676 $ 40, Accumulated Net Cost Amortization Book Value Computer equipment and software $ 9,599 $ 1,600 $ 7,999 Office equipment 3, ,436 Trucks 35,351 5,892 29, DEFERRED EXPENSES $48,768 $ 7,874 $40,894 As of February 1, 2011, the Company s management reasonably believed that the reverse take-over transaction (the transaction ) as described in Note 14 would be completed as planned. Deferred expenses consist of legal, accounting, filing and other miscellaneous charges incurred after February 1, 2011 directly for the purpose of completing the transaction. When the transaction is completed, these expenses will be charged against income or recorded as share issuance costs, as appropriate. These expenses will be written off if the transaction does not complete. 6. ADVANCES ON MINERAL PROPERTIES In conjunction with the transaction as described in Note 14, the Company advanced $135,000 to the takeover target company for the purpose of maintenance and care of their mineral properties. These amounts are not refundable and will be capitalized to mineral properties upon completion of the transaction or written off if the transaction does not complete. 12

14 7. MINERAL PROPERTY INTERESTS At April 30, 2010 and 2011, the Company s interests in mineral properties are located in Ontario, Canada. Cumulative expenditures incurred are as follows: 2009 Additions Write-downs 2010 Additions 2011 Trout Bay: Acquisition costs $183,850 $ - ($183,850) $ - $ - $ - Exploration expenditures Analysis 23,287 - (23,287) Camp cost 17, (17,389) Drilling 494,018 - (494,018) Equipment rental 12,211 13,432 (25,643) Geology 73,330 1,460 (74,790) Reimbursed expenditures 145,500 - (145,500) Recording fees ,198 (12,038) Reports, drafting and maps 62,265 19,657 (81,922) Travel and accommodation 36,177 1,490 (37,667) ,048,610 47,494 (1,096,104) Norpax: Acquisition costs 30,000 59,500-89,500 50, ,500 Exploration expenditures Analysis - 16,165-16,165-16,165 Camp cost - 5,635-5,635-5,635 Drilling - 131, , ,076 Equipment rental Geology 2,500 41,400-43,900-43,900 Reimbursed expenditures Reports, drafting and maps 10 26,010-26,020-26,020 Travel and accommodation - 12,561-12,561-12,561 32, , ,496 50, ,496 Benton: Acquisition costs 51, , , ,990 Exploration expenditures Reports, drafting and maps - 5,082-5,082-5,082 51, , , ,072 Werner Lake: Acquisition costs 85, ,131-1,071,131 10,000 1,081,131 Exploration expenditures Access road - 4,930-4, ,805 Analysis - 48,761-48,761 42,382 91,143 Camp cost - 21,705-21,705 28,203 49,908 Drilling - 686, ,805 88, ,197 Geology - 168, , , ,351 Recording fees - 1,075-1,075 2,080 3,155 Reports, drafting and maps - 53,242-53,242 20,218 73,460 Travel and accommodation - 55,286-55,286 16,336 71,622 85,000 2,026,118-2,111, ,654 2,564,772 Bug Lake/Fortune Lake: Acquisition costs - 7,500-7,500-7,500 $1,217,360 $2,819,930 ($1,096,104) $2,941,186 $503,654 $3,444,840 13

15 7. MINERAL PROPERTY INTERESTS (Continued) The properties are further described below: (a) Trout Bay On December 18, 2007, the Company entered into agreements with Goldcorp Inc. ( Goldcorp ) and West Timmins Mining Inc. ( West Timmins ) to acquire the option to earn an undivided 60% interest in the mineral properties known as the Trout Bay property located in Red Lake, Ontario. Aggregate exploration expenditures of $912,254 have been incurred to March 31, During the year ended April 30, 2010, the Company dropped the Trout Bay option and the project was written off. (b) Norpax On April 22, 2009, the Company entered into an agreement to acquire an option to purchase 100% of the mineral interests in the Norpax Property, located in the Reynar Lake District of the Kenora Mining District, Ontario. In order to acquire the option, the Company is required to make cash payments totalling $30,000 (paid) to the optionor and issue 50,000 common shares (issued on June 3, 2009 with a fair value of $19,500) of the Company. Additionally, the Company is required to make option payments of $90,000 and exploration expenditures of $1,000,000 on the Norpax Property as follows: $40,000 in cash and $50,000 in exploration expenditures on or before March 15, 2010 (paid and incurred); $50,000 in cash and $150,000 in exploration expenditures on or before March 15, 2011 (paid and incurred); $350,000 in exploration expenditures on or before March 15, 2012; and $450,000 in exploration expenditures on or before March 15, The property is subject to a 2% net smelter return ( NSR ) royalty. At any time before the commencement of commercial production, the Company shall have the right to purchase one-half of the royalty on the payment of $1,500,000. The Company has been granted a right of first refusal to purchase the royalty. (c) Benton Resources Property On November 19, 2008, the Company entered into an option agreement with Benton Resources Corp. (the Optionor ) to acquire an undivided 100% interest in the Werner-Rex Greenstone Belt located in the Kenora Mining Division of Ontario, subject to a 2% NSR. Following the agreement, the Company issued 103,100 common shares with a fair value of $41,240 and paid $10,000 in cash. On January 12, 2010, the Company entered into a purchase agreement with the Optionor to purchase an undivided 100% interest in eight claims in the Rex Lake area, which form part of the Company s Werner Lake cobalt project, in northwestern Ontario. The Company issued 1,550,000 common shares of the Company with a fair value of $410,750 on March 26, The Company was obligated to pay an additional $30,000 (paid on May 25, 2010) to the Optionor to complete the purchase. 14

16 7. MINERAL PROPERTY INTERESTS (Continued) (d) Werner Lake On April 1, 2009, the Company entered into a purchase agreement with Commerce Capital Inc. ( Commerce ) subject to the approval of the TSX-V (approved May 4, 2009) to acquire: (a) an undivided 100% interest in certain Werner Lake Mineral Belt Properties in the Kenora Mining District of Ontario; and (b) an option to acquire two unpatented claims known as the Riives Option. The Company is required to make cash payments pursuant to the agreement totalling $1,035,000 as follows: $85,000 on execution of the Agreement (paid); and $950,000 on or before that date, prior to the receipt of written acceptance for filing from the TSX-V (paid). The Company has granted a 2% NSR royalty to Commerce on all ores, minerals or concentrates produced from the property and the Company may purchase 1% of this NSR for $2,000,000. The Company will be entitled to exercise the Riives Option by making continued cash payments of: $10,000 payable upon July 16, 2010 (paid); and $10,000 payable upon July 16, 2011*. The Company will also be required to make a $2,000 advance royalty payment annually to the optionor commencing on July 16, 2011* and continuing until the property is brought into commercial production. The Riives Option is subject to an additional 2% NSR royalty and before the commencement of commercial production the Company shall have the right to purchase all of the royalty with a payment of $500,000 for each 1% of the royalty. *These amounts have not yet been paid. An extension has been granted by the title-holders whereby the Company is permitted to pay these amounts upon completion of the financing as described in Note 14. (e) Bug Lake/Fortune Lake On June 29, 2009, the Company entered into an agreement with Teck Resources Ltd. ( Teck ) to acquire the Bug Lake and Fortune Lake copper prospects in the Werner Lake Mineral Belt, located in the Kenora Mining District, Ontario. In consideration, the Company issued 25,000 common shares of the Company with a fair value of $7,500 to Teck on July 27, In addition, Teck will retain a 1.5% NSR royalty (with a 0.5% buyout for $1,500,000) in the Bug Lake and Fortune Lake claims. (f) Title to Mineral Property Interests Although the Company has taken steps to verify title to mineral properties in which it has an interest in accordance with industry standards for the current stage of exploration of such properties, these procedures do not guarantee the Company s title. Property title may be subject to unregistered prior agreements or transfers and title may be affected by undetected defects. 15

17 7. MINERAL PROPERTY INTERESTS (Continued) (g) Realization of Assets The investment in and expenditures on mineral property interests comprise a significant portion of the Company s assets. Realization of the Company s investment in these assets is dependent upon the establishment of legal ownership, the obtaining of permits, the satisfaction of governmental requirements and the attainment of successful production from the properties or from the proceeds of their disposition. Mineral exploration and development is highly speculative and involves inherent risks. While rewards if a feasible ore body is discovered might be substantial, few properties that are explored are ultimately developed into producing mines. There can be no assurance that the current exploration programs by the Company will result in the discovery of economically viable quantities of ore. (h) Environmental The Company is subject to the laws and regulations relating to environmental matters in all jurisdictions in which it operates, including provisions relating to property reclamation, discharge of hazardous material and other matters. The Company may also be held liable should environmental problems be discovered that were caused by former owners and operators of its properties and properties in which it has previously had an interest. The Company conducts its mineral exploration activities in compliance with applicable environmental protection legislation. The Company is not aware of any existing environmental problems related to any of its current or former properties that may result in material liability to the Company. 16

18 8. CAPITAL STOCK (a) (b) Authorized: An unlimited number of common shares without par value. Common Shares Issued: Number of common shares Amount Contributed surplus Balance, April 30, ,677,539 $ 1,768,484 $ 118,909 Issued during the year for cash 13,609,331 4,389,449 - Exercise of share purchase warrants 675, ,500 - Exercise of broker options 240,561 55,935 (21,879) For mineral property interest 1,625, ,750 - Share issue costs: Cash - (450,120) - Non-cash - (339,936) 339,936 Tax benefit renounced flow-through shares - (277,462) - Revaluation of warrants ,450 Stock-based compensation for stock options granted ,576 Balance, April 30, ,827,431 5,786, ,992 Issued during the year for cash 5,052,000 1,515,600 - Exercise of share purchase warrants 1,100, ,000 - Exercise of broker warrants 19,350 17,110 (7,435) Exercise of broker options 112,500 75,498 (30,499) Share issue costs Cash - (181,929) - Non-cash - (48,701) 48,701 Tax benefit renounced flow-through shares - (315,000) - Stock-based compensation for stock options granted ,262 Balance, April 30, ,111,281 $ 7,429,178 $ 916,021 17

19 8. CAPITAL STOCK (Continued) (b) Common Shares Issued (Continued) (i) During May and June 2009, the Company completed a private placement by issuing 583,000 non-flow-through units at a price of $0.35 per unit for gross proceeds of $204,050, and 1,475,000 flow-through units at a price of $0.40 per unit for gross proceeds of $590,000. Each non-flow-through unit is comprised of one common share of the Company and one-half of one common share purchase warrant. Each warrant will entitle the holder to purchase one common share of the Company for a period of 18 months from the date of issuance at a price of $0.50. Each flow-through unit is comprised of one flow-through common share and onehalf of one common share purchase warrant. Each flow-through warrant will entitle the holder to purchase one non-flow-through common share for a period of 18 months from the date of issuance at a price of $0.60. Finder s fees consisting of 63,735 broker warrants valued at $16,087, 112,500 broker options valued at $30,499 and $67,229 in cash were paid. Each broker warrant will entitle the holder to purchase one common share for a period of 18 months from the date of issuance at a price of $0.50. Each broker option will entitle the holder to purchase one broker unit of the Company for a period of 18 months from the date of issuance at a price of $0.40. Each broker unit consists of one share and one-half of one broker unit warrant. Each broker warrant is exercisable into one share at a price of $0.60 for a period of 18 months from the date of issuance of the broker options. The fair value of the broker warrants and options issued has been estimated using the Black-Scholes option pricing model with the following assumptions: risk-free interest rate of 1.11%, dividend yield of nil, volatility of % and an expected life of 1.5 years. (ii) (iii) (iv) (v) On June 26, 2009, the Company completed the second tranche of its private placement by issuing 50,000 flow-through units at a price of $0.40 per unit for gross proceeds of $20,000. Each flow-through unit is comprised of one common share of the Company and one-half of one common share purchase warrant. Each warrant will entitle the holder to purchase one common share of the Company for a period of 18 months from the date of issuance at a price of $0.50. Each flow-through warrant will entitle the holder to purchase one non-flow-through common share for a period of 18 months from the date of issuance at a price of $0.60. An amount of 4,500 broker warrants with a fair value of $1,032 and $1,800 in cash were paid. Each broker warrant will entitle the holder to purchase one share for a period of 18 months from the date of issuance at a price of $0.50. The fair value of the broker warrants issued has been estimated using the Black-Scholes option pricing model with the following assumptions: risk-free interest rate of 1.10%, dividend yield of nil, volatility of % and an expected life of 1.5 years. On June 3, 2009, the Company issued 50,000 shares with a fair value of $19,500 in connection with the Norpax option (Note 7(b)). On July 27, 2009, the Company issued 25,000 common shares with a fair value of $7,500 in connection with the Bug Lake/Fortune Lake prospects (Note 7(e)). In September 2009, the Company issued 10,251,331 non-flow-through units for gross proceeds of $3,075,399 and 1,250,000 flow-through shares for gross proceeds of $500,000. Each non-flow-through unit consisted of one common share and one-half of one common share purchase warrant, with each whole warrant exercisable into one common share at $0.40 within a 24-month period. Each flow-through unit is comprised of one common share of the Company and one-half of one common share purchase warrant. Each warrant will entitle the holder to purchase one common share of the Company for a period of two years from the date of issuance at a price of $

20 8. CAPITAL STOCK (Continued) (b) Common Shares Issued (Continued) (v) Continued The Company paid agent's compensation of 915,938 broker options with a fair value of $233,656 that entitle the holder thereof to purchase one unit at a price of $0.30 for a period of 24 months (each unit being comprised of one share and one-half of one warrant, with each whole warrant exercisable into one share at $0.40 within a 24-month period), 215,450 broker warrants with a fair value of $51,773 entitling the holder thereof to purchase one share at $0.40 for a period of 24 months, and $330,606 in cash. The fair value of the broker warrants and options issued has been estimated using the Black-Scholes option pricing model with the following assumptions: risk-free interest rate of 1.27%, dividend yield of nil, volatility of % and an expected life of 2 years. (vi) (vii) On December 10, 2009, 100,000 agent options were exercised resulting in the issuance of 50,000 warrants valued at $6,889. The warrants were immediately exercised. On March 26, 2010, the Company issued 1,550,000 shares with a fair value of $410,750 in connection with the Benton Resources Property (Note 7(c)). (viii) During the year ended April 30, 2010, the Company issued 915,561 shares and received cash proceeds of $236,556 from exercise of 675,000 share purchase warrants and 240,561 agent options. (ix) (x) During the year ended April 30, 2010, the Company paid $50,485 in legal fees relating to the private placements. On June 30, 2010, the Company completed a private placement by issuing 4,200,000 flowthrough shares at a price of $0.30 per share for gross proceeds of $1,260,000 and 852,000 non-flow-through units at a price of $0.30 per unit for gross proceeds of $255,600. Each nonflow-through unit is comprised of one common share of the Company and one-half of one common share purchase warrant, with each whole warrant exercisable into a common share at $0.40 within an 18-month period. As finder s fees, the Company paid a total of $131,248 in cash and issued 404,160 broker warrants with a fair value of $48,701. Each broker warrant will entitle the holder thereof to purchase one common share for a period of 18 months from the date of issuance at $0.30 per share. The fair value of broker warrants has been estimated using the Black-Scholes option pricing model with the following assumptions: risk-free interest rate of 1.45%, dividend yield of nil, volatility of 94.44% and an expected life of 1.5 years. The Company paid $50,681 in legal and filing fees relating to this private placement. (xi) During the year ended April 30, 2011, the Company issued 1,231,850 shares and received cash proceeds of $634,674 from the exercise of 1,100,000 share purchase warrants, 19,350 broker warrants and 112,500 broker options. The broker warrants were valued at $7,435 and the broker options at $30,499. (c) Flow-Through Financing and Future Income Taxes Under flow-through share financing arrangements, the Company renounced to investors $1,260,000 ( $1,109,847) of such expenditures at December 31, The tax effect of $315,000 ( $277,462) arising from the renunciation has been reflected as a reduction in capital stock. 19

21 8. CAPITAL STOCK (Continued) (d) Stock Options The Company has a fixed Stock Option Plan under which the maximum number of shares under option may not exceed 10% of the issued common shares of the Company. Options are granted to directors, officers, employees and consultants at exercise prices determined by reference to the market value on the date of the grant. During the year ended April 30, 2010, 112,500 stock options were granted to agents with an exercise price of $0.40, 915,938 stock options were granted to agents with an exercise price of $0.30, 575,000 stock options were granted with an exercise price of $0.34 and 350,000 stock options were granted to consultants with an exercise price of $0.30. No stock options were granted during the year ended April 30, The following is a summary of stock option transactions during the years ended April 30, 2011 and 2010: Weighted Weighted Average Average Number of Exercise Number of Exercise Options Price Options Price Balance, beginning of year 2,447,877 $ ,000 $0.28 Stock options granted ,000 $0.32 Agent options granted - - 1,028,438 $0.31 Agent options exercised (112,500) $0.40 (240,561) $0.18 Balance, end of year 2,335,377 $0.31 2,447,877 $0.32 As at April 30, 2011, all options have vested and are exercisable. The following summarizes information about stock options outstanding at April 30, 2011 and 2010: Grant Date Expiry date Exercise price Number of Number of Stock options Stock options Outstanding Outstanding 31-Oct Oct-2012 $ , , May May-2013 $ , , Apr Apr-2014 $ ,000 60, May Nov-2010 $ ,500* 20-Sep Sep-2011 $ ,938* 915,938* 30-Nov Nov-2014 $ , , Jan Jan-2015 $ , , Feb Feb-2015 $ ,000 50,000 2,335,377 2,447,877 Weighted average remaining contractual life of options 2 years 2.9 years * These options also include one-half share purchase warrants with a weighted average exercise price of $0.40 per warrant ( $0.42). 20

22 8. CAPITAL STOCK (Continued) (e) Stock-Based Compensation The Company applied the fair value method in accounting for stock options granted using the Black- Scholes option pricing model. During the year ended April 30, 2011, stock-based compensation expenses of $82,262 ( $205,576) were recorded, consisting of the vesting of $74,338 ( $20,545) in options granted to consultants and $7,924 ( $2,641) in options granted to employees during the year ended April 30, During the year, $nil ( $182,390) was recorded due to the grant of new stock options. The fair value of stock option grants used to calculate compensation expense is estimated using the Black-Scholes option pricing model with the following weighted average assumptions and resulting grant date fair value: Risk-free interest rate 2.30% 1.45% Expected dividend yield 0 0 Expected stock price volatility 107% 142% Expected option life in years Grant date fair value 0.39 $0.34 Option pricing models require the input of highly subjective assumptions including the expected price volatility. Changes in the subjective input assumptions can materially affect the fair value estimate. (f) Warrants At April 30, 2011, the Company has outstanding share purchase warrants to acquire up to an aggregate of common shares as follows: Number of Warrants Weighted Weighted Average Number of Average Exercise Price Warrants* Exercise Price Balance, beginning of year 7,913,351 $0.45 1,710,561 $0.51 Issued 426,000 $0.40 6,804,666 $0.42 Agent warrants 460,410** $ ,685 $0.39 Exercised (1,119,350) $0.52 (675,000) $0.30 Expired (1,159,135) $0.68 (260,561) $0.40 Balance, end of year 6,521,276 $0.39 7,913,351 $0.45 * There are 457,969 ( ,219) warrants contingently issuable on exercise of agent options (Note 8(d)). ** Includes 56,250 (2010 nil) warrants issued as part of the broker options that were exercised (Note 8(d)). These warrants expired on November 7,

23 8. CAPITAL STOCK (Continued) (f) Warrants (Continued) 9. INCOME TAXES Issue date Expiry date Exercise price Number of Number of Warrants Warrants Outstanding Outstanding 15-May Nov-2010* $ , Jan Jan-2011 $0.30/0.40** - 75, May Nov-2010 $ , May Nov-2010 $ , May Nov-2010 $ , May Nov-2010 $0.50-4, Sep Sep-2011 $0.40 5,691,116 5,966, Jun Dec-2011 $ , Jun Dec-2011 $ ,160-6,521,276 7,913,351 * In November 2009, the Company amended the terms of 750,000 warrants by extending their expiry date from November 14, 2009 to November 14, The aggregate fair value of the amendments to the warrants of $180,450 has been estimated using the Black-Scholes option pricing model with the following assumptions for the fair value of the amended warrants at the date of the amendment: risk-free interest rate of 1.50%, dividend yield of nil, volatility of %, and an expected life of 1 year. The adjustment has been included as a charge to deficit and contributed surplus. ** The exercise price of these warrants increased from $0.30 to $0.40 on January 15, 2010, one year after the issue date. As at April 30, 2011, the Company has accumulated losses for tax purposes of approximately $3,732,000 that expire in various years to 2031 as follows: 2027 $ 14, , , ,107, ,851,000 $ 3,732,000 Future income tax assets and liabilities are recognized for temporary differences between the carrying amount of the balance sheet items and their corresponding tax values as well as for the benefit of losses available to be carried forward to future years for tax purposes that are likely to be realized. 22

24 9. INCOME TAXES (Continued) Significant components of the Company s future tax assets and liabilities, after applying enacted corporate tax income rates of 25.00% ( %) are as follows: Future income tax assets: Non-capital tax losses carried forward $ 933,000 $ 470,000 Effect of share issuance costs and other 143, ,000 Future income tax assets 1,076, ,000 Valuation allowance for future income tax asset (488,000) (340,000) Future income tax assets, net 588, ,000 Future income tax liability: Book value over tax value on mineral property interests and other (588,000) (263,000) Future income taxes $ - $ - The reconciliation of income tax provision computed at statutory rates to the reported income tax provision is as follows: Income tax recovery at statutory rate $ 493,286 $ 668,553 Permanent differences (22,896) (60,645) Changes in temporary differences 45,066 79,106 Change in valuation allowance (148,000) (342,881) Effect of change in tax rate (52,456) (66,671) Future income tax recovery $ 315,000 $ 277, RELATED PARTY TRANSACTIONS During the year ended April 30, 2011, the Company entered into the following related party transactions: (a) (b) (c) (d) (e) Fees in the amount of $200,005 ( $399,910) to companies owned by directors and officers of the Company for consulting fees. Fees and reimbursements in the amount of $15,277 are included in accounts payable and accrued liabilities. Fees charged to mineral property interests in the amount of $95,025 ( $102,782) to a company owned by a director and an officer of the Company for consulting fees. Fees in the amount of $13,867 are included in accounts payable and accrued liabilities. Fees in the amount of $62,830 ( $55,160) to a company owned by a director and an officer for professional fees. Fees in the amount of $3,248 are included in accounts payable and accrued liabilities. Wages and benefits in the amount of $15,897 ( $nil) were paid to an immediate family member of an officer of the Company. Fees in the amount of $1,240 ( $nil) to companies owned by a director and an officer for deferred expenses. 23