Condensed Consolidated Interim Financial Statements of Scorpio Gold Corporation For the three months ended March 31, 2012 and 2011 (unaudited) Amended (Note 9)
MANAGEMENT S COMMENTS ON UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS NOTICE OF NO AUDIT OR REVIEW OF INTERIM FINANCIAL STATEMENTS Under National Instrument 51-102, Part 4, subsection 4.3(3)(a), if an auditor has not performed a review of the interim financial statements, they must be accompanied by a notice indicating that the financial statements have not been reviewed by an auditor. The accompanying unaudited interim financial statements of the Company have been prepared by and are the responsibility of the Company s management. The Company s independent auditor has not performed a review of these financial statements in accordance with standards established by the Canadian Institute of Chartered Accountants for a review of interim financial statements by an entity s auditor.
Condensed consolidated interim statements of operations (Expressed in US dollars) (unaudited) Amended (Note 9) Three months Three months ended ended March 31, March 31, 2012 2011 (Note 3b) Revenue 12,939,367 - Cost of sales excluding depletion and amortization 6,918,137 - Gross margin 6,021,230 - Depletion and amortization 1,230,933 - Mine operating earnings 4,790,297 - Expenses General and administrative (Note 5) 1,279,352 264,221 Impairment of the Caribou non-producing mining assets (Note 11) - 1,260,982 Operating earnings (loss) 3,510,945 (1,525,203) Other income (expenses) Finance costs (Note 6) (549,888) (22,741) Foreign exchange gain (loss) 4,370 (66,891) Finance income 1,886 6,766 (543,632) (82,866) Net earnings (loss) for the period 2,967,313 (1,608,069) Net earnings (loss) attributable to: Shareholders of the Company 1,533,152 (1,608,829) Non-controlling interest 1,434,161 760 2,967,313 (1,608,069) Earnings (loss) per share Basic 0.01 (0.02) Diluted 0.01 (0.02) Weighted average number of shares outstanding (Note 7) Basic 113,512,435 94,550,459 Diluted 118,176,603 94,550,459 See accompanying notes to the condensed consolidated interim financial statements 1
Condensed consolidated interim statements of comprehensive income (loss) (Expressed in US dollars) (unaudited) Amended (Note 9) Three months Three months ended ended March 31, March 31, 2012 2011 (Note 3b) Net earnings (loss) for the period 2,967,313 (1,608,069) Other comprehensive income (loss) Change in fair value of available-for-sale securities (4,054) 10,139 Comprehensive income (loss) for the period 2,963,259 (1,597,930) Comprehensive income (loss) attributable to: Shareholders of the Company 1,529,098 (1,598,690) Non-controlling interest 1,434,161 760 2,963,259 (1,597,930) See accompanying notes to the condensed consolidated interim financial statements 2
Condensed consolidated interim statements of changes in equity (Expressed in US dollars) (unaudited) Amended (Note 9) Accumulated other Investment comprehensive Non- Share capital Equity valuation income controlling Total Number Amount reserve reserve ("AOCI") Deficit interest equity $ Balance, December 31, 2011 (Note 3b) 113,308,236 44,637,217 4,827,346 (38,543) (194,204) (10,788,341) 6,017,626 44,461,101 Net earnings for the period - - - - - 1,533,152 1,434,161 2,967,313 Change in fair value of available-for-sale securities - - - (4,054) - - - (4,054) Shares issued upon exercise of warrants 773,333 754,675 (298,408) - - - - 456,267 Share-based compensation - - 1,162,714 - - - - 1,162,714 Balance, March 31, 2012 114,081,569 45,391,892 5,691,652 (42,597) (194,204) (9,255,189) 7,451,787 49,043,341 Accumulated other Investment comprehensive Non- Share capital Equity valuation income controlling Total Number Amount reserve reserve ("AOCI") Deficit interest equity $ Balance, December 31, 2010 (Note 3b) 78,765,020 21,688,407 5,729,439 (28,803) 1,012,875 (4,648,301) 6,445,963 30,199,580 Net loss for the period - - - - - (1,608,829) 760 (1,608,069) Change in fair value of available-for-sale securities - - - 10,139 - - - 10,139 Shares and warrants issued in private placement 19,333,333 11,667,015 306,615 - - - - 11,973,630 Shares issued upon exercise of options 150,000 174,838 (76,491 - - - - 98,347 Shares issued upon exercise of warrants 2,461,500 1,966,604 (469,190) - - - - 1,497,414 Share-based compensation - - 13,330 - - - - 13,330 Shares and warrants issue costs - (954,157) - - - - - (954,157) Translation adjustment - - - - 995,806 - - 995,806 Balance, March 31, 2011 100,709,853 34,542,707 5,503,703 (18,664) 2,008,681 (6,257,130) 6,446,723 42,226,020 See accompanying notes to the condensed consolidated interim financial statements 3
Condensed consolidated interim statements of financial position (Expressed in US dollars) (unaudited) Amended (Note 9) March 31, December 31, 2012 2011 (Note 3b) Assets Current assets Cash 2,905,233 1,878,359 Trade receivable, prepaid expenses and other (Note 8) 2,189,178 326,295 Inventories (Note 9) 11,057,086 441,671 Total current assets 16,151,497 2,646,325 Investments 8,083 12,138 Producing mining assets (Note 10) 30,434,749 - Non-producing mining assets and other (Note 11) 9,605,631 49,888,561 Reclamation bonds 6,018,443 6,016,607 Total assets 62,218,403 58,563,631 Equity and liabilities Current liabilities Trade and other payables 3,870,795 2,688,181 Current portion of long-term debt (Note 12) 4,654,638 6,776,318 Total current liabilities 8,525,433 9,464,499 Provision for environmental rehabilitation 4,649,629 4,638,031 Total liabilities 13,175,062 14,102,530 Equity Share capital (Note 13) 45,391,892 44,637,217 Equity reserve 5,691,652 4,827,346 Investment valuation reserve (42,597) (38,543) Accumulated other comprehensive loss (194,204) (194,204) Deficit (9,255,189) (10,788,341) Equity attributable to shareholders of the Company 41,591,554 38,443,475 Non-controlling interest 7,451,787 6,017,626 Total equity 49,043,341 44,461,101 Total liabilities and equity 62,218,403 58,563,631 Continuation of operations (Note 1) Commitments (Note 17) Contingencies (Note 18) APPROVED BY THE BOARD Director Director See accompanying notes to the condensed consolidated interim financial statements 4
Condensed consolidated interim statements of cash flows (Expressed in US dollars) (unaudited) Amended (Note 9) Three months Three months ended ended March 31, March 31, 2012 2011 (Note 3b) Operating activities Net earnings (loss) for the period before taxes 2,967,313 (1,608,069) Adjustment for: Finance costs 549,888 22,741 Impairment on the Caribou non-producing mining assets (Note 11) - 1,260,982 Share-based compensation (Note 13) 1,162,714 - Depletion and amortization 1,233,036 - Cash flows from (used by) operating activities before movements in working capital: 5,912,951 (324,346) Increase in trade receivable, prepaid expenses and other (1,862,669) (425,238) Increase in inventories (2,418,085) (126,002) Increase in trade and other payables 2,593,156 49,925 4,225,353 (825,661) Investing activities Additions to non-producing mining assets (2,480,088) (3,457,861) Additions to producing mining assets (179,519) - Additions to reclamation bonds (1,837) (3,464,065) (2,661,444) (6,921,926) Financing activities Issue of common shares and warrants 456,267 12,713,807 Repayment of long-term debt (833,333) - Payment of finance cost (159,969) (218,037) Payment of debt issue costs - (42,935) (537,035) 12,452,835 Effect of foreign exchange rate changes on cash - 73,583 Increase in cash 1,026,874 4,778,831 Cash, beginning of period 1,878,359 3,399,099 Cash, end of period 2,905,233 8,177,930 Supplemental cash flow information (Note 14) See accompanying notes to the condensed consolidated interim financial statements 5
1. Continuation of operations Scorpio Gold Corporation (the Company ) and its subsidiaries conduct mining exploitation, exploration and development in the United States. The Company is incorporated under the Business Corporations Act (British Columbia) and is listed on the TSX Venture Exchange. The address of the Company s registered office is 206-595 Howe Street, Vancouver, British Columbia, Canada, V6C 2T5 and its administrative office is located at 1462, de la Quebecoise, Val-d'Or, Quebec, Canada, J9P 5H4. These condensed consolidated interim financial statements have been prepared in accordance with standards applicable to a going concern, which assumes the realization of assets and discharge of liabilities in the normal course of business for the foreseeable future. With the exception of the first quarter of 2012, the Company has incurred losses from inception. The Company's 70% owned Mineral Ridge gold mine attained commercial production on January 1, 2012 and as such, the Company s ability to meet its obligations and continue as a going concern is dependent upon its ability in the future to generate sufficient cash flow from its operations or to raise financing as required. These factors cast substantial doubt about the Company's ability to continue as a going concern. If the Company were unable to continue as a going concern then material adjustments would be required to the carrying value of assets and liabilities and the balance sheet classifications used. 2. Statement of compliance and basis of preparation These condensed consolidated interim financial statements of the Company, including comparatives, have been prepared in accordance with International Accounting Standard 34 Interim Financial Reporting ( IAS 34 ) using the accounting policies consistent with International Financial Reporting Standards ( IFRS ) as issued by the International Accounting Standards Board ( IASB ) and should be read in conjunction with the Company s audited consolidated financial statements for the year ended December 31, 2011. The preparation of financial statements requires management to make judgments, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, and revenue and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgments about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and further periods if the review affects both current and future periods. Judgments made by management in the application of IFRS that have a significant effect on the financial statements and estimates with a significant risk of material adjustment in the current and following fiscal years are discussed in Note 3(d) of the Company s audited consolidated financial statements for the year ended December 31, 2011. These condensed consolidated interim financial statements were authorized for issuance by the Board of Directors of the Company on August 9, 2012. 6
3. Significant accounting policies The preparation of financial data is based on accounting principles and practices consistent with those used in the preparation of the audited consolidated financial statements as at December 31, 2011. The accompanying unaudited condensed consolidated interim financial statements should be read in conjunction with the Company's audited consolidated financial statements for the year ended December 31, 2011. The following policies reflect significant policies being applied in the current quarter which were not applicable in the 2011 consolidated financial statements. (a) Basis of consolidation These condensed consolidated interim financial statements include the accounts of the Company and its whollyowned subsidiaries, Scorpio Gold (Canada) Corporation and Scorpio Gold (US) Corporation. They also include its 70% owned subsidiary Mineral Ridge Gold LLC, the owner of the Mineral Ridge Mine. Control exists when the Company has the power, directly or indirectly, to govern the financial and operating policies of an entity so as to obtain benefits from its activities. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. All intercompany accounts, revenues and expenses transactions have been eliminated. (b) Foreign currency translation Prior to January 1, 2012, the Company considered the functional currency of all its operations to be the Canadian dollar. The Mineral Ridge Mine in Nevada achieved commercial production in January 2012, and the Company re-evaluated the functional currency of its operations since its sales and expenditures are essentially in US dollars. Foreign currency transactions are recorded at the exchange rate as at the date of the transaction. At each statement of financial position date, monetary assets and liabilities are translated using the period end foreign exchange rate. Non-monetary assets and liabilities in foreign currencies other than the functional currency are translated using the historical rate. All gains and losses on translation of these foreign currency transactions are included in the consolidated statements of operations. In addition, the Company changed its presentation currency to the US dollar. Accordingly, all comparative assets and liabilities have been converted at the closing rate (1$CAD=$US1.0216) and income, expenses and equity accounts have been converted at the exchange rates at the dates of the transactions. All resulting exchange differences are reported as accumulated other comprehensive loss as a separate component of shareholders equity. (c) Inventories Supplies are recorded at the lower of cost, using the weighted average cost formula, and net realizable value. In the event that the cost of ore inventory produced using these supplies exceeds its net realizable value, then the supplies are written down to net realizable value. In such circumstances, the Company uses replacement cost as the best available measure of the net realizable value of supplies. Inventories consisting of ore stockpile, in process and finished goods are valued at the lower of the cost of production and net realizable value. Net realizable value is calculated as the difference between estimated costs to complete production into a saleable form and the estimated future precious metal price based on prevailing metal prices. 7
3. Significant accounting policies (Continued) (c) Inventories (Continued) The cost of production includes an appropriate proportion of depreciation and overhead. Inventories in process represent inventories that are currently in the process of being converted to a saleable product. The assumptions used in the valuation of in-process inventories include estimates of metal contained and recoverable in the ore stacked on leach pad, the amount of metal included in carbon that is expected to be recovered and an assumption of the precious metal price expected to be realized when the precious metal is recovered. If the cost of inventories is not recoverable due to decline in selling prices or the costs of completion or the estimated costs to be incurred to make the sale have increased, the Company could be required to write-down the recorded value of its in-process inventories to net realizable value. Ore in stockpile is comprised of ore extracted from the mine and available for further processing. Costs are added to ore in stockpile at the current mining cost and removed at the accumulated average cost per tonne. Costs are added to ore on the heap leach pad based on current mining costs and removed from the heap leach pad as ounces are recovered in process at the plant based on the average cost per recoverable ounce on the heap leach pad. Although the quantity of recoverable gold placed on the heap leach pad is reconciled by comparing the grades of ore placed on the heap leach pad to the quantities of gold actually recovered, the nature of the leaching process inherently limits the ability to precisely monitor inventory levels. As such, engineering estimates are refined based on actual results over time. Variances between actual and estimated quantities resulting from changes in assumptions and estimates that do not result in write-downs to net realizable value are accounted for on a prospective basis. The ultimate recovery of gold from the heap leach pad will not be known until the leaching process is concluded. (d) Mining assets (i) Producing mining assets Upon reaching commercial production level, acquisition costs of mining interests, direct exploration and development expenditures, and pre-stripping costs, accumulated depletion and write-downs are moved from non-producing to producing assets. Producing mining costs are charged to operations on the unit of production method as a proportion of estimated recoverable mineral reserves. The Company reviews and evaluates the carrying values of its mining interests and related costs associated with them whenever events or changes in circumstances indicate a possible impairment. When such conditions exist for its producing mining assets, estimated recoverable amounts using estimated future prices, recoverable reserves, operating and capital costs are calculated by reference to estimated undiscounted future cash flows. When the carrying value of producing properties and related property, plant and equipment exceeds the related undiscounted cash flows, they are written down to their estimated fair value which is determined using discounted cash flows. Definition drilling and related costs are charged to operations. 8
3. Significant accounting policies (Continued) (d) Mining assets (Continued) (ii) Non-producing mining assets The Company follows the method of accounting for its mineral properties whereby all costs relating to the acquisition, exploration and development are deferred and capitalized by property. Up to the point of commercial production, costs relating to areas of interest abandoned are written off when such a decision is made. Prior to reaching commercial production levels intended by management, costs incurred are capitalized as part of the costs of related non-producing mining assets and proceeds from precious metal sales are offset against costs capitalized. Depletion of capitalized costs for mining properties begins when operating levels intended by management have been reached. The Company reviews the carrying values of its non-producing mining assets whenever events or changes in circumstances indicate that their carrying values may exceed their estimated recoverable amounts determined by reference to estimated undiscounted future cash flows. The recoverability of amounts shown is dependent upon the discovery of economically recoverable mineral reserves, the ability of the Company to finance the development of the properties, and on the future profitable production or proceeds from the disposition thereof. An impairment loss is recognized when the carrying value of those assets exceeds its estimated net recoverable amount, which is the higher of fair value less costs to sell and value in use. Costs incurred for general exploration that are not project-specific are charged to operations. (iii) Deferred stripping costs In open pit mining operations, it is necessary to remove overburden and other waste in order to access the ore body (stripping costs). During the pre-production and also in the production period, these costs are deferred as part of the mine property classified into mineral properties, if the costs relate to anticipated future benefits and meet the definition of an asset. Once mine production enters the area related to the capitalized stripping costs, these are depleted on a unit-of-production basis over the estimated recoverable mineral reserves that directly benefit from the specific stripping activity. Regular waste removal that does not give rise to future benefits is accounted for as variable production costs and included in the cost of the inventory produced during the period in which the stripping costs are incurred. When accounting for deferred stripping costs when multiple pits exist within a mining complex using a common infrastructure and where the Company develops a new pit, the Company accounts for the prestripping costs as if the development was a separately identified mine. 9
3. Significant accounting policies (Continued) (d) Mining assets (Continued) (iv) Property, plant and equipment Property, plant and equipment are carried at cost less accumulated amortization and impairment loss, if any. Amortization is calculated using the straight-line method over their estimated useful lives which are as follows: Plant and equipment Mobile equipment Furniture and office equipment 5-10 years 5 years 3-4 years The Company compares the carrying value of property, plant and equipment to its recoverable amount whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. The recoverable amount is the higher of fair value less costs to sell and value in use. Value in use is determined based on the expected use of the property, plant and equipment in the conduct of exploration activity, the potential for discovery of economically recoverable mineral reserves in the related mining properties on which exploration is occurring, alternative uses of the equipment and its potential resale value. Impairment in value would be indicated if the asset s carrying value exceeds its estimated recoverable amount. Where an item of property, plant and equipment comprises major components with different useful lives, the components are accounted for as separate items of property, plant and equipment. Expenditures incurred to replace a component of an item of property, plant and equipment that is accounted for separately, including major inspection and overhaul expenditures, are capitalized and the component being replaced is derecognized on disposal or when there are no future economic benefits. Directly attributable expenses incurred for major capital projects and site preparation are capitalized until the asset is brought to a working condition for its intended use. The amortization method, useful life and residual values are assessed annually. Construction in progress is carried at cost and depreciation will start when the asset is brought to a working condition for its intended use. The cost of self-constructed assets includes the cost of materials and direct labor. (e) Earnings (loss) per share Basic earnings (loss) per share is computed by dividing the net earnings (loss) by the weighted average number of common shares outstanding for the period. The diluted earnings (loss) per share reflects the potential dilution of common share equivalents, such as outstanding stock options and warrants, in the weighted average number of common shares outstanding during the period, if dilutive. The number of additional shares is calculated using the assumed proceeds upon the exercise of stock options and share purchase warrants that are used to purchase common shares at the average market price during the reporting periods if dilutive. 10
3. Significant accounting policies (Continued) (f) Accounting standards issued but not effective Certain pronouncements were issued by the IASB or the International Financial Reporting Interpretations Committee ( IFRIC ) that are mandatory for accounting periods after December 31, 2011. Pronouncements that are not applicable to the Company have been excluded from those described below. These recent accounting pronouncements should be read in conjunction with the Company s 2011 audited consolidated annual financial statements as there has been no change from last year. (i) The following four new Standards were issued by the IASB in May 2011, and are effective for annual periods beginning on or after January 1, 2013. The Company does not plan to early adopt the following standards. The Company is assessing the impact of the implementation of these standards on the Company s consolidated financial statements. IFRS 10 Consolidated Financial Statements IFRS 11 Joint Arrangements IFRS 12 Disclosure of Interests in Other Entities IAS 28 Investments in Associates and Joint Ventures (ii) IFRS 13 Fair Value Measurement (iii) IAS 1 Presentation of Financial Statements (iv) IFRIC 20 Stripping Costs in the Production Phase of a Surface Mine (v) IFRS 9 Financial Instruments 4. Financial instruments Financial risk factors The Company s risk exposures and the impact on the Company s financial instruments are summarized below: (i) Liquidity risk The Company s approach to managing liquidity risk is to ensure that it will have sufficient liquidity to meet liabilities when due. The Company s current policy to manage liquidity risk is to keep cash in bank accounts. As at March 31, 2012, the Company has cash of $2,905,233 to settle trade and other payables of $3,870,795. As at March 31, 2012, the Company also had a trade receivable for an amount of $1,610,548 for which payment was received on April 2, 2012. The Company s senior secured note, with a balance of $4,654,638 at March 31, 2012, matures in September 2012 and is payable by monthly instalments of $833,333. The Company anticipates that it will make the required payments on its trade and other payables and on its secured debt with cash flows from its operations at its 70% owned Mineral Ridge project. However, if cash flows are insufficient, additional financing will be required. 11
4. Financial instruments (Continued) (ii) Market risk Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. Market risk comprises three types of risk: interest rate risk, currency risk and price risk. (1) Interest rate risk Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market-interest rate. The Company's senior secured note bears interest at an implicit fixed rate of 25% per annum and accordingly is not subject to cash flow interest rate risk due to changes in the market rates of interest. The Company s reclamation bonds bear interest up to 0.35% and accordingly are not subject to significant cash flow interest rate risk The Company does not use financial derivatives to manage its exposure to interest rate risk. (2) Currency risk As at March 31, 2012, the Company is exposed to foreign currency risk through the following financial assets and liabilities denominated in Canadian dollars ( CAD$ ). March 31, 2012 CAD$ Cash 266,050 Value added tax and other receivable 13,562 Reclamation bonds 50,000 Trade and other payables 217,198 A sensitivity analysis as at March 31, 2012, using a reasonably possible change in the CAD$/US$ exchange rate of 10%, returns an approximate impact on net loss and comprehensive loss of $11,000. As of March 31, 2012, the CAD$/US$ exchange rate was 1.0009. The Company does not use derivatives to manage its exposure to currency risk. 12
5. General and administrative Three months Three months ended ended March 31, March 31, 2012 2011 (Note 3b) Share-based compensation 740,509 - Salaries and benefits 204,057 98,752 Professional fees 132,277 80,800 Project evaluation 82,511 - Investor relations 46,158 31,202 Insurance, travel and office related 39,523 15,955 Directors fees 17,951 1,521 Consultants 7,541 5,241 Management fees - 24,842 Transfer agent and listing fees 6,722 5,908 Amortization 2,103-1,279,352 264,221 6. Finance costs Three months Three months ended ended March 31, March 31, 2012 2011 (Note 3b) Senior secured note - profit participation (note 12) 159,969 - Interest on long-term debt 378,321 22,741 Unwinding of discount of provision for environmental rehabilitation 11,598-549,888 22,741 13
7. Weighted average number of shares and dilutive share equivalents Three months Three months ended ended March 31, March 31, 2012 2011 Basic weighted average number of shares 113,512,435 94,550,459 Effect of dilutive securities: Stock options 3,111,138 - Warrants 1,553,030 - Diluted weighted average number of shares 118,176,603 94,550,459 The following potentially dilutive securities were excluded from the dilutive number of shares outstanding for the period ended March 31, 2011 as they are anti-dilutive: 17,922,073 warrants 5,628,666 stock options 8. Trade receivable, prepaid expenses and other March 31, December 31, 2012 2011 (Note 3b) Trade receivable 1,610,548 - Deposits to suppliers 346,128 101,265 Prepaid expenses 153,618 167,663 Value added tax and other receivable 78,884 57,367 2,189,178 326,295 9. Inventories March 31, December 31, 2012 2011 (Note 3b) Supplies 692,845 441,671 Ore stockpile 620,485 - Metals in process 8,112,858 - Finished goods 1,630,898-11,057,086 441,671 During the period ended March 31, 2012, inventory included as cost of sales is $8,149,070 (2011, $NIL). 14
9. Inventories (Continued) Subsequent to March 31, 2012, the Company discovered an error in the determination of the number of gold ounces it had reported on the leach pad at the Mineral Ridge Mine, which resulted in an overstatement of inventories at March 31, 2012 and a corresponding overstatement of earnings. The correction of this error resulted in the following changes to the statement of operations for the three-month period ended March 31, 2012. Statement of operations As previously reported As amended Cost of sales 4,371,731 6,918,137 Depletion and amortization 1,900,008 1,230,933 Mine operating earnings 6,667,628 4,790,297 Net earnings 4,844,644 2,967,313 Basic earnings per share $0.03 $0.01 Diluted earnings per share $0.02 $0.01 Comprehensive income 4,840,590 2,963,259 The effect of the correction to the statement of financial position as at March 31, 2012, is as follows: Statement of financial position As previously reported As amended Inventories 14,402,491 11,057,086 Producing mining assets 28,966,675 30,434,749 Deficit (7,941,057) (9,255,189) Non-controlling interest 8,014,986 7,451,787 The correction of this error did not have an impact on the Company s financial position or operations as at and for the year ended December 31, 2011. Upon completion of the commissioning of the mine at January 1, 2012, the amount of inventories which were reclassified from producing mining assets would have been $9,864,138 instead of $10,663,138, as previously reported. 15
10. Producing mining assets Mineral Ridge mine Furniture Mining Plant and Mobile and office Construction interest equipment equipment equipment in progress Total Cost Balance, December 31, 2010 - - - - - - Additions - - - - - - Balance, December 31, 2011 - - - - - - Transfer from non-producing mining assets (1) 21,218,564 10,635,548 368,866 357,673 477,661 33,058,312 Additions - - 5,500 6,547 271,804 283,851 Transfer - 26,387-305,261 (331,648) - Balance, March 31, 2012 21,218,564 10,661,935 374,366 669,481 417,817 33,342,163 Accumulated amortization Balance, December 31, 2010 - - - - - - Amortization - - - - - - Balance, December 31, 2011 - - - - - - Transfer from non-producing mining assets (1) - 1,468,611 69,714 138,156-1,676,481 Depletion and amortization 981,931 201,259 18,377 29,366-1,230,933 Balance, March 31, 2012 981,931 1,669,870 88,091 167,522-2,907,414 Net book value December 31, 2010 - - - - - - December 31, 2011 - - - - - - March 31, 2012 20,236,633 8,992,065 286,275 501,959 417,817 30,434,749 (1) As of January 1, 2012, the Mineral Ridge Mine achieved commercial production, and therefore, asset balances were transferred from non-producing mining assets to producing mining assets. Depreciation of certain plant and equipment and construction in progress will commence when in condition and location necessary for its intended use. Certain areas of the Mineral Ridge property are subject to a sliding scale net smelter return ( NSR ) royalty between 1% and 3%. 16
11. Non-producing mining assets and other Furniture Mining Plant and Mobile and office Construction interest equipment equipment equipment in progress Total Cost Balance, December 31, 2010 (Note 3d) 28,526,295 4,456,316 194,698 245,288 2,790,900 36,213,497 Additions 27,032,070 3,065,775 201,441 143,638 1,709,543 32,152,467 Transfer - 4,003,765 - - (4,003,765) - Precious metal revenue (13,536,614) - - - - (13,536,614) Change in ARO estimate 109,725 - - - - 109,725 Translation adjustment (1,118,208) (347,779) (11,694) (11,534) 1,295 (1,487,920) Proceeds from option agreement (586,866) - - - - (586,866) Balance, December 31, 2011 40,426,402 11,178,077 384,445 377,392 497,973 52,864,289 Transfer to inventories (9,864,138) - - - - (9,864,138) Transfer to producing mining assets (21,218,564) (10,635,548) (368,866) (357,673) (477,661) (33,058,312) Additions 965,142 - - - - 965,142 Transfer - - - 20,312 (20,312) - Balance, March 31, 2012 10,308,842 542,529 15,579 40,031-10,906,981 Accumulated depreciation and impairment Furniture Mining Plant and Mobile and office Construction interest equipment equipment equipment in progress Total Balance, December 31, 2010 (Note 3d) - 52,952 31,074 44,812-128,838 Amortization - 557,734 57,746 99,296-714,776 Impairment 1,260,982 901,561 - - - 2,162,543 Translation adjustment - (23,312) (3,527) (3,590) - (30,429) Balance, December 31, 2011 1,260,982 1,488,935 85,293 140,518-2,975,728 Transfer to producing mining assets - (1,468,611) (69,714) (138,156) - (1,676,481) Amortization - - - 2,103-2,103 Balance, March 31, 2012 1,260,982 20,324 15,579 4,465-1,301,350 Net book value December 31, 2010 28,526,295 4,403,364 163,624 200,476 2,790,900 36,084,659 December 31, 2011 39,280,082 9,574,480 299,152 236,874 497,973 49,888,561 March 31, 2012 9,047,860 522,205-35,566-9,605,631 During the three months ended March 31, 2012, borrowing costs of $NIL (2011, $281,796) have been capitalized to Mineral Ridge exploration and development expenditures. 17
11. Non-producing mining assets and other (Continued) On April 7, 2011 the Company received an arms length offer to purchase the Company s interest in the Cochrane Hill property from Steeple Holding Limited ( Steeple ), subject to the Company's joint venture partner Atlantic Gold NL ("ATV") not exercising its rights pursuant to a right of first refusal provision contained in the Letter of Intent with ATV. Pursuant to the right of first refusal provision contained in the Letter of Intent with ATV, the Company offered ATV and its subsidiary, DDV Gold Ltd. ( DDV ), the right to purchase the Company s interest in the Cochrane Hill property on the same terms as those offered by Steeple, which included a $1,600,000 cash purchase price to be paid over a one year period. On April 19, 2011, ATV notified the Company that DDV would accept the offer pursuant to its right of first refusal. The Company and DDV subsequently completed a definitive purchase agreement in respect of this transaction. DDV paid the initial $200,000 purchase price payment to the Company, as well as a further $400,000 purchase price payment. On September 19, 2011, Steeple commenced a legal action in Nova Scotia against the Company and DDV, claiming a breach of contract in respect of its agreement with the Company to acquire the Company s interest in the Cochrane Hill property (the Steeple Agreement ) and requesting, among other things, an order for specific performance providing that the Company s interest in the Cochrane Hill property be transferred to Steeple in accordance with the terms of the Steeple Agreement. The Company and DDV each denied Steeple s claim and the matter proceeded to trial in early March 2012. Following the completion of the trial, the court rendered a decision that Steeple s request for specific performance of the Steeple Agreement was denied, but reserved its decision with respect to whether the Company breached its obligations under the Steeple Agreement or otherwise has any liabilities to Steeple. The decision of the court on these matters has not yet been rendered. The Company will vigorously defend this action and no provision has been recorded related to this claim. In April 2011, the Company provided notice to the Caribou property owner that the Company would terminate its option. Consequently, a $1,260,982 impairment of the Company s carrying value of this non-producing mining asset was recorded at March 31, 2011. 12. Long-term debt Senior secured note On October 20, 2010, the Company closed an $8,000,000 Senior secured note (the Note ) debt financing in connection with which it issued an aggregate of 5,000,000 common share purchase warrants (the Warrants ) to the lender. The Warrants are exercisable until October 20, 2013 to acquire 2,496,000 common shares at a price of $0.64 per share and 2,504,000 common shares at an exercise price of $0.79 per share. When issued, the Note bore interest at 11% per annum, payable monthly and had a maturity date of April 20, 2012. The Note is secured by all of the assets of the Company and its subsidiaries, including the assets comprising the Mineral Ridge project. Effective May 18, 2011, the Company reached an agreement with the lender on certain amendments to the Note to improve the Company s access to mine cash flows. Under the renegotiated terms, the Company no longer made monthly interest payments. Repayments commenced in October 2011, on a monthly basis, until September 2012 in the form of gold ounces or cash, at the option of the lender. If the lender elects to be paid in gold for any given month, the Company will deliver to the lender the number of ounces of gold having an aggregate notional value of $833,333, based on a deemed value per ounce of gold equal to the lower of the prior day gold price and the average of the last 30 trading days, and if the lender elects to be paid in cash, the Company will pay $833,333 for that month. If the prior day price of gold on any payment date exceeds $1,400 per ounce, the Company also pays to the lender a monthly profit participation amount equal to $595 multiplied by 25% of the amount by which the prior day gold price per ounce exceeds $1,400. There are certain restrictions placed on the Company pursuant to the Note, including limiting additional debt that can be obtained by the Company and, in certain circumstances, making such additional debt subordinate to the Note. 18
12. Long-term debt (Continued) (Note 3d) $ Balance, December 31, 2010 6,774,346 Accretion expense 360,046 Loss on renegotiation 875,500 Unrealized foreign exchange gain (426,065) Extinguishment on May 18, 2011 (7,583,827) - Fair value of senior secured note as renegotiated on May 18, 2011 7,583,827 Accrued interest 1,286,975 Repayments (2,500,000) Unrealized foreign exchange loss 405,516 Balance, December 31, 2011 6,776,318 Accrued interest 378,320 Repayments (2,500,000) Balance, March 31, 2012 4,654,638 Current portion (4,654,638) Long-term portion - 13. Share capital (a) Authorized and issued Authorized share capital consists of an unlimited number of common shares without par value. On January 21, 2011, the Company completed a CAD$11.6 million equity private placement through the issuance of 19,333,333 common shares at a price of CAD$0.60 per share. In connection with the closing of the private placement, the Company incurred fees totalling $639,390 and 773,333 share purchase warrants have been issued to the broker. Each warrant entitles the broker to acquire one common share of the Company at a price of $0.59 per share until July 21, 2012. The fair value of the warrants was calculated at $306,615 using the Black-Scholes Model and using the following assumptions: Expected life 1 year Risk free interest rate 1.68% Expected stock price volatility 103% Dividend yield 0% 19
13. Share capital (Continued) (b) Warrants March 31, 2012 December 31, 2011 Weighted Weighted average average Number exercise price (1) Number exercise price CAD Outstanding, beginning of period 5,773,333 0.70 19,610,240 0.62 Issued - - 773,333 0.60 Exercised (773,333) 0.59 (14,609,883) 0.59 Expired - - (357) 0.45 Outstanding, end of period 5,000,000 0.72 5,773,333 0.71 (1) On January 1, 2012, the original CAD$ denominated exercise price of all outstanding warrants have been modified to the equivalent in US currency at January 1, 2012. The following warrants were exercised during the period: Number exercised Weighted average share price at exercise date CAD$ Exercised in March 2012 773,333 1.03 As at March 31, 2012, the Company has warrants outstanding and exercisable entitling the holders to acquire common shares as follows: Number of Exercise warrants price Expiry date $ 2,496,000 0.64 October 20, 2013 2,504,000 0.79 October 20, 2013 5,000,000 20
13. Share capital (Continued) (c) Stock option plan The number of shares reserved for issuance under the Company s stock option plan is limited to 10% of the number of shares which are issued and outstanding on the date of a particular grant of options. Under the plan, the Board of Directors determines the term of a stock option to a maximum of 5 years, the period of time during which the options may vest and become exercisable as well as the option exercise price which shall not be less than the prevailing price permitted by the TSX Venture Exchange. The Compensation Committee determines and makes recommendations to the Board of Directors as to the recipients of, and nature and size of, share-based payment awards in compliance with applicable securities law, stock exchange and other regulatory requirements. A summary of changes in the Company s outstanding stock options for the three months ended March 31, 2012 and 2011, are as follows: Three months ended Year ended March 31, 2012 December 31, 2011 Weighted Weighted average average exercise exercise Number price Number price CAD$ CAD$ Outstanding, beginning of period 8,478,666 0.64 5,753,666 0.58 Granted 1,885,000 0.91 3,925,000 0.74 Exercised - - (600,000) 0.55 Expired - - (600,000) 0.74 Outstanding, end of period 10,363,666 0.69 8,478,666 0.64 Three months ended Three months ended March 31, 2012 March 31, 2011 Weighted average fair value as at grant date 0.61 0.44 The following table summarizes information about stock options outstanding and exercisable as at March 31, 2012: Weighted average Exercise remaining price contractual life Outstanding Exercisable CAD$ (in years) 0.33 0.26 66,666 66,666 0.44 2.24 2,787,000 2,787,000 0.65 3.83 375,000 124,997 0.68 2.03 200,000 66,667 0.75 3.83 5,050,000 5,050,000 0.91 4.87 1,885,000 1,885,000 10,363,666 9,980,330 21
13. Share capital (Continued) (d) Share-based compensation The Company used the Black-Scholes Model to estimate fair value using the following weighted average assumptions. Expected stock price volatility is based on the historical share price volatility. 22 Three months Three months ended ended March 31, March 31, 2012 2011 Expected dividend yield Nil% Nil% Expected stock price volatility 95% 133% Risk free interest rate 1.18% 2.26% Expected life 4 years 4 years Expected forfeiture rate 0.00% 3.45% Share-based compensation: Included in general and administrative expenses 740,509 - Included in cost of sales 422,205 - Included in deferred exploration and deferred expenditures - 13,330 Total share-based compensation 1,162,714 13,330 (e) Escrow shares As of March 31, 2012, there are 11,589,306 common shares held in escrow which will be released on June 12, 2012. These escrow shares may not be transferred, assigned or otherwise dealt with without the consent of the TSX Venture Exchange. 14. Supplemental cash flow information Supplementary information regarding other non-cash investing and financing transactions Three months Three months ended ended March 31, March 31, 2012 2011 (Note 3d) Amortization of property, plant and equipment capitalized in non-producing mining assets - 55,616 Transfer of equity reserves to share capital on exercise of: Options - 76,491 Warrants 298,408 489,190 Share-based compensation included in non-producing mining assets - 13,330 Fair value of compensation warrants issued on completion of private placement - 306,615 Debt repayment by delivery of gold ounces 1,666,667 -
15. Segmented information (a) Industry information The Company operates in one reportable operating segment being exploitation, acquisition, exploration and development of mineral resource properties. (b) Geographic information The Company s non-current assets by geographic locations are as follows: March 31, December 31, 2012 2010 (Note 3d) Canada 676,679 682,837 USA 45,390,227 55,234,469 46,066,906 55,917,306 16. Related party transactions a) Compensation of key management personnel and directors The Company considers its key management personnel to be the CEO and the individuals having the authority and responsibility for planning, directing and controlling the activities of the Company, directly or indirectly. The remuneration of directors and key management personnel during the periods ended March 31, 2012 and 2011 were as follows: Three months Three months ended ended March 31, March 31, 2012 2011 (Note 3d) Salaries and directors' fees 221,423 121,688 Share-based compensation 673,988 (1) 5,332 895,411 127,020 (1) Share-based compensation is the fair value of options granted to key management personnel and directors. Key management personnel were not paid post-employment benefits, termination benefits, or other long-term benefits during the three months ended March 31, 2012 and 2011. 23
16. Related party transactions (Continued) b) Scorpio Mining Corporation Up until June 15, 2011, the Company was related to its founding shareholder Scorpio Mining Corporation, at which time Scorpio Mining Corporation ceased to have a significant influence on the Company. The Company incurred with Scorpio Mining Corporation, management fees of $24,842 in the quarter ended March 31, 2011. As of March 31, 2012, an amount of $ NIL resulting from these transactions is included in trade and other payables. These transactions occurred within the normal course of business and were measured at exchange amount which is the amount of consideration established and agreed to by the related parties. 17. Commitments a) The Company has committed to sell its gold and silver from the Mineral Ridge mine to its lender at a price equal to 99.5% of the lesser of the 30 day trailing average price or the prior day settlement price less $0.50 per ounce of gold and $0.01 per once of silver. After five years and for the remaining life of mine, the 0.50% discount will no longer apply. b) Effective May 1, 2011, the Company entered into a service agreement with a mining contractor for contract mining at its Mineral Ridge gold project. The initial term of the contract extended to May 1, 2012, was renewed for a 12 month period and is renewable by the parties on an annual basis. Under the current mine plan, this mining contract represents a commitment of approximately US$13.3 million for the period from April 1, 2012 to May 1, 2013. 18. Contingencies Legal proceedings On April 4, 2012, the Company learned that its joint venture partner Golden Phoenix had commenced legal proceedings in Nevada against the Company, Scorpio Gold (US) Corporation and Waterton Global Value LP ("Waterton"). Waterton is Golden Phoenix's lender. In addition to claims against Waterton, Golden Phoenix is claiming damages against the Company for a number of allegations relating to the joint venture at Mineral Ridge. The Company considers the allegations baseless and will vigorously defend its position in the proceedings. 24