GEOLOGIX EXPLORATIONS INC. CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003

Transcription

1 CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003

2 AUDITORS REPORT To the Shareholders of Geologix Explorations Inc.: We have audited the consolidated balance sheets of Geologix Explorations Inc. as at December 31, 2003 and 2002, and the statements of operations, deficit, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 2003 and 2002, and the results of its operations and its cash flows for the years then ended in accordance with Canadian generally accepted accounting principles. As required by the Company Act (British Columbia), we report that, in our opinion, these principles have been applied on a consistent basis. Chartered Accountants Vancouver, B.C. March 23, 2004

3 CONSOLIDATED BALANCE SHEETS DECEMBER $ $ ASSETS Current Assets Cash and short-term deposits 1,109, ,216 Accounts receivable 74,892 6,418 Prepaid expenses 17,470 9,528 1,202, ,162 Mineral Properties (Notes 2(d) and 4) 703, ,496 Property, Plant And Equipment (Notes 2(c) and 3) 17,431 3,545 1,922, ,203 LIABILITIES Current Liability Accounts payable and accrued liabilities 87,375 10,537 SHAREHOLDERS EQUITY Share Capital (Note 5) 4,281,042 1,469,240 Stock Options 194,473 - Deficit (2,639,903) (1,036,574) NATURE OF OPERATIONS (Note 1) COMMITMENTS (Note 8) SUBSEQUENT EVENTS (Note 10) 1,835, ,666 1,922, ,203 APPROVED ON BEHALF OF THE BOARD (signed) Robert D. Willis Director (signed) Gregg J. Sedun Director Refer to accompanying notes.

4 CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT YEARS ENDED DECEMBER $ $ Revenue Interest and other income 9,522 1,011 Expenses Accounting and audit fees 22,591 3,060 Amortization 4, Bank charges and interest 3, Consulting fees 152,261 25,047 Filing fees 33,379 11,822 Legal fees 33,919 23,412 Management fees - 4,000 Office and administrative 83,499 22,027 Rent 27,654 9,342 Salaries and benefits 100,174 16,268 Property Investigation 27,341 - Foreign Exchange Loss 27,635 - Stock-based compensation - employees 169,645 - Stock-based compensation - consultants 24,828 - Travel 14,124 3, , ,098 Net Loss Before Undernoted Item (714,658) (119,087) Write-off of mineral properties (888,671) - Net Loss For the Year (1,603,329) (119,087) Deficit, beginning of year (1,036,574) (917,487) Deficit, End Of Year (2,639,903) (1,036,574) Basic And Diluted Loss Per Share (0.17 ) (0.02 ) Weighted Average Number Of Shares Outstanding 9,235,834 5,185,973 Refer to accompanying notes.

5 CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER $ $ Operating Activities Net loss for the year (1,603,329) (119,087) Items not involving cash Write-off of Mineral Properties 888,671 - Amortization 4, Non-cash stock-based compensation 194,473 - (516,123) (118,378) Cash applied to changes in non-cash working capital items Accounts receivable (68,474 ) (3,000 ) Prepaid expenses (7,942 ) (9,028 ) Accounts payable 76,838 7, (4,960 ) (515,701) (123,338) Financing Activity Share capital 2,811, ,938 Investing Activities Purchase of property, plant and equipment (17,948 ) (4,254 ) Mineral properties (1,378,499) (213,496) (1,396,447) (217,750) Increase In Cash And Short-Term Deposits During The Year 899, ,850 Cash and short-term deposits, beginning of year 210, ,366 Cash And Short-Term Deposits, End Of Year 1,109, ,216 Refer to accompanying notes.

6 FOR THE YEAR ENDED DECEMBER 31, Nature Of Operations The Company was incorporated on July 5, 1996 under the Laws of British Columbia. On February 4, 1998 the Company changed its name from B.C. Ltd. to Geologix Explorations Inc. The Company is listed on the TSX Venture Exchange ( TSX ). The Company is a mineral exploration company focused on acquiring, exploring and developing mineral properties in North and South America. 2. Significant Accounting Policies To facilitate review of these financial statements, the significant accounting policies followed by the Company are summarized below: (a) Principles Of Consolidation These consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Geologix (U.S.) Inc., incorporated under the laws of Alaska, U.S.A., Geologix (Peru) S.A., incorporated under the laws of Peru, and Geologix Explorations Mexico, S.A. de C.V., incorporated under the laws of Mexico. Significant inter-company balances and transactions have been eliminated upon consolidation. (b) Cash And Short-Term Deposits Cash and short-term deposits include highly liquid investments with original maturities of three months or less. (c) Property, Plant And Equipment Property, plant and equipment is recorded at cost, including betterment and renewals subsequent to acquisition, less accumulated amortization. When property, plant and equipment is sold or abandoned, the recorded costs and related accumulated amortization are removed from the accounts and any gains or losses are included in the determination of net earnings. Repairs and maintenance are recorded as an expense as incurred. Amortization of office equipment and computer hardware is calculated on the straight-line method over a three year period. (d) Mineral Properties The Company capitalizes the costs of acquisition of resource properties as well as all costs of direct exploration and development on the properties, net of third party reimbursements and option payments, until such time as the project to which they relate is put into commercial production, sold, abandoned or recovery of costs is determined to be unlikely. These costs will be amortized over the estimated productive lives of the properties upon commencement of production using the unit-of-production method. Resource property costs not directly attributable to specific properties are expensed during the year. For properties which do not yet have proven reserves, the amounts shown represent costs to date and are not intended to represent present or future values. The underlying value of all properties is entirely dependent on the existence and economic recovery of reserves in the future.

7 PAGE TWO 2. Significant Accounting Policies (Cont d) (d) Mineral Properties (Cont d) Title to mineral properties involves certain inherent risks due to the difficulties of determining the validity of certain claims, as well as the potential for problems arising from the frequently ambiguous conveyancing history characteristic of many mineral properties. The Company has investigated title to all of its mineral properties and, to the best of its knowledge, title to all of its properties is in good standing. (e) Environmental Expenditures The operations of the Company have been, and may in the future be, affected from time to time in varying degree by changes in environmental regulations, including those for future removal and site restoration costs. Both the likelihood of new regulations and their overall effect upon the Company vary greatly from country to country and are not predictable. The Company s policy is to meet or, if possible, surpass standards set by relevant legislation, by application of technically proven and economically feasible measures. Environmental expenditures that relate to ongoing environmental and reclamation programs are charged against earnings as incurred or capitalized and amortized depending on their future economic benefits. (f) Financial Instruments The financial instruments of the Company consist of cash and short-term deposits, accounts receivable and accounts payable. Unless otherwise noted, it is management s opinion that the Company is not exposed to significant currency or credit risks arising from these financial instruments. The fair values of these financial instruments approximate their carrying value, unless otherwise noted. (g) Earnings (Loss) Per Share Basic earnings (loss) per share is calculated using the weighted average number of common shares outstanding, and the treasury stock method is used to calculate diluted earnings per share. However, there are no dilutive effects on basic loss per share for 2003 and 2002 due to the Company s loss for the year. (h) Foreign Currency Translation The Company s subsidiaries are considered integrated operations and are translated into Canadian dollars using the temporal method. Under this method, monetary items are translated at the exchange rate in effect at the balance sheet date, non-monetary items are translated at historical rates, and revenue and expense items are translated at exchange rates prevailing when such items are recognized in the statement of operations. Exchange gains or losses arising on translation of foreign currency items are included in operating results. Foreign currency denominated items are translated at the year-end exchange rate. Exchange gains and losses arising on translation are included in operating results.

8 PAGE THREE 2. Significant Accounting Policies (Cont d) (i) Use Of Estimates The preparation of financial statements, in conformity with Canadian Generally Accepted Accounting Principles, 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 reporting period. Significant areas requiring the use of management estimates relate to the deferral and valuation of exploration expenditures. Actual results could differ from these estimates. (j) Stock-Based Compensation The Company has a stock-based compensation plan which is described in Note 5(d). Effective January 1, 2003, the Company prospectively adopted the fair value method of accounting for employee stock options, as permitted under the transitional provisions of the CICA Handbook Section 3870 Stock-Based Compensation and Other Stock-Based Payments. Previously, no compensation expense was recognized on the grant of employee stock options. Consequently, the Company accounts for all stock-based payments to employees and non-employees using the fair value based method. Compensation cost attributable to employee stock options is measured at fair value at the grant date and recognized over the vesting period. (k) Income Taxes Income taxes are accounted for under the asset and liability method. Under the asset and liability 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 bases. Future tax assets and liabilities are measured using enacted or substantively enacted tax rates expected to be recovered or settled. The effect on future tax assets and liabilities of a change in tax rates is recognized in income in the period that enactment or substantive enactment occurs. To the extent that the Company does not consider it more likely than not that a future tax asset will be recovered, it provides a valuation allowance against the excess. 3. Property, Plant And Equipment 2003 Accumulated Net Book Cost Amortization Value $ $ $ Office equipment 2, ,429 Computer hardware 19,740 4,738 15,002 22,201 4,770 17,431

9 PAGE FOUR 3. Property, Plant And Equipment (Cont d) 2002 Accumulated Net Book Cost Amortization Value $ $ $ Computer hardware 4, , Mineral Properties El Salitre, Mexico Millo II, Peru Cerro Calorco, Peru Puno, Peru Macomb, Alaska, USA Other Total $ $ $ $ $ $ $ Balance At December 31, Expenditures during the year Acquisition costs - 45, ,436 Consulting 89, ,749 Field supplies 11, ,624 Geochemical sampling and mapping 5, ,417 Geophysics 35, ,764 Travel & accommodation 25, ,506 Balance At December 31, ,060 45, ,496 Expenditures during the year Acquisition costs 21,678-73, ,614 44, ,614 Consulting 35, , ,426 38, ,267 Drilling 129, , ,163 Field Supplies 4,163-55, ,874 3, ,258 Geochemical sampling and mapping 21,956-2,006 1, ,642 Geophysics ,011 30,752 34, ,121 Helicopter , ,178 Travel & accommodation 8,661-5,649 60,548 8,320 2,078 85, , , , ,830 40,979 1,378, ,841 45, , , ,830 40,979 1,591,995 Less: Write-off of mineral properties (388,841 ) (499,830 ) - (888,671 ) Balance At December 31, , , ,651-40, ,324

10 PAGE FIVE 4. Mineral Properties (Cont d) (a) MaComb, Alaska, USA On January 17, 2003, the Company had entered into an option agreement to acquire a 100% interest in the Macomb property located in the State of Alaska, USA. On August 29, 2003 the Company announced that it has terminated its option on the MaComb property. Consequently, all related costs were written off to operations. (b) Puno, Peru During the year, the Company commenced exploration and subsequent mineral concession acquisition by staking in the Puno Gold Belt in Southern Peru. (c) Cerro Calorco, Peru On October 6, 2003, the Company signed an option to purchase 100% interest in the Cerro Calorco gold property in north-central Peru. Under the terms of the agreement the Company will pay US$1 million over four years as follows: US$90,000 by the first anniversary date; US$150,000 on the second anniversary; US$350,000 on the third anniversary and US$410,000 on the fourth anniversary. The property owner will retain a 2-3% NSR depending on gold prices. As at December 31, 2003, the Company has paid US$50,000 which has been included in acquisition costs. (d) El Salitre, Mexico On August 29, 2003, the Company announced that it has terminated its option on the El Salitre property in Mexico. Consequently, all related costs were written off to operations. (e) Other At December 31, 2003, the Company had incurred expenditures totalling $40,979 in relation to its acquisitions in Nevada, USA subsequent to year end (Notes 10(a) and 10(b)). 5. Share Capital (a) Authorized The authorized share capital of the Company consists of 100,000,000 common shares without par value.

11 PAGE SIX 5. Share Capital (Cont d) (b) Issued - Common Shares Number Of Shares Value $ Balance, December 31, ,824,000 1,019,302 Issued during the year for cash 1,315, ,938 Balance, December 31, ,139,000 1,469,240 Issued for cash on: Exercise of Stock Options 342, ,700 Private Placement, net of issue costs of $34,750 1,000, ,250 Private Placement, net of issue costs of $112,350 4,012,500 1,492,650 Exercise warrants 974, ,352 Issued for Finder s Fee 62,000 31,000 Issued for Broker s Commission 262, ,850 Balance, December 31, ,792,237 4,281,042 (c) Escrow Shares Included in issued share capital are 375,000 common shares ( ,000) that are subject to the terms of an escrow agreement dated effective June 1, These shares may not be transferred, assigned or otherwise dealt with without the consent of regulating bodies. Any shares not released by September 28, 2008 will be cancelled. (d) Stock-Based Compensation Under the terms of the Company s stock option plan, subject to annual shareholder approval, the Company may grant options to its key employees, directors, officers and consultants for up to 2,150,000 common shares. Under the plan, the exercise price of each option shall be fixed by the board of directors, but shall not be less than the quoted market value of the shares on the TSX Venture Exchange at the time the option is granted, and an option s maximum term is five years. If the Company s outstanding stock options exceed 10% of the Company s outstanding common shares, any options granted pursuant to this plan shall vest over a period of 18 months with the right to purchase one quarter of such shares being exercisable on granting, and a further one-quarter every six months.

12 PAGE SEVEN 5. Share Capital (Cont d) (d) Stock-Based Compensation (Cont d) Number Of Stock Options Weighted Average Exercise Price Per Share $ Outstanding, December 31, , Granted 255, Exercised - - Cancelled - - Outstanding, December 31, , Granted 1,440, Exercised (342,000) 0.35 Cancelled (70,000 ) 0.41 Outstanding, December 31, ,625, Stock Options Outstanding At December 31, 2003 Stock Options Exercisable At December 31, 2003 Range of Exercise Price Number of Stock Options Outstanding Weighted Average Remaining Contractual Life Weighted Average Exercise Price Number of Stock Options Exercisable $ $ $ Weighted Average Exercise Price 0.35 to ,200, , to , , to , , to ,625, , The weighted average fair value of options granted during the year was $0.43 ( $0.14). The following assumptions were used for the Black-Scholes Option Pricing Model: Volatility percentage 74% 100% Risk-free interest rate 3.82% 2.0% Dividend yield - - Expected life of options 4.69 years 2.46 years

13 PAGE EIGHT 5. Share Capital (Cont d) (d) Stock-Based Compensation (Cont d) Had compensation expense associated with employee stock options granted prior to January 1, 2003 been determined in accordance with the fair value method, the Company s net loss and loss per share for the year ended December 31, 2002, would have been increased by $81,000 and $0.02 respectively. (e) Warrants As at December 31, 2003 the following share purchase warrants were outstanding: Number Of Shares Exercise Price Expiry Date $ 1,699, July 10, , February 13, 2004 All of these warrants were exercised subsequent to year end (Note 10(e)). (f) Private Placements On February 13, 2003, the Company issued by way of a non-brokered private placement, 1,000,000 units, consisting of one common share and one-half a share purchase warrant, at a price of $0.50 per unit for proceeds of $500,000 was completed. Each whole warrant allows the holder to purchase an additional share of the Company for $0.70 per share and expires in one year. In consideration for its efforts in placing a portion of the private placement units, Haywood Securities Inc. received a finder s fee in the form of 62,000 units, which is subject to the same terms and conditions as those attached to the units issued to the subscribers. As of December 31, 2003, 135,850 warrants have been exercised. On July 10, 2003, the Company issued 4,012,500 units at a price of $0.40 per unit. Each unit consists of one common share and one-half of a non-transferable share purchase warrant. Each whole warrant entitles the holder to purchase an additional common share of the Company at a price of $0.60 per share for a period of two years. As part of this private placement, the Company issued 262,125 common shares and 532,312 broker warrants. The broker warrants have the same terms as the warrants issued under the private placement. 817,500 warrants and 21,262 brokers warrants have been exercised as of December 31, 2003.

14 PAGE NINE 6. Related Party Transactions The following is a summary of related party transactions and balances for the period ended December 31, 2003: (a) Consulting fees of $60,000 ( $22,500) were paid to a company controlled by a director in common with the company and management fees of $Nil ( $4,000) to a company having some common Director and Officers. (b) 20,000 units of the 1,000,000 units issued in the non-brokered private placement were issued to a corporation with a Director in common with the Company and 40,000 units of the 1,000,000 units issued in the non-brokered private placement were issued to an Officer of the Company. (c) 350,000 units of the 4,012,500 units issued in the private placement were issued to a corporation with a Director in common with the Company. 7. Income Taxes Income tax expense attributable to income from operations was $Nil for the year ended December 31, 2003 ( $Nil). The tax effects of temporary differences that give rise to significant portions of the future tax assets at December 31, 2003 and 2002 are presented below: Future Tax Assets $ $ Net operating loss carry-forwards 293, ,000 Mineral properties 377,000 84,000 Property, plant and equipment 1,400 1,400 Share issue costs 44,000 3,000 Valuation allowance (715,400) (204,400) Net Future Tax Assets - - At December 31, 2003, the Company has net operating loss carry-forwards for federal income tax purposes which are available to offset future federal taxable income. These operating losses expire as follows: , , , , , , ,000 $

15 PAGE TEN 8. Commitments The Company has entered into an operating lease agreement for its premises. The annual lease commitments under the lease are as follows: , , , , , ,741 $ In addition, the Company must pay its proportionate share of monthly operating costs. 9. Segmented Information The Company operates in one reportable business segment being the acquisition, exploration, and development of mineral properties. The Company s mineral properties and property, plant and equipment are located in the following geographic areas $ $ Canada 17,431 3,545 Peru 662,345 45,436 Mexico - 168,060 USA 40, , , Subsequent Events Subsequent to December 31, 2003: (a) The Company acquired the Jersey Canyon Prospect in north-central Nevada. Under the terms of a 21 year lease arrangement with Parratt Geological Services, LLC and Geocorp, Inc. of Reno, Nevada, the Company paid US$20,000 on signing and will pay escalating annual payments totaling US$255,000 by December 17, Thereafter the annual payments increase by US$50,000. The lease may be outright purchased at any time for US$1.5 million of which US$750,000 shall be applied to the owners NSR royalty. The current owners retain a 3% NSR which may be reduced to 2% by payment of US$1 million.

16 PAGE ELEVEN 10. Subsequent Events (Cont d) (b) The Company entered into an agreement with Placer Dome US Inc. ( Placer ) whereby the Company has acquired Placer s rights and obligations under an exploration agreement (the Agreement ) between Placer and Teck Resources Inc. related to the Silver Cloud Property in Nevada. Under the Agreement, the Company must pay the property maintenance fees for the assessment year to the US Bureau of Land Management by August 15, 2004 of approximately US$54,400 and a property payment of US$50,000 by May 15, In addition, the Company must incur expenditures of approximately US$900,000 by September 30, 2005 in order to earn its undivided 60% interest in the 544 claims comprising the property. (c) The Company issued 4,000,000 common shares at a price of $2.15 per share for proceeds of $8,084,000, net of a $516,000 cash commission to the underwriters. In addition, the underwriters were issued share purchase warrants enabling them to purchase up to 320,000 common shares at a price of $2.15 per share for one year. (d) The Company granted 18,000 stock options with an exercised price of $2.00 and 557,000 stock options with an exercise price of $2.25. The options are exercisable for a period of five years. (e) The Company issued 2,094,950 common shares on the exercise of warrants for proceeds of $1,926,485.