Aquila Resources : 2020 Q2 Condensed Interim Consolidated Financial Statements

CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in United States Dollars, unless otherwise stated) (Unaudited)

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2020

CONDENSED INTERIM CONSOLIDATED STATEMENTS OF FINANCIAL POSITION As at June 30, 2020 and December 31, 2019

(Unaudited, expressed in United States Dollars)

		June 30,	December
		2020		31, 2019
ASSETS
Current assets	$	3,965,634
Cash and cash equivalents	$	4,010,838
Accounts receivable		267,161		504,895
Prepaid expenses		61,600		114,050
		4,294,395		4,629,783
Non-current assets		24,652,050
Mineral property costs (Note 5)			24,621,827
Security deposits		26,538		26,538
Capital assets (Note 6)		973,148		1,012,157
		25,651,736		25,660,522
TOTAL ASSETS	$	29,946,131	$ 30,290,305
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
Current liabilities	$	1,831,812	$	2,404,952
Accounts payable and accrued liabilities
Reclamation obligation		628,141		628,141
Current portion of leases payable		44,269		44,411
Warrants payable (Note 11 and 13)		192,135		254,446
		2,696,357		3,331,950
Deferred revenue (Note 7, 8 &9)		36,854,626		31,725,873
Contingent consideration (Note 4)		4,421,364		4,393,889
Long-term portion of leases payable		99,095		120,743
Deferred share unit liability (Note 12)		243,767		271,744
Total liabilities		44,315,209		39,844,199
Shareholders' deficiency		75,425,431
Share capital (Note 10a)			75,409,506
Contributed surplus (Note 10)		9,396,829		9,325,832
Warrants (Note 11)		-		-
Deficit		(99,191,338)	(94,289,232)
		(14,369,078)	(9,553,894)
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIENCY	$	29,946,131	$ 30,290,305

The accompanying notes are an integral part of these interim financial statements.

Nature of operations and going concern (Note 1)

Commitments related to project spending (Note 6)

Approved on behalf of the Board
"Andrew W. Dunn, FCPA, FCA"	Director	"Barry Hildred"	Director

CONDENSED INTERIM CONSOLIDATED STATEMENTS OF NET LOSS AND COMPREHENSIVE LOSS For the three and six months ended June 30, 2020 and 2019

(Unaudited, expressed in United States Dollars, except number of shares)

		Three months ended		Six months
		June 30,			June 30,
		2020		2019		2020		2019
EXPENSES	$	(190,654)			$	521,506
Mineral property exploration expenses (Note 17)	$	2,164,885	$	3,208,168
Administrative expenses (Note 15)		845,826		1,170,077		1,650,053		2,420,760
Loss from operations	$	655,172	$	3,334,962	$	2,171,559	$	5,628,928
Other expenses (income)		2,561,415				2,732,013
Net finance expense (Note 16)			608,668			1,305,334
Loss (gain) on foreign exchange		791,227		79,162		(193,007)		(12,837)
Loss on change in value of contingent consideration		15,692		98,720		236,605		162,488
Loss (gain) on change in value of warrants		117,990		(302,564)		(45,064)		(349,622)
Total loss and comprehensive loss	$	4,141,496	$	3,818,948	$	4,902,106	$	6,734,291
Loss per share	$	0.01			$	0.01
Basic and diluted	$	0.01	$	0.02
Weighted average number of shares		338,556,404				338,549,111
outstanding - basic and diluted		338,284,556		338,062,622

The accompanying notes are an integral part of these interim financial statements.

CONDENSED INTERIM CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

As at June 30, 2020 and December 31, 2019

(Expressed in United States Dollars)

	Share Capital	Contributed
	Number		$		Surplus	Warrants		Deficit		Total
Balance, December 31, 2018	337,974,556	$	75,322,870	$	8,908,824	$	75,914	$	(86,758,702)	$	(2,451,094)
Shares issued on settlement of RSUs	82,500		-		-		-		-		-
Fair value on settlement of RSUs	-		15,925		(15,925)		-		-		-
Shares issued on exercise of options	227,500		25,669		-		-		-		25,669
Fair value on exercise of options	-		21,651		(21,651)		-		-		-
Fair value on expiry of warrants	-		-		75,914		(75,914)		-		-
Share-based compensation expense	-		-		221,367		-		-		221,367
Net loss for the period	-		-		-		-		(6,734,291)		(6,734,291)
Balance, June 30, 2019	338,284,556	$	75,386,115	$	9,168,529	$	-	$	(93,492,993)	$	(8,938,349)
Shares issued on settlement of RSUs	189,348		-		-		-		-		-
Fair value on settlement of RSUs	-		23,391		(23,391)		-		-		-
Share-based compensation expense	-		-		180,694		-		-		180,694
Net loss for the period	-		-		-		-		(796,239)		(796,239)
Balance, December 31, 2019	338,473,904	$	75,409,506	$	9,325,832	$	-	$	(94,289,232)	$	(9,553,894)
Shares issued on settlement of RSUs	82,500		-		-		-		-		-
Fair value on settlement of RSUs	-		15,925		(15,925)		-		-		-
Share-based compensation expense	-		-		86,922		-		-		86,922
Net loss for the period	-		-		-		-		(4,902,106)		(4,902,106)
Balance, June 30, 2020	338,556,404	$	75,425,431	$	9,396,829	$	-	$	(99,191,338)	$	(14,369,078)

The accompanying notes are an integral part of these interim financial statements.

CONDENSED INTERIM CONSOLIDATED STATEMENTS OF CASHFLOWS

For the six months ended June 30, 2020

(Expressed in United States Dollars)

		Six months ended
		June 30,
		2020		2019
Cash generated from (used in)
Operating activities	$	(4,902,106)
Net loss for the period	$	(6,734,291)
Items not affecting cash:		(45,064)
Gain on change in fair value of warrants			(349,622)
Loss on change in fair value of contingent consideration		236,605		162,488
Unrealized foreign exchange loss (gain)		(236,338)		232,100
Share-based compensation		70,627		320,451
Non-cash interest on financing component of deferred revenue		2,757,805		1,430,002
Finance expense (Note 16)		5,855		12,756
Amortization		40,105		64,338
	$	(2,072,511)	$	(4,861,778)
Net change in non-cash working capital		237,734
Accounts receivable			(11,054)
Prepaid expenses		52,450		27,759
Accounts payable and accrued liabilities		(573,140)		290,613
Net cash generated from (used in) operating activities	$	(2,355,467)	$	(4,554,460)
Investing activities		(1,096)
Acquisition of equipment			(61,453)
Increase in mineral properties		(30,223)		(150,973)
Net cash used in investing activities	$	(31,319)	$	(212,426)
Financing activities
Receipt of gold stream, net of costs		2,370,948		-
Repayment of lease liabilities		(27,645)		(27,647)
Exercise of options		-		25,669
Net cash generated from financing activities	$	2,343,303	$	(1,978)
Decrease in cash		(43,483)		(4,768,864)
Effect of foreign exchange on cash		(1,721)		3,909
Cash, beginning of period		4,010,838		14,388,039
Cash, end of period	$	3,965,634	$	9,623,084

The accompanying notes are an integral part of these interim financial statements.

NOTES TO THE CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

For the three and six months ended June 30, 2020 and 2019

(Unaudited, expressed in United States Dollars, unless otherwise stated)

1. Nature of Operations and Going Concern

Aquila Resources Inc. (the "Company" or "Aquila") is in the business of exploring for and developing mineral properties. Substantially all of the Company's efforts are devoted to these activities.

Aquila was incorporated in the Province of Ontario and is listed on the Toronto Stock Exchange under the symbol "AQA". The Company's head office address is 141 Adelaide Street West, Suite 520, Toronto, Ontario, Canada, M5H 3L5.

The Company's primary investment is the Back Forty Joint Venture LLC ("BFJV"). This investment holds a property for which a Feasibility Study was released in August 2018. In July 2012 HudBay Minerals Inc. ("HudBay"), which had the controlling interest in the BFJV, suspended its exploration and evaluation activities at the Back Forty Project. In November 2013, Aquila signed a definitive agreement with HudBay to take control and 100% ownership of the BFJV. These transactions were completed in January 2014.

The business of mining and exploration for minerals involves a high degree of risk and there can be no assurance that current exploration and development programs will result in profitable mining operations. The recoverability of the carrying value of exploration properties and the Company's continued existence is dependent upon the preservation of its interest in the underlying properties, the discovery of economically recoverable reserves, the achievement of profitable operations, and the ability of the Company to raise financing, or alternatively upon the Company's ability to dispose of its interests on an advantageous basis.

Although the Company has taken steps to verify title to the 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 government licensing requirements or regulations, unregistered prior agreements, undetected defects, unregistered claims, native land claims, and non-compliance with regulatory and environmental requirements.

Details of deficit and working capital (current assets less current liabilities excluding warrants payable) of the Company are as follows:

	June 30,	December
	2020	31, 2019
Deficit	$99,191,338	$94,289,232
Working capital excluding warrants payable	1,790,173	1,552,279

These conditions indicate the existence of material uncertainties that may cast significant doubt about the Company's ability to continue as a going concern. Changes in future conditions could require a material write down of carrying values and an inability to meet its obligations as they fall due.

These unaudited condensed interim consolidated financial statements ("the interim financial statements") have been prepared on the basis that Aquila is a going concern. Accordingly, they do not give effect to adjustments that would be necessary should the Company be unable to continue as a going concern and therefore be required to realize its assets and liquidate its liabilities and commitments in other than the normal course of business and at amounts different from those in the accompanying interim financial statements. Such adjustments could be material. It is not possible to predict whether the Company will be able to raise adequate financing or to ultimately attain profitable levels of operations. In addition, the Company has taken steps to organize financing for the Company in the short term and have plans for funding options through the

NOTES TO THE CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

For the three and six months ended June 30, 2020 and 2019

(Unaudited, expressed in United States Dollars, unless otherwise stated)

development phase of the mine. However, there can be no assurance over the ability to execute on such financing transactions.

2. Accounting Policies

Statement of Compliance

These interim financial statements have been prepared in accordance with International Accounting Standard 34, Interim Financial Reporting. Accordingly, they do not include all of the information required for full annual financial statements required by International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board ("IASB") and interpretations issued by the International Financial Reporting Interpretations Committee. These interim financial statements should be read in conjunction with the Company's audited consolidated financial statements for the year ended December 31, 2019.

These interim financial statements were authorized for issuance by the Board of Directors of the Company on August 12, 2020.

Basis of Preparation and Presentation

The accounting policies adopted are consistent with those of the previous financial year and corresponding interim reporting period, except as noted below in Significant Accounting Policies.

In the preparation of these interim financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the period. Actual results could differ from these estimates. The significant estimates and assumptions are consistent with these disclosed in the Company's audited consolidated financial statements for the year ended December 31, 2019 except for deferred share units (Note 12), warrants (Note 13) and contingent consideration (Note 4) where estimates have been updated to reflect current market conditions.

Basis of Consolidation

These interim financial statements include the accounts of the Company and all of its subsidiaries. Subsidiaries are entities controlled by the Company. Control exists when the Company has the power to govern the financial and operating policies of an entity so as to obtain variable benefits from its power over the entity's activities. Subsidiaries are included in the consolidated financial results of the Company from the effective date of acquisition of control up to the effective date of disposal or loss of control. The Company's principal subsidiaries are: Aquila Resources USA Inc. and Aquila Michigan Inc. (previously known as HudBay Michigan Inc.), which are based in Michigan USA. All inter-company balances and transactions have been eliminated.

These interim financial statements are expressed in United States Dollars, except those amounts denoted C$ which are in Canadian Dollars. The United States dollar is the functional and reporting currency of the Company and its subsidiaries' operations. Monetary assets and liabilities denominated in foreign currencies are translated into United States dollars at exchange rates in effect at the statement of financial position date. Non-monetary assets and liabilities are translated at historical exchange rates. Revenues and expenses are translated at the rate at the time of the transaction. Any resulting gain or loss is recorded in the consolidated statement of loss and comprehensive loss.

NOTES TO THE CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

For the three and six months ended June 30, 2020 and 2019

(Unaudited, expressed in United States Dollars, unless otherwise stated)

3. Critical Accounting Estimates and Judgments

Areas of judgment that have the most significant effect on the amounts recognized in the interim financial statements are disclosed in Note 3 of the Company's consolidated financial statements for the year ended December 31, 2019. There have been no significant changes to the areas of estimation and judgement during the six months ended June 30, 2020.

4. Contingent Consideration

On December 30, 2013, the shareholders approved the acquisition of 100% of the shares of HudBay Michigan Inc. ("HMI"), a subsidiary of HudBay Minerals Inc. ("HudBay"), effectively giving Aquila 100% ownership in the Back Forty Project (the "HMI Acquisition"). Pursuant to the HMI Acquisition, HudBay's 51% interest in the Back Forty Project was acquired in consideration for the issuance of common shares of Aquila, future milestone payments tied to the development of the Back Forty Project and a 1% net smelter return royalty on production from certain land parcels in the project.

The contingent consideration is composed of the following:

1. Fair value of future instalments is based on C$9 million tied to development of the Back Forty project as follows:
2. 1. C$3 million payable on completion of any form of financing for purposes including the commencement of construction of Back Forty (up to 50% of the C$3 million can be paid, at Aquila's option in Aquila shares with the balance payable in cash);
   2. C$2 million payable in cash 90 days after the commencement of commercial production;
   3. C$2 million payable in cash 270 days after the commencement of commercial production, and;
   4. C$2 million payable in cash 540 days after the commencement of commercial production.

For the six months ended June 30, 2020, a time value of money calculation was utilized to value the contingent consideration. Each milestone payment was assessed separately. Key risks including permitting, feasibility study, commercial production and timing were each assigned a probability weighting based on the likelihood of occurrence. U.S. Department of the Treasury bond yields ranging from 0.135% to 0.29% were used as the risk- free rate. The milestone payments are estimated to commence in 2021 with commercial production starting in 2023. When performing a sensitivity analysis, a 10% change in each of the probabilities, will impact on the fair value of the contingent consideration by an estimated $1,182,500 to $1,353,000. If another key assumption, being the commencement of the milestone payments and the commencement of production, were pushed by one year to 2022 and 2024, respectively, the combined impact on fair value would decrease by an estimated $80,500.

NOTES TO THE CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

For the three and six months ended June 30, 2020 and 2019

(Unaudited, expressed in United States Dollars, unless otherwise stated)

The fair value of the contingent consideration is as follows:

Fair value at December 31, 2018	$4,528,173
Loss on change in value of contingent consideration	(358,171)
Change due to foreign exchange	223,887
Fair value at December 31, 2019	$4,393,889
Gain on change in value of contingent consideration	236,605
Change due to foreign exchange	(209,130)
Fair value at June 30, 2020	$4,421,364

5. Mineral Property Costs

Total accumulated deferred mineral property costs are detailed as follows:

	Balance,			Balance, end
	beginning of
Year ended December 31, 2019	Additions	of year
year
Back Forty Project	$ 24,045,801	$	68,750	$ 24,114,551
Reef Gold Project	387,380		69,896	457,276
Bend Gold Project	-		50,000	50,000
	$ 24,433,181	$	188,646	$ 24,621,827
	Balance,			Balance, end
	beginning of
Six months ended June 30, 2020	Additions	of year
year
Back Forty Project	$ 24,114,551	$	1,000	$ 24,115,551
Reef Gold Project	457,276		29,223	486,499
Bend Gold Project	50,000		-	50,000
	$ 24,621,827	$	30,223	$ 24,652,050

Back Forty Project

The Back Forty Project (the "Project") controls surface and mineral rights which are owned or held under lease or option by BFJV. Some lands are subject to net smelter royalties varying from 1% to 3.5%, with certain lands subject to a 2% - 7% state royalty, which under state law can be renegotiated, at the option of Aquila.

NOTES TO THE CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

For the three and six months ended June 30, 2020 and 2019

(Unaudited, expressed in United States Dollars, unless otherwise stated)

An evidentiary hearing on the contested case challenge to the Wetlands Permit began in June 2019. The same Judge that ruled on the Mining Permit contested case is hearing the Wetlands Permit contested case. Rebuttal testimony was completed in October 2019. The Company expects briefings and a final decision to follow in 2020.

In November 2018, the Company submitted amendments to its Mining Permit to EGLE to align the permit with the project design outlined in the Feasibility Study as well as in the Wetlands Permit. The Company also submitted amendments to its Air Permit in November 2018. In December 2019, the Company announced that EGLE approved amendments to Aquila's Mining Permit and its Air Permit following an extensive environmental and technical review process. In February 2020, an administrative contested case challenge to the Mining Permit amendments was filed.

Estimated lease, option and property acquisition costs related to the Back Forty Project for 2020 to 2024, for which the Company is materially liable, are as follows:

Year		Amount
2020		$ 81,000
2021	246,391
2022	251,285
2023	256,179
2024	256,179

Reef Gold Project

The Company entered into a series of agreements with private landholders in Marathon County, Wisconsin for the optioning of surface and mineral rights. The agreements consist of mining leases and exploration agreements with an option to purchase. These agreements have terms from 2 to 20 years up to 2031. A variable net smelter royalty up to 2% is payable in the event of mineral production on the property.

Estimated lease and/or option costs related to the Reef Project for 2020 to 2024, which are at the Company's option, are as follows:

Year		Amount
2020		$ 220,520
2021	432,548
2022	661,234
2023	6,000
2024	6,000

NOTES TO THE CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

For the three and six months ended June 30, 2020 and 2019

(Unaudited, expressed in United States Dollars, unless otherwise stated)

Bend

In May 2019, Aquila entered into a long-term mineral lease agreement with a party that owns the mineral rights on a portion of the Bend deposit.

Estimated lease and/or option costs related to Bend for 2020 to 2024, which are at the Company's option, are as follows:

Year		Amount
2020		$	-
2021			-
2022			25,000
2023			25,000
2024			25,000

6. Capital Assets

				Furniture
				and
Cost		Land	Buildings	Fixtures		Total
Balance December 31, 2019	$	378,880	$ 706,677	$353,417	$	1,438,974
Additions		-	-	1,096		1,096
Balance, June 30, 2020	$	378,880	$ 706,677	$354,513	$	1,440,070
				Furniture
				and
Accumulated Depreciation		Land	Buildings	Fixtures		Total
Balance, December 31, 2019	$	-	$ 235,462	$191,355	$	426,817
Charge		-	17,529	22,576		40,105
Balance, June 30, 2020	$	-	$ 252,991	$213,931	$	466,922
Net book value, December 31, 2019	$	378,880	$ 471,215	$162,062	$	1,012,157
Net book value, June 30, 2020	$	378,880	$ 453,686	$140,582	$	973,148

NOTES TO THE CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

For the three and six months ended June 30, 2020 and 2019

(Unaudited, expressed in United States Dollars, unless otherwise stated)

7. Deferred Revenue

As at June 30, 2020, a breakdown of the deferred revenue is as follows:

Balance at December 31, 2018	$34,270,289
Adjustment to notional non-cash interest on silver stream	(2,359,767)
Adjustment to notional non-cash interest on gold stream	(184,649)
Balance at December 31, 2019	$31,725,873
Gold stream receipt, net of costs	$ 2,370,948
Adjustment to notional non-cash interest on silver stream	1,322,316
Adjustment to notional non-cash interest on gold stream	1,435,489
Balance at June 30, 2020	$36,854,626

Under IFRS 15, the stream arrangements are considered to have significant financing components on which an implied interest rate is accrued and added to deferred revenue, to be amortized once the stream begins to be paid down. Under these rules, the Company reports a notional non-cash interest expense each quarter based on the implied interest rate at the time that the stream arrangement is consummated, and a corresponding amount is added to deferred revenue. This interest accrual is not a contractual obligation but is intended to allocate the cost of the stream financing over the period it is outstanding. This accrual is a non-cash item and is shown as such on the statement of cash flows. Upon commencement of production, deferred revenue including the accrued interest will be brought into revenue over the life of mine.

These adjustments to the non-cash interest are made on a quarterly basis. The significant financing component is adjusted for timing in receipt of payments and timing for estimated production as well as changes in the long- term commodity price estimates. In the current period, the Company adjusted the value and timing of the receipt of payments as well as the timing for estimated production for the amended streaming agreements (see notes 8 and 9). As a result, the significant financing component increased in value and a non-cash debit was included in the statement of loss and comprehensive loss for the six months ended June 30, 2020. These adjustments will continue to take place as the Company continues to refine its production plans and the timing of receipt of payments is known.

8. Osisko Financing and Streaming Agreement

In November 2017, the Company completed a financing transaction with Osisko Bermuda Limited ("OBL"), a wholly owned subsidiary of Osisko Gold Royalties Ltd (TSX & NYSE: OR) ("Osisko"), pursuant to which OBL agreed to commit approximately $55 million to Aquila through a gold stream purchase agreement. In June 2020, the Company amended its agreement with Osisko, reducing the deposit owing from $40 million to $35 million, adjusting payment milestones as well as adjusting certain milestone dates under the gold stream and silver stream to align the streams with the current project development timeline.

NOTES TO THE CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

For the three and six months ended June 30, 2020 and 2019

(Unaudited, expressed in United States Dollars, unless otherwise stated)

a) Gold Stream

Concurrent with the Strategic Investment, the parties have also entered into a Gold Purchase Agreement (the "Stream Agreement"), whereby OBL will provide the Company with staged payments totaling $50 million, payable as follows:

• $7.5 million was received on closing of the Stream Agreement;
• $7.5 million upon receipt by Aquila of all material permits required for the development and operation of the Project, and receipt of a positive feasibility study: These funds were received in October 2018;
• $2.5 million was received on closing of the Stream Amendments ;
• $2.5 million upon the Company securing funding of $6 million;
• $5 million upon receipt of the dam safety permit in addition to completing all legal proceedings for all other permits required for the development and operation of the Project; and
• $25 million upon the first drawdown of an appropriate project debt finance facility, subject to the COC Provision (as defined below).

The $15 million received from OBL in 2017 and 2018 is shown as deferred revenue on the statement of financial position, net of transaction costs and capital commitment fees. The tranche of $2.5 million received on closing is shown as deferred revenue net of transaction costs on the statement of financial position. . The remaining $32.5 million is payable in three instalments and is subject to the completion of certain milestones and the satisfaction of certain other conditions. Therefore, it is not reflected on the statement of financial position at this time. OBL has been provided a general security agreement over the subsidiaries of Aquila that are directly involved with development of the Back Forty project.

Under the terms of the Stream Agreement, OBL will purchase 18.5% of the refined gold from the Project (the "Threshold Stream Percentage") until the Company has delivered 105,000 ounces of gold (the "Production Threshold"). Upon satisfaction of the Production Threshold, the Threshold Stream Percentage will be reduced to 9.25% of the refined gold (the "Tail Stream"). In exchange for the refined gold delivered under the Stream Agreement, OBL will pay the Company ongoing payments equal to 30% of the spot price of gold on the day of delivery, subject to a maximum payment of $600 per ounce.

In the event of a change of control of the Company prior to the advancement of the final $25 million under the Stream Agreement, the person or entity acquiring control over the Project may elect to forgo the final payment, in which case the Threshold Stream Percentage and Tail Stream will be reduced to 9.5% and 4.75%, respectively (the "COC Provision"). All other terms and conditions of the Stream Agreement will remain unchanged.

The initial term of the agreement is for 40 years, automatically renewable for the successive 10 year periods.

The agreement is subject to certain operating and financial covenants, which are in good standing as of June 30, 2020.

b) Transaction costs

Transactions costs for this transaction have been offset against the deferred revenue balance.

NOTES TO THE CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

For the three and six months ended June 30, 2020 and 2019

(Unaudited, expressed in United States Dollars, unless otherwise stated)

9. Orion Financing and Streaming Agreement

In March 2015, the Company closed a financing transaction with Orion that included an equity private placement and a silver purchase agreement for total cash payments of $20.75 million. In July 2017, Orion sold a royalty portfolio to Osisko Gold Royalties Ltd. which included the Company's Back Forty silver stream. In June 2020, the Company amended certain terms of its silver stream agreement with Osisko, specifically increasing the percentage of silver purchased under the stream from 75% to 85%.

a) Equity Private Placement

In connection with the private placement completed in March 2015, Orion also has the right to participate in any future equity or equity-linked financings to maintain its ownership level in Aquila. In connection with the private placement, Orion received the right to nominate one individual to the board of directors of Aquila for 24 months and thereafter for such time as Orion owns at least 10 per cent of the outstanding common shares. At June 30, 2020, Orion held 28.7% of the common shares of the Company (December 31, 2019 - 28.7%).

b) Silver Stream

Under the terms of the amended silver purchase agreement, Osisko has agreed to purchase up to 85 per cent of the total silver produced from the Back Forty project at $4 per ounce. A total of $17.25 million has been advanced and is shown as deferred revenue on the Statement of Financial Position as at June 30, 2020. An additional $653,692 was added to the value of the deferred revenue on the partial exercise of the Orion warrants. In 2016, the silver purchase agreement was amended to reduce the deposit owing by $639,000. Where the market price of silver is greater than $4, the difference realized from the sale of the silver will be applied against any deposit received from Osisko.

The initial term of the agreement is for 40 years, automatically renewable for the successive 10 year periods.

The agreement is subject to certain operating and financial covenants, which are in good standing as of June 30, 2020.

10. Share Capital

a) Authorized

Unlimited number of common shares. Issued and outstanding:

NOTES TO THE CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

For the three and six months ended June 30, 2020 and 2019

(Unaudited, expressed in United States Dollars, unless otherwise stated)

	Number of
	Shares	Total
Balance, December 31, 2018	337,974,556	$ 75,322,870
Shares issued on exercise of options	227,500	25,669
Fair value transferred on exercise of options	-	21,651
Shares issued on exercise of RSUs	82,500	-
Fair value transferred on exercise of RSUs	-	15,925
Balance, June 30, 2019	338,284,556	$ 75,386,115
	Number of
	Shares	Total
Balance, December 31, 2019	338,473,904	$ 75,409,506
Shares issued on exercise of RSUs (i)	82,500	-
Fair value transferred on exercise of RSUs (i)	-	15,925
Balance, June 30, 2020	338,556,404	$ 75,425,431

1. During the six months ended June 30, 2020, 82,500 restricted share unit options were exercised, each exchangeable for one common share. The relative fair value assigned to the restricted share units on issuance of C$20,625 ($15,925) was transferred from contributed surplus to share capital.

b) Stock-option plan and share-based compensation:

The Company maintains an Equity Incentive Plan (the "Plan") for the benefit of directors, officers, employees, consultants and other service providers of the Company and its subsidiaries in order to assist the Company in attracting, retaining, and motivating such persons by providing them with the opportunity, through stock options to acquire an increased interest in the Company. Under the Plan, options may be granted for a term not exceeding ten years. The number of common shares reserved for issue under the Plan will not exceed 10% of the number of then outstanding common shares nor may the number of common shares reserved for issuance to insiders must not exceed 10% of the then outstanding common shares. The exercise price of an option may not be lower than the closing price of the common shares on the TSX, subject to applicable discounts, on the business day immediately before the date the option is granted. The options are non-transferable and non- assignable.

NOTES TO THE CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

For the three and six months ended June 30, 2020 and 2019

(Unaudited, expressed in United States Dollars, unless otherwise stated)

A summary of the Company's stock option, and changes during the six months ended June 30, 2020 are presented below:

	Number of	Weighted Average
	Stock Options		Exercise Price
Balance - January 1, 2019	21,919,058	$	0.16
Exercised	(227,500)		0.15
Expired	(312,500)		0.15
Balance, June 30, 2019	21,379,058	$	0.16
	Number of	Weighted Average
	Stock Options		Exercise Price
Balance - January 1, 2020	21,679,058	$	0.19
Forfeited options	(850,000)		0.25
Balance, June 30, 2020	20,829,058	$	0.19

As at June 30, 2020, common share stock options held by directors, officers, employees and consultants are as follows:

						Weighted
				Weighted	Average
	Number of		Number of	Average	Remaining
	Options		Options	Exercise	Contractual
Expiry Date	Outstanding		Vested		Price	Life (years)
January 16, 2022	6,200,000	*	6,200,000	C$ 0.15	1.54
April 6, 2023	3,100,000		3,100,000		0.19	2.77
June 25, 2023	1,400,000		1,400,000		0.19	2.99
January 11, 2024	1,500,000		1,500,000		0.19	3.53
February 8, 2024	740,000		740,000		0.15	3.61
February 10, 2025	2,179,000		2,179,000		0.265	4.61
September 17, 2025	350,000		262,500		0.25	5.21
January 11, 2026	610,000		535,000		0.25	5.53
March 5, 2026	1,250,000		937,500		0.26	5.68
November 13, 2026	500,000		250,000		0.13	6.37
December 17, 2026	2,700,058		1,975,058		0.16	6.46
June 24, 2027	300,000		150,000		0.20	6.98
	20,829,058		19,079,058	$	0.19	3.62

* Issued under plan of arrangement.

NOTES TO THE CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

For the three and six months ended June 30, 2020 and 2019

(Unaudited, expressed in United States Dollars, unless otherwise stated)

c) Restricted share unit plan:

The Company introduced maintains a restricted share unit plan ("the RSU plan") for the benefit of officers and employees of the Company and its subsidiaries in order to assist the Company in attracting, retaining, and motivating such persons by providing them with the opportunity, through restricted share units to acquire an increased interest in the Company. Under the RSU plan, units are granted at the discretion of the Board of Directors who have the authority to determine the vesting terms. On the settlement date, each RSU is redeemable for one common share of the Company or subject to the approval of the plan administrator, a cash payment. It is the intention of the Board of Directors to settle all RSUs in common shares only. The number of common shares reserved for issue under the Plan cannot exceed 10% of the number of then outstanding common shares nor may the number of common shares reserved for issuance to insiders exceed 10% of the then outstanding common shares.

	Number of	Fair Value
	Restricted Share Units	on Issuance
Balance - January 1, 2019	6,337,389	C$ 0.21
Equity settled	(82,500)	0.25
Balance, June 30, 2019	6,254,889	C$ 0.21
	Number of	Fair Value
	Restricted Share Units	on Issuance
Balance - January 1, 2020	6,065,181	C$ 0.21
Equity settled	(82,500)	0.25
Balance, June 30, 2020	5,982,681	C$ 0.21

11. Warrants

The movements in the number of outstanding share purchase warrants for the six months ended June 30, 2020 are as follows:

	2020	2019
		Weighted		Weighted
		average		average
		exercise		exercise
		price		price
Balance, January 1	30,302,131	C$ 0.32	31,551,545	C$ 0.31
Expired	(18,008,862)	0.30	(1,249,414)	0.30
Balance, June 30,	12,293,269	C$ 0.34	30,302,131	C$ 0.32

NOTES TO THE CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

For the three and six months ended June 30, 2020 and 2019

(Unaudited, expressed in United States Dollars, unless otherwise stated)

The exercise price, expiry date, and warrants issued and outstanding as at June 30, 2020 are as follows:

					Weighted
		Number of warrants	Exercise		average
		outstanding	Price	Expiry Date	life (yrs)
	12,293,269	0.34	May 10, 2021	0.86
	12,293,269	$ 0.34		0.86

12. Deferred Share Units Liability

The Company maintains a deferred share unit plan ("the DSU plan") for the benefit of directors and officers of the Company and its subsidiaries in order to assist the Company in attracting, retaining, and motivating such persons by providing them with the opportunity, through restricted share units to acquire an increased interest in the Company. Under the DSU plan, units are granted at the discretion of board of directors who have the authority to determine the vesting terms. Directors can elect to receive up to 100% of their compensation in DSUs. On the settlement date, each DSU is redeemable for one common share of the Company. The number of common shares reserved for issue under the Plan cannot exceed 10% of the number of then outstanding common shares nor may the number of common shares reserved for issuance to insiders exceed 10% of the then outstanding common shares.

During the six months ended June 30, 2020, all director compensation was temporarily suspended. As such, no units were issued to directors in lieu of receiving director fees in cash.

	Number of		Fair Value
	Deferred Share Units		on Issuance
Balance - January 1, 2019	640,431	$	93,887
Granted	262,820		33,674
Granted	467,105		67,814
Granted (iii)
Granted (iv)
Change due to foreign exchange			4,654
Change due to revaluation			(1,083)
Balance, June 30, 2019	1,370,356	$	198,946
	Number of		Fair Value
	Deferred Share Units		on Issuance
Balance - January 1, 2020	2,076,238	$	271,744
Change due to foreign exchange			(12,542)
Change due to revaluation			(15,435)
Balance, June 30, 2020	2,076,238	$	243,767

NOTES TO THE CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

For the three and six months ended June 30, 2020 and 2019

(Unaudited, expressed in United States Dollars, unless otherwise stated)

13. Derivative Liabilities

During the six months ended June 30, 2020, no equity offerings were completed whereby any warrants or broker warrants were issued with exercise prices denominated in Canadian dollars (December 31, 2019 - no warrants were issued in Canadian dollars). Where the warrants have an exercise price denominated in a currency which is different from the functional currency of the Company (US dollar), the warrants are treated as a financial liability. Broker warrants are accounted as equity. The Company's share purchase warrants are classified and accounted for as a financial liability at fair value with changes in fair value recognized in net earnings. The warrant derivative liability is classified as level 2 in the fair value hierarchy. As of June 30, 2020, the Company had 12,293,269 (December 31, 2019 - 30,302,101) warrants outstanding which are classified and accounted for as a financial liability. The Company uses the Black-Scholes Option Pricing Model to estimate the fair value of the Canadian dollar denominated warrants. See note 11(a) for further information.

At June 30,	2020	2019
Risk free interest rate	0.25%	1.52%
Expected life	0.86 years 0.61-1.87 years
Price volatility	95%	73-81%
Share price (C$)	0.16	0.19
Dividend yield	Nil	Nil

Black-Scholes pricing models require the input of highly subjective assumptions. Volatility was estimated based on average daily volatility based on historical share price observations over the expected term of the option grant.

14. Related Party Transactions

In accordance with IAS 24, key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the Company, directly or indirectly, including any directors (executive and non-executive) of the Company. The remuneration of directors and key executives is determined by the nomination, compensation and governance committee of the Board of Directors. During the three months and six months ended June 30, 2020, director's fees, professional fees and other compensation of directors and key management personnel were as follows:

		For the three months	For the six months ended
		ended June 30,		June 30,
		2020	2019		2020		2019
Short-term compensation and benefits	$	96,234	$185,155	$	271,269	$	371,450
Share-based payments (fair value of stock option benefits and		49,956	171,678		107,827		310,555
share based payments)
	$	146,190	$356,833	$	379,096	$	682,005

During the three and six months ended June 30, 2020, the Company had expenditures in the amount of $27,329 (2019 - $23,020) and $56,351 (2019 - $45,669), respectively, for shared office costs paid to a partnership in which one of the Company's directors is an owner.

NOTES TO THE CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

For the three and six months ended June 30, 2020 and 2019

(Unaudited, expressed in United States Dollars, unless otherwise stated)

15. Administrative Expenses

		For the three months		For the six months
		ended June 30,		ended June 30,
		2020		2019		2020	2019
Salaries and benefits	$	402,299	$	580,879	$	990,654	$1,185,931
Professional fees		251,741		49,147		281,348	109,223
Office, general and administration		44,833		194,484		144,778	458,480
Share-based compensation		87,462		175,970		70,627	320,451
Rent		27,329		23,020		56,351	45,669
Filing and regulatory fees		6,438		25,009		43,256	62,857
Amortization		23,485		32,763		40,105	64,338
Travel and promotion		2,239		90,709		22,934	166,312
Directors' fees		-		(1,904)		-	7,499
Total administrative expenses	$	845,826	$	1,170,077	$	1,650,053	$2,420,760

16. Finance Charges

		For the three months	For the six months
		ended June 30,	ended June 30,
		2020		2019	2020	2019
Adjustment to interest on financing component of deferred revenue (Note 7)	$	2,586,671	$	682,809	$ 2,757,805	$1,430,002
Interest on lease obligations		2,826		6,308	5,855	12,756
Interest income		(28,082)		(80,449)	(31,647)	(137,424)
Total finance charges	$	2,561,415	$	608,668	$ 2,732,013	$1,305,334

17. Tax recovery

In 2018, the Company received a re-assessment of certain of its input tax credits ("ITCs") totaling approximately C$ 669,000 ($529,000). The Company has recorded the amount as a payable on the statement of financial position and as an exploration expense on the statement of net loss. The Company received a second reassessment of certain of its ITCs related to financing totaling approximately C$181,000 ($141,000) which is included in accounts receivable. The Company filed Notices of Objections in relation to these matters as the Company disagreed with Canada Revenue Agency's characterization of these ITCs.

In June 2020, the Company received notice from the Canada Revenue Agency that the Notice of Objections filed would be allowed in full. Approximately C$931,500 ($685,000) was received representing the full value of the ITCs plus associated penalties and interest. Approximately $243,200 was offset against accounts receivable, a recovery to exploration expenses was booked for the amount previously expensed in 2018 of approximately $412,400 and approximately $29,400 was recorded as interest income and penalties.

NOTES TO THE CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

For the three and six months ended June 30, 2020 and 2019

(Unaudited, expressed in United States Dollars, unless otherwise stated)

18. Financial Risk Management

In the normal course of business, the Company is exposed to a number of financial risks that can affect its operating performance. These risks are: credit risk, liquidity risk and market risk. The Company's overall risk management program and prudent business practices seek to minimize any potential adverse effects on the Company's financial performance.

The interim financial statements do not include all financial risk management information and disclosures required in the annual financial statements. They should be read in conjunction with the annual consolidated financial statements as at December 31, 2019. There have been no changes in the risk management or in any risk management policies since year end, except as noted below:

COVID-19 Pandemic

The rapid spread of the COVID-19 virus, which was declared by the World Health Organization to be a pandemic on March 11, 2020, and actions taken globally in response to COVID-19, have significantly disrupted business activities throughout the world. The Company's business relies, to a certain extent, on free movement of goods, services, and capital within Canada and the United States, which has been significantly restricted as a result of the COVID-19 pandemic. The Company took certain measures including temporary layoffs, temporary salary reductions and suspending all permitting activities in an effort to conserve funds.

Given the ongoing and dynamic nature of the circumstances surrounding COVID-19, it is difficult to predict how significant the impact of COVID-19,including any responses to it, will be on the economy and the Company's business in particular, or for how long any disruptions are likely to continue. The extent of such impact will depend on future developments, which are highly uncertain, rapidly evolving and difficult to predict, including new information which may emerge concerning the severity of COVID-19 and additional actions which may be taken to contain COVID-19, as well as the timing of the re-opening of the economy in Canada and the United States. Such further developments could have a material adverse effect on the Company's business, financial condition, results of operations and cash flows.