Headwater Exploration : Q1 2021 Financial Statements

HEADWATER EXPLORATION INC.

Interim Condensed Statements of Financial Position

(unaudited)

	March 31	December 31
	2021	2020
(thousands)	$	$
ASSETS
Current assets
Cash and cash equivalents	81,643	76,772
Restricted cash (notes 13 & 15)	590	1,827
Accounts receivable (note 13)	13,210	5,475
Financial derivatives receivable (note 13)	-	74
Inventories	554	571
Prepaids and deposits	487	448
Total current assets	96,484	85,167
Exploration and evaluation assets (note 3)	27,379	27,101
Property, plant and equipment (note 4)	219,030	187,664
Right-of-use assets (note 5)	385	418
Other assets	335	335
Total assets	343,613	300,685
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued liabilities (note 13)	37,828	4,105
Financial derivatives liability (note 13)	180	-
Deferred share units liability (note 9)	149	91
Current portion of lease liability (note 5)	140	138
Warrant liability (note 7)	29,500	10,305
Total current liabilities	67,797	14,639
Lease liability (note 5)	263	298
Decommissioning liability (note 6)	18,092	16,718
Total liabilities	86,152	31,655
Shareholders' Equity
Capital stock (note 8)	387,950	387,393
Warrants (note 8)	7,512	7,659
Contributed surplus	12,473	11,659
Deficit	(150,474)	(137,681)
Total shareholders' equity	257,461	269,030
Total liabilities and shareholders' equity	343,613	300,685
Commitments (note 15)
Subsequent events (note 16)

See accompanying notes to the interim condensed financial statements

Approved on behalf of the Board of Directors:

(signed) "Chandra Henry"	(signed) "Neil Roszell"
Chandra Henry, CPA, CA	Neil Roszell
Director	Chairman

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HEADWATER EXPLORATION INC.

Interim Condensed Statements of Loss and Comprehensive Loss

(unaudited)

	Three months ended March 31,
	2021	2020
(thousands, except per share data)	$	$
REVENUE
Sales (note 10)	25,492	2,308
Royalties	(2,355)	(57)
Revenue, net of royalties	23,137	2,251
Gains (losses) on financial derivatives (note 13)	(805)	2,456
	22,332	4,707
EXPENSES
Blending and transportation	4,959	-
Production	2,413	647
General and administrative	847	683
Transaction costs	-	4,382
Remeasurement loss on warrant liability (note 7)	19,195	-
Stock-based compensation expense (recovery) (note 9)	520	(19)
Depletion and depreciation (notes 4 & 5)	7,250	2,505
Exploration and evaluation expense (note 3)	-	3,821
	35,184	12,019
Interest income and other (note 11)	(59)	(502)
Loss before income taxes	(12,793)	(6,810)
Net loss and comprehensive loss	(12,793)	(6,810)
Net loss per share (note 8)
Basic	(0.07)	(0.06)
Diluted	(0.07)	(0.06)

See accompanying notes to the interim condensed financial statements

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HEADWATER EXPLORATION INC.

Interim Condensed Statements of Cash Flows

(unaudited)

	Three months ended March 31,
Cash flow related to the following activities:	2021	2020
(thousands)	$	$
OPERATING
Net loss	(12,793)	(6,810)
Items not involving cash:
Unrealized losses on financial derivatives (note 13)	254	1,481
Remeasurement loss on warrant liability	19,195	-
Stock-based compensation expense (recovery)	520	(19)
Depletion and depreciation	7,250	2,505
Exploration and evaluation expense	-	3,821
Accretion and finance charges (note 11)	53	53
Change in non-cash operating working capital (note 12)	(1,696)	151
Cash flows provided by operating activities	12,783	1,182
FINANCING
Issue of common shares, net of costs (note 8)	-	48,096
Payment of lease liability (note 5)	(36)	(37)
Proceeds from exercise of stock options & Warrants (note 8)	384	1,670
Cash flows provided by financing activities	348	49,729
INVESTING
Capital expenditures - property, plant and equipment (note 4)	(36,994)	(65)
Capital expenditures - exploration and evaluation (note 3)	(278)	(5)
Change in restricted cash	1,237	-
Change in non-cash investing working capital (note 12)	27,775	(164)
Cash flows used in investing activities	(8,260)	(234)
Change in cash and cash equivalents	4,871	50,677
Cash and cash equivalents, beginning of period	76,772	60,957
Cash and cash equivalents, end of period	81,643	111,634
Cash and cash equivalents consist of:
Cash	66,643	95,007
Cash equivalents	15,000	16,627
Cash and cash equivalents, end of period	81,643	111,634

See accompanying notes to the interim condensed financial statements

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HEADWATER EXPLORATION INC.

Interim Condensed Statements of Changes in Shareholders' Equity

(unaudited)

						Total
		Capital		Contributed		Shareholders'
	Notes	stock	Warrants	surplus	Deficit	equity
(thousands)		$	$	$	$	$
Balance at January 1, 2020		247,332	-	11,366	(144,388)	114,310
Issued on Recapitalization Transaction	8	50,000	-	-	-	50,000
Allocation to Warrants	8	(7,680)	7,680	-	-	-
Issue costs	8	(1,905)	-	-	-	(1,905)
Exercise of stock options	8	2,581	-	(911)	-	1,670
Stock-based compensation	9	-	-	(30)	-	(30)
Net loss		-	-	-	(6,810)	(6,810)
Balance at March 31, 2020		290,328	7,680	10,425	(151,198)	157,235
Balance at January 1, 2021		387,393	7,659	11,659	(137,681)	269,030
Exercise of stock options	8	26	-	(26)	-	-
Exercise of Warrants	8	531	(147)	-	-	384
Stock-based compensation	9	-	-	840	-	840
Net loss		-	-	-	(12,793)	(12,793)
Balance at March 31, 2021		387,950	7,512	12,473	(150,474)	257,461

See accompanying notes to the interim condensed financial statements

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HEADWATER EXPLORATION INC.

Notes to the Interim Condensed Financial Statements

(unaudited)

As at and for the three months ended March 31, 2021 and 2020

(All tabular amounts in thousands, unless otherwise stated)

1. NATURE OF OPERATIONS

Headwater Exploration Inc. ("Headwater" or the "Company") is a Canadian junior resource company engaged in the exploration for and development and production of petroleum and natural gas in Canada. Headwater is a public company existing under the Alberta Business Corporations Act with common shares listed on the Toronto Stock Exchange ("TSX") under the symbol "HWX".

Headwater's principal place of business is located at 1200, 500 - 4TH Avenue S.W., Calgary, Alberta, T2P 2V6 and its registered office is located at 2400, 525 - 8th Avenue S.W., Calgary Alberta, T2P 1G1.

2. BASIS OF PREPARATION Statement of compliance

These unaudited interim condensed financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board ("IASB"), and in accordance with IAS 34 - Interim Financial Reporting. The unaudited interim condensed financial statements do not include all information required for annual financial statements and should be read in conjunction with the Company's audited financial statements for the year ended December 31, 2020. These unaudited interim condensed financial statements have been prepared following the same accounting policies as the Company's audited financial statements for the year ended December 31, 2020.

These unaudited interim condensed financial statements were approved and authorized for issue by the Company's Board of Directors on May 12, 2021.

Basis of measurement, functional and presentation currency

The financial statements have been prepared on a historical cost basis except for certain financial instruments which are measured at fair value through profit or loss and inventories which are measured at the lower of cost and net realizable value.

The financial statements are presented in Canadian dollars, which is the Company's functional currency.

Significant judgments and estimates

The timely preparation of the financial statements requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amount of assets, liabilities, income and expenses. Actual results may differ materially from these estimates.

Estimates and underlying assumptions are reviewed on an ongoing basis. Significant judgments, estimates and assumptions made by management in these financial statements are outlined in note 2 of the December 31, 2020 annual financial statements. There have been no significant changes in the Company's judgments and estimates applied during the interim period ended March 31, 2021, relative to those described in the most recent annual financial statements as at and for the year ended December 31, 2020.

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