Falco Resources Ltd. — Interim / Quarterly Report 2020

May 27, 2020

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Falco Resources Ltd.

Condensed Consolidated Interim Financial Statements (Unaudited)

For the three-month and nine-month periods ended March 31, 2020 and 2019

Falco Resources Ltd. Consolidated Balance Sheets

Falco Resources Ltd. Consolidated Balance Sheets
(Unaudited)
(Expressed in Canadian Dollars) Assets Current assets Cash Accounts receivable Prepaid expenses and other assets Non-current assets Restricted cash Property, plant and equipment (Note 5) Exploration and evaluation assets (Note 6) Other non-current assets (Note 8) Total assets Liabilities Current liabilities Accounts payable and accrued liabilities (Note 7) Secured loan (Note 10) Non-current liabilities Deferred income taxes Contract Liability (Note 8) Total liabilities Equity Share capital Warrants (Note 11) Contributed surplus Deficit Total equity Total liabilities and equity Going concern (Note 1) Commitments (Note 18)	As at March 31, 2020 As at June 30, 2019
	$ $ 6,650,818 1,115,750 2,268,348 2,102,343 191,748 163,156
	9,110,914 3,381,249 905,000 905,000 115,746,249 108,919,623 20,301,022 21,170,821 1,728,528 1,728,528
	138,680,799 132,723,972
	147,791,713 136,105,221
	6,917,752 4,122,023 15,900,000 10,000,000
	22,817,752 14,122,023 9,312,000 9,477,000 28,793,276 26,115,576
	38,105,276 35,592,576
	60,923,028 49,714,599
	116,234,936 111,934,936 744,306 744,306 14,303,306 13,698,058 (44,413,863) (39,986,678)
	86,868,685 86,390,622
	147,791,713 136,105,221

Equity is solely attributable to Falco Resources Ltd. shareholders

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

2

Falco Resources Ltd.

Consolidated Statements of Loss and Comprehensive Loss

For the three-month and nine-month periods ended March 31, 2020 and 2019

(Unaudited)

(Expressed in Canadian Dollars)

Expenses Consulting and compensation Share-based compensation (Note 12) Professional fees Office and administrative Travel Investor and shareholder relations Depreciation Write-off of exploration and evaluation assets (Note 6) Cost recoveries Operating loss Interest income Interest expense Transaction costs (Note 4) Foreign exchange (loss) gain Other income – premium on flow through shares Loss before income taxes Deferred income tax recovery (expense) Net loss and comprehensive loss Net loss per common share (Note 13) Basic and diluted Weighted average number of common shares outstanding (Note 13) Basic and diluted	Three-months ended March 31, 2020 2019 $ $ 790,776 541,533 169,992 98,728 355,474 249,745 83,183 75,634 48,762 12,652 32,485 23,622 2,336 4,474 - - (248,545) (384,658) (1,234,463) (621,730) 21,785 22,950 (147) (351,270) (221,848) - - (658) - - (1,434,673) (950,708) (12,000) (42,000) (1,446,673) (992,708) (0.01) (0.00) 208,681,750 203,595,703	Nine-months ended March 31,
		2020 2019
		$ $ 2,143,172 2,380,041 511,135 684,657 558,782 564,045 250,333 232,960 127,057 60,920 95,039 97,301 8,316 12,928 1,166,081 - (606,646) (711,269)
		(4,253,269) (3,321,583) 60,546 74,753 (177,567) (656,587) (221,848) - (47) 23 - 489,851
		(4,592,185) (3,413,543) 165,000 (613,000)
		(4,427,185) (4,026,543)
		(0.02) (0.02) 208,144,461 195,562,907

The loss and the comprehensive loss are solely attributable to Falco Resources Ltd. shareholders.

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

3

Falco Resources Ltd.

Consolidated Statements of Cash Flows

For the three-month and nine-month periods ended March 31, 2020 and 2019

(Unaudited)
(Expressed in Canadian Dollars) Operating activities Net loss Adjustments for : Share-based compensation (Note 12) Depreciation Accretion expense on September Secured Loan (Note 10) Other income – premium on flow-through shares Deferred income tax (recovery) expense Write-off of exploration and evaluation assets (Note 6) Net proceeds from first deposit of the Stream Agreement (Note 8) Payment of transaction costs related to the Stream Agreement (Note 8) Changes in non-cash working capital items: Accounts receivable Prepaid expenses and other assets Accounts payable and accrued liabilities Net cash flows (used in) provided by operating activities Investing activities Acquisition of property, plant and equipment Cash acquired through the acquisition of Golden Queen (Note 4) Refundable tax credits received Investments in exploration and evaluation assets Net cash flows provide by (used in) investing activities Financing activities Net proceeds from the issuance of Secured Loan (Note 10) Proceeds from the exercise of options Payment of transaction costs Net cash flows provided by financing activities Increase (decrease) in cash Cash, beginning of period Cash, end of period Supplemental disclosure (Note 17)	Three-months ended March 31, 2020 2019 $ $ (1,446,673) (992,708) 169,992 98,728 2,336 4,474 - - - - 12,000 42,000 - - - 1,650,000 - (369,779) (845,340) 591,166 46,169 (30,360) 962,245 (98,206) (1,099,271) 895,315 (1,181,637) (6,416,655) 4,776,161 - 98,822 - (142,813) (2,420,062) 3,550,533 (8,836,717) - 10,000,000 - - - - - 10,000,000 2,451,262 2,058,598 4,199,556 989,467 6,650,818 3,048,065	Nine-months ended March 31,
		2020 2019
		$ $ (4,427,185) (4,026,543) 511,135 684,657 8,316 12,928 - 44,600 - (489,851) (165,000) 613,000 1,166,081 - - 1,650,000 (354,532) (543,333) (1,048,899) 2,131,707 (28,592) (15,457) 1,940,176 792,463
		(2,398,500) 854,171
		(2,704,929) (21,330,308) 4,776,161 - 1,126,591 800,000 (283,124) (6,419,924)
		2,914,699 (26,950,232)
		5,018,869 20,000,000 - 321,505 - (109,650)
		5,018,869 20,211,855
		5,535,068 (5,884,206)
		1,115,750 8,932,271
		6,650,818 3,048,065

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

4

Falco Resources Ltd.

Consolidated Statements of Changes in Equity For the nine-month periods ended March 31, 2020 and 2019

(Unaudited)

(Expressed in Canadian Dollars)

	Number
	of shares	Share	Convertible		Contributed
	outstanding	capital	Debenture	Warrants	surplus	Deficit	Total
		$	$	$	$	$	$
Balance – July 1, 2019	207,878,736	111,934,936	-	744,306	13,698,058	(39,986,678)	86,390,622
Net loss and comprehensive loss	-	-		-	-	(4,427,185)	(4,427,185)
Acquisition of Golden	18,268,560	4,300,000	-	-	-	-	4,300,000
Queen (Note 4)
Share options:
Share-based compensation	-	-	-	-	605,248	-	605,248
Balance – March 31, 2020	226,147,296	116,234,936	-	744,306	14,303,306	(44,413,863)	86,868,685
Balance – July 1, 2018	189,157,863	103,235,749	6,875,000	4,800,822	8,422,780	(31,064,420)	92,269,931
Net loss and comprehensive loss	-	-		-	-	(4,026,543)	(4,026,543)
Convertible Debenture (Note 9):
Conversion to common shares	12,104,444	6,536,400	(7,000,000)	463,600	-	-	-
and warrants
Share issue costs	-	(151,034)	125,000	(10,282)	-	-	(36,316)
Shares issued for interest (Note 10)	5,353,791	1,820,289	-	-	-	-	1,820,289
Share issue costs	-	(27,476)	-	-	-	-	(27,476)
Warrants expired	-	-	-	(4,509,834)	4,509,834	-	-
Share options:
Share-based compensation	-	-	-	-	815,758	-	815,758
Fair value of options exercised	-	199,503	-	-	(199,503)	-	-
Proceeds from exercise of	1,262,638	321,505	-	-	-	-	321,505
options
Balance – March 31, 2019	207,878,736	111,934,936	-	744,306	13,548,869	(35,090,963)	91,137,148

The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements

5

Notes to the Condensed Consolidated Interim Financial Statements For the three-month and nine-month periods ended March 31, 2020 and 2019 (Unaudited) (Expressed in Canadian Dollars)

Falco Resources Ltd.

1. Nature of activities and going concern

Falco Resources Ltd. (“Falco” or the “Company”) was incorporated under the Business Corporations Act (British Columbia) on March 16, 2010 and was continued under the Canada Business Corporations Act on June 12, 2015. The Company’s common shares trade under the symbol “FPC” on the TSX Venture Exchange. The Company’s registered office is 1100, avenue des Canadiens-de-Montréal, Suite 300, Montréal, Québec, Canada.

On March 27, 2020, the Company acquired all of the issued and outstanding common shares of Golden Queen Mining Consolidated Ltd. (“Golden Queen”) (see Note 4).

The Company is in the business of exploring, evaluating and developing its mineral properties in the Rouyn-Noranda district of the Province of Québec (Canada) for base and precious metals.

On October 30, 2017, the Company filed a National Instrument 43-101, Standards of Disclosure for Mineral Projects Technical Report, entitled “ Feasibility Study, Horne 5 Gold Project ”, dated effective October 5, 2017 on SEDAR (the “Feasibility Study”) relating to its Horne 5 Deposit in Rouyn-Noranda (the “Horne 5 Project” or “Horne 5 Deposit”). Management of the Company (“Management”) has determined that the technical feasibility and commercial viability of the Horne 5 Project is established and accordingly, the development phase of the Horne 5 Project has commenced.

Until it is determined that properties contain mineral reserves or resources that can be economically mined, they are classified as exploration and evaluation properties. The recoverability of deferred exploration and evaluation expenses is dependent on the discovery of economically recoverable reserves and resources; securing and maintaining title and beneficial interest in the properties; the ability to obtain necessary financing to continue the exploration, evaluation and development of its properties; and obtaining certain government approvals or proceeds from the disposal of properties. Changes in future conditions could require material impairment of the carrying value of the deferred exploration and evaluation expenses. Although the Company has taken steps to verify title to its mining properties on which it is currently conducting exploration, evaluation and development work, in accordance with industry standards, these procedures do not guarantee the Company’s title. Property title may be subject to unregistered prior agreements and non-compliance with regulatory requirements.

These financial statements have been prepared on the basis of accounting principles applicable to a going concern, which contemplates the realization of assets and settlement of liabilities in the normal course of business as they come due. In assessing whether the going concern assumption is appropriate, Management takes into account all available information about the future, which is at least, but not limited to twelve months from the end of the reporting period. As at March 31, 2020, the Company had negative working capital of $13,706,838 (including a cash balance of $6,650,818), an accumulated deficit of $44,413,863 and had incurred a loss of $4,427,185 for the nine-month period ended March 31, 2020. As the Company is in the development stage for the Horne 5 Project, it has not recorded any revenues from operations and has no source of operating cash flow, with the exception of the milestone payments under the silver stream agreement (the “Stream Agreement”) signed on February 27, 2019 with Osisko Gold Royalties (“Osisko”), a shareholder with significant influence over the Company and therefore a related party (Note 8).

The working capital as at March 31, 2020 will not be sufficient to meet the Company’s obligations, commitments and budgeted expenditures through March 31, 2021. Management is aware, in making its assessment, of material uncertainties related to events and conditions that may cast a significant doubt upon the Company's ability to continue as a going concern as described in the preceding paragraph, and accordingly, the appropriateness of the use of accounting principles applicable to a going concern. These financial statements do not reflect the adjustments to the carrying values of assets and liabilities, expenses and balance sheet classifications that would be necessary if the going concern assumption was not appropriate. These adjustments could be material.

March 2020 was marked by the severity of the Coronavirus global outbreak which has triggered a significant negative effect on global financial markets. The extent and duration of impacts that the Coronavirus may have on the Company’s operations including suppliers, service providers, employees and on global financial markets limiting our ability to access financing is not known at this time but could be material. The Company is monitoring developments in order to be in a position to take appropriate action.

The Company’s ability to continue future operations and fund its planned development activities at the Horne 5 Deposit is dependent on Management’s ability to secure third parties’ approvals and additional financing in the future. Any funding shortfall may be met in the future in a number of ways, including, but not limited to, achieving the next milestones of the Stream Agreement and the issuance of debt or equity instruments. While Management has been successful in securing financing in the past (see Notes 4, 8, 9 and 10), there can be no assurance that it will be able to do so in the future or that these sources of funding or initiatives will be available to the Company or that they will be available on terms which are acceptable to the Company. If Management is unable to obtain new funding, the Company may be unable to continue its operations as expected, and amounts realized for assets might be less than the amounts reflected in these financial statements.

6

Falco Resources Ltd.

Notes to the Condensed Consolidated Interim Financial Statements For the three-month and nine-month periods ended March 31, 2020 and 2019 (Unaudited) (Expressed in Canadian Dollars)

2. Basis of presentation

These unaudited condensed consolidated interim financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”) applicable to the preparation of interim financial statements, including International Accounting Standard (“IAS”) 34, Interim Financial Reporting . These condensed consolidated interim financial statements should be read in conjunction with the annual audited financial statements of the Company for the year ended June 30, 2019, which have been prepared in accordance with IFRS as issued by the IASB.

These condensed consolidated interim financial statements were approved by the Company's Board of Directors (the “Board”) on May 27, 2020.

The policies applied in these condensed consolidated interim financial statements are the same accounting policies and methods as those in Falco’s most recent audited annual financial statements except as noted below:

Impact on financial statements IFRS 16 Leases

Effective July 1, 2019, the Company has adopted IFRS 16 on a retrospective basis without restatement of comparative periods in accordance with the transitional provisions of IFRS 16. IFRS 16 sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract, which is the customer (“lessee”) and the supplier (“lessor”). IFRS 16 replaces IAS 17 Leases , and related interpretations. Save for limited exceptions, all leases result in the lessee obtaining the right to use an asset at the start of the lease and, if lease payments are made over time, also obtaining financing. Accordingly, IFRS 16 eliminates the classification of leases as either operating leases or finance leases as is required by IAS 17 and, instead, introduces a single lessee accounting model. Applying that model, a lessee is required to recognize:

• (i) assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value; and (ii) depreciation of lease assets separately from interest on lease liabilities in the statement of loss and comprehensive loss.

The adoption of IFRS 16 did not have a significant effect on the date of initial application.

Basis of consolidation

On March 27, 2020, the Company acquired all of the issued and outstanding common shares of Golden Queen (see Note 4). The financial statements of Golden Queen are included in the consolidated financial statements from the date that control was obtained. The accounting policies of Golden Queen were changed when necessary to align them with the policies adopted by the Company.

Inter-company balances and transactions, and any unrealized income and expenses arising from inter-company transactions, are eliminated in preparing the consolidated financial statements.

3. Judgments, estimates and assumptions

The preparation of financial statements in conformity with IFRS requires the Company to make judgments, estimates and assumptions on reported amounts of assets and liabilities, and reported amounts of expenses. The estimates and 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 be substantially different. The critical accounting, judgments, estimates and assumptions are the same as those in our most recent audited annual financial statements.

7

Falco Resources Ltd.

Notes to the Condensed Consolidated Interim Financial Statements For the three-month and nine-month periods ended March 31, 2020 and 2019 (Unaudited)

(Expressed in Canadian Dollars)

4 . Acquisition of Golden Queen

On March 27, 2020, the Company acquired all of the issued and outstanding common shares of Golden Queen, which was completed by way of a statutory plan of arrangement under the provisions of the Business Corporations Act (British Columbia) (the “Arrangement“). Under the terms of the Arrangement, each former shareholder of Golden Queen received 1.35 of a common share of Falco in exchange for each common share of Golden Queen held immediately prior to the Arrangement. The Company issued 18,268,560 common shares and incurred $221,848 of transaction costs related to this acquisition.

The transaction has been accounted for as an asset acquisition as Golden Queen does not meet the definition of a business under IFRS 3 Business Combinations . As such, IFRS 2 Share-based Payment has been applied. The assets acquired and liabilities assumed were recognized at their estimated fair value at the acquisition closing date, i.e. March 27, 2020. Acquisitionrelated transaction costs ($221,848) were expensed in the consolidated statement of loss and comprehensive loss. The following table shows the purchase price allocation between the assets acquired and liabilities assumed, based on the fair value of the total consideration paid at the transaction closing date.

paid at the transaction closing date.
	$
Fair value of consideration paid:
Commonshares	4,300,000
	4,300,000
Allocation of consideration paid to net assets
acquired:
Cash	4,776,161
Other current assets	40,016
Current liabilities	(516,177)
	4,300,000

5. Property, plant and equipment

Cost Balance – June 30, 2018 Additions Capitalized borrowing costs (Note 8) Transfer of Relocation Project costs Balance–June 30,2019 Additions Capitalized borrowing costs (Notes 8 and 10) Balance– March31,2020 Accumulated Depreciation Balance – June 30, 2018 Depreciation Depreciation capitalized to exploration and evaluation assets Balance–June 30,2019 Depreciation Depreciation capitalized to exploration and evaluation assets Balance– March31,2020 Carrying Amounts At June 30, 2019 At March 31, 2020	Mining equipment	Mining equipment	Mining equipment	Mining equipment	Mining equipment	Land and buildings Construction inprogress Office and other equipment Total	Land and buildings Construction inprogress Office and other equipment Total	Land and buildings Construction inprogress Office and other equipment Total	Land and buildings Construction inprogress Office and other equipment Total	Land and buildings Construction inprogress Office and other equipment Total	Land and buildings Construction inprogress Office and other equipment Total	Land and buildings Construction inprogress Office and other equipment Total	Land and buildings Construction inprogress Office and other equipment Total	Land and buildings Construction inprogress Office and other equipment Total	Land and buildings Construction inprogress Office and other equipment Total	Land and buildings Construction inprogress Office and other equipment Total	Land and buildings Construction inprogress Office and other equipment Total	Land and buildings Construction inprogress Office and other equipment Total
	$ 16,828,932					$ 37,943,360					$ $ $ 45,763,434 433,573 100,969,299
		1,041,771					3,123,341			2	2,972,440		24,171			7,161,723
				- -					-		1,115,576			- -		1,115,576
						(22,500,000)					2,500,000						-
	17,870,703					18,566,701					72,351,450 457,744 109,246,598
			44,038					67,490			3,545,104			- -		3,656,632
				-					-		3,198,744					3,198,744
	17,914,741					18,634,191					79,095,298 457,744 116,101,974
	- - -					- - -					- 277,836 277,836 - 16,732 16,732 - 32,407 32,407
	-					-					- 326,975 326,975
	- -					- -					- 8,316 8,316 - 20,434 20,434
	-					-					- 355,725 355,725
	17,870,703 17,914,741					18,566,701 18,634,191					72,351,450 130,769 108,919,623 79,095,298 102,019 115,746,249

8

Falco Resources Ltd.

Notes to the Condensed Consolidated Interim Financial Statements For the three-month and nine-month periods ended March 31, 2020 and 2019 (Unaudited)

(Expressed in Canadian Dollars)

6 . Exploration and evaluation assets

The Company has incurred the following costs on its exploration and evaluation assets:

	For the nine-monthperiod ended March 31, 2020 Central Camp(i) Otherproperties(ii) Total
Balance – July 1, 2019 Compensation Drilling and data compilation Geology Geophysics Administrative and other Total expenditures for the period Refundable tax credits Total for the period, net of tax credits Write-offs for the period(iii) Balance – March 31, 2020	$ $ $ 12,251,099 8,919,722 21,170,821 6,803 41,377 48,180 8,077 80,035 88,112 - 38,757 38,757 16,335 127,122 143,457 11,489 125,993 137,482 42,704 413,284 455,988 - (159,706) (159,706) 42,704 253,578 296,282 (48,944) (1,117,137) (1,166,081) 12,244,859 8,056,163 20,301,022
	For theyear ended June 30, 2019
	Central Camp(i) Otherproperties(ii) Total
Balance – July 1, 2018 Compensation Drilling and data compilation Geology Geophysics Administrative and other Total expenditures for the period Refundable tax credits Total for the period, net of tax credits Write-offs for the period(iii) Balance – June 30, 2019	$ $ $ 14,009,617 8,298,657 22,308,274
	81,368 152,852 234,220 1,825,074 210,943 2,036,017 15,511 213,834 229,345 36,626 302,338 338,964 56,818 332,963 389,781
	2,015,397 1,212,930 3,228,327 23,191 (6,446) 16,745
	2,038,588 1,206,484 3,245,072 (3,797,106) (585,419) (4,382,525)
	12,251,099 8,919,722 21,170,821

(i) The Central Camp is located north of the Horne 5 Project and covers an area of approximately 289 square kilometers, including many former gold and base metal producers.

(ii) Including the Noranda Camp properties.

(iii) During the nine-month period ended March 31, 2020 and the year ended June 30, 2019, the Company wrote-off 100% of the capitalized historical costs related to specific areas where claims are not expected to be renewed, where the Company has decided to discontinue exploration and evaluation activities or the assets carrying amount exceeds its recoverable amount.

7. Accounts payable and accrued liabilities

Accounts payable and accrued liabilities
	March 31, 2020 June 30, 2019
Trade payables and accrued liabilities Holdbacks payable Short-term payable on the purchase of property Interest payable on the Secured Loan (Note 10)	$ $ 5,031,400 2,724,061 - 210,074 946,900 946,900 939,452 240,988
	6,917,752 4,122,023

In September 2014, the Company entered into a five-year option agreement with the City of Rouyn-Noranda (the “City”) to acquire surface rights above or near the Horne 5 Deposit. This option agreement was extended for an additional five years in January 2020. On June 29, 2017, the Company exercised part of this option agreement, purchasing a property for $2,946,900. On October 28, 2019, the City and Falco agreed to extend the payment date of the remaining amount payable of $946,900 to January 1, 2021.

9

Falco Resources Ltd.

Notes to the Condensed Consolidated Interim Financial Statements For the three-month and nine-month periods ended March 31, 2020 and 2019 (Unaudited)

(Expressed in Canadian Dollars)

8. Contract Liability

On February 27, 2019, the Company completed the Stream Agreement with Osisko, whereby Osisko agreed to provide the Company with staged payments totaling up to $180 million, toward the funding of the development of the Horne 5 Project, payable as follows:

• First deposit of $25,000,000 on closing of the Stream Agreement, net of any amounts owing by the Company to Osisko including the repayment of the principal amount ($10,000,000) of the loan granted in May 2016, the principal amount of the $10,000,000 loan granted in September 2018 (Note 10), amounts payable ($2,750,000) for professional services rendered and transaction costs ($600,000);

• Second deposit of $20,000,000 upon the Company receiving all necessary material third-party approvals, licenses, rights of way, and surface rights;

• Third deposit of $35,000,000 following receipt of all material permits required for the construction of a mine at the Horne 5 Project, a positive construction decision for the Horne 5 Project, and raising a minimum of $100,000,000 in equity, joint venture or any other non-debt financing for the construction of the mine;

• Fourth deposit of $60,000,000 upon the total projected capital expenditure for the Horne 5 Project having been demonstrated to be financed; and

• Optional fifth deposit of $40,000,000 at the sole election of Osisko to increase the stream percentage, payable concurrently with the fourth deposit.

Under the terms of the Stream Agreement, Osisko will purchase 90% of the payable silver from the Horne 5 Project, increasing to 100% of the payable silver from the Horne 5 Project in the event the optional fifth deposit is paid. In exchange for the silver delivered under the Stream Agreement, Osisko will pay the Company ongoing payments equal to 20% of the spot price of silver on the day of delivery, subject to a maximum payment of USD$6.00 per silver ounce. The silver produced from the Horne 5 Project and properties within a 5 km area of interest will be subject to the Stream Agreement.

The Stream Agreement was subject to a right of first refusal in favor of Glencore Canada Corporation (“Glencore Canada”), which right was not exercised.

On January 31, 2020, the Company and Osisko agreed to amend the Stream Agreement, whereby Osisko agreed to postpone by one year each of the deadlines granted to Falco to achieve milestones set as condition precedent to Osisko funding the remaining staged payments and certain other deadlines. Further to this contract modification, the Company revised the implied interest rate of the Stream Agreement from 13% to 12.8% to align the modified timing of cash flows to the revised production schedule.

The breakdown of the Contract Liability is as follows:

down of the Contract Liability is as follows:
	$
First deposit of the Contract Liability	25,000,000
Accretionofthe ContractLiability’sfinancing component	1,115,576
Balance at June 30, 2019	26,115,576
Accretion of the Contract Liability’s financingcomponent	2,677,700
Balance at March 31, 2020	28,793,276

Under IFRS 15, the Stream Agreement is considered to have a significant financing component on which an implied interest rate is accrued and added to the Contract Liability, to be amortized once the Stream begins to be paid down. Under these rules, the Company reports notional non-cash interest, which is subject to capitalization to property, plant and equipment as borrowing costs, at each financial reporting date based on the implied interest rate at the time that the Stream Agreement was consummated and/or modified and a corresponding amount is added to the Contract Liability. This accrued interest is not a contractual obligation but is intended to allocate the cost of the Stream Agreement over the period it is outstanding. This accrual is a non-cash item and is reflected as such on the statement of cash flows. The Contract Liability including the accrued interest will be brought into revenue over the term of the Stream Agreement, which corresponds to the life of mine.

10

Falco Resources Ltd.

Notes to the Condensed Consolidated Interim Financial Statements For the three-month and nine-month periods ended March 31, 2020 and 2019 (Unaudited)

(Expressed in Canadian Dollars)

8. Contract Liability (continued)

As of March 31, 2020, the Company has incurred $1,728,528 of transaction costs relating to the Contract Liability ($1,728,528 as of June 30, 2019), which is accounted for as other non-current assets on the balance sheet.

Pursuant to the Stream Agreement, the Company agreed to pay a $2,000,000 capital commitment fee. The fee is payable upon Osisko funding the third deposit under the Stream Agreement.

Falco’s obligations towards Osisko with respect to the Stream Agreement is secured by a deed of hypothec for a maximum of $600 million.

9. Convertible debenture

On June 29, 2018, the Company closed a financing transaction (the “Convertible Debenture”) with Osisko for $7,000,000. Under the terms of the Convertible Debenture, Osisko purchased a secured debenture (the “Debenture”) having a principal amount of $7,000,000.

On November 29, 2018, the Debenture was converted into 12,104,444 units of the Company (the “Converted Units”). Each Converted Unit consists of one common share of the Company (“Common Share”) and one-half of one common share purchase warrant (“Warrant”). Each whole Warrant shall entitle the holder to purchase one Common Share, subject to customary antidilution clauses, at a price of $0.75 for a period of thirty-six months from the date the Converted Units were issued.

Gross proceeds from the Converted Units were allocated between the Common Shares ($6,536,400) and the Warrants ($463,600), based on the fair value of the Common Shares at the date of the closing of the Convertible Debenture, with the residual value of the Converted Units allocated to the Warrants. Issue costs of $161,316 were allocated to the Converted Units, of which $151,034 were allocated to the Common Shares and $10,282 were allocated to the Warrants, based on their respective allocated proceeds.

10. Secured Loan

On September 10, 2018, Falco closed a secured senior loan agreement with Osisko (the “September Secured Loan”). Under the terms of the September Secured Loan, Osisko provided the Company with a loan for $10,000,000 (the "Amount"). The September Secured Loan had an initial maturity date of December 31, 2018, which was amended to February 28, 2019 on December 19, 2018. Interest was payable on the Amount at a rate per annum that was equal to 7%, compounded quarterly and accrued interest was payable upon repayment of the Amount. The Amount was repaid on the closing date of the Stream Agreement (see Note 7) and the interest payable was settled through the issuance of common shares of the Company. The transaction costs incurred on the September Secured Loan totaled $44,600.

On February 22, 2019, Falco closed a secured senior loan agreement with Osisko (the “Secured Loan”) for $10,000,000 (the “Principal Amount”). The Secured Loan had an initial maturity date of December 31, 2019. On November 22, 2019, the Secured Loan was amended, increasing the Principal Amount by $5,900,000 (the “Increased Principal Amount”) to $15,900,000 (the “Amended Principal Amount”) and the maturity date was extended to December 31, 2020. Osisko was entitled to withhold and set-off from the Increased Principal Amount a sum of $881,131, representing the then current accounts payable owing to Osisko by the Corporation, so that, on a net basis, Osisko made an amount of $5,018,869 available to Falco for withdrawal. Under the terms of the Secured Loan, interest shall be payable on the Amended Principal Amount at a rate per annum that is equal to 7%, compounded quarterly and accrued interest shall be payable upon repayment of the Amended Principal Amount. A portion of the Secured Loan’s Amended Principal Amount is directly attributable to the acquisition or construction of a qualifying asset, as such these borrowing costs are capitalized to property, plant and equipment.

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Falco Resources Ltd.

Notes to the Condensed Consolidated Interim Financial Statements For the three-month and nine-month periods ended March 31, 2020 and 2019 (Unaudited)

(Expressed in Canadian Dollars)

11. Warrants

The following table details the changes in the Company’s warrants:

	Number of Warrants Weighted Average Exercise Price
Balance – June 30, 2018 Issued Expired Balance – June 30, 2019 Balance – March 31, 2020	$ 16,540,042 1.61 6,052,222 (16,190,042) 0.75 1.62 6,402,222 0.77 6,402,222 0.77

12. Share-based compensation

Share options

The following table summarizes information about the movement of the share options:

	Number of Options Weighted Average Exercise Price
Balance – June 30, 2018 Granted Exercised Forfeited Expired Balance – June 30, 2019 Forfeited Expired Balance – March 31, 2020 Options exercisable – March 31, 2020	$ 10,348,371 0.65 7,369,000 0.30 (1,262,638) 0.25 (410,172) 0.93 (2,163,204) 0.43
	13,881,357 0.52
	(430,322) 0.96 (2,256,683) 0.60
	11,194,352 0.49
	3,094,752 0.84

Share-based compensation for the three-month period ended March 31, 2020 amounted to $211,025 ($130,114 for the threemonth period ended March 31, 2019) of which $39,633 ($26,238 for the three-month period ended March 31, 2019) was capitalized to construction in progress and $1,400 ($5,148 for the three-month period ended March 31, 2019) was capitalized to exploration and evaluation assets.

Share-based compensation for the nine-month period ended March 31, 2020 amounted to $605,248 ($815,758 for the ninemonth period ended March 31, 2019) of which $92,713 ($106,097 for the nine-month period ended March 31, 2019) was capitalized to construction in progress and $1,400 ($25,004 for the nine-month period ended March 31, 2019) was capitalized to exploration and evaluation assets.

13. Net loss per share

The calculation of basic and diluted loss per share for the three-month and nine-month periods ended March 31, 2020 was based on the net loss attributable to shareholders of $1,446,673 and $4,427,185, respectively ($992,708 and $4,026,543 for the three-month and nine-month periods ended March 31, 2019, respectively). The weighted average number of common shares outstanding for the three-month and nine-month periods ended March 31, 2020 was 208,681,750 and 208,144,461, respectively (203,595,703 and 195,562,907 common shares for the three-month and nine-month periods ended March 31, 2019, respectively). As a result of the net loss for the three-month and nine-month periods ended March 31, 2020 and 2019, all potentially dilutive common shares (Notes 11 and 12) are deemed to be antidilutive and thus diluted net loss per share is equal to the basic net loss per share for these periods.

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Notes to the Condensed Consolidated Interim Financial Statements For the three-month and nine-month periods ended March 31, 2020 and 2019 (Unaudited) (Expressed in Canadian Dollars)

Falco Resources Ltd.

14. Key management and related party transactions

Key management includes directors (executive and non-executive) and certain officers of the Company. The compensation paid or payable to key management for employee services is presented below for the three-month and nine-month periods ended March 31, 2020 and 2019:

March 31, 2020 and 2019:
	Three-months ended March 31,	Nine-months ended March 31,
(1) Including consulting fees. Salaries and short-term employee benefits(1) Share-based compensation	2020 2019 $ $ 463,060 267,306 169,036 88,272	2020 2019
		$ $ 889,426 1,147,670 609,269 634,372
	632,096 355,578	1,498,695 1,782,042

Related party transactions and balances, not otherwise disclosed, are summarized below:

During the three-month and nine-month periods ended March 31, 2020, amounts of $535,000 and $1,360,000, respectively, were invoiced by Osisko for professional services and access to offices ($237,887 and $1,064,470, respectively, for the threemonth and nine-month periods ended March 31, 2019). An amount of $780,000 is included in accounts payable and accrued liabilities as at March 31, 2020 ($226,785 as at June 30, 2019).

On September 10, 2018, the Company entered into the September Secured Loan with Osisko (Note 10). The September Secured Loan was reimbursed on February 27, 2019. Interest expense on the September Secured Loan for the three-month period ended March 31, 2019 was $107,767 ($327,142 for the nine-month period ended March 31, 2019).

On February 22, 2019, the Company entered into the Secured Loan with Osisko (Note 10). As at March 31, 2020, interest payable on the Secured Loan amounted to $939,452 and is included in accounts payable and accrued liabilities on the balance sheet ($240,988 as at June 30, 2019). Interest incurred on the Secured Loan for the nine-month period ended March 31, 2020 totaled $698,464 ($177,420 was expensed to the statement of loss and comprehensive loss and $521,044 was capitalized to property, plant and equipment).

During the three-month and nine-month periods ended March 31, 2020, amounts of $235,000 and $535,000, respectively, were invoiced to associates of Osisko for professional services provided by the Company ($340,000 and $680,000, respectively, for the three-month and nine-month periods ended March 31, 2019), which have been recorded as cost recoveries in the statement of loss and comprehensive loss.

15. Fair value of financial instruments

The Company has no financial assets and no financial liabilities at fair value in the balance sheets as at March 31, 2020 and June 30, 2019.

Financial instruments that are not measured at fair value on the balance sheets are represented by cash, restricted cash, accounts receivable, accounts payable and accrued liabilities and the Secured Loan. The fair values of these instruments approximate their respective carrying values due to their short-term nature.

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Notes to the Condensed Consolidated Interim Financial Statements For the three-month and nine-month periods ended March 31, 2020 and 2019 (Unaudited) (Expressed in Canadian Dollars)

Falco Resources Ltd.

16. Liquidity risk

Liquidity risk is the risk that the Company will not be able to meet the obligations associated with its financial liabilities. The Company manages the liquidity risk by continuously monitoring actual and projected cash flows, taking into account the requirements related to its investment commitments and mining properties and matching the maturity profile of financial assets and liabilities. The Board reviews and approves any material transaction out of the ordinary course of business, including proposals on mergers, acquisitions or other major investments or divestitures. As at March 31, 2020, cash is comprised of bank balances. As described in Note 1, the Company estimates that with its liquidity position as at March 31, 2020, it does not have enough funds available to meet its financial liabilities for the next year.

The following table summarizes the Company’s contractual commitments as at March 31, 2020:

		Between one
	Less than	and three	More than
	oneyear	years	threeyears
	$	$	$
Accounts payable and accrued liabilities	5,978,300	-	-
Secured Loan, including interest to maturity	17,750,000	-	-

The following table summarizes the Company’s contractual commitments as at June 30, 2019:

		Between one
	Less than	and three	More than
	oneyear	years	threeyears
	$	$	$
Accounts payable and accrued liabilities	3,881,035	-	-
Secured Loan, including interest to maturity	10,600,000	-	-

17. Supplemental disclosure – Statements of cash flows

	Three-months ended March 31,	Nine-months ended March 31,
Property and equipment acquisitions included in accounts payable and accrued liabilities and long-term payable on the purchase of property Beginning of period End of period Exploration and evaluation asset expenditures included in accounts payable and accrued liabilities Beginning of period End of period Share issue costs included in accounts payable and accrued liabilities Beginning of period End of period Depreciation capitalized in assets Interest income received Other non-current assets included in accounts payable and accrued liabilities Beginning of period End of period	2020 2019 $ $ 2,816,391 8,382,901 2,884,187 2,968,645 25,280 2,313,983 150,634 186,483 - - - - 6,215 7,626 21,785 22,950 - 753,080 - 637,109	2020 2019
		$ $ 1,459,782 17,360,519 2,884,187 2,968,645 - 3,652,179 150,634 186,483 - 28,734 - - 20,434 25,528 60,546 74,753 354,532 - - 637,109

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Notes to the Condensed Consolidated Interim Financial Statements For the three-month and nine-month periods ended March 31, 2020 and 2019 (Unaudited) (Expressed in Canadian Dollars)

Falco Resources Ltd.

18. Commitments

Glencore Canada

As per the purchase agreement dated March 28, 2011, assigned to the Company in September 2012 and considering, amongst other, further transactions among the Company and Glencore Canada as well as among Glencore Canada and BaseCore Metals LP (“Basecore”), Glencore Canada remains the owner of an off-take option to purchase production from the Horne 5 Project and BaseCore owns a 2% NSR royalty on the Horne 5 Project.

Falco’s obligations towards Glencore Canada and BaseCore, including, respectively, with respect to the off-take option and the royalty interest, as well as the payment of any damages to Glencore Canada caused by Falco, are secured by deeds of hypothec for a maximum of $100 million (Glencore Canada) and $45 million (BaseCore).

Furthermore, the Horne 5 Project is located adjacent to Glencore Canada’s operations and the Company is contractually bound to seek authorizations from time to time from Glencore Canada to perform certain activities, which may affect or impact their operations.

- “ ” City of Rouyn Noranda (the City )

On September 12, 2017, the Company concluded the signing of a Memorandum of Understanding (the “MOU”) with the Commission scolaire de Rouyn-Noranda (the “School Board”) to acquire the Pavilion located on the site of the Horne 5 Project. As per the MOU, Falco became the owner of the Pavilion upon completion of a relocation program for the current Pavilion activities (the “Relocation Project”). As per the Relocation Project, the Company transferred the Pavilion’s activities to the Complexe La Source-Polymétier (the “Complexe”) and Falco funded and executed the expansion of the Complexe to accommodate these additional activities. Falco transferred the expanded Complexe to the School Board on June 28, 2018, completing the Relocation Project on time and on budget (relocation and construction costs totaled $22.5 million). The Company has no more obligations towards the School Board.

As the Complexe was constructed on property owned by the City and where sports and community activities were undertaken, Falco concluded an agreement with the City in December 2018, which was amended in August 2019, to finance and build infrastructure to relocate such activities no later than June 1, 2021 for an amount not to exceed $2.5 million.

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