EX-99.1 2 exhibit99-1.htm FINANCIAL STATEMENTS FOR THE THIRD QUARTER ENDED SEPTEMBER 30, 2008 Filed by sedaredgar.com - Quaterra Resources Inc. - Exhibit 99.1

EXHIBIT 99.1


Consolidated Interim Financial Statements

(An Exploration Stage Company)

For the Nine Months Ended September 30, 2008

(Unaudited and Expressed in Canadian Dollars)

 

 

Notice of No Auditor Review

The accompanying unaudited consolidated interim financial statements of Quaterra Resources Inc. have been prepared by, and are the responsibility of, the Company’s management. The Company’s independent auditor has not performed a review of these consolidated financial statements.


Quaterra Resources Inc.
(An Exploration Stage Company)
Consolidated Balance Sheets
(Unaudited and Expressed in Canadian Dollars)

    Unaudited     Audited  
    September 30, 2008     December 31, 2007  
Assets            
Current            
       Cash and cash equivalents $                        609,674   $                          3,389,900  
       Other receivables   432,350     268,869  
       Prepaid and deposits   268,812     62,854  
       Amount due from Joint Venture Partner (Note 10(c))   382,556     581,124  
    1,693,392     4,302,747  
Prepaid and deposits   1,482     20,814  
Equipment (Note 4)   228,498     180,452  
Mineral properties (Note 5)   30,135,280     19,554,706  
Reclamation bonds   259,794      139,492  
Total Assets $                  32,318,446   $                       24,198,211  
             
Liabilities            
Current            
       Accounts payable and accrued liabilities $                     1,085,739   $                          1,079,779  
       Due to related parties   38,594     86,391  
       Current portion of promissory note (Note 5(h))   292,655     270,050  
    1,416,988     1,436,220  
Promissory note   –     270,050  
Total Liabilities   1,416,988     1,706,270  
             
             
Shareholders' Equity            
Share capital (Note 6)   48,293,645     36,875,448  
Commitment to issue shares (Note 9(d))   15,000     –  
Contributed surplus   9,458,199     7,409,795  
Deficit   (26,865,386 )   (21,793,302 )
Total Shareholders' Equity   30,901,458     22,491,941  
Total Liabilities and Shareholders' Equity $                  32,318,446   $                       24,198,211  
             
Commitments (Note 9)            
Subsequent events (Note 10)            

Approved on behalf of the
Board of Directors:

  “Thomas Patton” “Robert Gayton”
  Thomas Patton Robert Gayton

The accompanying notes are an integral part of the consolidated financial statements


Quaterra Resources Inc.
(An Exploration Stage Company)
Consolidated Statements of Operations and Deficit
(Unaudited and Expressed in Canadian Dollars)

    Three months ended     Nine months ended  
    September 30,     September 30,  
    2008     2007     2008     2007  
Exploration Costs, net of recoveries $             267,439   $              67,843   $             455,274   $            197,885  
                         
General Administrative Expenses                        
       Administration   65,865     30,000     181,665     90,000  
       Amortization   20,476     13,843     57,547     31,029  
       Consulting   148,889     91,072     539,197     227,842  
       Directors and officers fees   31,666     19,808     57,166      36,308  
       Investor relations and communications   116,907     83,183     356,929     319,651  
       Office and general   153,141     41,794     398,940     138,616  
       Professional fees   118,464     23,361     537,885     195,078  
       Regulatory fees and taxes   28,452     4,378     131,605     53,465  
       Salaries and benefits   106,482     56,133     326,046     172,042  
       Stock based compensation (Note 6(c))   305,942     5,834,303     2,428,55     6,123,013  
       Transfer agent   9,295     5,888     22,475     19,186  
       Travel and promotion   47,944     35,931     123,458     130,848  
    1,153,523     6,239,694     5,161,468     7,537,078   
                         
Operating Expenses   1,420,962     6,307,537     5,616,742     7,734,963  
                         
Other Income                        
       Foreign exchange gain(loss)   432,199     (242,974 )   432,518     (733,832 )
       Interest    17,572     54,205     53,169     207,329  
       Joint venture administration fee   33,570     –      58,971     –   
    483,341     (188,769 )   544,658     (526,503 )
                         
                         
Loss for the period               (937,621 )   (6,496,306 )             (5,072,084 )   (8,261,466 )
                         
Deficit, beginning of period          (25,927,765 )   (16,255,258 )           (21,793,302 )   (14,490,098 )
                         
Deficit, end of period $      (26,865,386 ) $      (22,751,564 ) $       (26,865,386 ) $      (22,751,564 )
                         
Loss per share – basic and diluted $                 (0.01 ) $                 (0.08 ) $                  (0.06 ) $                 (0.10 )
                         
Weighted average number of shares outstanding   87,402,435     79,428,158     85,922,462     78,871,925  

The accompanying notes are an integral part of the consolidated financial statements


Quaterra Resources Inc.
(An Exploration Stage Company)
Consolidated Statements of Cash Flows
(Unaudited and Expressed in Canadian Dollars)

    Three months ended     Nine months ended  
    September 30,     September 30,  
    2008     2007     2008     2007  
Operating Activities                        
Net loss for the period $             (937,621 ) $         (6,496,306 ) $      (5,072,084 ) $      (8,261,466 )
Items not involving cash:                        
       Amortization   20,476     13,843     57,547     31,029  
       Commitment to issue shares for services                   (22,500 )   –     15,000     –  
       Stock based compensation    305,942     5,834,303     2,428,555     6,123,013  
       Shares issued for services   45,000     22,500     67,500     45,000  
       Foreign exchange on promissory note   1,869     –     22,603     –  
                  (586,834 )   (625,660 )          (2,480,879 )   (2,062,424 )
Changes in non–cash working capital                         
       Accounts receivable                   (38,612 )   (67,964 )             (163,481 )   (108,580 )
       Prepaid and deposits   25,613     (14,091 )             (186,626 )   (16,106 )
       Accounts payable and accrued liabilities                 (101,156 )   (346,298 )               (35,797 )   (153,682 )
       Due to related parties                   (21,804 )   (3,600 )               (47,797 )   (13,107 )
Cash used in operating activities                 (722,793 )   (1,057,613 )          (2,914,580 )   (2,353,899 )
                         
Financing Activities                        
       Shares issued for cash, net of issue costs   54,581     5,698,010     10,970,546     6,534,660   
       Payment of promissory note                 (270,050 )   –               (270,050 )   –   
Cash provided by financing activities                 (215,469 )   5,698,010     10,700,496     6,534,660   
                         
Investing Activities                        
       Expenditures on mineral properties              (3,887,813 )   (2,606,251 )        (10,538,816 )   (6,878,763 )
       Due from Joint Venture partner                     (9,904 )   (79,243 )   198,568     (35,800 )
       Purchase of equipment   –     (62,064 )             (105,592 )   (121,761 )
       Purchase of reclamation bonds                 (100,587 )   (3,663 )             (120,302 )   (49,393 )
Cash used in investing activities              (3,998,304 )   (2,751,221 )        (10,566,142 )   (7,085,717 )
                         
                         
Increase (decrease) in cash during the period              (4,936,566 )   1,889,176            (2,780,226 )   (2,904,956 )
                         
Cash and cash equivalents, beginning of period    5,546,240     4,318,600     3,389,900     9,112,732  
                         
Cash and cash equivalents, end of period $              609,674   $          6,207,776   $           609,674   $       6,207,776  
Supplemental Information                        
       Interest received $                17,572   $               53,101   $             53,169   $          212,318  
       Mineral property cost included in accounts payable $              942,370   $             247,153   $           942,370   $          247,153  
       Share issued for services $                  7,500   $               22,500   $             67,500   $            45,000  
       Share issue costs $              555,319   $                    756   $           555,319   $              6,316  
       Share issued for mineral property $                      –   $          1,201,000   $                  –   $       1,201,000  

The accompanying notes are an integral part of the consolidated financial statements


Quaterra Resources Inc.
(An Exploration Stage Company)
Consolidated Statements of Shareholders’ Equity
(Unaudited and Expressed in Canadian Dollars)

    Common Shares     Commitment to        Share       Contributed               
    Shares     Amount     Issue Shares      Subscription      Surplus        Deficit      Total   
Balance as at December 31, 2006   78,104,820   $      27,861,058   $                       –   $        (17,500 ) $            3,709,557   $           (14,490,098 )  $          17,063,017  
 Common shares issued for cash during the year:                                           
      Exercise of warrants     2,480,785     5,581,766                             5,581,766  
      Exercise of options    2,108,500     1,288,515           17,500                 1,306,015  
 Shares issued for mineral property acquisitions    200,000     586,000                             586,000  
 Allotted for mineral property acquisitions    250,000     695,000                             695,000  
 Shares issued for services    22,900     67,500                             67,500  
 Fair value of options and warrants exercised          801,925                 (801,925 )         –   
 Share issue costs, net of future income taxes          (6,316 )                           (6,316 )
 Stock based compensation                             4,502,163           4,502,163  
 Net loss for the year                                  (7,303,204 )   (7,303,204 )
Balance as at December 31, 2007   83,167,005     36,875,448     –       –       7,409,795     (21,793,302 )   22,491,941  
 Common shares issued during the period:                                           
      Shares issued for cash, net of issue cost    3,482,500     10,414,556                             10,414,556  
      Exercise of options    744,000     555,990                             555,990  
      Shares issued for services    23,312     67,500                             67,500  
 Fair value of options exercised          380,151                 (380,151 )         –   
 Commitment to issue shares for services                15,000                                      15,000  
 Stock based compensation                             2,428,555           2,428,555  
 Net loss for the period                                  (5,072,084 )   (5,072,084 )
Balance as at September 30, 2008   87,416,817   $      48,293,645   $                 15,000   $                   –   $            9,458,199   $           (26,865,386 ) $          30,901,458  

The accompanying notes are an integral part of the consolidated financial statements


Quaterra Resources Inc.
(An Exploration Stage Company)
Consolidated Statements of Shareholders’ Equity
(Unaudited and Expressed in Canadian Dollars)

1.

Nature of Operations and Going Concern

   

Quaterra Resources Inc. (the “Company”) is an exploration stage company incorporated under the laws of British Columbia. Its shares are listed on the TSX Venture Exchange under symbol “QTA” and the NYSE Alternext under symbol “QMM”.

   

The Company and its subsidiaries are engaged in the acquisition, exploration and development of mineral properties and have not yet determined whether these mineral properties contain ore reserves. The Company has not generated any operating revenue to date and has experienced recurring operating losses.

   

The Company’s financial statements have been prepared on the basis of accounting principles applicable to a going concern which assumes the realization of assets and discharges of liabilities in the normal course of business. As of September 30, 2008, the Company had a net working capital of $276,404. The ability of the Company to meet its commitments as they become due, including completion of the acquisition, exploration and development of its mineral properties, is dependent on the Company’s ability to obtain the necessary financing. Management’s plan in this regard is to raise equity financing as required. These consolidated financial statements do not give effect to any adjustments that would be necessary should the Company not be able to continue as a going concern.

   
2.

Significant Accounting Policy Changes

   

These unaudited consolidated financial statements are prepared in accordance with Canadian generally accepted accounting principles (“GAAP”) and are consistent with the policies outlined in the Company’s audited consolidated financial statements for the year ended December 31, 2007 except as described below:

a) CICA Handbook Section 1535 - “Capital Disclosures”

Effective January 1, 2008, the Company adopted the recommendation of the CICA Handbook Section 1535, “Capital Disclosures”. Section 1535 establishes standards for disclosing information about an entity’s capital and how it is managed. The entity’s disclosure should include information about its objectives, policies and processes for managing capital and disclose whether it has complied with any capital requirements to which it is subject and the consequences of non-compliance.

As required under Section 1535, the Company’s objectives, policies and processes for managing capital are as follows:

The Company manages its common shares, options and warrants as capital. As the Company is in the exploration stage, its principal source of funds for its operations is from the issuance of common shares. The issuance of common shares requires approval of the Board of Directors. It is the Company’s objective to safeguard its ability to continue as a going concern, so that it can continue to explore its various properties for the benefits of its stakeholders. The Company primarily uses stock options to retain and provide future incentives to key employees and members of the management team. The granting of stock options is approved by the Board of Directors.


Quaterra Resources Inc.
(An Exploration Stage Company)
Consolidated Statements of Shareholders’ Equity
(Unaudited and Expressed in Canadian Dollars)

2.

Significant Accounting Policy Changes (Continued)

b) Financial Instrument CICA Handbook Section 3862 and 3863

Effective January 1, 2008, the Company also adopted the recommendations of the CICA Handbook Section 3862, “Financial Instruments – Disclosures” and Section 3863, “Financial Instruments – Presentation”. CICA Handbook Section 3862 modifies the disclosure requirements for Section 3861, “Financial Instruments - Disclosure and Presentation”, including required disclosure for a) the assessment of the significance of financial instruments for an entity’s financial position and performance; and b) the nature and extent of risks arising from financial instruments to which the Company is exposed and how the Company manages those risks. The Section requires the Company to account for certain financial assets and liabilities at fair value at each balance sheet date.

See Note 3 for disclosures related to financial instruments.

c) New Accounting Pronouncements

In February 2008, the CICA Accounting Standards Board (“AcSB”) confirmed that the use of International Financial Reporting Standards (“IFRS”) will be required in 2011 for public companies in Canada (i.e. IFRS will replace Canadian GAAP for public companies). The official changeover date will apply for interim and annual financial statements relating to fiscal years beginning on or after January 1, 2011. The transition date of January 1, 2011 will require the restatement for comparative purposes of amounts reported by the Company for the year ended December 31, 2009. While the Company has begun assessing the adoption of IFRS for 2011 or earlier, the financial reporting impact of the transition to IFRS cannot be reasonably estimated at this time.

3.

Financial Instruments

     
a.

Fair Value: As at September 30, 2008, the recorded amounts for cash and cash equivalents, other receivables, accounts payable and accrued liabilities, and due to related party approximate their fair value due to their short-term nature. The Company has designated its cash and cash equivalents as held for trading assets.

     
b.

Interest Rate Risk: The Company is not exposed to significant interest rate risk due to the short-term maturity of its monetary current assets and current liabilities.

     
c.

Credit Risk: The Company does not currently generate any revenues from sales to customers nor does it hold derivative type of instruments that would require a counterparty to fulfill a contractual obligation.

     

Financial instruments that potentially subject the Company to credit risk consist of due from its Joint Venture partner for shared exploration costs and cash and cash equivalents or short-term investment. The Company has mitigated the risks by holding the property as collateral and placing its cash and cash equivalents or short-term investment with Canadian chartered banks and U.S. commercial banks with a DBRS, Standard and Poor’s or/and Moody’s rating of single A or better.



Quaterra Resources Inc.
(An Exploration Stage Company)
Consolidated Statements of Shareholders’ Equity
(Unaudited and Expressed in Canadian Dollars)

3.

Financial Instruments (Continued)

     
d.

Currency Risk: The Company is exposed to currency risk to the extent expenditures incurred or funds received by the Company are denominated in currencies other than the Canadian dollar (primarily US dollars and Mexican pesos). The Company does not manage the currency risks through hedging or other currency management tools.

     
e.

Derivatives – Mineral Properties: The Company retains and/or has obligations related to certain carried interest rights and net smelter royalties, the value of which is derived from future events and commodity prices. These rights are derivative instruments. However, the mineral interests to which they relate are not sufficiently developed to reasonably determine value.


4.

Equipment

   

Equipment is carried at cost less accumulated amortization. Details of equipment are as follows:


            Accumulated         
      Cost     Amortization      Net Book Value  
  Computer $                        37,482   $                            14,943   $                          22,539  
  Equipment   42,327     19,488     22,839  
  Furniture   39,387     8,921     30,466  
  Software   52,452     33,147     19,305  
  Vehicles   195,140     61,791     133,349  
  September 30, 2008 $                      366,788   $                          138,290   $                        228,498  

            Accumulated         
      Cost     Amortization      Net Book Value  
  Computer $                        23,249   $                              6,916   $                          16,333  
  Equipment   34,780     14,511     20,269  
  Furniture   27,045     2,463     24,582  
  Software   35,829     22,066     13,763  
  Vehicles   140,293     34,788     105,505  
  December 31, 2007 $                      261,196   $                            80,744   $                        180,452  


Quaterra Resources Inc.
(An Exploration Stage Company)
Consolidated Statements of Shareholders’ Equity
(Unaudited and Expressed in Canadian Dollars)

5. Mineral Properties
   

The Company follows the policy of capitalizing all acquisition, exploration and development costs relating to the mineral properties. The amounts shown for mineral properties represent costs incurred to date, less recoveries; and do not necessarily reflect present or future values. These costs will be amortized against revenue from future production or written off if the property is abandoned or sold.

 

The Company has interests in several mineral resources properties in Mexico and the United States. The total capitalized deferred exploration and acquisition costs of mineral properties were as follow:


  Mineral Properties         United States        
      Uranium     MacArthur     Alaska     Yerinton     Other     Subtotal  
      Properties     Copper     Cu–Ni–Gold     Copper     Properties     United States  
  Balance, December 31, 2007 $        6,475,720   $        2,932,728   $        2,783,875   $        1,256,078   $ 1,413,048   $ 14,861,449  
                                       
  Additions:                                    
  Acquisition   569,897     286,667     51,943     189,585     197,679     1,295,771  
  Assays and surveys   38,373     538,725     186,839     127,130     12,867     903,934  
  Camp costs   65,276     177,320     11,807     5,972     3,692     264,067  
  Drilling services   1,506,713     2,010,101         36,549     –     –     3,553,363  
  Equipment rental    3,863     137,536     839     –     33     142,271  
  Exploration support   88,782     212,051     78,466     4,932     1,775     386,005  
  Field supplies    13,642     85,912     2,366     –     5,844     107,764  
  Geological services   658,397     868,835     159,732     228,161     55,568     1,970,693  
  Project management   68,779     59,552     3,913     635     –     132,879  
  Travel   26,666     31,107     12,679     2,766     1,795     75,014  
  Vehicle expneses   74,546     120,559     1,722     11,648     4,845     213,320  
      3,114,934     4,528,365     546,855     570,829     284,098     9,045,081  
  Balance, September 30, 2008 $        9,590,654   $        7,461,093   $        3,330,730   $        1,826,907   $        1,697,146   $      23,906,530  

5.

Mineral Properties (Continued)



Quaterra Resources Inc.
(An Exploration Stage Company)
Consolidated Statements of Shareholders’ Equity
(Unaudited and Expressed in Canadian Dollars)

  Mineral Properties         Mexico        
      Nieves     Crestones     Mirasol – America     Other     Subtotal  
      Silver     Gold–Silver     Gold–Silver     Properties     Mexico  
  Balance, December 31, 2007 $        2,405,889   $        1,446,523   $           682,064   $           158,781   $        4,693,257  
                                 
  Additions:                              
  Acquisition   52,143     6,101     31,154     52,513     141,911  
  Assays and surveys   74,848     –     112,061     23,216     210,125  
  Camp costs   15,570     2,600     38,725     2,787     59,682  
  Drilling services   351,521     –     360,026     –     711,548  
  Equipment rental    –     –     8,104     –     8,104  
  Exploration support   11,717     932     105,678     2,605     120,932  
  Field supplies    15,738     1,520     956     –     18,214  
  Geological services   18,333     3,321     4,689     1,249     27,592  
  Project management   54,718     9,089     95,240     26,023     185,070  
  Travel   2,237     55     18,977     26     21,293  
  Vehicle expneses   8,229     5,580     16,412     800     31,022  
      605,054     29,198     792,022     109,219     1,535,493  
  Balance, September 30, 2008 $        3,010,943   $        1,475,721   $        1,474,086   $           268,000   $        6,228,750  

  (a)

Uranium Properties, United States

     
 

Pursuant to an August 2006 agreement with Nustar Exploration LLC, the Company leased 18 claims in the Arizona strip district. The Company has paid US$90,000 acquisition costs up to date and is required to make US$100,000 on August 10, 2009.

     
 

Pursuant to a June 2005 agreement with North Exploration LLC, the Company acquired an option to purchase mining claims situated in Arizona, Utah and Wyoming. Up to September 30, 2008, the Company has paid US$165,000 and issued 600,000 common shares. The Company is required to pay US$135,000 and US$200,000 on September 6, 2009 and 2010 respectively.

     
 

In April and June 2008, new breccia pipes with high-grade uranium mineralization were discovered using a VTEM geophysical system. Additional drilling is planned later this year.

     
 

In September 2008, three environmental groups filed a lawsuit against the U.S. Secretary of Interior, the U.S. Department of Interior and U.S. Bureau of Land Management for authorizing uranium exploration on one million acres of public land near Grand Canyon. If successful, this legal action could affect the Company’s rights to explore and develop its uranium claims on Arizona Strip and economic viability of the Company’s Arizona uranium project. The Company believes the lawsuit is without legal merit and is pursuing other procedures to protect its interests.



Quaterra Resources Inc.
(An Exploration Stage Company)
Consolidated Statements of Shareholders’ Equity
(Unaudited and Expressed in Canadian Dollars)

5.

Mineral Properties (Continued)
   
(b)

MacArthur Claim, United States
   

Pursuant to an agreement entered into in October 2005 with North Exploration LLC, the Company acquired the right to earn an interest in certain unpatented mining claims covering the former MacArthur copper-oxide mine, in the Yerington district of Lyon County, Nevada. Up to September 30, 2008, the Company has paid US $210,000 and incurred US $500,000 in exploration expenditures by January 15, 2008, and may elect to acquire the property by making further payments of US$125,000 and US$2,420,000 on January 15, 2009 and 2010 respectively.
   

The Company has completed approximately 77,500 feet of drilling in 180 holes since the drilling program commenced in April 2007. At September 30, 2008, one rig was drilling on the project.
   

The Company has retained Tetra Teck Inc. of Denver, Colorado, to complete a NI43-101 compliant technical report and resource estimate for MacArthur project. The study is in progress and is expected to be completed before the end of this year. To expedite completion of the study, the drilling program will be temporarily discontinued from the middle of October until the end of the year.
   
(c)

Alaskan Properties, United States
   

The Company’s 100%-owned Duke Island Cu-Ni-PGE prospect is located in southeast Alaska. The project consists of 129 unpatented Federal lode mining claims and 11 state of Alaska mining claims that cover an area of six square miles of multiple-use lands open to mineral development. In early 2008, a survey was conducted to identify new drilling targets. The Company is currently reviewing the survey data to determine if any of the identified anomalies have potential for massive copper-nickel mineralization.
   

In October 2007, the Company acquired the Herbert Glacier gold property in the historic Juneau Gold Belt of southeast Alaska. The Herbert Glacier property consists of 91 unpatented Federal lode mining claims that host four main composite vein-fault structures with ribbon structure quartz-sulfide veins.
   
(d)

Nieves Concessions, Mexico
   

The Company owns a 50% interest in the Nieves silver property located in northern Zacatecas, Mexico. The project occurs within a northwest trending mineral belt which hosts many of the world’s premier silver deposits. The joint venture partners drilled 24 core holes totalling 6,173 meters from May to August 2008, and have defined 400-meter-long-zone of silver mineralization. All data are being analyzed and modelled in preparation for an updated NI43-101 report which will include a resource estimate. All work plans are made in consultation with the US-based Joint Venture partner Blackberry Ventures 1, LLC (“Blackberry”), which will continue to contribute its share of ongoing exploration costs.
   

During the nine months ended September 30, 2008, the Company has received US$874,752 from Blackberry in respect to its share of ongoing exploration costs that were incurred on the property.


Quaterra Resources Inc.
(An Exploration Stage Company)
Consolidated Statements of Shareholders’ Equity
(Unaudited and Expressed in Canadian Dollars)

5.

Mineral Properties (Continued)
   
(e)

Yerington, United States
   

On May 1, 2007, the Company received approval from the appropriate U.S. court to the acquisition of all Arimetco assets in the Yerington Mining District by a subsidiary of the Company. The purchase price comprises US$500,000 cash, 250,000 shares of the Company common stock and a 2% net smelter return royalty capped at US$7.5 million dollars on production from any claims owned by the Company in the Yerington and MacArthur mine areas. The original 180-day review period which began on July 13, 2007 was extended for an additional 240 day period to October 17, 2008.
   

An environmental assessment has been completed as part of the Company’s due diligence. Subject to successful completion of due diligence, the Company plans to execute the option to acquire the property and explore the property as part of its ongoing exploration drilling program at MacArthur.
   

As at September 30, 2008, the Company has paid a US$150,000 non-refundable deposit and issued 250,000 common shares for the purchase option.
   
(f)

Mirasol and Americas, Mexico
   

The Mirasol and Americas projects are located in the Municipality of Simon Bolivar, Durango, Mexico roughly halfway between the cities of Durango and Torreon in the central part of Mexico Silver Belt or Fajoa de Plata. The two projects consist of 13 exploration concessions that total 82,926 hectares (320.18 square miles) and are 100%-owned by the Company’s Mexico subsidiary Agua Tierra SA de CV.
   

A reconnaissance drilling program started in May 2008 for Mirasol project. Additional geological mapping survey, IP and magnetic surveys are planned to be followed by a second RC scout drilling to test for additional feeders and a core drilling program to test the known feeders at depth.
   

The Las Americas prospect in the far west portion of the Mirasol concessions is an extension of the San Sebastian hydrothermal system. The property encompasses an elongate, northeasterly-trending zone of hydrothermally altered rhyodacite and several large white silica “Crestones” or veins that are up to a kilometre along strike. A 2,500-meter diamond core drill program has commenced for this property.
   

The work plan for Americas is to extend the geological mapping survey east towards Mirasol, cover the identified targets with a grid IP-magnetic geophysical survey and test the best targets with a core drilling program.
   
(g)

Crestones Property, Mexico
   

The Company holds a 100% interest in a certain mineral concession located in northern Durango, Mexico.


Quaterra Resources Inc.
(An Exploration Stage Company)
Consolidated Statements of Shareholders’ Equity
(Unaudited and Expressed in Canadian Dollars)

5.

Mineral Properties (Continued)
   
(h)

East Durango, Mexico
   

On September 30, 2008, the Company and EXMIN Resources Inc. entered a joint venture agreement allowing the Company to earn a 75%-ineterest in EXMIN’s East Durango Property, Mexico.
   

The East Durango property consists of the 11,181-hectare Tecolote concession which is 100%-owned by EXMIN’s Mexico subsidiary. EXMIN’s Tecolote concession abuts and is directly north of the Company’s Mirasol-Americas projects. Under the terms of the agreement, the Company can earn 75% interest in the East Durango property by spending US$500,000 in exploration plus annual property payment to EXMIN that total US$100,000 over a four-year period. As of September 30, 2008, US$20,000 property payment has been made.
   
(i)

Cave Peak Molybdenum Prospect and Other Properties, Mexico and United States
   

In July 2008, the Company announced the acquisition of a mining lease with the General Land Office, State of Texas, on 523.746 acres in Cullberson County, Texas, covering all or parts of three breccia pipes. Historic drilling at the Main pipe identified a large mineralized system with high-grade molybdenum mineralization that is open at depth; two other nearby breccia pipes have to be evaluated.
   

Other properties of the Company include the SW Tintic, Gray Hills, Peg Leg, Carbon County, Cave Peak, Copper Canyon and Wassuk Copper properties in the United States, and Jaboncillos, Cerro Blanco, East Durango, Inde and La Reforma properties in Mexico. All these properties all are in the initial stages of exploration. Data from prior activities is limited or in the process of being acquired and studied. Total expenditures by the Company to date are minimal.
   

The Company has a promissory note of US$550,000 for its S.W. Tintic Claims in Juab County, Utah. The US $550,000 note has a term of two years starting August 29, 2007, with no interest. The Company has guaranteed full payment of this note and paid US$275,000 on August 29, 2008.

6.

Share Capital
   
a.

Common stock: authorized unlimited common shares without par value.
   

On April 16, 2008 the Company completed a non-brokered private placement of 3,482,500 units at a price of US$3.20 per unit for total proceeds of US$11,144,000. Each unit consists of one common share and one-half of one common share purchase warrant. Each whole warrant entitles the holder to purchase one common share at a price of US$4.20 per warrant share until October 17, 2009. In the event the Company’s shares trade at a closing price of greater than US$5.50 per share for a period of 15 consecutive days at any time after six months from April 16, 2008, the Company may accelerate the expiry date of the warrants by providing notice to the shareholders thereof and in such case the warrants will expire on the 30th day after the date on which such notice is given.


Quaterra Resources Inc.
(An Exploration Stage Company)
Consolidated Statements of Shareholders’ Equity
(Unaudited and Expressed in Canadian Dollars)

6.

Share Capital (Continued)


  b.

Warrants


      September 30, 2008     December 31, 2007  
            Weighted               
            Average            Weighted   
      Number of      Exercise Price      Number of      Average   
      Warrants     (US$)      Warrants     Exercise Price   
  Outstanding, beginning of period   –    $                     –     2,623,928   $                 2.25  
  Issued   1,741,250     4.20     –     –  
  Exercised    –      –     (2,480,785 )   2.25  
  Expired   –      –     (143,143 )   2.25  
  Outstanding, end of period   1,741,250   $                    4.20     –    $                   –  

  c.

Stock Options

     
 

The Company has an incentive stock option plan in place under which it is authorized to grant options to directors, executive officers, employees and consultants. Stock options are exercisable once they have vested under the terms of the grant. A summary of the Company’s options is presented below:


      September 30, 2008     December 31, 2007  
            Weighted            Weighted   
      Number of      Average      Number of      Average   
      Options     Exercise Price      Options     Exercise Price   
  Outstanding, beginning of period   5,559,500   $                    1.99     5,427,000   $                 0.92  
  Granted   2,390,000     3.31     2,261,000     3.29  
  Exercised    (744,000 )   0.75     (2,108,500 )   0.84  
  Forfeited    –     –      (20,000 )   3.33  
  Outstanding, end of period   7,205,500   $                    2.55     5,559,500   $                 1.99  

As at September 30, 2008, the Company had outstanding stock options for the purchase of an aggregate 7,205,500 common shares as follows:

6.

Share Capital (Continued)



Quaterra Resources Inc.
(An Exploration Stage Company)
Consolidated Statements of Shareholders’ Equity
(Unaudited and Expressed in Canadian Dollars)

  c.

Stock Options (Continued)


  Options Outstanding                 Options Exercisable  
              Weighted                        Weighted   
        Weighted      Average                  Weighted      Average   
        Average      Remaining                  Average      Remaining   
  Number     Exercise Price     Contractual Life       Expiry Date     Numer     Exercise Price     Contractual Life    
  5,000   $                   0.34     0.19     December 8, 2008     5,000   $                  0.34     0.19  
  95,000     0.62     0.48     March 25, 2009     95,000     0.62     0.48  
  285,200     0.35     1.86     August 9, 2010     285,200     0.35     1.86  
  200,000     0.40     2.28     January 9, 2011     200,000     0.40     2.28  
  125,000     1.04     2.49     March 27, 2011     125,000     1.04     2.49  
  75,000     1.00     2.63     May 19, 2011     75,000     1.00     2.63  
  100,000     1.12     2.70     June 12, 2011     100,000     1.12     2.70  
  1,439,300     1.55     2.82     July 28, 2011     1,439,300     1.55     2.82  
  100,000     1.55     2.89     August 23, 2011     100,000     1.55     2.89  
  100,000     1.50     2.99     September 25, 2011     100,000     1.50     2.99  
  100,000     2.05     3.22     December 18, 2011     100,000     2.05     3.22  
  75,000     2.65     3.28     January 11, 2012     75,000     2.65     3.28  
  25,000     2.70     3.39     February 21, 2012     25,000     2.70     3.39  
  2,011,000     3.33     4.05     July 20, 2012     2,011,000     3.33     4.05  
  80,000     3.33     3.85     August 7, 2012     80,000     3.33     3.85  
  200,000     3.45     4.50     March 31, 2013     200,000     3.45     4.50  
  2,190,000     3.30     4.72     June 19, 2013     887,500     3.30     4.72  
  7,205,500   $                   2.56     3.65           5,903,000   $                  2.40     3.42  

The total fair value of $2,428,555 for options expensed during the period ended September 30, 2008 is listed below using the Black-Scholes option pricing model with the following assumptions:

      September 30, 2008     September 30, 2007  
      Number           Number        
      of Options     Stock–based      of Options     Stock–based   
      Issued     Compensation     Issued     Compensation  
                           
  Consulting   975,000   $               668,346     1,115,000   $            3,047,297  
  Directors and officers   1,095,000     1,357,682     855,000     2,411,637  
  Empoloyees   320,000     402,527     241,000     664,079  
  Total   2,390,000   $            2,428,555     2,211,000   $            5,458,934  

6.

Share Capital (Continued)


  c.

Stock Options (Continued)



Quaterra Resources Inc.
(An Exploration Stage Company)
Consolidated Statements of Shareholders’ Equity
(Unaudited and Expressed in Canadian Dollars)

    September 30, 2008 December 31, 2007 September 30, 2007
  Risk–free interest rate 3.84% 4.57% 4.57%
  Expected share price volatility 85.79% 89.42% 151.79%
  Expected option life in years                                3.0 3.0  3.0 
  Expected dividend yield 0% 0% 0%

7.

Related Party Transactions

     

The Company had the following related party transactions during the nine months ended September 30, 2008:

     
a.

$440,399 service charges (2007 - $213,487) paid to a private firm of which a director is the principal for administration, accounting, office space, and corporate development services;

     
b.

$42,833 consulting fees (2007 - $29,250) paid to a company of which an officer is the principal;

     
c.

$12,328 legal fees (2007 - $9,918) to a law firm of which a director is the principal; and

     
d.

$32,500 investor relations (2007 - $18,750) paid to a consulting firm of which a former officer is the principal.


The above transactions are conducted in the normal course of business and were measured at the amount of consideration established and agreed by the parties.

 

8.

Segmented Information

 

The Company has only one industry segment, the exploration of mineral properties. The Company’s major non- current assets are distributed by geographic locations as follows:


    September 30, 2008           December 31, 2007        
          Mineral     Reclamation                 Mineral     Reclamation        
    Equipment     Property     Bond     Total     Equipment     Property     Bond     Total  
Canada $       12,756   $                –   $               –   $          12,756   $       22,335   $                –   $               –   $          22,335  
Mexico   65,439     6,228,750     –     6,294,189     56,276     4,693,257     –     4,749,533  
U.S.A   150,303     23,906,530     259,794     24,316,627     101,841     14,861,449     139,492     15,102,782  
Total $     228,498   $   30,135,280   $        259,794   $   30,623,572   $     180,452   $   19,554,706   $        139,492   $   19,874,650  


Quaterra Resources Inc.
(An Exploration Stage Company)
Consolidated Statements of Shareholders’ Equity
(Unaudited and Expressed in Canadian Dollars)

9.

Commitments

   

The Company has following commitments in respect to mineral option payments, office space leases and service agreements:


      Mineral      Office Lease  (2)     Service         
      Properties (1)           Agreements  (3)        
                        Total  
  Year ending December 31, 2008 $        156,437   $                  11,400   $             87,000   $                254,837  
  Year ending December 31, 2009   1,047,705     –     168,000     1,215,705  
  Year ending December 31, 2010   3,029,777     –     168,000     3,197,777  
  Year ending December 31, 2011   949,266     –     168,000     1,117,266  
  Year ending December 31, 2012   840,718     –     84,000     924,718  
  Year ending December 31, 2013   659,804     –           659,804  
  Year ending December 31, 2014   659,804     –           659,804  
  Year ending December 31, 2015   872,644     –           872,644  
  Year ending December 31, 2016   287,334     –           287,334  
  Year ending December 31, 2017   287,334     –           287,334  
  Year ending December 31, 2018   31,926     –           31,926  
    $     8,822,750   $                  11,400   $           675,000   $             9,509,150  

  a.

The Company is required to make option payments and other expenditure commitments to maintain the properties and earn its interest. Details of the mineral properties obligations are described in Note 5 of the audited financial statements as at December 31, 2007.

     
  b.

The Company has commitments for two operating leases on a year to year basis for office space in Yerington, Nevada, and Kanab, Utah, in the United States for a combined monthly lease of US$3,800.

     
  c.

During 2007, the Company entered into a service agreement with Manex Resource Group (“Manex”) for its Vancouver office space, administration, and corporate development at a monthly fee of $14,000. The agreement can be cancelled at anytime upon one year notice. The current expiry date is June 30, 2012.

     
  d.

In January 2007, the Company engaged Roman Friedrich & Company Ltd. (“Roman”) to provide financial and advisory services to the Company. The retainer fee is $15,000 per month of which $7,500 is to be paid in cash and the remaining $7,500 is payable in common shares of the Company subject to regulatory approval. As of September 30, 2008, $15,000 is to be paid in shares for the service received form August to September 2008. The agreement was renewed for another year in 2008 and will expire in January 2009.



Quaterra Resources Inc.
(An Exploration Stage Company)
Consolidated Statements of Shareholders’ Equity
(Unaudited and Expressed in Canadian Dollars)

10.

Subsequent Events

     

The following occurred subsequent to September 30, 2008:

     
a.

US$25,000 was paid to extend the Yerington property’s due diligence review to February 16, 2009.

     
b.

Assay results for the remaining eight drill holes at joint venture Nieves silver property was announced with silver mineralization.

     
c.

US$359,477 was received from joint venture partner for its share in the on-going exploration costs at the Nieves property.

     
d.

On October 28, 2008, the Company announced that it was seeking TSX Venture Exchange (“Exchange”) approval for a non-brokered private placement of up to US$5,000,000 by way of Non- Transferrable Convertible Promissory Notes (“Notes”) in the ratio of US$0.60 of Note equals one unit where one unit is equal to one common share and one full warrant to buy one common share. The Notes will have a term of two years from the date of issuance unless previously converted or redeemed and will bear interest at rate of 10% per annum payable at maturity or upon conversion or redemption. If the Company’s common shares shall have achieved or exceeded a closing price of US$0.75 for a 10 consecutive trading days after the first four months of the issuance, the Notes outstanding shall automatically be deemed to have been redeemed and converted into units in the ratio of US$0.60. Any interest payable will be converted into common shares of the Company at the market rate on the date of conversion.

     
e.

Subject to TSX Venture Exchange approval, the Company entered into an option agreement with Willow Creek Discovery Group, LLC to acquire 129 unpatented mining claims located in Granite County, Montana, United States. Under the terms of the agreement, the Company was required to pay US$2,455,000 lease payment over six years and issue 100,000 common shares on the first and second anniversary respectively.


11.

Comparative Figures

   

Certain 2007 comparative figures have been reclassified to conform to the financial statement presentation adopted for 2008.

   
12.

Reconciliation of Canadian and United States Generally Accepted Accounting Principles

   

Under US GAAP, exploration costs incurred in locating areas of potential mineralization are expensed as incurred. Detailed reconciliation of Canadian GAAP and US GAAP is discussed in Note 12 in the year end audited financial statements December 31, 2007.



Quaterra Resources Inc.
(An Exploration Stage Company)
Consolidated Statements of Shareholders’ Equity
(Unaudited and Expressed in Canadian Dollars)

12.

Reconciliation of Canadian and United States Generally Accepted Accounting Principles (Continued)

   

Reconciliation of total assets, liabilities and stockholders’ equity:


      September 30, 2008     December 31, 2007  
  Total assets – Canadian GAAP $               32,318,446   $              24,198,211  
  Expensed expenditures on resource properties   (22,890,909 )   (13,110,749 )
  Total assets – US GAAP $                 9,427,537   $              11,087,462  
               
  Total liabilities – Canadian & US GAAP $                 1,416,988   $                1,706,270  
               
  Total equity – Canadian GAAP   30,901,458     22,491,941  
  Expenditures on resource properties   (22,890,909 )   (13,110,749 )
  Total equity – US GAAP   8,010,549     9,381,192  
  Total Liability and Shareholders' Equity per US GAAP $                 9,427,537   $              11,087,462  

Reconciliation of net loss reported in Canadian GAAP and US GAAP:

      Three months ended 
September 30, 		    Nine months ended 
September 30,
      2008     2007     2008     2007  
  Loss for period – Canadian GAAP $                  (937,621 ) $               (6,496,306 ) $               (5,072,084 ) $               (8,261,466 )
  Expenditures on mineral properties                   (3,898,251 )   (2,397,415 )                   (9,780,160 )   (5,433,738 )
  Net loss for period – US GAAP                   (4,835,872 )   (8,893,721 )                 (14,852,244 )   (13,695,204 )
  Deficit, Beginning of period per US GAAP                 (44,920,423 )   (24,487,946 )                 (34,904,051 )   (19,686,463 ) 
  Deficit, end of period – US GAAP $             (49,756,295 ) $             (33,381,667 ) $             (49,756,295 ) $             (33,381,667 )
                           
  Net loss per share – Canadain GAAP $                        (0.01 ) $                        (0.08 ) $                        (0.06 ) $

                       (0.10

 )
  Total difference $                        (0.04 ) $                        (0.03 ) $                        (0.11 ) $                        (0.07 )
  Net loss per share – US GAAP $                        (0.06 ) $                        (0.11 ) $                        (0.17 ) $                        (0.17 )
  Weighted average number of share outstanding   86,649,405     79,428,158     85,922,462     78,871,925  


Quaterra Resources Inc.
(An Exploration Stage Company)
Consolidated Statements of Shareholders’ Equity
(Unaudited and Expressed in Canadian Dollars)

12.

Reconciliation of Canadian and United States Generally Accepted Accounting Principles (Continued)

Reconciliation of cash flows reported in Canadian GAAP and US GAAP:

      Three months ended 
September 30, 		    Nine months ended
 September 30, 		 
      2008     2007     2008     2007  
  Operating activities – Canadian GAAP $                  (722,793 ) $               (1,057,613 ) $               (2,914,581 ) $               (2,353,899 )
  Adjustments for mineral expenditures   3,898,251     2,397,415     9,780,160     (5,433,738 )
  Cash used in operating actitivies – US GAAP   3,175,458     1,339,802     6,865,580     (7,787,637 )
                           
  Investing activities – Canadian GAAP                   (3,998,303 )   (2,751,221 )                 (10,566,141 )   (7,085,717 )
  Reclassification of expenditures on mineral                         
  property                   (3,898,251 )   (2,397,415 )                   (9,780,160 )   5,433,738  
  Cash used in investing actitivies – US GAAP                   (7,896,554 )   (5,148,636 )                 (20,346,302 )   (1,651,979 )
  Cash provided by financing activities – Canadian                         
  & US GAAP                      (215,469 )   5,698,010     10,700,496     6,534,660  
                           
  (Decrease) increase in cash during the period                   (4,936,566 )   1,889,176                     (2,780,226 )   (2,904,956 )
                           
  Cash, beginning of period    5,546,240     4,318,600     3,389,900     9,112,732  
                           
  Cash, end of period – US GAAP $                   609,674   $                6,207,776   $                   609,674   $                6,207,776