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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number: 0-21968
BRAZAURO RESOURCES CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
BRITISH COLUMBIA 76-0195574
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
800 Bering, Suite 208
Houston, Texas 77057
(Address of Principal Executive Offices, including Zip Code)
(713) 785-1278
(Registrant's Telephone Number, Including Area Code)
The registrant has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes
X No___________
Shares of Registrant's Common Stock outstanding as of December 7, 2004:
42,719,716
BRAZAURO RESOURCES CORPORATION
FORM 10-Q
TABLE OF CONTENTS
PAGE
PART I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets - January 31, 2004
and October 31, 2004 (Unaudited) . . . . . . . . . . . . . . . . . . . 1
Interim Consolidated Statements of Operations and Deficit Accumulated
During the Exploration Stage - Three and Nine Months Ended
October 31, 2004 and 2003 (Unaudited). . . . . . . . . . . . . . . . . 2
Interim Consolidated Statements of Cash Flows - Three and Nine Months
Ended October 31, 2004 and 2003 (Unaudited). . . . . . . . . . . . . . 3
Notes to Interim Consolidated Financial Statements (Unaudited) -
October 31, 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. . . . . . . . . . . . . . . . . . . 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk . . . . 13
Item 4. Controls and Procedures. . . . . . . . . . . . . . . . . . . . . . 13
PART II. Other Information.
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . 14
Item 2. Changes in Securities and Use of Proceeds. . . . . . . . . . . . . 14
Item 3. Defaults Upon Senior Securities. . . . . . . . . . . . . . . . . . 14
Item 4. Submission of Matters to a Vote of Security Holders. . . . . . . . 14
Item 5. Other Information. . . . . . . . . . . . . . . . . . . . . . . . . 14
Item 6. Exhibits and Reports on Form 8-K.. . . . . . . . . . . . . . . . . 14
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
i
BRAZAURO RESOURCES CORPORATION
(AN EXPLORATION STAGE ENTERPRISE)
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
October 31, 2004 January 31, 2004
------------------ ------------------
(In Canadian Dollars)
ASSETS
Current assets:
Cash . . . . . . . . . . . . . . . . . . . . . . $ 483,725 $ 1,982,536
Accounts receivable. . . . . . . . . . . . . . . 201,353 109,468
------------------ ------------------
Total current assets. . . . . . . . . . . . . . . . 685,078 2,092,004
------------------ ------------------
Property, plant and equipment, at cost:
Mineral properties and deferred
expenditures (Note 2) . . . . . . . . . . . . . 2,446,636 714,283
Equipment and other . . . . . . . . . . . . . . . 76,496 68,788
Accumulated depreciation. . . . . . . . . . . . . (69,825) (63,472)
------------------ ------------------
Total property, plant and equipment, at cost. . . . 2,453,307 719,599
------------------ ------------------
Other assets. . . . . . . . . . . . . . . . . . . . 7,203 7,826
------------------ ------------------
Total assets. . . . . . . . . . . . . . . . . . . . $ 3,145,588 $ 2,819,429
================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities. . . . . $ 398,695 $ 369,714
------------------ ------------------
Total current liabilities . . . . . . . . . . . . . 398,695 369,714
------------------ ------------------
Commitments and contingencies (Note 6)
Shareholders' equity:
Common share capital, no par value:
Authorized shares - 100,000,000
Issued and outstanding shares - 40,357,216
(35,748,871 at January 31, 2004) (Note 5). . 37,013,970 35,622,793
Contributed surplus (Note 8). . . . . . . . . . . 1,566,000 54,403
Deficit accumulated during the exploration stage. (35,833,077) (33,227,481)
------------------ ------------------
Total shareholders' equity. . . . . . . . . . . . . 2,746,893 2,449,715
------------------
Total liabilities and shareholders' equity. . . . . $ 3,145,588 $ 2,819,429
================== ==================
See accompanying notes.
1
BRAZAURO RESOURCES CORPORATION
(AN EXPLORATION STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT ACCUMULATED
DURING THE EXPLORATION STAGE (UNAUDITED)
Three Months Ended October 31, Nine Months Ended October 31,
2004 2003 2004 2003
------------- ------------- ------------- -------------
(In Canadian Dollars)
Revenues:
Interest income. . . . . . . . . . . . . . . . $ 749 $ 277 $ 1,059 $ 1,128
Gains on sales of plant and equipment (Note 2) - - - 446,647
------------- ------------- ------------- -------------
749 277 1,059 447,775
Expenses:
General and administrative (Note 7). . . . . . 860,353 177,887 2,578,354 536,791
Finance charges. . . . . . . . . . . . . . . . 39,118 58,449 43,728 80,579
Interest expense . . . . . . . . . . . . . . . - 26,727 - 84,960
Translation (gains) losses . . . . . . . . . . 4,430 1,577 (15,427) 20,390
------------- ------------- ------------- -------------
903,901 264,640 2,606,655 722,720
------------- ------------- ------------- -------------
Loss before provision for income taxes . . . . . (903,152) (264,363) (2,605,596) (274,945)
Provision for income taxes . . . . . . . . . . . - - - -
------------- ------------- ------------- -------------
Net loss . . . . . . . . . . . . . . . . . . . . (903,152) (264,363) (2,605,596) (274,945)
Deficit accumulated during the exploration
stage at the beginning of the period . . . . . (34,929,925) (32,446,135) (33,227,481) (32,435,553)
------------- ------------- ------------- -------------
Deficit accumulated during the exploration
stage at end of the period . . . . . . . . . . $(35,833,077) $(32,710,498) $(35,833,077) $(32,710,498)
============= ============= ============= =============
Net loss per common share - basic and diluted. . $ (0.02) $ (0.01) $ (0.07) $ (0.01)
============= ============= ============= =============
Weighted-average common shares outstanding . . . 38,964,012 21,903,690 37,293,982 19,857,731
See accompanying notes.
2
BRAZAURO RESOURCES CORPORATION
(AN EXPLORATION STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended October 31, Nine Months Ended October 31,
2004 2003 2004 2003
------------- -------------- --------------- ------------
(In Canadian Dollars)
OPERATING ACTIVITIES
Net loss. . . . . . . . . . . . . . . . . . . $(903,152) $(264,363) $(2,605,596) $(274,945)
Items not affecting cash:
Depreciation. . . . . . . . . . . . . . . 675 4,168 6,353 14,109
Interest expense. . . . . . . . . . . . . - 26,727 - 84,960
Gains on sales of plant and
equipment (Note 2) . . . . . . . . . . - - - (446,647)
Stock based compensation (Note 8) . . . . 500,447 - 1,511,597 -
Other . . . . . . . . . . . . . . . . . . 642 519 623 1,217
---------- ---------- ------------ ----------
(401,388) (232,949) (1,087,023) (621,306)
---------- ---------- ------------ ----------
Changes in noncash working capital:
Accounts receivable . . . . . . . . . . . (12,516) (17,082) (91,885) 21,246
Accounts payable and accrued liabilities. (154,618) (6,649) 28,981 (7,584)
---------- ---------- ------------ ----------
(167,134) (23,731) (62,904) 13,662
---------- ---------- ------------ ----------
Net cash used in operating activities . . . . (568,522) (256,680) (1,149,927) (607,644)
---------- ---------- ------------ ----------
INVESTING ACTIVITIES
Property acquisition and exploration. . . . . (422,573) (240,300) (1,462,353) (289,426)
Equipment and other . . . . . . . . . . . . . - - (7,708) -
---------- ---------- ------------ ----------
Net cash used in investing activities . . . . (422,573) (240,300) (1,470,061) (289,426)
---------- ---------- ------------ ----------
FINANCING ACTIVITIES
Proceeds from issuance of common shares . . . 673,061 396,166 1,121,177 396,166
Proceeds from sales of plant and
equipment (Note2) . . . . . . . . . . . . . - - - 521,978
---------- ---------- ------------ ----------
Net cash provided by financing activities . . 673,061 396,166 1,121,177 918,144
---------- ---------- ------------ ----------
Increase (decrease) in cash and temporary
cash investments. . . . . . . . . . . . . . (318,034) (100,814) (1,498,811) 21,074
Cash and temporary cash investments,
beginning of period . . . . . . . . . . . . 801,759 144,622 1,982,536 22,734
---------- ---------- ------------ ----------
Cash and temporary cash investments,
end of period . . . . . . . . . . . . . . . $ 483,725 $ 43,808 $ 483,725 $ 43,808
========== ========== ============ ==========
See accompanying notes.
3
BRAZAURO RESOURCES CORPORATION
(AN EXPLORATION STAGE ENTERPRISE)
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
OCTOBER 31, 2004
1. BASIS OF OPERATIONS
Brazauro Resources Corporation ("the Company"), formerly Jaguar Resources
Corporation, is engaged in the business of exploring for and, if warranted,
developing mineral properties. The accompanying interim unaudited consolidated
financial statements have been prepared in accordance with Canadian generally
accepted accounting principles and comply in all material respects with United
States generally accepted accounting principles except as discussed in Note 4.
The consolidated financial statements are presented in accordance with the
instructions to Form 10-Q and Article 10 of Regulation S-X of the United States
Securities and Exchange Commission for interim financial information.
Accordingly, they do not include all of the information and footnotes required
by Canadian and United States generally accepted accounting principles for
complete financial statements.
In the opinion of management all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three and nine month periods ended October 31, 2004
are not necessarily indicative of the results that may be expected for the year
ended January 31, 2005.
SIGNIFICANT ESTIMATES
The nature of the Company's operations results in significant expenditures for
the acquisition and exploration of properties. None of the Company's properties
have been proven to have economically recoverable reserves or proven reserves at
the current stage of exploration. Direct acquisitions, evaluation and
exploration expenditures are capitalized, reduced by sundry income, to be
amortized over the recoverable mineral reserves if a property becomes
commercially developed. When an area is disproved or abandoned, the acquisition
costs and related deferred expenditures are written off. Management's
assessment of the net realizable value of mineral properties and deferred
expenditures requires considerable judgment and estimates which could change
significantly in the near term.
All amounts are in Canadian dollars unless noted otherwise. For further
information, refer to the consolidated financial statements and footnotes
thereto.
2. MINERAL PROPERTIES AND DEFERRED EXPENDITURES
BRAZILIAN PROPERTIES
Tocantinzinho Properties
In August 2003 the Company entered into an option to acquire exploration rights
to a total of 27,590 hectares in the Tapaj s gold district in Para State, Brazil
under an option agreement with two individuals. The option agreement entitles
the Company to acquire a 100% interest in the exploration rights to such area
(referred to herein as the "Tocantinzhino Properties") over a four-year period
in consideration for the staged payment of US$465,000, the staged issuance of
2,600,000 shares of the Company and the expenditure of $1,000,000 (U.S.) on
exploration. The Company received approval for the acquisition from the TSX
Venture Exchange in August 2003 and made the initial payment required by the
option agreement to the optionors, consisting of 1,100,000 common shares of the
Company and $75,000 (U.S.). The Company made the second option payment,
consisting of 200,000 common shares of the Company and $30,000 (U.S.), in
February 2004. In August 2004, the Company made the third option payment of
200,000 common shares of the Company and $40,000 (U.S.).
The total commitment under the option agreement is as follows (all amounts are
in U.S. dollars): $70,000 and 400,000 common shares of the Company (paid),
$40,000 and 200,000 common shares of the Company, $130,000 and 200,000 common
4
BRAZAURO RESOURCES CORPORATION
(AN EXPLORATION STAGE ENTERPRISE)
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
OCTOBER 31, 2004
2. Mineral Properties and Deferred Expenditures (continued)
shares of the Company, and $150,000 and 700,000 common shares of the Company for
the 2005, 2006, 2007 and 2008 fiscal years, respectively. During fiscal 2005
the Company met the requirement under the option agreement to expend a total of
$300,000 (U.S.) by July 31, 2004.
Additionally, the option agreement requires the Company to assume all existing
obligations of the optionors to the owners of the mineral rights of the
Tocantinzinho Properties (the "Underlying Agreements") totaling $1,600,000
(U.S.) over a four-year period. The remaining payment commitments under the
Underlying Agreements are as follows (all amounts are in U.S. dollars): $80,000,
$120,000, $160,000 and $1,205,000 in fiscal years 2005, 2006, 2007 and 2008,
respectively. The Company made payments totaling $35,000 (U.S.) in respect of
the Underlying Agreements during fiscal 2004. One of the optionors entered into
a consulting agreement with the Company for an 18-month period at a rate of
$7,000 (U.S.) per month. The payments under the option agreement, the
Underlying Agreements and the consulting agreement are considered expenditures
for purposes of meeting the required total and initial annual expenditures of
$1,000,000 (U.S.) and $300,000 (U.S.), respectively, discussed above. Now that
the Company has met its first year commitments under the option agreement, the
option agreement is cancelable by the Company without further obligations.
The optionors are entitled to a sliding scale gross revenues royalty ranging
from 2.5% for gold prices below $400 (U.S.) per ounce to 3.5% for gold prices in
excess of $500 (U.S.) per ounce.
In May 2004 the Company applied for exploration permits for an additional 16,000
hectares adjacent to the above Tocantinzho Properties. The Company has agreed
to make payments totaling $300,000 (U.S.) over a period of approximately four
years to an individual as a finder's fee related to this 16,000 hectare
property. This additional property is not subject to the option agreement and
therefore is not subject to the royalty.
Mamoal Property
The Company entered into an option agreement under which it may acquire the
exploration license to the 10,000 hectare Mamoal Property, located 30 kilometers
southeast of the Company's Tocantinzinho Properties, in December 2003. The
Company has an option to earn 100% of the Mamoal Property by payment of a total
of $300,000 (U.S.) over three and one half years. The Company may terminate the
option agreement at any time without further obligation. An initial $10,000
(U.S.) payment was made by the Company in December 2003, and the exploration
research license has been transferred to Jaguar Resources do Brasil Ltda. The
remaining option payments are as follows (all amounts are in U.S. dollars):
$25,000, $45,000, $65,000, and $155,000 in fiscal years ending January 31, 2005,
2006, 2007 and 2008, respectively. The Company may acquire the Mamoal Property
at any time by accelerating the option payments.
Batalha Property
In September, 2004 the Company acquired an exploration license to the 9800
hectare Batalha Property, located in the Tapaj s gold province in northern
Brazil. The property, host to a well known "garimpo" or artisanal mine, lies at
the western end of the Tocantinzinho trend. The Company has agreed to pay the
original holder of artisanal mining rights of Batalha, who controls over 1,700
hectares lying within the exploration license and directly over the Batalha
zone, the equivalent of approximately $86,000 Canadian dollars in Brazilian
reals over a 42 month period with a buyout after 4 years of $250,000 (U.S.) (if
the project is deemed economic by the Company) and an additional sum based on
the number of ounces of gold in the proven and probable (or measured and
indicated) categories at Batalha as set out in a pre-feasibility or feasibility
study. The per ounce payment amount ranges in a sliding scale from US$1 per
ounce for the first one million ounces up to $10 (U.S.) per ounce for each ounce
over four million ounces. The 9,800 hectare exploration license lies over top
of this area, covering extensions to north, south and west. If after four years
the Company, in its sole opinion, has not found an economic ore body, the area
and all collected data will be returned to the vendor.
5
BRAZAURO RESOURCES CORPORATION
(AN EXPLORATION STAGE ENTERPRISE)
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
OCTOBER 31, 2004
2. Mineral Properties and Deferred Expenditures (continued)
ARKANSAS PROPERTIES
The Company maintained interests in several Arkansas Properties during the
period from fiscal 1993 through fiscal 2003. In December 2002, based upon the
cumulative exploration results obtained on the Arkansas Properties, the Company
made the decision to cease operations in Arkansas.
American Mine Property
Pursuant to an agreement dated November 4, 1992, Diamond Exploration Inc.
("DEI"), a wholly-owned subsidiary of the Company, was granted a permit to
explore a mineral property located in Pike County, Arkansas. The Company's
Plant was located on this leased property. The Company leased the property and
conducted exploration activities during certain periods from 1992 to 2002. The
lease payment of $47,500 (U.S.) on the American Property, due November 1, 2002,
was not made by the Company.
In March 2003 the Company sold the Plant to a third party for $350,000 (U.S.).
In conjunction with the sale, the third party paid the lessor of the American
Mine Property $47,500 (U.S.) on behalf of the Company in order to extend the
Company's lease on the property through October 31, 2003. The Company recorded
a reserve for leasehold reclamation costs during the quarter ended April 30,
2003 of approximately $70,000, representing the estimated costs of the Company's
obligation to restore the Arkansas properties to their original condition prior
to lease expiration and to perform reclamation activities as required by
Arkansas regulatory authorities. The reserve for leasehold reclamation was
increased during the fourth quarter of fiscal 2004 to approximately $150,000
based upon a revision in the estimate discussed above. The Company allowed the
lease to expire effective November 1, 2003.
Mineral properties and deferred expenditures were as follows:
BALANCE AT BALANCE AT
JANUARY 31 IMPAIRED OCTOBER 31,
2004 ADDITIONS WRITE-OFFS 2004
---------- ---------- ---------- ----------
Brazilian Properties
Tocantinzinho Properties:
Acquisition costs. . $ 527,345 $ 442,584 $ - $ 969,929
Exploration costs. . 173,788 1,231,357 - 1,405,145
---------- ---------- ---------- ----------
701,133 1,673,941 - 2,375,074
---------- ---------- ---------- ----------
Mamoal Property:
Acquisition costs. . 13,150 13,678 - 26,828
Exploration costs. . - 39,485 - 39,485
---------- ---------- ---------- ----------
13,150 53,163 - 66,313
---------- ---------- ---------- ----------
Batalha Property
Acquisition costs. . - 5,249 - 5,249
Exploration costs. . - - - -
---------- ---------- ---------- ----------
- 5,249 - 5,249
---------- ---------- ---------- ----------
Total acquisition costs. . . 540,495 461,511 - 1,002,006
Total exploration costs. . . 173,788 1,270,842 - 1,444,630
---------- ---------- ---------- ----------
Total costs. . . . . . . . . $ 714,283 $1,732,353 $ - $2,446,636
========== ========== ========== ==========
6
BRAZAURO RESOURCES CORPORATION
(AN EXPLORATION STAGE ENTERPRISE)
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
OCTOBER 31, 2004
3. DEBENTURES
In fiscal 2002, the Company completed the issuance of $1,278,595 principal
amount of 10% secured convertible debentures ("the Debentures"). The Debentures
were convertible into units at the rate of one unit for each $2.87 principal
amount of the Debentures until February 16, 2003. Each unit was to consist of
one common share of the Company and one share purchase warrant with an exercise
price of $3.15, exercisable through August 16, 2003. The conversion and share
purchase warrant prices above were adjusted to reflect the Company's seven for
one share consolidation on November 27, 2001.
On February 11, 2003, the holders of the Debentures approved the amendment of
the conversion price of the units to $0.30 and the extension of the maturity
date of the Debentures to February 16, 2004. As amended, each of the 4,261,976
units consisted of one common share of the Company and one share purchase
warrant with an exercise price of $0.30, exercisable through February 16, 2004.
Additionally, the terms of the Debenture were amended to include a mandatory
conversion provision of all Debentures and exercise of all related warrants
within 30 days after the closing price of the Company's common shares has
exceeded $0.375 for ten consecutive trading days.
Interest at the rate of 10% was payable on conversion or maturity in cash, or at
the election of the Company, in common shares valued at the weighted average
trading price of the common shares of the Company for the ten trading days
preceding the interest payment date. The Debentures were secured by a general
security interest in the Company's current and future assets and by the stock of
Star U.S., Inc. ("Star"), a wholly owned subsidiary of the Company, and a
wholly-owned subsidiary of Star.
During fiscal 2004, several holders of the Debentures elected to convert a total
of $197,000 principal amount and received 656,666 common shares and 656,666
common share purchase warrants with exercise prices of $0.30. Additionally,
during the third quarter of fiscal 2004, a director of the Company elected to
convert $97,000 principal amount and received 323,333 common shares.
Effective October 31, 2003 a total of $984,595 principal amount of Debentures
were automatically converted into 3,281,977 units of the Company in accordance
with the February 11, 2003 amendments discussed in the third preceding
paragraph. Each unit consisted of one common share and one common share
purchase warrant with exercise prices of $0.30. Additionally, under terms of
the mandatory conversion provision, the expiration date of all warrants issued
upon conversion of the Debentures was established as December 1, 2003. During
the fourth quarter of fiscal 2004, the Company received a total of $937,593,
representing the exercise price of 3,125,311 warrants, and issued 3,125,311
common shares. A total of 813,332 common share warrants expired unused on
December 1, 2003. During fiscal 2004, a total of $335,075 of interest accrued
on the principal amounts converted during fiscal 2004 was paid via the issuance
of a total of 1,129,522 shares, representing the conversion of the interest
amounts at weighted average prices from $0.17 to $0.33 per share.
4. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES ("GAAP")
The consolidated financial statements have been prepared in accordance with
Canadian GAAP, which differs in some respects from United States GAAP. The
material differences in respect to these financial statements between Canadian
and United States GAAP, and their effect on the Company's financial statements,
are summarized below.
Mineral Properties and Deferred Expenditures
Under United States GAAP, the preferred method for accounting for evaluation and
exploration costs on properties without proven and probable reserves is to
expense all costs incurred, other than acquisition costs, prior to the
establishment of proven and probable reserves. The effect of the application of
7
BRAZAURO RESOURCES CORPORATION
(AN EXPLORATION STAGE ENTERPRISE)
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
OCTOBER 31, 2004
4. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES ("GAAP")(CONTINUED)
this method to the financial statements would be to increase net loss by
approximately $360,000 and $1,271,000, respectively, for the three and nine
months ended October 31, 2004 and to decrease mineral properties and deferred
expenditures by approximately $1,445,000 and $174,000 as of October 31, 2004 and
January 31, 2004, respectively. The application of this method to the income
statements dated October 31, 2003 would be to increase net loss by approximately
$125,000 for the three and nine months ended October 31, 2003.
Foreign Currency Translation
Under United States GAAP, shareholders' equity would reflect a foreign currency
translation gain of approximately $15,300 at January 31, 2004 and a foreign
currency translation loss of approximately $214,400 at October 31, 2004.
5. SHARE CAPITAL
On January 29, 2002 the Company completed a private placement of 5,691,376 units
at a price of $0.20 per unit, each unit to consist of one common share and one
share purchase warrant with an exercise price of $0.25 per unit. The share
purchase warrants had an expiration date of January 29, 2003, which was extended
during fiscal 2003 to January 29, 2004. A total of 5,669,101 warrants were
exercised in January 2004, and the Company received total exercise proceeds of
$1,417,275. A total of 22,275 warrants expired unused on January 29, 2004.
On September 18, 2002, the Company completed a private placement of 2,819,774
units at a price of $0.20 per unit, each unit consisting of one common share and
one share purchase warrant with an exercise price of $0.25 per unit. The share
purchase warrants have an expiration date of September 18, 2004. The Company
received a total of $563,955 during fiscal 2003 representing subscriptions for
the private placement. Included in that amount was a total of $85,240
representing subscriptions for 426,200 units by three of the Company's
directors. During fiscal year 2005, all 2,819,774 common share warrants were
exercised, and the Company received total exercise proceeds of $704,944.
In July, 2004 the Company's shareholders approved an amendment to its stock
option plan to increase the number of shares reserved for issuance from
4,000,000 to 7,000,000. During the second quarter of fiscal 2005, directors,
employees and consultants exercised a total of 1,108,571 common stock options,
and the Company received exercise proceeds totaling approximately $360,000. In
June and July 2004, the Company issued to directors, employees and consultants a
total of 950,000 and 2,327,376 options to purchase common shares at prices of
$0.92 and $1.02, respectively. During the third quarter of fiscal 2005,
directors and employees exercised a total of 280,000 common stock options, and
the Company received exercise proceeds totaling approximately $56,000. As of
October 31, 2004, the Company had a total of 6,337,858 options outstanding at
prices ranging from $0.10 to $1.02.
6. COMMITMENTS AND CONTINGENCIES
Except as described below, there are no material pending legal proceedings to
which the Company or any of its subsidiaries is a party or to which any of their
property is subject.
On May 15, 1998, a legal action styled James Cairns and Stewart Jackson vs.
Texas Star Resources Corporation d/b/a Diamond Star, Inc. was filed in the 215th
Judicial District Court of Harris County, Texas, Cause No. 9822760 wherein the
Plaintiffs allege, among other things, that the Company breached contractual
agreements and committed fraud by not timely releasing or causing to be released
8
BRAZAURO RESOURCES CORPORATION
(AN EXPLORATION STAGE ENTERPRISE)
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
OCTOBER 31, 2004
6. COMMITMENTS AND CONTINGENCIES (CONTINUED)
from an escrow account required by Canadian law certain shares of the Company to
which Plaintiffs allege that they were entitled to receive in calendar 1995 and,
as a result of the Company's alleged actions with respect to the release of such
shares, the Plaintiffs sought monetary damages for losses in share value,
attorney's fees, court costs, expenses, interest and exemplary damages. In
1999, the litigation against the Company in Houston, Harris County, Texas, was
dismissed by the court with prejudice, leaving only the claims of James M.
Cairns, Jr. pending in British Columbia, which is generally described below.
The legal action in Texas is similar to one filed against the Company in the
Supreme Court of British Columbia, Canada, in August 1996 styled Cause No.
C96493; James M. Cairns, Jr. vs. Texas Star Resources Corporation. In January
1993, the Plaintiffs were issued common stock of the Company in escrow which
shares were to be released based on exploration expenditures by the Company on
certain of its properties in Arkansas. The escrow requirements were imposed by
the Vancouver Stock Exchange. Plaintiffs requested that all of the shares be
released in 1995. At that time the Company believed that the release of the
shares when requested by the Plaintiffs was inappropriate due to legal
requirements and regulatory concerns. The shares were subsequently released to
the Plaintiffs. The Company intends to vigorously defend the allegations of the
Plaintiffs in the pending litigation in British Columbia and in Texas (if the
case is appealed or refiled) and believes it has meritorious defenses to such
claims. No proceedings in the action in British Columbia have been taken by the
Plaintiff since March 30, 2000. However, the Company cannot provide any
assurances that it will be successful, in whole or in part, with respect to its
defense of the claims of the Plaintiffs. If the Company is not successful, any
judgment obtained by Plaintiffs could have a material and adverse effect on its
financial condition.
7. GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses consisted of the following:
Three Months Ended October 31, Nine Months Ended October 31,
2004 2003 2004 2003
---------- ---------- ---------- ----------
Consulting fees . . . . . . . . . . $ 102,057 $ - $ 283,736 $ 14,916
Depreciation expense. . . . . . . . 225 12,572 6,354 14,109
Entertainment . . . . . . . . . . . . 20,145 4,231 31,125 21,684
Insurance . . . . . . . . . - 9,487 1,908 1,041
Office expenses . . . . . . . . . . . 64,478 10,845 138,142 32,420
Professional fees . . . . . . . . . 33,870 24,423 67,331 85,195
Rent. . . . . . . . . . . . . . . . . 7,420 7,659 19,636 24,693
Repairs and maintenance . . . . . . 1,352 7,880 1,352 21,667
Salary. . . . . . . . . . . . . . . . 588,379 72,452 1,833,582 235,633
Shareholder relations . . . . . . . 29,149 9,330 130,082 26,974
Travel. . . . . . . . . . . . . . . 13,278 19,008 65,106 53,222
Utilities . . . . . . . . . . . . . . - - - 5,237
---------- ---------- ---------- ----------
Total . . . . . . . . . . . . .. . $ 860,353 $ 177,887 $2,578,354 $ 536,791
========== ========== ========== ==========
9
BRAZAURO RESOURCES CORPORATION
(AN EXPLORATION STAGE ENTERPRISE)
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
OCTOBER 31, 2004
8. STOCK BASED COMPENSATION
Commencing February 1, 2004, in accordance with Handbook Section 3870 of the
Canadian Institute of Chartered Accountants, the Company has recorded stock
based compensation to employees, directors and consultants on a fair value
basis, as follows:
Three Months Ended October 31 Nine Months Ended October 31,
2004 2003 2004 2003
---------- ---------- ---------- ----------
Consulting $ 32,842 $ - $ 98,525 $ -
Salaries . 467,605 - 1,413,072 -
---------- ---------- ---------- ----------
$ 500,447 $ - $1,511,597 $ -
========== ========== ========== ==========
These amounts have been recorded using the Black Scholes valuation model with
the following variables: risk-free interest rate from 3.0% to 4.08%; expected
life, 3.5 years; volatility, 160%; expected dividend yield, $nil.
9. SUBSEQUENT EVENTS
In November 2004, the Company completed a private placement of 2,112,500 common
shares of the Company at a price of $0.85 per share and received proceeds
totaling $1,795,625. In consideration for assistance with the private
placement, the Company paid finders' fees of $96,050 in cash and issued 113,000
share purchase warrants entitling the finders to purchase 113,000 common shares
of the Company at $1.05 per share until November 2, 2005.
In November 2004, the Company granted incentive options for the purchase of a
total of 530,000 shares in its capital. The options are exercisable on or
before November 19, 2009 at the price of $1.10 per share.
In December 2004, the Company completed a private placement of 2,150,000 common
shares of the Company at a price of $1.00 per share and received proceeds of
$2,150,000.
10
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Form 10-Q under "Part I - Item 1. Financial
Information," "Part I - Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Part II - Item 1. Legal
Proceedings" and elsewhere constitute "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995 (the "Reform
Act"). Such forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause the actual results, performance
or achievements of the Company to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among others, the following:
general economic and business conditions; competition; success of operating
initiatives; the success (or lack thereof) with respect to the Company's
exploration and development operations on its properties; the Company's ability
to raise capital and the terms thereof; the acquisition of additional mineral
properties; changes in business strategy or development plans; exploration and
other property writedowns; the continuity, experience and quality of the
Company's management; changes in or failure to comply with government
regulations or the lack of government authorization to continue certain
projects; the outcome of litigation matters, and other factors referenced from
time to time in the Company's filings with the Securities and Exchange
Commission. The use in this Form 10-Q of such words as "believes", "plans",
"anticipates", "expects", "intends" and similar expressions are intended to
identify forward-looking statements, but are not the exclusive means of
identifying such statements. The success of the Company is dependent on the
efforts of the Company, its employees and many other factors including,
primarily, its ability to raise additional capital and establishing the economic
viability of any of its exploration properties.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
-----------------------------------------------------------------
RESULTS OF OPERATIONS
- -----------------------
Results of Operations - For the Three and Nine Month Periods Ended October 31,
2004 and 2003
All dollar amounts referred to herein are in Canadian Dollars unless otherwise
stated. As of December 7, 2004, the exchange rate is $1.00 (Canadian) = $0.8165
(U.S.)
The Company is in the exploration stage and has no revenues from operations
other than rental income related to the Diamond Recovery Plant, totaling
approximately $1,079,000 from inception through March 2003, when the Plant was
sold. None of its Properties have proven to be commercially developable to date
and as a result the Company has not generated any revenue from these activities.
The Company's existing Properties are gold prospects in Brazil, as discussed in
Note 2, which were acquired during fiscal 2004 and 2005. The Company
capitalizes expenditures associated with the direct acquisition, evaluation and
exploration of mineral properties. When an area is disproved or abandoned, the
acquisition costs and related deferred expenditures are written-off. The net
capitalized cost of each mineral property is periodically compared to
management's estimation of the net realizable value and a write-down is recorded
if the net realizable value is less than the cumulative net capitalized costs.
As discussed in Note 2, during fiscal 2003 the Company decided to cease
exploration activities in Arkansas due to disappointing exploration results, and
the total of $3,141,726 of accumulated capitalized costs related to the Arkansas
leases were written off. The Company has recorded cumulative write-offs of
mineral properties of $15,306,613 during its exploration stage, a period of
approximately fifteen years, and cumulative writedowns of property, plant and
equipment of $3,614,952.
During the nine months ended October 31, 2004, the Company's mineral
properties and deferred expenditures increased to $2,446,636 from $714,283
primarily as a result of acquisition costs totaling $442,584 and exploration
costs totaling $1,231,357 related to the activities on the Company's
Tocantinzinho Properties, a gold prospect. The increase in mineral properties
and deferred expenditures during the quarter ended October 31, 2004 of $622,573
consisted primarily of acquisition costs totaling $257,468 and exploration costs
totaling $332,121 related to the activities on the Company's Tocantinzinho
Properties. The Company completed its Phase I drilling program on the
Tocantinzinho Properties in May 2004. The Phase I drilling program consisted of
8 inclined diamond drill holes totaling approximately 1700 meters. Based upon
the positive results of the Phase I drilling program, Company management planned
and completed the Phase II drilling program totaling 3000 meters in the second
11
fiscal quarter of 2005. The Phase II drilling program consisted of 12 diamond
drill holes, and 11 of the drill holes encountered significant gold
mineralization. The drilling results may be viewed in detail at the Company's
website (www.brazauroresources.com).
The Company had no significant revenues during the three and nine months
ended October 31, 2004 and during the three months ended October 31, 2003. The
Company's revenues totaling $447,775 during the nine months ended October 31,
2003 are primarily comprised of the gain from the sale of the diamond sorting
and recovery plant ("the Plant"). The Plant was sold to a third party for
US$350,000 and was fully depreciated at disposal. As discussed in Note 2 to the
Company's Interim Financial Statements, the Plant was located on the American
Mine Property, and a reserve for leasehold improvements totaling approximately
$150,000 is included in accounts payable and accrued liabilities as of October
31, 2004. The Company has not received any revenues from mining operations from
inception.
General and administrative expenses for the nine months ended October 31,
2004 increased by approximately $2,042,000 or 380% compared to the nine months
ended October 31, 2003. Approximately $1,512,000 of this increase consisted of
stock compensation expense recorded using the fair value method adopted by the
Company effective February 1, 2004, as discussed in Note 8. The remaining
increase totaling approximately $530,000 was primarily due to the increased
activity surrounding the Phase I and II drilling programs, which were in process
throughout the first three quarters of fiscal 2005. In contrast, during the
first three quarters of fiscal 2004, the Company was engaged in the acquisition
of the Brazilian Properties and had not begun exploration activities.
General and administrative expenses for the three months ended October 31,
2004 increased by approximately $682,466 or 384% compared to the three months
ended October 31, 2003. Approximately $500,000 of this increase consisted of
stock compensation expense recorded using the fair value method adopted by the
Company effective February 1, 2004, as discussed in Note 8, and the remaining
increase of $182,000 relates to the commencement of the drilling programs
discussed above. The Company anticipates that general and administrative
expenses during the remaining three months of fiscal 2005 will remain consistent
with the level experienced in the first nine months of fiscal 2005.
FINANCIAL CONDITION; LIQUIDITY AND CAPITAL RESOURCES.
As of October 31, 2004 and January 31, 2004, the Company had working
capital of $286,383 and $1,722,290, respectively. At October 31, 2004, the
Company had current assets of $685,078, including $483,725 in cash, compared to
total current liabilities of $398,695.
The Company received $563,955 during fiscal 2003, representing
subscriptions for a private placement of the Company's common shares. A total
of 2,819,774 units were issued in the private placement at a price of $0.20 per
unit, each unit to consist of one common share and one share purchase warrant
with an exercise price of $0.25. The share purchase warrants have an expiration
date of September 17, 2004. During fiscal year 2005, all 2,819,774 common share
warrants were exercised, and the Company received total exercise proceeds of
$704,944.
The Company received approximately $1,138,000 during fiscal 2002
representing subscriptions for a private placement of the Company's common
shares. A total of 5,691,376 units were issued at a price of $0.20 per unit,
each unit to consist of one common share and one share purchase warrant with an
exercise price of $0.25. The share purchase warrants originally had an
expiration date of January 29, 2003, and that date was extended during fiscal
2003 to January 29, 2004. A total of 5,669,101 warrants were exercised in
January 2004, and the Company received total exercise proceeds of $1,417,275. A
total of 22,275 warrants expired unused on January 29, 2004.
During the second and third quarters of fiscal 2005, directors, employees
and consultants exercised a total of 1,388,571 common stock options and the
Company received exercise proceeds totaling approximately $416,000.
12
In November 2004, the Company completed a private placement of 2,112,500 common
shares of the Company at a price of $0.85 per share and received proceeds
totaling $1,795,625. In consideration for assistance with the private placement,
the Company paid finders' fees of $96,050 in cash and issued 113,000 share
purchase warrants entitling the finders to purchase 113,000 common shares of the
Company at $1.05 per share until November 2, 2005. In December 2004, the Company
completed a private placement of 2,150,000 common shares of the Company at a
price of $1.00 per share and received proceeds of $2,150,000.
All financings described herein were private placements and were made
pursuant to the private placement laws of Canada and pursuant to the exemptions
provided by Section 4(2) and Regulation S under the United States Securities Act
of 1933. The Debentures were offered to a limited number of accredited
investors in the United States and Canada pursuant to Rule 506 of Regulation D
and Regulation S.
The Company has no properties that have proven to be commercially
developable and has no revenues from mining operations other than the rentals
received from the Plant and the proceeds from the sales of the Plant and related
equipment. The rights and interests in the Tocantinzinho, Mamoal and Batalha
Properties in Brazil constitute the Company's current mineral holdings. The
Company cannot estimate with any degree of certainty either the time or the
amount of funds that will be required to acquire and conduct additional
exploration activities on new prospects. The Company intends to seek additional
equity financing during fiscal 2005, including the potential exercise of
outstanding options. The inability of the Company to raise further equity
financing will adversely affect the Company's business plan, including its
ability to acquire additional properties and perform exploration activities on
existing properties. If additional equity is not available, the Company may
seek additional debt financing or seek exploration partners to assist in funding
acquisition or exploration efforts. Historically, the Company has been able to
successfully raise capital as required for its business needs; however, no
assurances are made by the Company that it can continue to raise debt or equity
capital for a number of reasons including its history of losses and property
writedowns, the decline in the price of its common stock, the number of shares
outstanding and the Company's limited and speculative asset base of exploration
properties and prospects.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
-----------------------------------------------------------------
Not applicable.
ITEM 4. CONTROLS AND PROCEDURES.
---------------------------
(a) Evaluation of disclosure controls and procedures.
The term "disclosure controls and procedures" (defined in SEC rule
13a-14(c)) refers to the controls and other procedures of a company
that are designed to ensure that information required to be disclosed
by a company in the reports that it files under the Securities
Exchange Act of 1934 (the "Exchange Act") is recorded, processed,
summarized and reported within required time periods. The Company's
Chairman, who also serves as the Company's principal financial
officer, has evaluated the effectiveness of the Company's disclosure
controls and procedures as of a date within 90 days before the filing
of this quarterly report, and he concluded that, as of such date, the
Company's controls and procedures were effective.
(b) Changes in internal controls.
The Company maintains a system of internal accounting controls that
are designed to provide reasonable assurance that its books and
records accurately reflect its transactions and that established
policies and procedures are followed. There were no significant
changes to the Company's internal controls or in other factors that
could significantly affect its internal controls subsequent to such
evaluation.
13
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
-------------------
Except as described in "Part I - Item 1 - Financial Information - Note 6 of
Notes to Interim Consolidated Financial Statements (Unaudited)" which
description is incorporated in its entirety by this reference into this part,
there are no material pending legal proceedings to which the Company or any of
its subsidiaries is a party or to which any of their property is subject.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
------------------------------------------------
Any issuances or sales of equity securities resulting in cash proceeds to
the Company described in "Part 1. Item 2. Liquidity and Capital Resources",
were made in reliance on exemptions from registration provided by Regulation D,
Regulation S and/or Section 4(2) of the Securities Act of 1933, as amended, and
the rules and regulations promulgated thereunder.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
-----------------------------------
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
------------------------------------------------------------
Not applicable.
ITEM 5. OTHER INFORMATION.
-------------------
Not applicable.
-
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
--------------------------------------
(a) Exhibits.
See Index of Exhibits.
(b) Reports on Form 8-K.
Form 8-K filed September 13, 2004.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
BRAZAURO RESOURCES CORPORATION
(Registrant)
Dated: December 15, 2004 By: /s/ Mark E. Jones, III
--------------------------
MARK E. JONES, III
Chairman
(and principal financial officer)
14
INDEX OF EXHIBITS
Exhibit No. Description of Exhibits
- ----------- ------------------------------------------------------------------------------------
31 Certification of Chairman pursuant to Rule 13a-14(a)/15d-14(a) of the Securities
. . . . . Exchange Act of 1934.
32 Certification of Chairman pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
. . . . . Section 906 of the Sarbanes-Oxley Act of 2002.
15