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 July 31, 2005
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)
1500 - 701 West Georgia Street
Vancouver, BC, Canada V7Y 1C6
(Address of Principal Executive Offices, including Zip Code)
(604) 689-1832
(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 September 9, 2005:
52,897,645
BRAZAURO RESOURCES CORPORATION
FORM 10-Q
TABLE OF CONTENTS
PAGE
PART I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets - January 31, 2005
and July 31, 2005 (Unaudited) . . . . . . . . . . . . . . . . . . . . . . . 1
Interim Consolidated Statements of Operations - Three and Six Months Ended
July 31, 2005 and 2004 (Unaudited). . . . . . . . . . . . . . . . . . . . . 2
Interim Consolidated Statements of Shareholders' Equity
January 31, 2004, January 31, 2005 and July 31, 2005 (Unaudited). . . . . . 3
Interim Consolidated Statements of Cash Flows - Three and Six Months
Ended July 31, 2005 and 2004 (Unaudited). . . . . . . . . . . . . . . . . . 4
Notes to Interim Consolidated Financial Statements (Unaudited) -
July 31, 2005 and 2004. . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. . . . . . . . . . . . . . . . . . . . 13
Item 3. Quantitative and Qualitative Disclosures about Market Risk . . . . . 15
Item 4. Controls and Procedures. . . . . . . . . . . . . . . . . . . . . . . 15
PART II. Other Information.
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . 16
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. . . . . 16
Item 3. Defaults Upon Senior Securities. . . . . . . . . . . . . . . . . . . 16
Item 4. Submission of Matters to a Vote of Security Holders. . . . . . . . . 16
Item 5. Other Information. . . . . . . . . . . . . . . . . . . . . . . . . . 17
Item 6. Exhibits and Reports on Form 8-K.. . . . . . . . . . . . . . . . . . 17
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
i
BRAZAURO RESOURCES CORPORATION
CONSOLIDATED BALANCE SHEETS
July 31, 2005 January 31, 2005
--------------- ------------------
(Unaudited) (Audited)
(In Canadian Dollars)
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . $ 9,699,250 $ 3,557,214
Accounts receivable . . . . . . . . . . . . . 89,830 87,443
-------------- --------------
Total current assets . . . . . . . . . . . . . . 9,789,080 3,644,657
-------------- --------------
Property and equipment, at cost:
Mineral properties and deferred
expenditures (Note 2). . . . . . . . . . . . 4,279,029 2,817,746
Equipment and other. . . . . . . . . . . . . . 70,561 80,887
Accumulated depreciation . . . . . . . . . . . (27,587) (70,561)
-------------- --------------
Total property and equipment, at cost. . . . . . 4,322,003 2,828,072
-------------- --------------
Other assets . . . . . . . . . . . . . . . . . . 7,232 8,874
-------------- --------------
Total assets . . . . . . . . . . . . . . . . . . $ 14,118,315 $ 6,481,603
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities . . . $ 247,490 $ 206,011
Asset retirement obligations . . . . . . . . . 130,844 142,554
-------------- --------------
Total current liabilities. . . . . . . . . . . . 378,334 348,565
-------------- --------------
Commitments and contingencies (Note 4)
Shareholders' equity:
Common share capital, no par value:
Authorized shares - 100,000,000
Issued and outstanding shares - 47,869,073
(44,869,716 at January 31, 2005) (Note 3) 44,406,592 41,536,205
Share subscriptions received (Note 10) . . . . 6,866,600 -
Contributed surplus (Note 6) . . . . . . . . . 3,273,070 2,131,304
Deficit. . . . . . . . . . . . . . . . . . . . (40,806,281) (37,534,471)
-------------- --------------
Total shareholders' equity . . . . . . . . . . . 13,739,981 6,133,038
-------------- --------------
Total liabilities and shareholders' equity . . . $ 14,118,315 $ 6,481,603
============== ==============
See accompanying notes.
1
BRAZAURO RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In Canadian Dollars)
Three Months Ended July 31, Six Months Ended July 31,
2005 2004 2005 2004
------------ ------------ ------------ ------------
Revenues:
Interest income. . . . . . . . . . . . . . . $ 11,211 $ 76 $ 25,096 $ 310
Gains on sale equipment. . . . . . . . . . . - - 1,202 -
------------ ------------ ------------ ------------
11,211 76 26,298 310
------------ ------------ ------------ ------------
Expenses:
General and administrative (Notes 5 and 6) . 1,947,267 1,238,694 3,262,193 1,718,001
Finance charges. . . . . . . . . . . . . . . 6,068 1,460 12,272 4,610
Foreign exchange translation (gains) losses. 53,315 18,053 23,643 (19,857)
2,006,650 1,258,207 3,298,108 1,702,754
------------ ------------ ------------ ------------
Loss before provision for income taxes . . . . (1,995,439) (1,258,131) (3,271,810) (1,702,444)
Provision for income taxes . . . . . . . . . . - - - -
------------ ------------ ------------ ------------
Net loss for the period. . . . . . . . . . . . $(1,995,439) $(1,258,131) $(3,271,810) $(1,702,444)
============ ============ ============ ============
Basic and diluted net loss per common share. . $ (0.04) $ (0.03) $ (0.07) $ (0.05)
Weighted-average common shares outstanding . . 45,839,724 37,135,474 45,522,997 36,449,791
See accompanying notes.
2
BRAZAURO RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)
(In Canadian Dollars)
Share Total
Common Shares Subscriptions Contributed Shareholders'
Number Amount Received Surplus Deficit Equity
-------------- -------------- -------------- -------------- -------------- --------------
Balance at January 31, 2004 . . 35,748,871 $ 35,819,799 $ - $ 423,232 $(33,793,316) $ 2,449,715
Issued for cash, net of share
issue cost. . . . . . . . . . 4,262,500 3,848,675 - - - 3,848,675
Issued for property acquisition 400,000 270,000 - - - 270,000
Issued on exercise of warrants. 2,819,774 704,943 - - - 704,943
Stock-based compensation. . . . - - - 2,123,283 - 2,123,283
Issued on exercise of stock
options . . . . . . . . . . . 1,638,571 892,788 - (415,211) - 477,577
Net loss for the year . . . . . - - - - (3,741,155) (3,741,155)
-------------- -------------- -------------- -------------- -------------- --------------
Balance at January 31, 2005 . . 44,869,716 41,536,205 - 2,131,304 (37,534,471) 6,133,038
Issued for property acquisition 200,000 400,000 - - - 400,000
Issued on exercise of warrants. 79,000 82,950 - - - 82,950
Share subscriptions received. . - - 6,866,600 - - 6,866,600
Stock-based compensation. . . . - - - 2,248,934 - 2,248,934
Issued on exercise of stock
options . . . . . . . . . . . 2,720,357 2,387,437 - (1,107,168) - 1,280,269
Net loss for the period . . . . - - - - (3,271,810) (3,271,810)
-------------- -------------- -------------- -------------- -------------- --------------
Balance at July 31, 2005. . . . 47,869,073 $ 44,406,592 $ 6,866,600 $ 3,273,070 $(40,806,281) $ 13,739,981
============== ============== ============== ============== ============== ==============
See accompanying notes.
3
BRAZAURO RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended July 31, Six Months Ended July 31,
2005 2004 2005 2004
------------ ------------ ------------ ------------
(In Canadian Dollars)
OPERATING ACTIVITIES
Net loss. . . . . . . . . . . . . . . . . . . $(1,995,439) $(1,258,131) $(3,271,810) $(1,702,444)
Adjustments to reconcile net income (loss)
to net cash used in operations:
Depreciation. . . . . . . . . . . . . . . 6,220 1,150 8,100 5,678
Gain on sale of equipment . . . . . . . . - - (1,202) -
Stock based compensation (Note 6) . . . . 1,383,186 855,880 2,248,934 1,011,150
Changes in noncash working capital:
Accounts receivable . . . . . . . . . . . (5,217) (26,169) (3,180) (80,798)
Accounts payable and accrued liabilities. 111,285 131,871 33,442 186,253
------------ ------------ ------------ ------------
Net cash used in operating activities . . . . (499,965) (295,399) (985,716) (580,161)
------------ ------------ ------------ ------------
INVESTING ACTIVITIES
Mineral property acquisition and
exploration . . . . . . . . . . . . . . . . (752,734) (627,926) (1,061,283) (1,039,780)
Equipment and other . . . . . . . . . . . . . (12,282) - (40,748) (7,708)
------------ ------------ ------------ ------------
Net cash used in investing activities . . . . (765,016) (627,926) (1,102,031) (1,047,488)
------------ ------------ ------------ ------------
FINANCING ACTIVITIES
Proceeds from issuances of common
shares. . . . . . . . . . . . . . . . . . . 1,163,043 385,616 1,363,219 448,116
Proceeds from subscriptions received. . . . . 6,866,600 - 6,866,600 -
Proceeds from sale of equipment . . . . . . . - - 1,202 -
------------ ------------ ------------ ------------
Net cash provided by financing activities . . 8,029,643 385,616 8,231,021 448,116
Effect of exchange rate changes on cash . . . (2,549) (6,768) (1,238) (1,244)
------------ ------------ ------------ ------------
Increase (decrease) in cash and cash
equivalents . . . . . . . . . . . . . . . . 6,762,113 (544,477) 6,142,036 (1,180,777)
Cash and cash equivalents, beginning of
period. . . . . . . . . . . . . . . . . . . 2,937,137 1,346,236 3,557,214 1,982,536
------------ ------------ ------------ ------------
Cash and cash equivalents, end of period. . . $ 9,699,250 $ 801,759 $ 9,699,250 $ 801,759
============ ============ ============ ============
See accompanying notes.
See Note 9 for supplemental cash flow disclosure and non-cash investing and financing activities.
4
BRAZAURO RESOURCES CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN CANADIAN DOLLARS)
JULY 31, 2005 AND 2004
1. BASIS OF OPERATIONS
Brazauro Resources Corporation ("the Company") 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 7. 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. This report on
Form 10-Q should be read in conjunction with the Company's financial statements
and notes thereto included in the Company's Form 10-K for the fiscal year ended
January 31, 2005. The Company assumes that the users of the interim financial
information herein have read or have access to the audited financial statements
for the preceding fiscal year and that the adequacy of additional disclosure
needed for a fair presentation may be determined in that context.
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 six month periods ended July 31, 2005 are
not necessarily indicative of the results that may be expected for the year
ended January 31, 2006.
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. The recoverability of the carrying value of
mineral properties and deferred expenditures is dependent upon a number of
factors including the existence of recoverable reserves, the ability of the
Company to obtain financing to renew leases and continue exploration and
development, and the discovery of recoverable reserves.
Certain amounts in the financial statements for the quarter ended July 31, 2004
have been reclassified to conform to the presentation as of July 31, 2005.
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
The Company cannot guarantee title to all of its Properties as the Properties
may be subject to prior unregistered agreements or transfers or native land
claims, and title may be affected by undetected defects. The Company does not
maintain title insurance on its properties.
BRAZILIAN PROPERTIES
Tocantinzinho Properties
In August 2003 the Company entered into an option to acquire exploration rights
to a total of 28,275 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 "Tocantinzinho Properties") over a four-year period
in consideration for the staged payment of US$465,000, the staged issuance of
5
BRAZAURO RESOURCES CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(IN CANADIAN DOLLARS)
JULY 31, 2005 AND 2004
2. MINERAL PROPERTIES AND DEFERRED EXPENDITURES (CONTINUED)
2,600,000 shares of the Company and the expenditure of $1,000,000 (U.S.) on
exploration ($300,000 (U.S.) by July 31, 2004). 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 and July 2005, the Company
made the third and fourth option payments, both consisting of 200,000 common
shares of the Company and $40,000 (U.S.).
As of July 31, 2005, the total commitment remaining under the option agreement
is as follows (all amounts are in U.S. dollars): $130,000 and 200,000 common
shares of the Company, and $150,000 and 700,000 common shares of the Company for
the 2007 and 2008 fiscal years, respectively.
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. At July 31, 2005, the remaining payment
commitments under the Underlying Agreements are as follows (all amounts are in
U.S. dollars): $65,000, $160,000 and $1,205,000 in fiscal years 2006, 2007 and
2008, respectively. The Company made payments totaling $35,000 (U.S.), $80,000
and $55,000 (U.S.) in respect of the Underlying Agreements during fiscal 2004,
2005 and 2006, respectively. 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 which expired during fiscal 2005. 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. During fiscal 2005 the Company met the requirement under the option
agreement to expend a total of $300,000 (U.S.) and met the requirement to expend
$1,000,000 (U.S.) on exploration. The Company has met its first year
commitments under the option agreement, and 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. The Company has filed applications for
exploration licenses with the regulatory authorities in Brazil and has received
final approval on several claim areas. The Company anticipates it will receive
final approval on the remaining claim areas in fiscal 2006.
In May 2004 the Company applied for exploration permits for an additional 16,000
hectares adjacent to the above Tocantinzinho 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.
During fiscal 2005 and 2006, the Company made payments under the option
agreement totaling $25,000 (U.S.) and $20,000 (U.S.), respectively. The
remaining option payments are as follows (all amounts are in U.S. dollars):
$25,000, $65,000, and $155,000 in fiscal years ending January 31, 2006, 2007 and
2008, respectively. The Company may acquire the Mamoal Property at any time by
accelerating the option payments. The Company has received the exploration
license from the Brazilian regulatory authority.
6
BRAZAURO RESOURCES CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(IN CANADIAN DOLLARS)
JULY 31, 2005 AND 2004
2. MINERAL PROPERTIES AND DEFERRED EXPENDITURES (CONTINUED)
Batalha Property
In September, 2004 the Company applied for 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 $91,000
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.
Mineral properties and deferred expenditures were as follows:
BALANCE AT BALANCE AT
JANUARY 31 IMPAIRED JULY 31,
2005 ADDITIONS WRITE-OFFS 2005
---------- ---------- ---------- ----------
Brazilian Properties
Tocantinzinho Properties:
Acquisition costs . . . . . . . $1,042,977 $ 544,742 $ - $1,587,719
Exploration costs:
Drilling . . . . . . . . . . 607,334 238,931 - 846,265
Field expenses . . . . . . . 701,236 312,198 - 1,013,434
Geological . . . . . . . . . 181,445 98,745 - 280,190
Assay. . . . . . . . . . . . 111,870 36,853 - 148,723
---------- ---------- ---------- ----------
Total exploration costs. . . . 1,601,885 686,727 - 2,288,612
---------- ---------- ---------- ----------
Total Tocantinzinho Properties 2,644,862 1,231,469 - 3,876,331
Mamoal Property:
Acquisition costs . . . . . . . 45,288 25,110 - 70,398
Exploration costs:
Field expenses . . . . . . . 105,258 108,340 - 213,598
Geological . . . . . . . . . 10,901 90,865 - 101,766
Assay. . . . . . . . . . . . 4,138 106 - 4,244
---------- ---------- ---------- ----------
Total exploration costs. . . . 120,297 199,311 - 319,608
---------- ---------- ---------- ----------
Total Mamoal Property. . . . . 165,585 224,421 - 390,006
Batalha Property
Acquisition costs . . . . . . . 7,299 5,393 - 12,692
Exploration costs . . . . . . . - - - -
---------- ---------- ---------- ----------
7,299 5,393 - 12,692
---------- ---------- ---------- ----------
Total acquisition costs . . . . . . . . 1,095,564 575,245 - 1,670,809
Total exploration costs . . . . . . . . 1,722,182 886,038 - 2,608,220
---------- ---------- ---------- ----------
Total costs . . . . . . . . . . . . . . $2,817,746 $1,461,283 $ - $4,279,029
========== ========== ========== ==========
7
BRAZAURO RESOURCES CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(IN CANADIAN DOLLARS)
JULY 31, 2005 AND 2004
3. SHARE CAPITAL
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 had 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 the quarter ended April 30, 2004, 250,000 common share
warrants were exercised, and the Company received total exercise proceeds of
$62,500. During the last three quarters of fiscal year 2005, the remaining
2,569,774 common share warrants were exercised, and the Company received
additional exercise proceeds of $642,443.
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 $96,950 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 the first two
quarters of fiscal 2006, a holder of the share purchase warrants elected to
exercise 79,000 warrants and the Company received proceeds of $82,950.
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.
In the first two quarters of fiscal 2006, the Company granted incentive options
as follows:
DATE OF EXERCISE EXPIRATION
NUMBER. . GRANT PRICE DATE
100,000 . February 15, 2005 $ 1.15 February 15, 2010
600,000 . March 22, 2005 1.30 March 22, 2010
500,000 . April 1, 2005 1.30 April 1, 2010
300,000 . May 31, 2005 1.25 May 31, 2010
2,000,000 July 21, 2005 2.00 July 21, 2010
As of July 31, 2005, the Company had a total of 7,383,215 common stock options
outstanding at prices ranging from $0.18 to $2.00. In the first two quarters of
fiscal 2006, employees, directors and consultants of the Company exercised a
total of 2,720,357 common share options at prices ranging from $0.10 to $1.30,
and the Company received exercise proceeds of $1,280,269.
4. 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
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,
8
BRAZAURO RESOURCES CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(IN CANADIAN DOLLARS)
JULY 31, 2005 AND 2004
4. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 said
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.
5. GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses consisted of the following:
Three Months Ended July 31, Six Months Ended July 31,
2005 2004 2005 2004
----------- ----------- ----------- -----------
Consulting fees . . . . . . $ 91,282 $ 104,330 $ 219,808 $ 181,679
Depreciation expense. . . . 6,220 1,151 8,100 5,679
Entertainment . . . . . . . 19,077 6,416 36,847 10,980
Insurance . . . . . . . . . 21,000 1,945 21,000 1,945
Office expenses . . . . . . 40,368 51,225 108,791 74,077
Professional fees . . . . . 69,068 9,804 128,428 33,461
Rent. . . . . . . . . . . . 8,020 5,194 16,642 12,216
Repairs and maintenance . . 2,989 - 6,736 -
Salary. . . . . . . . . . . 1,541,850 981,204 2,508,184 1,245,203
Shareholder relations . . . 84,357 47,433 107,080 100,933
Travel. . . . . . . . . . . 63,036 29,992 100,577 51,828
----------- ----------- ----------- -----------
Total . . . . . . . . . . $1,947,267 $1,238,694 $3,262,193 $1,718,001
=========== =========== =========== ===========
9
BRAZAURO RESOURCES CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(IN CANADIAN DOLLARS)
JULY 31, 2005 AND 2004
6. STOCK BASED COMPENSATION
Stock-based compensation related to options granted to employees and
non-employees increased the following expenses in the consolidated financial
statements of the Company in the three and six months ended July 31, 2005 and
2004:
Three Months Ended July 31, Six Months Ended July 31,
2005 2004 2005 2004
----------- ----------- ----------- -----------
Consulting. . . . . . . . . $ 34,944 $ 40,666 $ 91,243 $ 65,683
Salaries. . . . . . . . . . 1,348,242 815,214 2,157,691 945,467
----------- ----------- ----------- -----------
$1,383,186 $ 855,880 $2,248,934 $1,011,150
=========== =========== =========== ===========
These amounts have also been recorded as contributed surplus on the balance
sheet.
The fair value of each option granted has been estimated as of the date of grant
using the Black-Scholes option-pricing model with the following assumptions:
2006 2005
Expected dividend yield . . 0% 0%
Expected volatility . . . . 146-150% 160%
Risk-free interest rate . . 3.4 to 3.6% 4.00%
Expected life . . . . . . . 2 to 3 years 3.5 years
Weighted average fair value
of options granted. . . . $ 1.24 $ 0.86
7. 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 Canadian GAAP, companies have the option to defer mineral exploration
expenditures on prospective properties until such time as it is determined that
further work is not warranted, at which point property costs would be written
off. Under United States GAAP, all exploration expenditures are expensed until
an independent feasibility study has determined that the property is capable of
commercial production. At this stage, the Company has not yet identified
economically recoverable reserves on any of its properties. Accordingly, under
United States GAAP, all exploration costs incurred are expensed.
10
BRAZAURO RESOURCES CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(IN CANADIAN DOLLARS)
JULY 31, 2005 AND 2004
7. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES ("GAAP") (continued)
The significant differences in the consolidated statements of loss relative to
US GAAP were:
Six months ended July 31
2005 2004
------------ ------------
Net loss in accordance with Canadian GAAP. . . . . . . . . . . . $(3,271,810) $(1,702,444)
Deduct:
Deferred exploration expenditures capitalized during the period. (886,038) (910,986)
------------ ------------
Net loss in accordance with United States GAAP . . . . . . . . . $(4,157,848) $(2,613,430)
============ ============
Basic and diluted net loss per share (United States GAAP). . . . $ (0.09) $ (0.07)
============ ============
Weighted average shares outstanding (United States GAAP) . . . . 45,522,997 36,449,791
============ ============
The significant differences in the consolidated balance sheet relative to US
GAAP were:
July 31, January 31,
2005 2005
Shareholders' equity - Canadian GAAP . . . . . . . . . . $13,739,981 $ 6,133,038
Mineral properties and deferred exploration expenditures (2,608,220) (1,722,182)
------------ ------------
Shareholders' equity - United States GAAP. . . . . . . . $11,131,761 $ 4,410,856
============ ============
Mineral properties and deferred exploration expenditures
- - Canadian GAAP. . . . . . . . . . . . . . . . . . . . . $ 4,279,029 $ 2,817,746
Mineral properties and deferred exploration expenditures
expensed per United States GAAP. . . . . . . . . . . . . (2,608,220) (1,722,182)
Acquisition costs of mineral properties - United States
GAAP . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,670,809 $ 1,095,564
============ ============
The significant differences in the consolidated statement of cash flows relative
to US GAAP were:
Six months ended July 31,
2005 2004
NET CASH USED IN OPERATIONS
Canadian GAAP. . . . . . . . . . . . . . . . . . . . . . $ (985,716) $ (580,161)
Mineral properties and deferred exploration expenditures (886,038) (910,986)
------------ ------------
US GAAP. . . . . . . . . . . . . . . . . . . . . . . . . (1,871,754) (1,491,147)
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES
Canadian GAAP. . . . . . . . . . . . . . . . . . . . . . (1,102,031) (1,047,488)
Mineral properties and deferred exploration expenditures 886,038 910,986
------------ ------------
US GAAP. . . . . . . . . . . . . . . . . . . . . . . . . (215,993) (136,502)
------------ ------------
NET CASH USED IN FINANCING ACTIVITIES
Canadian GAAP and U.S. GAAP. . . . . . . . . . . . . . . 8,231,021 448,116
------------ ------------
11
BRAZAURO RESOURCES CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(IN CANADIAN DOLLARS)
JULY 31, 2005 AND 2004
8. RELATED PARTY TRANSACTIONS
The chairman has significant share ownership of the Company. Accounts
receivable at January 31, 2005 includes $55,900 receivable from the chairman of
the Company. Amounts totaling $61,243 and $56,639 were paid by the Company
during the first quarter of fiscal 2006 and fiscal 2005, respectively, to a law
firm in which a director is a partner.
9. SUPPLEMENTAL CASH FLOW AND NON-CASH INVESTING AND FINANCING DISCLOSURE
Six Months ended
July 31,
2005 2004
---------- ----------
Supplemental cash flow disclosure:
Interest paid in cash. . . . . . . . $ - $ -
Income taxes paid. . . . . . . . . . - -
Non-cash investing activities:
Shares issued for mineral properties $ 400,000 $ 70,000
10. SUBSEQUENT EVENT
During August 2005 the Company closed a private placement of 5,000,000 units at
$1.90 per unit for gross proceeds of $9,500,000. As of July 31, 2005, the
Company had received a total of $6,866,600, representing subscriptions for
3,614,000 units. The Company paid a brokerage commission on the placement of
$475,000.
Each unit consists of one share and one half of one share purchase warrant.
Each whole warrant will entitle the holder to purchase one additional share of
the Company at $3.80 for a period of one year. If the shares of the Company
trade at $4.80 or higher on each trading day during a thirty day period, the
exercise period of the warrants will accelerate and holders will have a period
of 30 days thereafter to exercise their warrants, failing which they will
expire.
12
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 Six Month Periods Ended July 31,
2005 and 2004
All dollar amounts referred to herein are in Canadian Dollars unless
otherwise stated. As of September 7 2005 the exchange rate is $1.00 (Canadian) =
$0.8435 (U.S.)
The Company is engaged in the business of exploring for and, if warranted,
developing mineral properties and is concentrating its current acquisition and
exploration efforts on those properties which the Company believes have large
scale gold potential. The Company leases interests in properties located in the
Tapaj s Gold District of Brazil's northerly Par State (collectively the
"Properties").
The Company has had no significant revenues from mining operations. 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.
The Company's mineral properties and deferred expenditures increased to
$4,279,029 at July 31, 2005 from $2,817,746 at January 31, 2005 as a result of
acquisition costs totaling $575,245 and exploration costs totaling $886,038
related to the activities on the Company's Brazilian Properties as further
described in Note 2. The increases were primarily due to the acquisition and
exploration efforts of the Company related to its Tocantinzinho Properties.
The Company completed a 20 hole diamond drill program (approximately 4000
meters) at the Tocantinzinho Properties during fiscal 2005 in which 19 of 20
holes encountered mineralization. The Company commenced its Phase 3 drilling
program at the Tocantinzinho Properties in the second quarter of fiscal 2006.
The initial seven holes of the expected thirteen-hole, 3500-meter Phase 3
13
program intersected significant gold mineralization. Drill results to date
indicate a mineralized zone 640 meters in length, by 160 meters width, which
remains open along strike to the northwest and the southeast. In addition, the
bottom of the mineralized zone has not yet been defined. Additionally, the
Company completed both a ground magnetic survey and metallurgical testing of
drill core samples of the Tocantinzinho Properties during fiscal 2005 and 2006
and was encouraged by the results. Detailed results of the above testing,
including maps of the ground magnetics and drill hole mineralization, are
located at the company's website, www.brazauroresources.com.
In fiscal 2005 the Company carried out a regional soil auger sampling
program on its Mamoal Property, in conjunction with channel-sampling of old pits
and rock-chip sampling. The results were so encouraging that grid soil auger
sampling has been planned for the 2006 fiscal year followed by drilling of the
best anomalies.
The Company's revenues during the three and six month periods ending July
31, 2005 and 2004 were primarily comprised of interest income and gains on sales
of equipment. The Company has not received any revenues from mining operations
since inception.
General and administrative expenses for the six months ended July 31, 2005
increased by approximately $1,544,000 or 90% compared to the six months ended
July 31, 2004. Included in general and administrative expenses during the first
six months of fiscal 2006 and 2005 were approximately $2,249,000 and $1,011,000,
respectively, of stock compensation expense recorded using the fair value
method, which was an increase of approximately $1,238,000 in stock compensation
expense from fiscal 2005 to fiscal 2006. The remaining increase in general and
administrative expenses was primarily related to the increased activities
surrounding the exploration program underway in Brazil during fiscal 2006.
General and administrative expenses for the three months ended July 31,
2005 increased by approximately $709,000 or 57% compared to the three months
ended July 31, 2004. Approximately $527,000 of this increase consisted of an
increase in stock compensation expense, 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 two quarters of fiscal 2006 will increase from the level experienced
in the first two quarters of fiscal 2006. The Company expects to incur
additional consulting and exploration expenditures related to the Brazilian
Properties as drilling activities commenced in the second quarter of fiscal 2006
on the Company's Tocantinzinho Properties.
FINANCIAL CONDITION; LIQUIDITY AND CAPITAL RESOURCES.
As of July 31, 2005, the Company had working capital of $9,410,746 as
compared to working capital of $3,296,092 at January 31, 2005. At July 31,
2005, the Company had current assets of $9,789,080, including $9,699,250 in cash
and $89,830 in accounts receivable compared to total current liabilities of
$378,334.
In September, 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 had an expiration date of September 18, 2004. The Company
received a total of $563,955 during fiscal 2003 representing subscriptions for
the private placement. During fiscal year 2005, all 2,819,774 common share
warrants were exercised, and the Company received total exercise proceeds of
$704,943.
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 $96,950 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 the first two
quarters of fiscal 2006, a holder of the share purchase warrants elected to
exercise 79,000 warrants and the Company received proceeds of $82,950.
14
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.
During August 2005 the Company closed a private placement of 5,000,000
units at $1.90 per unit for gross proceeds of $9,500,000. As of July 31, 2005,
the Company had received a total of $6,866,600, representing subscriptions for
3,614,000 units. The Company paid a brokerage commission on the placement of
$475,000. Each unit consists of one share and one half of one share purchase
warrant. Each whole warrant will entitle the holder to purchase one additional
share of the Company at $3.80 for a period of one year. If the shares of the
Company trade at $4.80 or higher on each trading day during a thirty day period,
the exercise period of the warrants will accelerate and holders will have a
period of 30 days thereafter to exercise their warrants, failing which they will
expire.
During the six months ended July 31, 2005, employees, directors and
consultants of the Company exercised a total of 2,720,357 common share options
at prices ranging from $0.10 to $1.30, and the Company received exercise
proceeds of $1,280,269.
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 significant revenues from mining operations. 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.
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.
15
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
-------------------
Except as described in "Part I - Item 1 - Financial Information - Note 4 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. UNREGISTERED SALES OF EQUITY 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.
------------------------------------------------------------
The Company's Annual General Meeting of Shareholders was held July 26,
2005. The nominees elected as directors at such meeting and the number of
shares voted for, against or withholding authority for each director are listed
below:
Shares
Director/ Nominee. In Favor Against Withheld Abstain
- ------------------ ---------- ---------- ----------- ----------
D. Harry Dobson. . 27,610,388 - 3,786 -
Patrick L. Glazier 27,610,531 - 3,643 -
Brian C. Irwin . . 27,610,388 - 3,786 -
Mark E. Jones, III 27,610,531 - 3,643 -
Daniel B. Leonard. 27,610,531 - 3,643 -
Leendert G. Krol . 27,610,388 - 3,786 -
Roger H. Mitchell. 27,541,781 - 72,393 -
Roger D. Morton. . 27,610,531 - 3,643 -
The following is a brief description of each other matter submitted to vote at
such meeting and the number of shares voted for, against or withholding
authority:
16
Shares
Description of matter . . . . . . . . . . . . In Favor Against Withheld Abstain
- --------------------------------------------- ---------- --------- -------- ----------
1. To fix the number of directors at eight.. 27,608,522 5,652 - -
2. To appoint Morgan & Co. as auditor. . . . 27,603,382 - 5,792 -
3. To authorize the directors to fix the
renumeration to be paid to the auditors. 27,591,732 16,650 - -
4. To approve amendments to the
Company's Stock Option Plan. . . . . . . 15,028,305 1,208,477 - 12,310,461
5. To transact such other business as may
properly come before the meeting.. . . . 27,076,159 526,301 - -
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.
None.
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: September 14, 2005 by: /s/ Mark E. Jones, III
--------------------------
MARK E. JONES, III
Chairman
(and principal financial officer)
17
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.
18