ITEM 7. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF OPERATION Management's Discussion and Analysis of Results of Financial Condition and Results of Operations ("MD&A") should be read in conjunction with the financial statements included herein. Further, this MD&A should be read in conjunction with the Company's Financial Statements and Notes to Financial Statements included in this Annual Report on Form 10-K for the years ended June 30, 2011 and June 30, 2010, as well as the "Business" and "Risk Factors" sections of this Annual Report on Form 10-K. The Company's financial statements have been prepared in accordance with United States generally accepted accounting principles
Management's Discussion and Analysis contains various "forward looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, regarding future events or the future financial performance of the Company that involve risks and uncertainties. Certain statements included in this Form 10-K, including, without limitation, statements related to anticipated cash flow sources and uses, and words including but not limited to "anticipates", "believes", "plans", "expects", "future" and similar statements or expressions, identify forward looking statements. Any forward-looking statements herein are subject to certain risks and uncertainties in the Company's business and any changes in current accounting rules, all of which may be beyond the control of the Company. The Company adopted at management's discretion, the most conservative recognition of revenue based on the most astringent guidelines of the SEC. Management will elect additional changes to revenue recognition to comply with the most conservative SEC recognition on a forward going accrual basis as the model is replicated with other similar markets (i.e. SBDC). The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth therein.
Based on the nature of our business, we anticipate incurring operating losses in the foreseeable future. We base this expectation, in part, on the fact that very few mineral properties in the exploration stage ultimately develop into producing, profitable mines. Our future financial results are also uncertain due to a number of factors, some of which are outside our control. These factors include, but are not limited to:
- our ability to raise additional funding;
- the market price for vanadium, gold and uranium;
- the results of our proposed exploration programs on our mineral properties;
-the political instability in Madagascar; and
- our ability to find joint venture partners for the development of our property interests.
Any future equity financing will cause existing shareholders to experience dilution of their interest in our company. In the event we are not successful in raising additional financing, we anticipate that we will not be able to proceed with our business plan. In such a case, we may decide to discontinue our current business plan and seek other business opportunities in the resource sector. Any business opportunity would require our management to perform diligence on possible acquisition of additional resource properties. Such due diligence would likely include purchase investigation costs such as professional fees by consulting geologists, preparation of geological reports on the properties, conducting title searches and travel costs for site visits. It is anticipated that such costs will not be sufficient to acquire any resource property and additional funds will be required to close any possible acquisition.
During this period, we will need to maintain our periodic filings with the appropriate regulatory authorities and will incur legal and accounting costs. In the event no other such opportunities are available and we cannot raise additional capital to sustain operations, we may be forced to discontinue business. We do not have any specific alternative business opportunities in mind and have not planned for any such contingency.
Due to our lack of operating history and present inability to generate revenues, our auditors have stated their opinion that there currently exists substantial doubt about our ability to continue as a going concern.
Plan of Operation
Our plan of operations for the period until the end of the calendar year ending December 31, 2011 (to the end of the Company's second quarter 2012) is to complete the following objectives within the time periods specified, subject to our obtaining the necessary funding and/or permits for continued exploration of the mineral properties. The following table, although subject to revision and although assurances can be provided that the objectives will be reached, summarizes the anticipated exploration expenditures on our current properties for the period until December 31, 2011.
Estimated Exploration Budget
Our plan is to incur approximately $1,500,000 - $2,000,000 on exploration up to December 31, 2010 on our Green Giant property and approximately $10,000 on other projects. They must have meant Dec 31, 2011....oops.
Future Programs
The property merits an ambitious exploration program consisting of exploratory and infill diamond drilling over vanadium-bearing zones identified by diamond drilling and trenching completed in 2008 and 2009. The goal of the program is to establish a compliant vanadium resource in the Jaky, Manga and Mainty Zones at a minimum, and to continue exploration on other less well-developed target areas mainly the Fondrana and Maitso Zones. A 7,000 meter, 35-hole drill program will employ two Boart Longyear diamond drills and will include a number of step-out drill holes along the main vanadium trend to verify additional mineralized zones previously confirmed through trenching.
Our National Instrument 43-101 compliant resource estimate confirmed that a significant amount of vanadium has been discovered in two mineralized zones that account for a very small portion (1.35 kilometers) of the overall 21-kilometre trend of continuous vanadium mineralization.
The Manga zone has a high-grade core with vanadium values assaying as high as 1.2% V2O5 and is open along strike to the south and at depth. In just 500 meters of strike-length drilled to date, the Manga zone accounts for 77% of the total resource estimate.
To date, 131 diamond drill holes and 151 trenches, totaling 38,643 meters have been completed on the Green Giant Property. Our management expects, but cannot guarantee, to complete a NI 43-101 compliant preliminary economic assessment (scoping) study by the end of this fiscal year.
The economic potential of the property rests upon the ability to extract vanadium using reasonable, potentially economic parameters. We are carrying out further larger sample tests and more complete mineralogy and metallurgical testing of vanadium ores to establish the technological and economic parameters of vanadium processing. The goal of this work is to identify a potentially economic processing method to extract vanadium from both the vanadium silicate and vanadium oxide types, which are known to exist on the property.
We have had no operating revenues from inception on March 1, 2004 through to the year ended June 30, 2011. Our activities have been financed from the proceeds of securities subscriptions. From inception, on March 1, 2004, to June 30, 2011, we raised net aggregate proceeds of $37,464,105 from private offerings of our securities and $886,500 through the exercise of common share purchase warrants.
For the period from inception, March 1, 2004, to June 30, 2011, we incurred a loss before income taxes of $52,073,840. Expenses included $18,667,956 in mineral property and exploration costs. These costs charged to operations were for the acquisition of the Madagascar properties, Sagar Properties in Canada, and other abandoned properties. This amount includes ancillary costs related to the mineral properties. We also incurred $3,698,195 in professional fees since inception. In addition, since inception, we have recorded general and administrative expenses of $5,038,784 which includes rental costs, travel and office expenses; stock based compensation valued at $19,037,563, a foreign exchange translation gain of $971,695, donated services and expenses of $18,750, and total other income (including interest) of $1,059,473.
Liquidity and Capital Resources
As at June 30, 2011, we had cash on hand of $4,536,275 plus $8,031,076 invested in dual currency deposits. Our working capital was $12,052,743.
We hold a significant portion of cash reserves in Canadian dollars. Due to foreign exchange rate fluctuations, the value of these Canadian dollar reserves can result in translation gains or losses in US dollar terms. If there was to be a significant decline in the Canadian dollar against the US Dollar, the US dollar value of that Canadian dollar cash position presented on the company's balance sheet would also significantly decline. If the US Dollar significantly declines relative to the Canadian dollar our quoted US dollar cash position would also significantly decline. We have not entered into derivative instruments to offset the impact of foreign exchange fluctuations. Such foreign exchange declines could cause us to experience losses.
There are no assurances that we will be able to achieve further sales of common stock or any other form of additional financing. If our company is unable to achieve the financing necessary to continue the plan of operations, then we will not be able to continue our exploration and our venture will fail.
Capital Financing
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From inception to June 30, 2004, we raised $59,750 through the issuance of 9,585,000 common shares.
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For the year ended June 30, 2005, we did not raise any new financing.
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For the year ended June 30, 2006, we raised $795,250 through the issuance of 2,750,000 common shares and 2,265,000 share purchase warrants.
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For the year ended June 30, 2007, we raised $17,300,000 through the issuance of 34,600,000 common shares and 29,000,250 share purchase warrants.
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For the year ended June 30, 2008, we did not raise any new financing.
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For the year ended June 30, 2009, we raised $680,000 through the issuance of 6,800,000 common shares and 3,400,000 share purchase warrants.
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For the year ended June 30, 2010, we raised $6,500,000 through the issuance of 21,666,667 common shares and 21,666,667 share purchase warrants.
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For the year ended June 30, 2011, we raised net proceeds of $13,178,708 through the issuance of 30,936,654 common shares and 15,468,328 common share purchase warrants and $886,500 through the exercise of common share purchase warrants.
We anticipate that additional funding will be in the form of equity financing from the sale of our common shares. However, our company cannot provide investors with any assurance that we will be able to raise sufficient funding from the sale of common shares for additional phases of exploration. Our management believes that debt financing will not be an alternative for funding additional phases of exploration. We do not have any arrangements in place for any future equity financing.
We have funded our business to date from sales of our securities.
On March 15, 2010, the Company closed a private placement of 21,666,667 units for gross proceeds of $6,500,000 (the "2010 Offering"). Each unit consists of one common share and one common share purchase warrant. Each warrant entitles the holder the right to purchase one common share at an exercise price of $0.50 for a period of three years following the later of March 15, 2010 or the date of listing on the TSX-V (May 5, 2010). The expiry of the warrants may be accelerated by the Company if the shares of common stock trade at a price greater than $0.75 at any time after 9 months from March 15, 2010 for a period of 21 consecutive days on the OTC Bulletin Board ("OTCBB") or the TSX-V, provided that the Company has filed, and had declared effective, the Registration Statement (as defined below).
The units were issued together with listing and filing rights, which rights could have been converted into an escalating number of shares of common stock if the Company did not complete its TSX-V listing or file a resale registration statement for the securities issued in connection with the 2010 Offering (the "Registration Statement") by certain specific dates. The Company was listed on the TSX-V on May 5, 2010 and its Registration Statement was declared effective by the Securities Exchange Commission on November 10, 2010. Therefore the rights have expired.
As consideration for their services in connection with the brokered offerings, two agents ( "Agents") were (i) paid a cash commission of 6% of the gross proceeds of the brokered offerings, (ii) issued 870,000 Class A broker warrants, and (iii) issued 870,000 Class B broker warrants. Each Class A broker warrant entitles the holder to acquire one common share at an exercise price of US$0.30 until March 15, 2012. Each Class B broker warrant entitles the holder to acquire one common share at an exercise price of US$0.50 at any time after a corresponding number of Class A broker warrants have been exercised by the Agent and on or before May 5, 2013.
In addition, an Agent was issued 400,000 shares of common stock and 400,000 Class C broker warrants for certain advisory services in connection with the brokered offerings. Each Class C broker warrant entitles the holder to acquire one common share at an exercise price of US$0.30 until March 15, 2013.
All of these shares were issued to non-US investors. The Offering of such shares of our common stock and common stock purchase warrants to the Investors was effected in reliance on the exemptions for sales of securities not involving a public offering, in reliance upon Regulation S of the Securities Act of 1933, as amended (the "Securities Act"), based on the following: (a) the Investors confirmed to us that they were "accredited investors," as defined in Rule 501 of Regulation D promulgated under the Securities Act and had such background, education and experience in financial and business matters as to be able to evaluate the merits and risks of an investment in the securities; (b) there was no public offering or general solicitation with respect to the offering; (c) the Investors were provided with certain disclosure materials and all other information requested with respect to our company; (d) the Investors acknowledged that all securities being issued were "restricted securities" for purposes of the Securities Act, and agreed to transfer such securities only in a transaction registered under the Securities Act or exempt from registration under the Securities Act; and (e) a legend was placed on the certificates representing each such security stating that it was restricted and could only be transferred if subsequent registered under the Securities Act or transferred in a transaction exempt from registration under the Securities Act. The Investors, in conjunction with the issuance of common shares and common stock purchase warrants pursuant to Rule 903(a) and (b)(3) of Regulation S represented to us that they were not a "U.S. Person". We did not engage in a distribution of this offering in the United States. The Investors represented its intention to acquire the securities for investment only and not with a view towards distribution. Appropriate legends have been affixed to the stock certificate issued to the Investors in accordance with Regulation S.
For purposes of this disclosure, "U.S. Person" within the meaning of U.S. tax laws, means a citizen or resident of the United States, any former U.S. citizen subject to Section 877 of the Internal Revenue Code, any corporation, or partnership organized or existing under the laws of the United States of America or any state, jurisdiction, territory or possession thereof and any estate or trust the income of which is subject to U.S. federal income tax irrespective of its source, and within the meaning of U.S. securities laws, as defined in Rule 902(o) of Regulation S, means: (i) any natural person resident in the United States; (ii) any partnership or corporation organized or incorporated under the laws of the United States; (iii) any estate of which any executor or administrator is a U.S. person; (iv) any trust of which any trustee is a U.S. person; (v) any agency or branch of a foreign entity located in the United States; (vi) any non-discretionary account or similar account (other than an estate or trust) held by a dealer or other fiduciary for the benefit or account of a U.S. person; (vii) any discretionary account or similar account (other than an estate or trust) held by a dealer or other fiduciary organized, incorporated, or (if an individual) resident in the United States; and (viii) any partnership or corporation if organized under the laws of any foreign jurisdiction, and formed by a U.S. person principally for the purpose of investing in securities not registered under the Securities Act, unless it is organized or incorporated, and owned, by accredited investors (as defined in Rule 501(a)) who are not natural persons, estates or trusts.
We offered and sold the securities in the brokered and non-brokered offerings outside the United States in compliance with Rule 903 of Regulation S under the Securities Act. Each purchaser of such securities has represented to us that it is not a "U.S. person", as defined under Regulation S (a "U.S. Person"), and is not acquiring the securities for the account or benefit of a U.S. Person or person in the United States.
On March 31, 2010, 2,000,000 stock options were exercised for gross proceeds of $300,000.
On December 17, 2010 the Company issued 200,000 shares of common stock valued at $90,000 pursuant to a contract with a party to provide advisory services in China.
During January and February 2011, the Company closed a private placement of 30,936,654 units for gross proceeds of $13,921,495. Each unit consisted of one common share and one half of one common share purchase warrant. Each of the 15,468,327 warrants issued entitles the holder the right to purchase one common share at an exercise price of $0.75 for a period of two years from the date of issue. In connection with the private placement, the Company paid finders' fees consisting of a cash fee of 6% to certain eligible finders totaling $704,115, TSX-V fees totaling $38,411 and compensation warrants equal to 6% of the eligible units sold totaling 1,564,700. Each full compensation warrant entitles the holder to acquire one unit of the Company at $0.45 per unit and expire on February 25, 2013.
During the year ended June 30, 2011, the Company issued a total of 4,549,500 shares of common stock for consideration of $886,500. This common stock was issued pursuant to the exercise of several share purchase warrants.
The offer and sale of all shares of our common stock and warrants listed above were affected in reliance on the exemptions for sales of securities not involving a public offering, as set forth in Regulation S promulgated under the Securities Act. The Investor acknowledged the following: Subscriber is not a United States Person, nor is the Subscriber acquiring the shares of our common stock and warrants directly or indirectly for the account or benefit of a United States Person. None of the funds used by the Subscriber to purchase the shares of our common stock and warrants have been obtained from United States Persons. For purposes of this Agreement, "United States Person" within the meaning of U.S. tax laws, means a citizen or resident of the United States, any former U.S. citizen subject to Section 877 of the Internal Revenue Code, any corporation, or partnership organized or existing under the laws of the United States of America or any state, jurisdiction, territory or possession thereof and any estate or trust the income of which is subject to U.S. federal income tax irrespective of its source, and within the meaning of U.S. securities laws, as defined in Rule 902(o) of Regulation S, means: (i) any natural person resident in the United States; (ii) any partnership or corporation organized or incorporated under the laws of the United States; (iii) any estate of which any executor or administrator is a U.S. person; (iv) any trust of which any trustee is a U.S. person; (v) any agency or branch of a foreign entity located in the United States; (vi) any non-discretionary account or similar account (other than an estate or trust) held by a dealer or other fiduciary for the benefit or account of a U.S. person; (vii) any discretionary account or similar account (other than an estate or trust) held by a dealer or other fiduciary organized, incorporated, or (if an individual) resident in the United States; and (viii) any partnership or corporation if organized under the laws of any foreign jurisdiction, and formed by a U.S. person principally for the purpose of investing in securities not registered under the Securities Act, unless it is organized or incorporated, and owned, by accredited investors (as defined in Rule 501(a)) who are not natural persons, estates or trusts.
Further, we anticipate that additional funding will be in the form of equity financing from the sale of our common stock. However, we cannot provide investors with any assurance that we will be able to raise sufficient funding for additional phases of exploration. We currently believe that debt financing will not be an alternative for funding additional phases of exploration. We do not have any arrangements in place for any future equity financing.
There are no assurances that we will be able to achieve further sales of our common stock or any other form of additional financing. If we are unable to achieve the financing necessary to continue our plan of operations, then we will not be able to continue our exploration and our venture will fail.
Foreign currencies
We hold a significant portion of our cash reserves in Canadian dollars. Due to foreign exchange rate fluctuations, the value of these Canadian dollar reserves can result in either translation gains or losses in US dollar terms. If the US Dollar significantly declines relative to the Canadian dollar our quoted US dollar cash position would also significantly decline. We have not entered into derivative instruments to offset the impact of foreign exchange fluctuations. Such foreign exchange declines could cause us to experience losses.
In addition to paying certain expenses in Canadian dollars, our company is also required, from time to time, to pay expenses in South African Rand, Australian Dollars and Madagascar Ariary. Therefore our company is subject to risks relating to movements in those currencies.
Off-balance sheet arrangements
We have no off-balance sheet arrangements including arrangements that would affect the liquidity, capital resources, market risk support and credit risk support or other benefits.
CRITICAL ACCOUNTING POLICIES
Principals of Consolidation and Basis of Presentation
The consolidated financial statements are presented in accordance with accounting principles generally accepted in the United States ("U.S. GAAP"), and are expressed in US dollars. The accompanying consolidated financial statements include the accounts of Energizer Resources Inc. and its wholly-owned subsidiaries, Uranium Star (Mauritius) Ltd., THB Ventures Ltd, Energizer Resources Madagascar Sarl and Energizer Resources Minerals Sarl. All inter-company balances and transactions have been eliminated on consolidation.
Use of Estimates
The preparation of consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the period. On an ongoing basis, management evaluates its judgments and estimates in relation to assets, liabilities, revenue and expenses. Management uses historical experience and other factors it believes to be reasonable as the basis for its judgments and estimates. Actual results could differ from those estimates. The consolidated financial statements include estimates which, by their nature, are uncertain. The impacts of such estimates are pervasive throughout these consolidated financial statements, and may require accounting adjustments based on future occurrences. Revisions to accounting estimates are recognized in the period in which the estimate is revised and the revision affects current and future periods.
Mineral Property Costs
The Company has been in the exploration stage since its inception on March 1, 2004, and has not yet realized any revenues from its mineral operations. Mineral property exploration costs are expensed as incurred. Mineral property acquisition costs are initially capitalized when incurred using the guidance in ASC Topic-930, "Whether Mineral Rights Are Tangible or Intangible Assets". The Company assesses the carrying costs for impairment under ASC Topic-360, at each fiscal quarter end.
When it has been determined that a mineral property can be economically developed as a result of establishing probable and proven reserves, the costs then incurred to develop such property will be capitalized. Such costs will be amortized using the units of production method over the estimated life of the probable reserve. If the properties are abandoned or the carrying value is determined to be in excess of possible future recoverable amounts the Company will write off the appropriate amount.
Financial Instruments
The fair value of cash and cash equivalents, amounts receivable, marketable securities, dual currency deposits and accounts payable and accrued liabilities were estimated to approximate their carrying values due to the immediate or short-term maturity of these financial instruments. The Company's exploration operations are primarily in Madagascar but also in Canada, which result in exposure to market risks from changes in foreign currency rates. Financial risk is the risk to the Company's operations that arise from fluctuations in foreign exchange rates and the degree of volatility of these rates.
Foreign Currency Translation
The Company's functional and reporting currency is United States Dollars. Monetary assets and liabilities denominated in foreign currencies are translated in accordance with ASC Topic-830, "Foreign Currency Translation", using the exchange rate prevailing at the balance sheet date. Gains and losses arising on settlement of foreign currency denominated transactions or balances are included in the consolidated statement of operations.
The Company has a stock option plan as described in note 8. All stock-based awards granted, including those granted to directors not acting in their capacity as directors, are accounted for using the fair value based method. The fair value of stock options granted is recognized as an expense within the income statement and a corresponding increase in shareholder equity. Any consideration paid by eligible participants on the exercise of stock options is credited to capital stock. The additional paid in capital amount associated with stock options is transferred to capital stock upon exercise.
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