Auditors’ Report and Consolidated Financial Statements of
SKN RESOURCES LIMITED
April 30, 2004
Deloitte & Touche LLP
P.O. Box 49279
Four Bentall Centre
2800 - 1055 Dunsmuir Street
Vancouver, British Columbia
V7X 1P4
Tel: (604) 669 4466
Fax: (604) 685 0395
www.deloitte.ca
Auditors’ Report
To the Shareholders of
SKN Resources Limited
We have audited the consolidated balance sheet of SKN Resources Limited as at April 30, 2004 and the
consolidated statements of operations and deficit and cash flows for the year then ended. These financial statements
are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with Canadian generally accepted auditing standards. Those standards
require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position
of the Company as at April 30, 2004 and the results of its operations and its cash flows for the year then ended in
accordance with Canadian generally accepted accounting principles.
The financial statements as at April 30, 2003 and for the year then ended were audited by other auditors who
expressed an opinion without reservation on those statements in their report dated July 14, 2003.
(Signed) Deloitte & Touche LLP
Chartered Accountants
Vancouver, British Columbia
July 27, 2004
SKN RESOURCES LTD.
Consolidated Balance Sheet
April 30, 2004
ASSETS
CURRENT
Cash and cash equivalent (Note 4)
Short-term investments (Note 5)
Accounts receivable
Prepaid expenses
Amount due from a related company
Refundable advance (Note 7 (d))
PROPERTY, PLANT AND EQUIPMENT (Note 6)
INVESTMENT IN AND EXPENDITURES ON
RESOURCE PROPERTIES (Note 7)
Mineral properties
Reclamation deposits
LIABILITIES
CURRENT
Accounts payable and accrued liabilities
Deposit for sale of property (Note 7 (b))
SHAREHOLDERS' EQUITY
Share capital (Note 8)
Stock options
Warrants
Share subscriptions received
Deficit
COMMITMENTS (Note 13)
APPROVED BY THE DIRECTORS
(Signed) Rui Feng
Rui Feng, Director
(Signed) Myles Gao
Myles Gao, Director
2004
2003
(Note 3)
$
1,929,633
5,000,000
128,671
162,046
71,208
66,240
7,357,798
649,738
$
2,433,575
-
21,192
5,500
-
-
2,460,267
29,454
1,232,712
10,000
9,250,248
$
289,144
10,000
2,788,865
$
$
182,604
27,414
210,018
$
45,721
-
45,721
24,124,435
1,411,031
431,347
9,000
(16,935,583)
9,040,230
9,250,248
$
15,073,268
30,390
870,750
-
(13,231,264)
2,743,144
2,788,865
$
See accompanying Notes to the Consolidated Financial Statements.
SKN RESOURCES LTD.
Consolidated Statement of Operations and Deficit
Year ended on April 30, 2004
EXPENSES
Bank charges and interest
Consulting
Depreciation
Foreign exchange loss
General exploration expenses
Mineral properties written off
Office and miscellaneous
Shareholder relations
Stock-based compensation (Note 8 (d))
Professional fees
Transfer agent and filing fees
OPERATING LOSS
OTHER INCOME AND EXPENSES
Gain on disposal of furniture
Gain on sale of investments
Debts forgiven
Write-off of oil and gas lease
Write-off of licencing agreement
Interest income
NET LOSS FOR THE YEAR
DEFICIT, BEGINNING OF YEAR
DEFICIT, END OF YEAR
2004
2003
$
5,004
313,525
18,810
64,883
537,022
299,417
515,982
297,446
1,421,483
244,998
59,224
3,777,794
(3,777,794)
$
20,958
31,655
4,481
29,750
16,862
2,028,730
41,836
15,464
30,390
69,556
32,767
2,322,449
(2,322,449)
147
-
-
-
-
73,328
73,475
(3,704,319)
(13,231,264)
(16,935,583)
$
-
138,129
141,670
(1)
(1)
-
279,797
(2,042,652)
(11,188,612)
(13,231,264)
$
BASIC AND DILUTED LOSS PER SHARE
$
(0.13)
$
(0.36)
WEIGHTED-AVERAGE NUMBER OF SHARES
27,873,060
5,671,616
See accompanying Notes to the Consolidated Financial Statements.
SKN RESOURCES LTD.
Consolidated Statement of Cash Flows
Year ended on April 30, 2004
OPERATING ACTIVITIES
Net loss
Items not involving cash
Gain on sale of investments
Debts forgiven
Write-off of mineral properties
Write-off of oil and gas lease
Write-off of licensing agreement
Interest on debt settled with shares
Gain on disposal of furniture
Stock-based compensation
Non-cash general exploration expenses
Depreciation
Changes in non-cash working capital
Accounts receivable
Prepaid expenses
Accounts payable and accrued liabilities
Deposit for sale of property
INVESTING ACTIVITIES
Mineral property additions
Property, plant and equipment additions
Purchase of short-term investment
Proceeds from sale of investments
Proceeds from disposal of furniture
2004
2003
$
(3,704,319)
$
(2,042,652)
-
-
299,417
-
-
-
(147)
1,421,483
240,000
18,810
(1,724,756)
(107,479)
(156,546)
136,883
27,414
(1,824,484)
(1,242,985)
(640,418)
(5,000,000)
-
1,471
(6,881,932)
(138,129)
(141,670)
2,028,730
1
1
24,845
-
30,390
-
4,481
(234,003)
(12,810)
(5,500)
(190,604)
-
(442,917)
(225,415)
(17,205)
-
215,787
-
(26,833)
FINANCING ACTIVITIES
Advance to a related company
Refundable advance
Common shares issued for cash, net of commission
Share subscriptions
(DECREASE) INCREASE IN CASH
CASH AND CASH EQUIVALENT, BEGINNING OF YEAR
CASH AND CASH EQUIVALENT, END OF YEAR
(71,208)
(66,240)
8,330,922
9,000
8,202,474
(503,942)
2,433,575
1,929,633
$
-
-
2,902,288
-
2,902,288
2,432,538
1,037
2,433,575
$
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid
Income taxes paid
$
1
$
-
$
751
$
-
See accompanying Notes to the Consolidated Financial Statements.
SKN RESOURCES LIMITED
Notes to the Consolidated Financial Statements
Year ended April 30, 2004
1.
NATURE OF OPERATIONS
SKN Resources Limited, together with its subsidiaries (individually and collectively referred to
as the “Company”), is a development stage company engaged in the acquisition and exploration
of mineral properties in the People’s Republic of China (“China”).
The ability of the Company to continue operations is dependent upon the continued financial
support of its shareholders, other investors and lenders, and upon the successful development of
the mineral properties in which the Company holds an interest.
Although the Company has taken steps to verify title to the mineral properties in which it,
through its subsidiaries, has an interest, in accordance with industry standards for the stage of
exploration of such property, those procedures do not guarantee the Company’s title. Property
title may be subject to unregistered prior agreements and non-compliance with regulatory
requirements.
2.
SIGNIFICANT ACCOUNTING POLICIES
These consolidated financial statements have been prepared in accordance with accounting
principles generally accepted in Canada (“Canadian GAAP”). The significant accounting policies
used in these consolidated financial statements are as follows:
(a)
Principles of consolidation
These consolidated financial statements of the Company include the accounts of the
Company and its subsidiaries, Yunnan Jin Chang Jiang Mining Co. Ltd., Fortune Mining
Ltd., Fortune Copper Ltd., Fortress Mining Inc., Victor Gold Ltd., Lachlan Gold Ltd.,
Victor Resources Ltd., Victor Mining Ltd. and SKN Nickel & Platinum Ltd.. All
significant
transactions have been eliminated upon
consolidation.
intercompany balances and
(b)
Accounting estimates
The preparation of financial statements in conformity with Canadian GAAP 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
financial statements and the reported amounts of revenues and expenses during the
period. Actual results could differ from those estimates.
SKN RESOURCES LIMITED
Notes to the Consolidated Financial Statements
Year ended April 30, 2004
2.
SIGNIFICANT ACCOUNTING POLICIES (Continued)
(c)
Foreign currency translation
Monetary assets and liabilities denominated in foreign currencies are translated at the
exchange rate in effect at the balance sheet date and non-monetary assets and liabilities at
the exchange rates in effect at the time of acquisition or issue. Revenues and expenses are
translated at the average exchange rate in effect during the period. Realized and
unrealized foreign exchange gains and losses are included in earnings.
(d)
Cash and cash equivalent
Cash and cash equivalent includes cash and short-term investments maturing within 90
days of the original date of acquisition.
(e)
Mineral properties
Acquisition costs of mineral properties, excluding indirect costs relating to securing
mineral interests, and direct exploration and development expenditures thereon are
capitalized. Costs incurred for general exploration that do not result in the acquisition of
mineral properties with ongoing exploration or development potential are charged to
operations. Costs relating to properties abandoned are written-off when such decision is
made. When production is attained, the capitalized costs will be amortized using the unit
of production method based upon estimated proven and probable recoverable reserves.
The Company reviews the carrying value of each property that is in the exploration or
development stage by reference to the project economics including the timing of the
exploration and/or development work, the work programs and the exploration results
experienced by the Company and others. The review of the carrying value of each
producing property is made by reference to the estimated future operating results and net
cash flows. When the carrying value of a property exceeds its estimated net recoverable
amount, provision is made for the decline in value.
The recoverability of the amounts capitalized for the undeveloped mineral properties and
deferred development costs is dependent upon the determination of economically
recoverable ore reserves, confirmation of the Company’s interest in the underlying
mineral claims, the ability to obtain the necessary financing to complete their
development and future profitable production or proceeds from the disposition thereof.
SKN RESOURCES LIMITED
Notes to the Consolidated Financial Statements
Year ended April 30, 2004
2.
SIGNIFICANT ACCOUNTING POLICIES (Continued)
(f)
Property, plant and equipment
Property, plant and equipment are recorded at cost. Amortization is computed using the
straight-line method at the following rates calculated to amortize the cost of the assets
less their residual values over their estimated useful lives.
Motor vehicle
Equipment and furniture
Computer equipment
Computer software
Mining equipment
20%, straight line
20%, declining balance (except for
equipment and furniture located in China
which is 20%-50% straight line)
30%, declining balance (except for
computer equipment located in China
which is 50% straight line)
50%, straight line
10%, straight line
Amortization on mining equipment is not taken until the equipment is used in production.
As at April 30, 2004, the mining equipment had not been placed into production.
(g)
Stock-based compensation plans
All stock-based awards made to non-employees are measured and recognized using a fair
value based method. Awards that the Company has the ability to settle in stock are
recorded as equity.
The Company uses the intrinsic value method for stock-based awards made to
employees, officers and directors whereby compensation cost is recorded for the excess,
if any, of the quoted market price over the exercise price, at the date the stock options are
granted.
(h)
Income taxes
Future income tax assets and liabilities are computed based on differences between the
carrying amounts of assets and liabilities on the balance sheet and their corresponding tax
values, using the enacted or substantively enacted, as applicable, income tax rates at each
balance sheet date. Future income tax assets also result from unused loss carryforwards
and other deductions. The valuation of future income tax assets is reviewed yearly and
adjusted, if necessary, by use of a valuation allowance to reflect the estimated realizable
amount.
SKN RESOURCES LIMITED
Notes to the Consolidated Financial Statements
Year ended April 30, 2004
2.
SIGNIFICANT ACCOUNTING POLICIES (Continued)
(i)
Loss per common share
The basic loss per share is computed by dividing the net loss by the weighted average
number of common shares outstanding during the year. The diluted loss per share
reflects the potential dilution of common share equivalents, such as outstanding stock
options and share purchase warrants, in the weighted average number of common shares
outstanding during the year, if dilutive. For this purpose, the “treasury stock method” is
used whereby the assumed proceeds upon the exercise of stock options and warrants are
used to purchase common shares at the average market price during the year.
(j)
Comparative figures
Certain of the comparative figures have been reclassified to conform with the
presentation as at and for the year ended December 31, 2003.
3.
CHANGE IN ACCOUNTING POLICY
Effective May 1, 2003, the Company changed its accounting policy on a retroactive basis with
respect to the method of accounting for warrants issued as compensation. The Company has
chosen to account for all warrants issued as compensation in accordance with the fair value
method of accounting, using the Black-Scholes option pricing model.
This change was applied retroactively with restatement to 2003. The impact of the change was to
decrease share capital by $870,750 and increase warrants by $870,750 for a net effect of $Nil to
shareholders’ equity as at April 30, 2003. The change in accounting policy had no impact on the
reported results of operations in any year presented.
4.
CASH AND CASH EQUIVALENT
Cash and cash equivalent includes a guaranteed investment certificate (“GIC”) of $400,000
(2003 - $Nil) with an interest rate of prime minus 2% maturing on May 28, 2004. As of April 30,
2004, the interest receivable is $7,364 (2003 - $Nil).
SKN RESOURCES LIMITED
Notes to the Consolidated Financial Statements
Year ended April 30, 2004
5.
SHORT-TERM INVESTMENTS
Short term investments of $5,000,000 (2003 - $Nil) are made up of GICs with the following
terms:
Principal Amount
Interest Rate
Maturity Date
$
$
2,000,000
800,000
400,000
400,000
1,400,000
5,000,000
2.55%
2.30%
1.95%
1.95%
1.90% March 17, 2005
November 16, 2004
January 17, 2005
February 7, 2005
February 11, 2005
As of April 30, 2004, the interest receivable is $35,059 (2003 - $Nil).
6.
PROPERTY, PLANT AND EQUIPMENT
2004
Accumulated
Amortization
Net Book
Value
Cost
$
$
$
77,956
33,268
83,853
2,714
482,982
680,773
5,469
6,257
17,952
1,357
-
31,035
72,487
27,011
65,901
1,357
482,982
649,738
$
$
$
2003
Net Book
Value
$
-
10,972
18,482
-
-
29,454
$
Motor vehicle
Equipment and furniture
Computer equipment
Computer software
Mining equipment
7.
MINERAL PROPERTY
Tuobuka Property
Gou Gold Property
Kang Dian Property
Ying Property
Clearwater Property
Tongchang Property
Dongchuan Property
Huidong Property
2,004
2003
$
1,101,069
21,028
45,047
65,568
-
-
-
-
$
1,232,712
$
-
9,278
-
-
80,679
35,673
149,085
14,429
289,144
$
SKN RESOURCES LIMITED
Notes to the Consolidated Financial Statements
Year ended April 30, 2004
7.
MINERAL PROPERTY (Continued)
(a)
Tuobuka Property
On August 1, 2003, the Company, through its wholly-owned subsidiary Lachlan Gold
Ltd., signed a cooperative joint venture agreement with a Chinese party to form a Sino-
Foreign Joint Venture Cooperative Company, Yunnan Jin-Chang-Jiang Mining Co. Ltd.
(“YJCJM”), to explore the Tuobuka Gold Property located in Yunnan Province, China.
Under the terms of the cooperative joint venture agreement, the Chinese party held a 20%
interest in YJCJM in consideration of the transference of the Tuobuka Project exploration
permit to YJCJM, and the Company was to earn its 80% interest in YJCJM by
contributing RMB8,000,000 ($1,324,800) to YJCJM over three years and paying
RMB1,000,000 ($165,000) (paid) to the Chinese party. On January 13, 2004, the
Company acquired the remaining 20% interest in YJCJM from the Chinese party by
paying an additional RMB1,600,000 ($256,978) (paid). The Company now has a 100%
interest in the Tuobuka project. Upon acquisition of 100% of the Tuobuka property, the
Company no longer has any remaining commitments under the joint venture agreement.
(b)
Gou Gold Property
On June 24, 2003, the Company, through its wholly-owned subsidiary, Victor Gold Ltd.
(“Victor”), signed a cooperative letter agreement with a Chinese party. This was
replaced by a Cooperative Joint Venture Contract on November 21, 2003, under which
the parties have agreed to form a Sino-Foreign Cooperative Joint Venture Company (“JV
Company”) to hold the Gou Project permits located in Gansu Province, China. Victor
can earn an 80% interest in the joint venture by making capital contributions of
US$2,000,000 ($2,741,400) to the JV Company over 3 years and payment of US$30,000
($41,121) to the Chinese party. After Victor has earned its 80% interest, contributions to
the JV Company will be made on a pro-rata basis. The Chinese party’s interest can be
diluted to not less than 10% if it elects not to make cash contributions.
On February 4, 2004, Windridge Technology Corp. (“Windridge”), signed an acquisition
agreement with the Company whereby Windridge will acquire 100% of the Company’s
rights in the Gou Gold Project through the purchase of 100% of the issued and
outstanding shares of Victor Gold Ltd. Under the terms of the agreement, Windridge will
issue 2,000,000 of its treasury shares to the Company at a deemed price of $0.25 per
share and reimburse the Company the sum of US$20,000 ($27,414) for expenses
previously incurred in relation to its acquisition of the Gou property. The transaction is
subject to shareholders’ approval of Windridge and has received conditional regulatory
approval. The US$20,000 ($27,414) has been received from Windridge.
SKN RESOURCES LIMITED
Notes to the Consolidated Financial Statements
Year ended April 30, 2004
7.
MINERAL PROPERTY (Continued)
(c)
Kang Dian Property
In November 2003, the Company, through a wholly-owned subsidiary SKN Nickel &
Platinum Ltd. (“SNP”), entered into two letter agreements with the respective holders of
the permits and permit applications comprising the Kang Dian Project located in Sichuan
Province, China, thereby obtaining the rights to acquire 75% and 90% interests,
respectively, in the exploration permits by contributing US$2,500,000 ($3,426,750) to
fund the exploration and development of the Project over a period of four years and
paying US$80,000 to a Chinese party within 10 days after obtaining the approvals from
China government. After SNP has earned its 75% and 90% interests, respectively,
contributions to fund the exploration and development of the project will be made pro
rata. The interest of the Chinese property owners can be diluted to not less than 10% and
12%, respectively, if they elect not to make cash contributions.
The Company has signed a letter agreement with Nu-XMP Ventures Limited (“NUX”),
whereby NUX has the option to acquire SNP and thereby the Kang Dian Project through
the issuance of a total of 7,000,000 of its shares at a deemed price of $0.375 per share.
The Company will receive 6,500,000 of these Shares (the “SKN Shares”), while one of
the Chinese property owners will receive 500,000 of the NUX Shares. The SKN Shares
will be issued on the basis of 2,500,000 on issuance of a Bulletin by the TSX Venture
Exchange accepting the transaction; a further 2,000,000 shares will be issued upon
successful completion of the US$374,000 ($512,642) work program recommended under
the Technical Report that has been completed on the Project; and 2,000,000 shares will
be issued on completion of US$1,000,000 ($1,370,700) in funding obligations by SNP
under the agreement with one of the permit holders. The SKN Shares will be subject to
escrow for three years with quarterly releases. SKN Shares remaining in escrow are
subject to cancellation in the event NUX determines not to continue contributing to the
joint venture company to be created. The Company will have the right to place a
representative on the NUX board of directors. The transactions referred to have received
conditional regulatory approvals.
SKN RESOURCES LIMITED
Notes to the Consolidated Financial Statements
Year ended April 30, 2004
7.
MINERAL PROPERTY (Continued)
(d)
Ying Property
In May 2004, the Company, through its wholly-owned subsidiary, Victor Mining Ltd.,
entered into a cooperative joint venture agreement with a Chinese party to acquire a
77.5% interest in the high grade Ying Silver-Gold Project located in Hennan Province,
China. Under the cooperative agreement with the Chinese party, the Company holds the
right to acquire 77.5% of the Ying Project by funding exploration and development of the
Project in the amount of US$3,670,000 to the joint venture company, Hennan Found
Mining Co. Ltd. (“HFMC”), over a period of three years for a 55% interest in HFMC and
pay US$1,500,000 to the Chinese party over a period of three years for purchasing
another 22.5% interest in HFMC. After the Company has earned its 77.5% interest,
contributions to fund the exploration and development of the Project will be made pro
rata. The interest of the Chinese party can be diluted to not less than 10% if it elects not
to make cash contributions. The acquisition of the Ying Project obtained conditional
regulatory approval subsequent to the year ended April 30, 2004.
The Company has advanced $66,240 (RMB400,000) to the Chinese party for the initial
preparation work and the amount will be repaid upon the formation of HFMC.
(e)
Clearwater Property
During the year ended April 30, 2004, the Company decided to write off its investment of
$80,679 in the Clearwater Property located in the Province of British Columbia, Canada,
as the Company intends to concentrate its effort on its mineral properties in China.
A reclamation deposit of $10,000 is pledged until the expiry of the mineral claims in
November 2006.
(f)
Tongchang Property
During the year ended April 30, 2004, the Company determined not to proceed with the
Tongchang Property located in Yunnan Province, China as a final joint venture contract
with the property owner could not be completed on acceptable terms. The Company
wrote off of its investment of $35,673 in the Tongchang Property. The Company did not
issue any shares for the acquisition of the Tongchang Property.
(g)
Dongchuan Property
During the year ended April 30, 2004, due to its grass root nature, the Company decided
to write off its investment of $119,389 in the Dongchuan Property located in Yunnan
Province, China.
SKN RESOURCES LIMITED
Notes to the Consolidated Financial Statements
Year ended April 30, 2004
7.
MINERAL PROPERTY (Continued)
(h)
Huidong Property
During the year ended April 30, 2004, the Company determined not to proceed with the
Huidong Property located in Sichuan Province, China as the initial geological result was
disappointing. The Company wrote off of its investment of $14,429 in the Huidong
Property.
(i)
Zage Property
During the year ended April 30, 2004, the Company incurred exploration expenditures of
$1,958 in the Zage Property located in the Northeast Xizang Autonomous Region of
China. After an initial assessment of the Project, the Company decided to write off its
investment.
(j)
Feng Ma Property
During the year ended April 30, 2004, the Company incurred exploration expenditures of
$85,203 on the Feng-Ma project located on the boundaries of Yunnan, Guizhou and
Guangxi Provinces of China. The Company wrote off of its investment of $85,203 in the
Feng-Ma Property as a final joint venture contract with the property owner could not be
completed on acceptable terms.
SKN RESOURCES LIMITED
Notes to the Consolidated Financial Statements
Year ended April 30, 2004
8.
SHARE CAPITAL
(a)
Authorized
100,000,000 common shares without par value
(b)
Issued and outstanding
Changes in outstanding common shares were as follows:
Balance, April 30, 2002
Issued for debt settlement
Issued for cash under private placement in February 2003
Issuance of brokers warrants for commission on private
placement
Issued for cash under private placement in February 2003
Balance, April 30, 2003
Issued for cash under private placement in September 2003
Issued for cash under private placement in November 2003
Issuance of brokers warrants for commission on private
placement (Note 8 (c))
Issuance for finders' fee of the projects
Exercise of warrants
Cash received
Transfer from warrants account
Exercise of options
Cash received
Transfer from stock options account
Balance, April 30, 2004
Number of
Shares
3,211,422
13,889,120
6,450,000
-
500,000
24,050,542
220,000
2,750,000
-
150,000
5,885,145
-
523,125
-
Amount
(Note 3)
$
11,652,818
1,388,912
2,682,288
(870,750)
220,000
15,073,268
187,000
4,578,750
(712,500)
240,000
3,371,546
1,151,903
193,625
40,843
33,578,812
$
24,124,435
On September 10, 2003, the Company raised $187,000 through a non-brokered private
placement of the sale of 220,000 units at $0.80 per unit with two officers of the Company.
Each unit was comprised of one common share and one share purchase warrant, exercisable
for a period of two years at a price of $1.05 per share.
On November 4, 2003, the Company raised $4,950,000 (net proceeds of $4,578,750)
through a brokered and non-brokered private placement of a total of 2,750,000 units at
$1.80 per unit. Each unit was comprised of one common share and one half-share purchase
warrant, exercisable for a period of one year at a price of $2.25 per share. On the 2,500,000
brokered units the agents received a cash commission equal to 7.5% of the gross proceeds,
or $337,500, together with 250,000 brokers warrants (Note 8 (c)) exercisable for one year
at $2.18 per share. On the 250,000 non-brokered units a finder’s fee equal to 7.5% of the
gross proceeds, or $33,750, was paid.
SKN RESOURCES LIMITED
Notes to the Consolidated Financial Statements
Year ended April 30, 2004
8.
SHARE CAPITAL (Continued)
(c)
Warrants
The following is a summary of warrant transactions:
Balance, May 1, 2002
Issued for debt settlement
Issued for cash on non-brokered private placement
Issued for cash on brokered private placement
Issued for broker commission on private placement
Balance, April 30, 2003
Issued for cash on non-brokered private placement
Issued for cash on brokered private placement
Issued for broker commission on private placement
Warrants exercised and shares issued
Warrants exercised but shares not issued (Note 8 (f))
Weighted
Average
Exercise
Price
-
$
0.11
0.60
0.60
0.60
0.31
1.05
2.25
2.18
(0.57)
(0.60)
Number of
Warrants
-
6,347,190
250,000
3,225,000
967,500
10,789,690
220,000
1,375,000
250,000
(5,885,145)
(15,000)
Balance, April 30, 2004
6,734,545
$
0.57
The warrants will expire on the following dates:
Number
Exercise Price
Expiry Date
5,163,195
200,000
1,220,000
151,350
6,734,545
$
0.11
1.05
2.25
2.18
November 14, 2004
September 23, 2005
November 4, 2004
November 4, 2004
SKN RESOURCES LIMITED
Notes to the Consolidated Financial Statements
Year ended April 30, 2004
8.
SHARE CAPITAL (Continued)
(c)
Warrants (continued)
As part of the consideration of arranging the private placement on November 4, 2003,
250,000 share purchase warrants were granted to the agent. These warrants are
exercisable until November 4, 2004 at a price of $2.18 per share. A fair value of
$712,500 has been recorded as a cost of the private placement, which is estimated on the
date of grant using the Black-Scholes option pricing model with weighted average
assumptions for grants as follows (Note 8 (b)):
Risk free interest rate
Expected life
Expected volatility
Dividend per share
(d)
Options
1.43%
1 year
155%
$0.00
The Company is able to grant stock options up to 3,420,000 shares. The options are
exercisable for a period of up to ten years from the date of grant, as determined by the
Board of Directors, and the exercise price cannot be less than the last price on the TSX
Venture Exchange immediately preceding the grant of the option. Options vest over a
minimum period of eighteen months from the date of grant.
A summary of the status of the Company’s stock options as of April 30, 2004 and 2003,
and changes during the years ended on those dates is presented below:
Balance, April 30, 2002
Options granted
Balance, April 30, 2003
Options granted
Options exercised
Balance, April 30, 2004
Weighted
Average
Exercise Price
Per Share
-
$
0.35
0.35
0.71
(0.39)
0.45
$
Number of
Shares
-
2,042,000
2,042,000
665,000
(523,125)
2,183,875
The fair value of options granted to non-employees and non-directors of $1,421,483
(2003 - $30,390) has been recorded as compensation expenses.
On July 15, 2003, the Company granted incentive stock options for 480,000 shares at a
price of $0.70 per share exercisable up to July 14, 2008, to consultants, directors and
employees. 25% of the options were vested on the date of grant and 12.5% of the options
are vested every three months after the date of grant for eighteen months.
SKN RESOURCES LIMITED
Notes to the Consolidated Financial Statements
Year ended April 30, 2004
8.
SHARE CAPITAL (Continued)
(d)
Options (continued)
On July 15, 2003, the Company granted incentive stock options for 160,000 shares at a
price of $0.70 per share exercisable up to July 14, 2006, to two consultants. On the date
of grant, 25% of the options vested and 12.5% of the options vest every three months
after the date of grant for eighteen months.
On September 15, 2003, the Company granted incentive stock options for 25,000 shares
at a price of $0.96 per share exercisable up to September 14, 2008, to a consultant. On
the date of grant, 25% of the options vested and 12.5% of the options vest every three
months after the date of grant for eighteen months.
The Company accounts for its stock-based plans to employees, officers and directors
using the intrinsic value method whereby no compensation costs are recognized in the
financial statements. If the fair value method had been used for options granted
subsequent to January 1, 2002, a value of $285,476 would be recorded for the year ended
April 30, 2004 (2003 - $172,210). The Company’s net loss and net loss per share would
approximate the following pro forma amounts:
2004
2003
Net loss as reported
Compensation expense of employees
Pro forma net loss
Pro forma basic and diluted loss per
common share
$
$
(3,704,319)
285,476
(3,989,795)
$
$
(2,042,652)
172,210
(2,214,862)
$
(0.14)
$
(0.39)
The fair value of each option granted is estimated on the date of grant using the Black-
Scholes option pricing model with weighted average assumptions for grants as follows:
Risk free interest rate
Expected life of options in years
Expected volatility
Dividend per share
2004
2003
3.00% to 4.47%
1 to 5 years
155% to 157%
$0.00
3.00%
1 to 5 years
62%
$0.00
SKN RESOURCES LIMITED
Notes to the Consolidated Financial Statements
Year ended April 30, 2004
8.
SHARE CAPITAL (Continued)
(d)
Options (continued)
The following table summarizes information about stock options outstanding at April 30,
2004:
Range of
Exercise
Prices
Number
Outstanding at
April 30,
2004
$
0.35
0.70
0.96
$0.35 to $0.96
1,517,000
626,250
15,625
2,158,875
Weighted
Average
Remaining
Contractual
Life (Years)
3.58
3.68
4.33
3.61
Weighted
Average
Exercise
Price
Number
Exercisable at
April 30,
2004
Weighted
Average
Exercise
Price
$
$
0.35
0.70
0.96
0.46
1,261,750
386,250
3,125
1,651,125
$
$
0.35
0.70
0.96
0.43
(e)
Escrow shares
At April 30, 2004, 4,568,738 (2003 - 11,466,839) common shares of the Company were
subject to escrow arrangements.
(f)
Share subscriptions
In April 2004, the Company received total proceeds of $9,000 in connection with the
exercise of 15,000 common share purchase warrants. The shares were issued subsequent
to the year ended April 30, 2004.
(g)
Normal course issuer bid
In March 2004 the Company announced its intention and received regulatory approval to
commence a normal course issuer bid. The Company intends to purchase up to
1,355,000 of its common shares over a one year period, from the period of March 26,
2004 to March 25, 2005. All of the shares acquired under this program will be held for
possible future resale or cancellation at a later date.
SKN RESOURCES LIMITED
Notes to the Consolidated Financial Statements
Year ended April 30, 2004
9.
RELATED PARTY TRANSACTIONS
(a)
During the year ended April 30, 2004, the Company:
(i)
(ii)
incurred consulting fees of $122,150 (2003 - $29,950) payable to an officer and
director;
incurred legal fees of $116,645 (2003 - $49,049) payable to a law firm of which a
director of the Company is the proprietor.
(iii)
incurred management fees of $97,500 (2003 - $7,500) payable to an officer and
director.
(iv)
incurred rental charges of $Nil (2003 - $4,500) payable to a director.
(b)
(c)
(d)
Included in accounts payable is an amount of $76,461 (2003 - $Nil) due to a law firm of
which a director of the Company is the proprietor.
Included in accounts payable is an amount of $24,025 (2003 - $Nil) due to two directors
for their services in April 2004.
Included in prepaid expenses is an amount of $12,471 (2003 - $Nil) due from two
directors as travel advances for normal business courses.
10.
INCOME TAXES
The provision for income taxes differs from the amount computed by applying the cumulative
Canadian federal and provincial income tax rates to the loss before income tax provision due to
the following:
2004
2003
Canadian basic statutory tax rate
37.62%
39.62%
Expected income tax recovery
Non-deductible expenses
Losses producing no current tax benefit
$
(1,393,565)
540,017
853,548
$
-
$
(809,299)
13,205
796,094
$
-
SKN RESOURCES LIMITED
Notes to the Consolidated Financial Statements
Year ended April 30, 2004
10.
INCOME TAXES (Continued)
The approximate tax effect of each type of temporary difference that gives rise to the Company’s
future tax assets is as follows:
Future income tax assets arising from tax loss carryforwards
Unused cumulative exploration and development expenses
Valuation allowance
Net future income tax assets
2004
2003
$
1,409,700
1,486,804
2,896,504
(2,896,504)
$
829,692
1,841,100
2,670,792
(2,670,792)
$
-
$
-
Due to the uncertainty surrounding the realization of future income tax assets in future income tax
returns, the Company has made a 100% valuation allowance against its future income tax assets.
The Company has non-capital losses of approximately $3,739,000 available to apply against
future Canadian income for tax purposes. The non-capital losses will expire as follows:
2005
2006
2007
2008
2009
2010
2011
$
317,000
508,000
401,000
236,000
186,000
140,000
1,951,000
3,739,000
$
The Company also has capital losses of approximately $16,000 available to apply against future
capital gain.
11.
FINANCIAL INSTRUMENTS
The fair values of the Company’s cash and cash equivalents, short-term investments, accounts
receivable, refundable advance, accounts payable and deposit for sale of property are estimated to
approximate their carrying values. Due to the non-arms length nature of amounts due from a
related company, the fair value is not determinable.
The Company undertakes transactions denominated in foreign currencies and as such is exposed
to risk due to fluctuations in foreign exchange rates. The Company does not use derivative
instruments to reduce its exposure to foreign currency risks.
Credit risk arises from the potential that a counterparty will fail to perform its obligations. The
Company invests its cash balances in money market instruments with financial institutions with
high credit standing.
SKN RESOURCES LIMITED
Notes to the Consolidated Financial Statements
Year ended April 30, 2004
12.
SEGMENTED INFORMATION
(a)
Industry information
The Company operates in one reportable operating segment, being the acquisition,
exploration and development of mineral properties.
(b)
Geographic information
Property, plant and equipment
China
Canada
Total
Year ended April 30, 2004
Mineral properties
Property, plant and equipment
Year ended April 30, 2003
Mineral properties
Property, plant and equipment
$
1,232,712
50,069
$
-
116,687
$
1,232,712
166,756
208,465
-
80,679
29,454
289,144
29,454
13.
COMMITMENTS
The Company has entered into a consulting agreement with a company controlled by the
President of the Company to provide consulting services at $10,000 per month expiring on
February 28, 2005. The agreement can be cancelled by either party with 30 days’ written notice.
The Company has entered into a consulting agreement with a company controlled by the
Chairman and CEO of the Company to provide consulting services at a rate of $700 per day
expiring on April 30, 2005. The agreement can be cancelled by either party with 30 days’ written
notice.