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The following is an excerpt from a 10KSB SEC Filing, filed by AURELIO RESOURCE CORP on 4/4/2007.
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AURELIO RESOURCE CORP - 10KSB - 20070404 - PART_II

We did not submit any matters to our security holders to be voted upon during the seven months ended December 31, 2006.

PART II

 

ITEM 5 MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Market Information

Our shares are currently trading on the OTC Bulletin Board under the symbol AULO. Our shares commenced trading on the OTC Bulletin Board on November 16, 2004 under the symbol FURR. On June 16, 2006, we changed our name to Aurelio Resource Corporation and effected a six and one-half for one (6.5:1) forward stock split resulting in the new symbol.

The high and the low bid prices for our common shares reported for the OTC Bulletin Board for each of the quarters during the year ended May 31, 2006 and for the two quarters and the month of December in the seven months ended December 31, 2006 are set forth in the table below.

The high and low prices for the Common Shares reported for the OTC Bulletin Board for each of the quarters during the years ended May 31 st , 2006 and December 31, 2006 are set forth in the table below:

 

            High    Low

2005

  

June to August

   $ 0.06    $ 0.06
  

September to November

     0.06      0.06

2005/2006

  

December to February

     0.06      0.06

2006

  

March to May

     0.06      0.06
  

June to August

     1.01      0.06
  

September to November

     1.25      0.73
  

December

     0.94      0.75

These quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not represent actual transactions.

 

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Holders of our Common Stock

As of March 28, 2007, there were 47 registered shareholders of our common stock.

Dividends

Since our inception, we have not declared nor paid any cash dividends on our capital stock and we do not anticipate paying any cash dividends in the foreseeable future. Our current policy is to retain any earnings in order to finance the expansion of our operations. Our board of directors will determine future declarations and payments of dividends, if any, in light of the then-current conditions they deem relevant and in accordance with applicable corporate law.

There are no restrictions in our articles of incorporation or bylaws that prevent us from declaring dividends. The Nevada Revised Statutes, however, do prohibit us from declaring dividends where, after giving effect to the distribution of the dividend:

 

  1. We would not be able to pay our debts as they become due in the usual course of business; or

 

  2. Our total assets would be less than the sum of our total liabilities plus the amount that would be needed to satisfy the rights of shareholders who have preferential rights superior to those receiving the distribution.

Equity Compensation Plan Information

On September 15, 2006, the directors adopted the 2006 Stock Option Plan (“the Plan”) and reserved two million eight hundred thousand (2,800,000) common shares to be made available for grant. The Plan is administered by the Compensation Committee of the Board. Additional information about the Plan is set forth under “Stock Option Plan” in Item 10.

 

Plan Category

  

No. of securities to be
issued upon exercise of
outstanding options,
warrants and rights

(a)

  

Weighted- average
exercise price of
outstanding
options, warrants
and rights

(b)

  

No. of securities remaining
available for future issuance
under equity compensation
plans (excluding securities
reflected in column (a)

(c)

Equity compensation plans approved by security holders

   —        —      —  

Equity compensation plans not approved by security holders

   500,000    $ 0.81    2,300,000

 

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Recent Sales of Unregistered Securities

On August 17, 2006, we issued 10,000,000 shares of our common stock without registration to the shareholders of Aurelio Resources, Inc. pursuant to an exemption from registration as set out under Rule 506 of Regulation D to both accredited and non-accredited investors and pursuant to an exemption from registration as set out under Section 4(2) of the Securities Act of 1933, as amended. No advertising or general solicitation was employed in offering these securities. The following table sets out the purchasers of these 10,000,000 shares of common stock of our company:

 

      

Number of Shares of our

Common Stock Acquired

Fred Warnaars

6373 S. Yates Court

Littleton, CO 80123

   6,000,000

International American Resources, Inc.

6373 S. Yates Court

Littleton, CO 80123

   800,000

Stephen Doppler

1696 Ajax Lane

Evergreen, CO 80439

   500,000

David C. Jonson

3082 S. Wheeling Way #410

Aurora, CO 80014

   700,000

Jonson Management Inc.

3082 S. Wheeling Way #410

Aurora, CO 80014

   800,000

David S. Johnson

740 Gilpin St.

Denver, CO 80218

   250,000

Hernandez Family Trust

P.O. Box 61

Pearce, AZ 85625

   200,000

Steve Stine

17055 East Dorado Circle

Centennial, CO 80015

   250,000

Briner Group Holdings Inc.

Suite 510, 999 West Hastings Street

Vancouver, BC V6C 2W2

   500,000
    

Total

   10,000,000
    

On September 29, 2006, we closed a non-brokered private placement financing and issued 4,000,000 shares of our common stock for gross proceeds of $1.6 million. We issued the securities to twenty-six (26) non-US persons (as that term is defined in Regulation S of the Securities Act of 1933) in an offshore transaction relying on Regulation S and/or Section 4(2) of the Securities Act of 1933 and to two US Accredited Investors (as this term is defined in Regulation D under the 1933 Act). No advertising or general solicitation was employed in offering these securities. The following table sets out the purchasers of these 4,000,000 shares of common stock of our company:

 

      

Number of Shares of our

Common Stock Acquired

Kevin Moe

808 – 1011 Beach Avenue

Vancouver, BC V6C 1T8

   300,000

financial.de AG

Wanderweg 52

86316 Friedberg

Germany

   50,000

 

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Number of Shares of our

Common Stock Acquired

Brunner - Joach IM

(IR-World.com)

Wickepointgasse 13

4611 Buchkirchen

Austria

   50,000

Middlemarch Partners Ltd.

94 Mount Street

London W1K 2SZ

United Kingdom

   125,000

Silver Capital AG

Oliver Frank

Woernergasse 5

D-35510 Butzbach-Hochweisel

Germany

   20,000

Oliver Frank

Woernergasse 5

D-35510 Butzbach- Hochweisel

Germany

   20,000

Rick R. McGrath

9311 Kirkmond Crescent

Richmond, BC V7E 1M7

   120,000

Burton Egger

Suite 804 – 1233 West Cordova St.

Vancouver, BC V6C 3R1

   100,000

Frederick Doyne Harstone

3209 West 48th Avenue

Vancouver, BC V6N 3P7

   250,000

Osgoode Developments Inc.

Suite 220 – 7565 132 Street

Surrey, BC V3S 6B2

   100,000

Gregory Kane

470 Acacia Avenue

Ottawa, Ontario K1M 0M2

   100,000

Accent Marketing Ltd.

Deisenhofener Strasse 79c

81539 Munich Germany

   50,000

Juliano Overseas Limited

19 Seaton Place

St. Helier, Jersey JEZ 3QL

Channel Islands, UK

   41,250

Hilldon Trading Limited

19 Seaton Place

St. Helier, Jersey JEZ 3QL

Channel Islands, UK

   382,500

Romeo D’Angela

90 Adelaide Street West, Suite 800

Toronto, Ontario M5H 3V9

   125,000

 

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Number of Shares of our

Common Stock Acquired

Ennio D’Angela

90 Adelaide Street West, Suite 800

Toronto, Ontario M5H 3V9

Tel: (416) 862-2626

   250,000

Grant Grimshaw

8175 Meadow Lane

Whistler, BC V0N 1B8

   62,500

Jeffrey Berwick

Suite 520 – 1027 Davie Street

Vancouver, BC V6E 4L2

Phone: n/a

   75,000

Sanovest Holdings Ltd.

Suite 411 – 375 Water Street

Vancouver, BC V6B 5C6

   250,000

Nick DeMare

4338 Frances Street

Burnaby, BC V6E 3V7

   62,500

0760838 B.C. Ltd.

#314 – 2906 West Broadway

Vancouver, BC

   125,000

Pinetree Resource Partnership

130 King Street West, Suite 2810

Toronto, Ontario M5X 1A9

   500,000

Rakesh Dhir

8592 No. 5 Road

Richmond, BC V6Y 2V5

   500,000

Stephen Ray Stine

17055 E. Dorado Circle

Centennial, CO 80015

   25,000

Quisqueya Holdings, Ltd.

Cento Colon, 8V0 Piso, Oficina 8-4

Paeso Colon, San Jose

Costa Rica

   125,000

Graeme Renton

Flat 4B, 222 Great Portland Street

London, England W1W 5Q2

United Kingdom

   83,125

Keith Neumeyer

Flat 2 – Hanway Place

London, England W1T 1HF

   83,125

Fred W. Warnaars

6973 South Yates Court

Littleton, CO 80123

   25,000
    

Total

   4,000,000
    

 

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ITEM 6 MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS

You should read the following discussion of our financial condition and results of operations together with our audited financial statements and the related notes for the seven months ended December 31, 2006 and for the year ended May 31, 2006 which appear elsewhere in this annual report. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward looking statements. Factors that could cause or contribute to such differences include, but are not limited to those discussed below and elsewhere in this annual report, particularly in Item 1 – Description of Business – Risk Factors of this annual report.

Overview

We were incorporated in the State of Nevada on February 19, 2004 under the name Furio Resources, Inc. We are an exploration stage company engaged in the exploration of mineral properties and we may also, from time to time, acquire additional mineral properties to explore. We have focused our efforts since incorporation acquiring mineral properties and carrying out exploration activities on those mineral properties.

We changed our name to Aurelio Resource Corporation effective June 16, 2006 and implemented a six and one-half (6.5) for one (1) forward stock split of our authorized, issued and outstanding common stock. As a result, our authorized capital has increased from 75,000,000 shares of common stock with a par value of $0.001 to 487,500,000 shares of common stock with a par value of $0.001.

On August 17, 2006 we completed our acquisition of all of the issued and outstanding common stock of Aurelio Resources, Inc., a privately-owned Colorado corporation engaged in mineral exploration, pursuant to an agreement we entered into with Aurelio Resources, Inc. (“ARI”) and its shareholders dated April 27, 2006, as amended on June 9, 2006 and further amended on July 13, 2006 and on July 21, 2006. As a result of our acquisition of ARI, we indirectly acquired all of its assets. In particular, we acquired properties in Arizona, now referred to as our Hill Copper Project and held through our wholly-owned subsidiary Bolsa Resources, Inc. (“Bolsa”), and a 98% interest in Minera Milenium S.A. de C.V. (“Minera Milenium”), a company incorporated in Mexico which holds an option to acquire a 100% interest in the Gavilanes Property.

We continue to focus our efforts on the acquisition and exploration of mineral properties. To date, we have not discovered an economically viable mineral deposit on the mineral claims, and there is no assurance that we will discover one. A great deal of further exploration will be required before a final evaluation as to the economic and legal feasibility for our future development is determined.

We have no revenues, have experienced losses since inception, have no operations, have been issued a going concern opinion by our auditors and rely upon the sale of our securities to fund operations.

Plan of Operations

Our plan of operations for the next twelve months involves the implementation of phased exploration programs and additional property acquisitions for our Hill Copper Project in Arizona and our Gavilanes Property in Mexico. We will undertake these operations with our existing management and field personnel and will contract for additional labor on a project basis as required. We do not anticipate any major purchases or sales of plant and equipment as we intend to sub-contract the drilling programs and outsource the assaying, resource estimation, engineering and metallurgical studies.

We wish to complete the following objectives within the time periods specified, subject to our obtaining the funding necessary for the continued exploration of our mineral properties:

Hill Copper Project, Arizona:

We plan to acquire additional land adjoining our Courtland area and the MAN claims on the Hill Copper Project, through negotiations with private landholders and through staking “free” land. We anticipate that the next phase of

 

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the work program will cost approximately $850,000 over the next six months and approximately $3,400,000 over the next twelve months, for exploration, engineering, environmental and metallurgical studies, property payments and land acquisition. We will need to raise additional funds in order to conduct these exploration programs and for the land acquisitions.

The planned six month exploration program will include further drill programs totaling approximately 17,000 feet of reverse circulation drilling on our current landholdings to confirm the previously identified resources and to test additional exploration targets with the goal of increasing the resource estimates. We anticipate that this drill program will cost approximately $680,000 and take most of the six months to complete. We have also budgeted to continue both diamond drilling and reverse circulation drilling in the twelve month program and for preliminary scoping and pre-feasibility studies.

Gavilanes Property:

We plan to make the option payments due February 15, 2007 and August 15, 2007 in order to keep the Gavilanes option in good standing. These two payments will total $30,000. We will need to raise additional funds in order to make these option payments.

Our planned six month exploration program includes 7,000 feet of diamond drilling to test the seven best targets identified to date on the Gavilanes Property. Based on our review of all the pertinent data available on the property, we are pursuing our goal of identifying a bulk mineable, open pittable deposit at Gavilanes. The budget for this drill program is approximately $280,000 and we expect that to be completed well within the six months. If this program shows the expected results, we will then undertake a larger program of up to 15,000 feet of diamond drilling on the property, which is budgeted to cost approximately $600,000 and, as long as funding is available, we would anticipate completing this within the next twelve months

Lake Iliamna Property, Alaska

By mineral staking in March 2004, we acquired a 100% interest in twenty-five mineral claims located in the State of Alaska approximately 7.5 miles northwest of Lake Iliamna which is 215 miles south-west of Anchorage, Alaska. During November 2006, we allowed our interest in the Alaska property to lapse and we have no ongoing interest in that property.

General Operating Expenses

We anticipate spending approximately $100,000 in ongoing general and administrative expenses per month for the next six months, while our total general and administrative expense over the whole of the next twelve months is expected to total approximately $2,000,000. In addition, we plan to make property payments on new and our existing property agreements of approximately $300,000 over the six months and approximately $1,000,000 over the next twelve months, and these payments may be expensed. We plan to spend approximately $1,100,000 for exploration and engineering studies over the next six months and approximately $6,000,000 for exploration programs, land payments and property acquisitions and engineering studies during the twelve months. The general and administrative expenses for the year will consist primarily of professional fees for the our management and field personnel, accounting and reporting expenses, audit and legal work relating to our regulatory filings, as well as transfer agent fees, promotion and investor relations activities and the costs of maintaining our executive office in Littleton, Colorado and our field offices in Arizona and in Culiacan, Mexico.

The following discussion should be read in conjunction with the pro forma financial statements accompanying this Form 10-KSB. At December 31, 2006, we had cash on hand of $464,521 and working capital of $350,463. Our cash and working capital will not be sufficient to enable us to pay for the costs of our exploration and general and administrative expenses. We will have to raise additional capital in order to pay for our exploration and anticipated general and administrative expenses. Our ability to complete the next phases of our recommended work programs will be subject to us obtaining additional financing as these expenditures will exceed our cash reserves.

 

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During the next twelve-month period, we anticipate that we will not generate any revenue. Accordingly, we will be required to obtain additional financing in order to continue our plan of operations. We believe that debt financing will not be an alternative for funding additional phases of exploration as we do not have tangible assets to secure any debt financing. We anticipate that additional funding will be in the form of equity financing from the sale of our common stock. However, we do not have any financing arranged and we cannot provide investors with any assurance that we will be able to raise sufficient funding from the sale of our common stock to fund the next phase of our exploration program. In the absence of such financing, we will not be able to continue exploration of our mineral claims and our business plan might not succeed. Even if we are successful in obtaining equity financing to fund the next phase of our exploration program, there is no assurance that we will obtain the funding necessary to pursue any advanced exploration of our mineral claims following the completion of the work program. If we do not continue to obtain additional financing, we will be forced to abandon our mineral claims and our plan of operations.

We may consider entering into a joint venture arrangement to provide the required funding to develop the mineral claims. We have not undertaken any efforts to locate a joint venture partner for the mineral claims. Even if we determined to pursue a joint venture partner, there is no assurance that any third party would enter into a joint venture agreement with us in order to fund exploration of our mineral claims. If we entered into a joint venture arrangement, we would likely have to assign a percentage of our interest in our mineral claims to the joint venture partner.

Cash Requirements

For the next 12 months we plan to continue to explore for base metals on our Hill Copper Project in Arizona, and to explore for precious metals on our Gavilanes Property in Mexico. Our budget for the next six months is $2,000,000 and for the full 12 months (which includes additional property payments) our budget is $6,000,000.

We will require additional funds to implement our exploration and development programs. These funds may be raised through equity financing, debt financing, or other sources, which may result in further dilution in the equity ownership of our shares. There is still no assurance that we will be able to maintain operations at a level sufficient for an investor to obtain a return on his investment in our common stock. Further, we may continue to be unprofitable. We need to raise additional funds in the immediate future in order to proceed with our exploration program.

In order to proceed with our plans, we plan to raise additional funds by way of private placements of equity securities in our company.

Results of Operations

We have had no operating revenues since our inception on February 19, 2004, through to December 31, 2006.

Following the acquisition of ARI we have focused most of our attention during the seven months ended December 31, 2006 on the Hill Copper Project in Arizona. There we purchased 30 patented claims on approximately 545 acres in the Courtland area from Hope Mining and staked an additional 18 MAN claims on the property and now have a total of 31unpatented MAN claims. We acquired a data base that includes assay results from 274 holes drilled from the 1950s to the 1990s and were able to develop preliminary in-house copper resource estimates. And, we commenced a 6,000-foot drilling program in the Courtland area to confirm the results from the historic drilling in the data base. While our drilling resulted in similar results as the previous drilling campaigns, some of the drilling was significantly better and we discovered two new zones in the south Courtland area, and a near-surface copper oxide zone and a zone of zinc mineralization. Our mineral property expenditures totaled $460,000 in the seven months, but the drilling was not finished at year-end and our exploration program was not completed until early in 2007.

During the comparative period, being the year ended May 31, 2006 which was prior to the change of name and direction of our company, we incurred operating costs of $36,750. These operating costs included $29,026 in professional fees for the ongoing legal and accounting costs of the quarterly and annual filings. We also incurred mineral property expenditures during the year ended May 31, 2006, of $6,430, which included the $2,500 annual rental fee to the State of Alaska and the final costs of the Phase I work program conducted on the Alaska property in the summer of 2005.

 

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Our loss for the seven months ended December 31, 2006 was $957,221, and this included the expensing of all our exploration programs and overhead costs, including some non-cash compensation expense for stock options issued to our directors and officers. This loss compared with a loss of $36,750 in the year ended May 31, 2006 (and during that year the company had essentially been dormant) and brought our loss accumulated since inception to $1,069,276 at December 31, 2006. Our cash used in operations, which was primarily focused on exploring the Hill Copper Project, was $851,290 during the seven months ended December 31, 2006 (compared with cash used of $48,816 in the year ended May 31, 2006) and we used a further $285,130 during the seven months for the deposit for the purchase of the Courtland area patented mining claims ($253,614) and for some fixed asset purchases.

Liquidity and Capital Resources

At December 31, 2006, we had cash on hand of $464,521 and working capital of $350,463.

We anticipate that our cash and working capital will only be sufficient to enable us to pay for the costs of our exploration programs and general and administrative expenses for approximately the next four months. Accordingly, our ability to complete our ongoing exploration activities and the next phase of our recommended work programs will be subject to us obtaining additional financing as these expenditures will exceed our cash reserves.

During the next twelve-month period, we anticipate that we will not generate any revenue. Therefore, we must obtain additional financing in order to continue our plan of operations. We believe that debt financing will not be an alternative for funding additional phases of exploration as we do not have tangible assets to secure any debt financing. We anticipate that additional funding will be in the form of equity financing from the sale of our common stock. However, we do not have any financing arranged and we cannot provide investors with any assurance that we will be able to raise sufficient funding from the sale of our common stock to fund the next phase of our exploration program. In the absence of such financing, we will not be able to continue exploration of our mineral claims and our business plan will fail. Even if we are successful in obtaining equity financing to fund the next phase of our exploration programs, there is no assurance that we will obtain the funding necessary to pursue any advanced exploration of our mineral claims following the completion of the work program. If we do not continue to obtain additional financing, we will be forced to abandon our mineral claims and our plan of operations.

We may consider entering into a joint venture arrangement to provide the required funding to develop our patented and unpatented mineral claims. We have not undertaken any efforts to locate a joint venture partner for this to date. Even if we determined to pursue a joint venture partner, there is no assurance that any third party would enter into a joint venture agreement with us in order to fund exploration of our properties. If we entered into a joint venture arrangement, we would likely have to assign a percentage of our interest in our properties to the joint venture partner. Our requirements for additional financing are discussed in further detail above under the heading Plan of Operation.

Cash used in operating activities was $851,290 for the seven months ended December 31, 2006, which reflects the costs of our operations for the period, as compared with cash used in operating activities of $48,816 during the year ended May 31, 2006. The difference in the amount of cash used in the periods reflects the active exploration program we initiated in September 2006 on the Hill Copper Project in Arizona.

We have funded our business to date from sales of our common stock. Gross cash proceeds from the sale of our common shares during the period from inception, on February 19, 2004, through December 31, 2006, totaled $1,544,514 (after adjustments when we acquired ARI), with $1,600,000 from the private placement closed in September 2006.

We anticipate continuing to rely on equity sales of our common shares in order to continue to fund our business operations. Issuance of additional shares will result in dilution to our existing shareholders. 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 of our properties.

 

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Subsequent Events

In early February 2007, we announced that we had reached an agreement in principle with Newmont Mining Corporation to purchase two of its patented mineral claims. These claims, known as the Banner claim and the Australia claim, are adjacent to our 31 unpatented MAN claims in Arizona. Newmont has agreed to a purchase price of $100,000 and we agreed to give a 1% Net Smelter Returns Royalty on the patented claims as well as any properties we currently own or acquire within a designated Area of Interest. We expect to close on the agreement with Newmont by early April 2007. In addition, we gave Newmont a Right of First Offer with respect to any option, joint venture, sale or any other disposition of the property to a third party. We also acquired an extensive exploration file of the Courtland-Gleeson Mining District, Cochise County, Arizona, where the Hill Copper Project is located including the logs and assay results of 274 holes, drilled by ten different companies between the 1950s to the late 1980s. These companies include Santa Fe Mining, Asarco Mining, Kennecott Copper, MEXCO (a division of Union Oil) and Great Gray Resources.

Contractual Obligations, Contingent Liabilities and Commitments

 

Contractual Obligations

as of December 31, 2006

   Total   

Less then

1 year

  

1 to 3

years

  

3 to 5

years

  

More than

5 years

Long-term debt (1)

   $ 26,601    $ 8,693    $ 17,908    $ —      $ —  

Note payable – Courtland Claims (2)

              

Interest

     194,750      57,000      114,000      23,750      —  

Principal

     950,000      —        —        950,000      —  

MAN Claims – annual renewal fees (3)

     3,875      3,875      7,750      7,750      —  

Gavilanes option payments (4)

     485,000      30,000      90,000      365,000      —  

 

(1) The long-term debt was to finance the purchase of office equipment and is a 36-month note payable under a business installment loan from JPMorgan Chase Bank, NA. The interest rate is 12.25% simple interest and the loan is cash collateralized.

 

(2) The purchase of the 30 patented Courtland Claims (which form part of the Hill Copper Project) from Hope Mining and Milling Company was closed on September 18, 2006 with the payment of the deposit of $250,000. In addition to the acquisition price, the seller is entitled to receive a net smelter return royalty, up to a cumulative total of $3 million, of 3% for precious metals, and 1.5% for base metals produced from the property. At any time prior to the commencement of commercial production, we can buy this royalty for $2 million.

 

(3) For each of our 31 MAN claims on the Hill Copper Project there is an annual renewal fee of $125 per claim payable to the Bureau of Land Management, an agency of the U.S. Department of the Interior. These claim fees are payable annually, as long as we are actively exploring on this land.

 

(4) In addition to the total of the option payments (as above) for the purchase price of the three mining claims (covering approximately 1,000 hectares) making up the Gavilanes property, the property is subject to a 3% net smelter return royalty in favor of Mr. Modesto Rivas Beltran of Culiacan, Sinaloa, Mexico.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to stockholders.

Related Party Transactions

During the seven months ended December 31, 2006 we entered into consulting contracts with our president, company officers, directors and their wholly-owned companies, through which they provide services to our company. During the seven months we paid consulting fees in lieu of salaries to our president, company officers and directors of $129,159 in total. These fees were in the normal course of business and were measured at the exchange amount, which is the amount of consideration established and agreed to by the related parties.

 

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As of December 31, 2006 the Company owed $15,319 to the same related parties for consulting fees and for the reimbursement of expenses.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with United States generally accepted accounting principles requires our management to make estimates and assumptions that affect the reported amount 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 reporting period. Actual results could differ from those estimates. Our management routinely makes judgments and estimates about the effects of matters that are inherently uncertain. The most significant policy we have implemented is to capitalize the cost of acquiring the patented mining claims which form the core part of our Hill Copper Project. Our significant accounting policies are disclosed in Note 3 to the audited consolidated financial statements included in this Annual Report on Form 10-KSB. These financial statements do not include any adjustments to the amount and classification of assets and liabilities that may be necessary should we be unable to continue as a going concern.

 

ITEM 7 FINANCIAL STATEMENTS

Our audited financial statements for the seven months ended December 31, 2006, are described below:

 

(a)     Report of Independent Registered Public Accounting Firm

   29

(b)     Consolidated Balance Sheets as at December 31, 2006 and May 31, 2006

   30

(c)     Consolidated Statements of Operations for the seven months ended December 31, 2006, the year ended May 31, 2006 and the period from inception (February 19, 2004) to December 31, 2006

   31

(d)     Consolidated Statements of Stockholders’ Equity (Deficit) for the period from inception (February 19, 2004) to December 31, 2006

   32

(e)     Consolidated Statements of Cash Flows for the seven months ended December 31, 2006, the year ended May 31, 2006 and the period from inception (February 19, 2004) to December 31, 2006

   33

(f)      Notes to the Consolidated Financial Statements

   35

 

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Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of

Aurelio Resource Corporation

We have audited the accompanying consolidated balance sheets of Aurelio Resource Corporation (formerly Furio Resources, Inc.) as of December 31, 2006 and May 31, 2006, and the related consolidated statements of operations, stockholders’ equity and cash flows for the seven months ended December 31, 2006 and the year ended May 31, 2006 and for the period from inception (February 19, 2004) to December 31, 2006. 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. The financial statements of Aurelio Resource Corporation as of May 31, 2005 were audited by other auditors whose report dated July 19, 2005 on those statements included an explanatory paragraph describing conditions that raised substantial doubt about the Company’s ability to continue as a going concern.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about 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. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly in all material respects, the financial position of Aurelio Resource Corporation as of December 31, 2006 and May 31, 2006 and the results of operations and cash flows for the seven months ended December 31, 2006 and the year ended May 31, 2006 and for the period from inception (February 19, 2004) to December 31, 2006 in conformity with U.S. generally accepted accounting principles.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As shown in the financial statements, the Company incurred losses of $957,221 for the seven months ended December 31, 2006, and has an accumulated deficit of $1,069,276 at December 31, 2006. These factors, and others discussed in Note 2, raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts and classification of liabilities that might be necessary in the event the Company cannot continue in existence.

 

/s/ Mason Russell West, LLC

Littleton, CO

March 27, 2007

 

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AURELIO RESOURCE CORPORATION

(An Exploration Stage Company)

CONSOLIDATED BALANCE SHEETS

 

       Dec. 31, 2006     May 31, 2006  
ASSETS     

Current assets

    

Cash

   $ 464,521     $ 2,521  

Security deposits

     2,255       —    

Deposit for core drilling

     150,000       —    
                

Total current assets

     616,776       2,521  
                

Mining claims

     1,203,614       —    

Equipment, net

     55,489       —    
                
     1,259,103       —    
                

Total Assets

   $ 1,875,879     $ 2,521  
                
LIABILITIES & STOCKHOLDERS’ EQUITY     

Current liabilities

    

Accounts payable

   $ 242,301     $ 18,376  

Accounts payable-related parties

     15,319       —    

Current portion of long-term debt

     8,693       —    
                

Total current liabilities

     266,313       18,376  
                

Long-term debt

     17,908       —    

Note payable - Courtland Claims

     950,000       —    
                
     967,908       —    
                

Total Liabilities

     1,234,221       18,376  
                

Stockholders’ Equity

    

Common stock, $0.001 par value;

    

487,500,000 shares authorized;

    

32,436,500 issued and outstanding

     32,437       31,402  

Additional paid in capital

     1,680,077       64,798  

Deficit accumulated during exploration stage

     (1,069,276 )     (112,055 )

Cumulative effect of currency translation

     (1,580 )     —    
                

Total Stockholders’ Equity

     641,658       (15,855 )
                

Total Liabilities and Stockholders’ Equity

   $ 1,875,879     $ 2,521  
                

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

 

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AURELIO RESOURCE CORPORATION

(An Exploration Stage Company)

CONSOLIDATED STATEMENTS OF OPERATIONS

 

      

Seven Months
Ended

Dec. 31, 2006

   

Twelve
Months

Ended

May 31, 2006

   

Feb. 19, 2004
(Inception)
Through

Dec. 31, 2006

 

Revenue

   $ —       $ —       $ —    

Expenses:

      

Bank charges

     1,560       134       1,961  

Depreciation

     2,628       —         2,628  

Non-cash compensation expense

     168,000       —         168,000  

General and administrative expenses

     77,181       —         77,181  

Mineral property expenditures

     459,835       6,430       509,959  

Office expenses

     38,080       660       39,444  

Professional and filing fees

     193,326       29,026       252,132  

Transfer agent

     1,700       500       3,375  

Travel

     22,032       —         22,032  
                        
     964,342       36,750       1,076,712  
                        

Loss from operations

     (964,342 )     (36,750 )     (1,076,712 )

Other income (expense)

      

Interest income

     8,154       —         8,469  

Interest expense

     (1,033 )     —         (1,033 )
                        

Income (loss) before provision for income tax

     (957,221 )     (36,750 )     (1,069,276 )

Provision for income tax

     —         —         —    
                        

Net income (loss)

     (957,221 )     (36,750 )     (1,069,276 )

Other comprehensive income (loss) - net of tax

      

Foreign currency translation gains (losses)

     (1,580 )     —         (1,580 )
                        

Comprehensive loss

   $ (958,801 )   $ (36,750 )   $ (1,070,856 )
                        

Net income (loss) per share

      

(Basic and fully diluted)

   $ (0.03 )   $ (0.00 )  
                  

Weighted average number of common shares outstanding

     31,260,355       31,401,500    
                  

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

 

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AURELIO RESOURCE CORPORATION

(An Exploration Stage Company)

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

 

       Common Stock    

Additional

Paid-in

Capital

   

Deficit

Accumulated

During

Exploration
Stage

   

Cumulative

Effect of

Currency

Translation

   

Total

Stockholders’

Equity

(Deficit)

 
       Shares     Amount          

Balance , February 19, 2004 (date of inception)

   —       $ —       $ —       $ —       $ —       $ —    

Common stock issued for cash at $0.002 per share, March 2004

   13,000,000       13,000       7,000       —         —         20,000  

Common stock issued for cash at $0.004 per share, April 2004

   18,200,000       18,200       51,800       —         —         70,000  

Common stock issued for cash at $0.03 per share, May 2004

   201,500       202       5,998       —         —         6,200  

Net loss

   —         —         —         (14,607 )     —         (14,607 )
                                              

Balance , May 31, 2004

   31,401,500       31,402       64,798       (14,607 )     —         81,593  

Net loss

   —         —         —         (60,698 )     —         (60,698 )
                                              

Balance , May 31, 2005

   31,401,500       31,402       64,798       (75,305 )     —         20,895  

Net loss

   —         —         —         (36,750 )     —         (36,750 )
                                              

Balance , May 31, 2006

   31,401,500       31,402       64,798       (112,055 )     —         (15,855 )

Common stock returned for cancellation

   (12,965,000 )     (12,965 )     12,965       —         —         —    

Common stock issued for acquisition of Subsidiaries

   10,000,000       10,000       (161,686 )     —         —         (151,686 )

Common stock issued for cash at $0.40 per share, September 2006

   4,000,000       4,000       1,596,000       —         —         1,600,000  

Common stock options issued

   —         —         168,000       —         —         168,000  

Net loss

   —         —         —         (957,221 )     (1,580 )     (958,801 )
                                              

Balance , December 31, 2006

   32,436,500     $ 32,437     $ 1,680,077     $ (1,069,276 )   $ (1,580 )   $ 641,658  
                                              

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

 

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AURELIO RESOURCE CORPORATION

(An Exploration Stage Company)

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

     Seven Months
Ended
Dec. 31, 2006
    Twelve Months
Ended
May 31, 2006
    Feb. 19, 2004
(Inception)
Through
Dec. 31, 2006
 

Cash Flows From Operating Activities:

      

Net loss

   $ (957,221 )   $ (36,750 )   $ (1,069,276 )

Adjustments to reconcile comprehensive loss to net cash provided by (used for) operating activities:

      

Depreciation

     2,628       —         2,628  

Non-cash compensation expense

     168,000       —         168,000  

Changes in current assets and liabilities:

      

Deposit for core drilling

     (150,000 )     —         (150,000 )

Security deposits

     (2,255 )     —         (2,255 )

Accounts payable and accrued liabilities

     72,239       (12,066 )     242,301  

Accounts payable - related parties

     15,319       —         15,319  
                        

Net cash provided by/(used for) operating activities

     (851,290 )     (48,816 )     (793,283 )
                        

Cash Flows Used For Investing Activities:

      

Purchase of mining claims – net

     (253,614 )     —         (253,614 )

Purchase of fixed assets – net

     (31,516 )     —         (31,516 )
                        

Net cash provided by/(used for) investing activities

     (285,130 )     —         (285,130 )
                        

(Continued On Following Page)

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

 

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AURELIO RESOURCE CORPORATION

(An Exploration Stage Company)

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Continued From Previous Page)

 

    

Seven Months

Ended

Dec. 31, 2006

   

Twelve Months

Ended

May 31, 2006

   

Feb. 19, 2004

(Inception)

Through

Dec. 31, 2006

 

Cash Flows From Financing Activities:

      

Issuance of common stock for cash

     1,600,000       —         1,544,514  
                        

Net cash provided by/(used for) financing activities

     1,600,000       —         1,544,514  
                        

Effect of exchange rate changes on cash

     (1,580 )     —         (1,580 )
                        

Net Increase/(Decrease) In Cash

     462,000       (48,816 )     464,521  

Cash At The Beginning Of The Period

     2,521       51,337       —    
                        

Cash At The End Of The Period

   $ 464,521     $ 2,521     $ 464,521  
                        
Schedule Of Non-Cash Investing And Financing Activities  

Acquisition of Minera Milenium, S.A. de C.V.

   $ (46 )   $ —       $ (46 )

Acquisition of Aurelio Resources, Inc.

     (151,640 )     —         (151,640 )
Supplemental Disclosure  

Mineral properties

   $ 1,203,614     $ —       $ 1,203,614  

Less note payable

     (950,000 )     —         (950,000 )

Fixed asset purchases

     58,117       —         58,117  

Less long-term debt

     (26,601 )     —         (26,601 )

Cash paid for interest

     (1,033 )     —         (1,033 )

Cash paid for income taxes

     —         —         —    

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

 

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AURELIO RESOURCE CORPORATION

(An Exploration Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

February 19, 2004 (Inception) through December 31, 2006

NOTE 1 HISTORY AND ORGANIZATION OF THE COMPANY

The Company was incorporated on February 19, 2004, under the Laws of the State of Nevada and is in the business of exploring mineral properties. The Company has not yet determined whether its properties contain mineral resources that may be economically recoverable. Therefore, the Company has not reached the development stage and is considered to be an exploration stage company.

The recoverability of mineral property costs is dependent upon the existence of economically recoverable reserves, confirmation of the Company’s interest in the underlying mineral claims, the ability of the Company to obtain necessary financing to complete the exploration and upon future profitable production.

On August 17, 2006, we completed our acquisition of all of the issued and outstanding common stock of Aurelio Resources, Inc. (“ARI”), a privately-owned Colorado corporation engaged in mineral exploration, pursuant to an agreement we entered into with ARI and its shareholders dated April 27, 2006, as amended on June 9, 2006 and further amended on July 13, 2006 and on July 21, 2006. As a result of our acquisition of ARI, we indirectly acquired all of its assets. In particular, we acquired properties in Arizona, now held through ARI and our wholly-owned subsidiary Bolsa Resources, Inc. (“Bolsa”), and a 98% interest in Minera Milenium S.A. de C.V. (“Minera Milenium”), a company incorporated in Mexico which holds an option to acquire a 100% interest in a property in Mexico.

NOTE 2 GOING CONCERN

These financial statements have been prepared with the on-going assumption that the Company will be able to realize its assets and discharge its liabilities in the normal course of business. However, certain conditions noted below currently exist which raise substantial doubt about the Company’s ability to continue as a going concern. These financial statements do not include any adjustments to the amounts and classifications of assets and liabilities that might be necessary should the Company be unable to continue as a going concern.

The operations of the Company have primarily been funded by the sale of common stock. Continued operations of the Company are dependent on the Company’s ability to complete additional equity financings or generate profitable operations in the future. Management’s plan in this regard is to secure additional funds through future equity financings. Such financings may not be available or may not be available on reasonable terms.

 

December 31, 2006

    

Deficit accumulated during the exploration stage

   $ 1,069,276

Working capital

   $ 350,463

NOTE 3 SIGNIFICANT ACCOUNTING POLICIES

Significant accounting policies adopted by the Company are as follows:

Basis of consolidation and the preparation of financial statements

These consolidated financial statements are prepared and reported in United States (U.S.) dollars and in accordance with U.S. generally accepted accounting principles. The consolidated financial statements include the accounts of the company and its subsidiaries. All inter-company balances and transactions have been eliminated. The company does not have any special purpose entities.

 

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Cash and cash equivalents

The Company considers cash held at banks and all highly liquid investments with original maturities of three months or less to be cash and cash equivalents.

Use of estimates

The preparation of financial statements requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from these estimates.

Foreign Currency Translation

The U.S. dollar is the functional currency of the Company. Transactions involving foreign currencies for items included in operations are translated into U.S. dollars using the monthly average exchange rate; monetary assets and liabilities are translated at the exchange rate prevailing at the balance sheet date and all other balance sheet items are translated at the historical rates applicable to the transactions that comprise the amounts. The cumulative effect of the translation of non-realized gains and losses are included in Stockholders’ Equity.

Mineral properties and exploration expenditures

The costs of acquiring mineral properties are capitalized and will be amortized over their estimated useful lives following the commencement of commercial production or written-off if the properties are sold or abandoned. Exploration expenses and the costs for carrying and retaining mineral properties are expensed as incurred. When it is determined that a mineral deposit can be economically and legally extracted or produced based on established proven and probable reserves and the results of feasibility studies, further exploration costs and development costs incurred after such determination will be capitalized. Upon the commencement of commercial production, capitalized costs will be amortized on the units of production basis using the estimated proven and probable reserves as the depletion basis.

Equipment and depreciation

Equipment is recorded at cost, and depreciation is provided on a straight line basis over the estimated useful lives of the equipment of between three and seven years.

Investments

Investments are considered to be held to maturity and are carried at cost. Investments are continually reviewed to determine whether any events or changes in circumstances indicate that the carrying amount of the investment may not be recoverable. The Company bases its evaluation on such impairment indicators as the nature of the investments, the future economic benefit of the investments, any historical or future profitability measurements as well as other external market values, conditions or factors that may be present. If it is determined that the value of the investment is permanently impaired, it is written down to its estimated net realizable value.

Environmental remediation

At the report date, environmental requirements related to mineral claims acquired are unknown and therefore an estimate of any future cost cannot be made.

Income taxes

A deferred tax asset or liability is recorded for all temporary differences between financial and tax reporting and net operating loss carry-forwards. Deferred tax expenses (benefit) result from the net change during the period of deferred tax assets and liabilities.

 

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Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

Net loss per share

Basic net loss per share is computed by dividing the net loss for the period by the weighted average number of shares of common stock outstanding during the period. Diluted net loss per share takes into consideration shares of common stock outstanding (computed under basic net loss per share) and potentially dilutive shares of common stock. Diluted net loss per share is not presented separately from net loss per share since there are no potentially dilutive shares of common stock outstanding.

Recent Accounting Pronouncements

In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments — an amendment of FASB Statements No. 133 and 140”. This Statement, among other things, allows a preparer to elect fair value measurement of instruments in cases in which a derivative would otherwise have to be bifurcated. The provisions of this Statement are effective for all financial instruments acquired or issued in fiscal years beginning after September 15, 2006. We do not believe that the adoption of this Statement in fiscal 2007 will have a material impact on our consolidated financial position or results of operations.

In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets-an amendment of FASB Statement No. 140” This Statement amends SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”, with respect to the accounting for separately recognized servicing assets and servicing liabilities. The provisions of this Statement are effective for all financial instruments acquired or issued in fiscal years beginning after September 15, 2006. We do not believe that the adoption of this Statement in fiscal 2007 will have a material impact on our consolidated financial position or results of operations.

In July 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109” (“FIN 48”) which prescribes a recognition threshold and measurement attribute, as well as criteria for subsequently recognizing, derecognizing and measuring uncertain tax positions for financial statement purposes. FIN 48 also requires expanded disclosure with respect to the uncertainty in income taxes assets and liabilities. FIN 48 is effective for fiscal years beginning after December 15, 2006 and is required to be recognized as a change in accounting principle through a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption. We are currently evaluating the impact of adopting the provisions of FIN 48 in fiscal 2007.

In September 2006, FASB issued SFAS No. 157, “ Fair Value Measurement” define fair value, establish a framework for measuring fair value and to expand disclosures about fair value measurements. The statement only applies to fair value measurements that are already required or permitted under current accounting standards and is effective for fiscal years beginning after November 15, 2007. We do not expect the adoption of this Interpretation to have a significant effect on the company’s results of operations or financial position.

In September 2006, FASB issued SFAS No. 158, “ Employers’ Accounting for Defined Benefit Pension and Other Retirement Plans – an amendment of FASB Statements No. 87, 88, 106 and 132(R)”. d This Statement improves financial reporting by requiring an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income of a business entity or changes in unrestricted net assets of a not-for-profit organization. This Statement also improves financial reporting by requiring an employer to measure the funded status of a plan as of the date of its year-end statement of financial position, with limited exceptions. An employer with publicly traded equity securities is required to initially recognize the funded status of a defined benefit postretirement plan and to provide the required disclosures as of the end of the fiscal year ending after December 15, 2006. We do not expect the adoption of this Statement will have any impact on our consolidated results of operations or financial position.

 

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NOTE 4 RELATED PARTY TRANSACTIONS

During the seven months ended December 31, 2006 we entered into consulting contracts with our president, company officers, directors and their wholly-owned companies, through which they provide services to our company. During the seven months we paid consulting fees in lieu of salaries to our president, company officers and directors of $129,159 in total. These fees were in the normal course of business and were measured at the exchange amount, which is the amount of consideration established and agreed to by the related parties.

As of December 31, 2006 the Company owed $15,319 to the same related parties for consulting fees and for the reimbursement of business expenses.

NOTE 5 FINANCIAL INSTRUMENTS

The Company’s financial instruments consist of cash and cash equivalents, notes payable and accounts payable and accrued liabilities. Unless otherwise noted, it is management’s opinion that the Company is not exposed to significant interest, currency or credit risks arising from these financial instruments. In each case, the fair value of these financial instruments approximate their carrying values, unless otherwise noted.

NOTE 6 SEGMENT INFORMATION

The Company operated in two reportable segments, these being the exploration for copper and zinc on its Hill Copper Project in Arizona and the exploration for gold on its Gavilanes Property in Mexico.

NOTE 7 BUSINESS ACQUISITIONS

On July 5, 2006 the Company acquired 98% of the outstanding stock Minera Milenium in a transfer of benefit from ARI in a transaction accounted for as a business purchase. ARI was not a related party at the date of transfer. The net worth of Minera Milenium at fair value on July 5, 2006 was $(46). The primary reason for this acquisition was to acquire the rights to the option to earn a 100% interest in three mining claims/concessions in Durango, Mexico.

On August 17, 2006 the Company acquired 100% of ARI in a transaction accounted for as a business purchase, by issuing 10,000,000 shares for 100% of the outstanding stock of ARI. The net worth of ARI measured at fair value on August 17, 2006 was $(151,640). The primary reason for the acquisition was to acquire the 100% interest in thirteen mining claims on a property located in southeastern Arizona. The business objective of the company is now to progress the discovery, acquisition and exploration of advanced stage mineral properties with the potential to be expanded.

The purchase cost and the allocation of the purchase costs to ARI’s assets and liabilities (unaudited) are as follows:

Purchase cost

 

     Amount    Value  

Issuance of Aurelio Resource Corporation common stock

   10,000,000    $ (151,640 )
           

Allocation of Purchase Cost

 

Current assets

   $ 10,875  

Equipments, net

     1,239  

Accounts payable

     (40,741 )

Advance on investment

     (103,150 )

Accounts payable – related parties

     (19,863 )
        

Net Asset Value

   $ (151,640 )
        

 

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We have calculated unaudited proforma results of operations for the seven months ended December 31, 2006 and for the year ended May 31, 2006, presented as if the acquisition of ARI had taken place on June 1, 2006 and June 1, 2005, respectively. The results would have shown a net loss for the seven months ended December 31, 2006 of $969,863 or $(0.03) per share (unchanged) and a net loss for the year ended May 31, 2006 of $247,527 or $(0.01) per share.

NOTE 8 PROPERTY ACQUISITION

On May 15, 2006 our subsidiary, ARI, entered into a purchase and sale agreement with Hope Mining and Milling Company (“Hope MMC”), an Arizona corporation, concerning the acquisition by ARI of 30 patented mining claims known as the Courtland Claims and located in the Turquoise Mining District, Cochise County, Arizona. The purchase price for the subject property was $1,200,000.00 with a $250,000 down payment. The remaining balance of $950,000 is being carried on an interest-only four year term 6% straight line annual interest-only promissory note, secured by a deed of trust, with a balloon payment at the end of year four. On September 15, 2006, ARI, Bolsa and Hope MMC entered into an agreement amending the terms of the purchase agreement and, pursuant to the amending agreement, Bolsa accepted the assignment and completed the acquisition of the 30 patented mining claims from Hope MMC on September 18, 2006.

NOTE 9 LONG-TERM DEBT AND CONTRACTUAL OBLIGATIONS

 

     As of
December 31, 2006

Current debt:

  

Bank debt – portion payable within one year (1)

   $ 8,693
      
   $ 8,693

Long-term debt:

  

Bank debt – portion payable after one year (1)

   $ 17,908

Note payable – Courtland Claims (2)

     950,000
      
   $ 967,908

There was no long-term debt in prior periods.

 

Contractual Obligations

as of December 31, 2006

   Total   

Payable in

2007

  

Payable in

2008 & 2009

  

Payable in

2010 & 2011

  

Payable

after 2011

Long-term debt (1)

   $ 26,601    $ 8,693    $ 17,908    $ —      $ —  

Note payable – Courtland Claims (2)

              

Interest

     194,750      57,000      114,000      23,750      —  

Principal

     950,000      —        —        950,000      —  

MAN Claims – annual renewal fees (3)

     3,875      3,875      7,750      7,750      —  

Gavilanes option payments (4)

     485,000      30,000      90,000      365,000      —  

 

(1) The long-term debt was to finance the purchase of office equipment and is a 36-month note payable under a business installment loan from JPMorgan Chase Bank, NA. The interest rate is 12.25% simple interest and the loan is cash collateralized.

 

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(2) The purchase of the 30 patented Courtland Claims which form part of the Hill Copper Project (as described in Note 8 above) from Hope Mining and Milling Company was closed on September 15, 2006 with the payment of the deposit of $250,000. In addition to the acquisition price, the seller is entitled to receive a net smelter return royalty, up to a cumulative total of $3 million, of 3% for precious metals, and 1.5% for base metals produced from the property. At any time prior to the commencement of commercial production, we can buy this royalty for $2 million.

 

(3) For each of our 31 MAN claims on the Hill Copper Project there is an annual renewal fee of $125 per claim payable to the Bureau of Land Management, an agency of the U.S. Department of the Interior. These claim fees are payable annually, as long as we are actively exploring on this land.

 

(4) In addition to the total of the option payments (as above) for the purchase price of the three mining claims (covering approximately 1,000 hectares) making up the Gavilanes property, the property is subject to a 3% net smelter return royalty in favor of Mr. Modesto Rivas Beltran of Culiacan, Sinaloa, Mexico.

NOTE 10 OTHER COMMITMENTS AND CONTINGENCIES

 

a. Property related Commitments

As described in Note 9 and set out in the table above, we have commitments for the interest on the Note Payable for the purchase of the Courtland Claims, annual renewal fees on our unpatented MAN claims, and option payments to retain the Gavilanes option. Meeting these obligations is fundamental to our being able to retain and explore our mineral properties.

In addition, should we produce precious or base metals on our properties, we would have to pay net smelter return royalties, also as described in Note 9 above.

 

b. Office Rentals

We rent office space in Littleton, Colorado for $1,868 per month, including utilities, with a commitment through August 2007. We rent office space in Arizona, near our Hill Copper Project, for $500 per month with a commitment through October 2007. We also rent storage space near the Arizona property for $535 per month with a commitment through October 2007. We rent office space in Culiacan, Sinaloa, Mexico for P1,700 (approximately $160) per month, with a commitment through October 2007. Our total rent expense during the seven months ended December 31, 2006 was $9,794.

NOTE 11 EQUIPMENT

 

As at December 31, 2006

   Cost    Depreciation    Net Book Value

Littleton – office furniture

   $ 10,099    $ 348    $ 9,751

     – office equipment

     35,188      1,859      33,329

Mexico - truck

     10,267      342      9,925

    - furniture and equipment

     2,563      79      2,484

Total

   $ 58,117    $ 2,628    $ 55,489

NOTE 12 STOCKHOLDERS’ EQUITY

 

a. Authorized

On June 16, 2006 we changed our name to Aurelio Resource Corporation and implemented a six and one-half (6.5) for one (1) forward stock split of our authorized, issued and outstanding common stock. As a result, our authorized capital has increased from 75,000,000 shares of common stock with a par value of $0.001 to 487,500,000 shares of common stock with a par value of $0.001.

 

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b. Issued and outstanding

On August 16, 2006 we cancelled 12,965,000 shares of our common stock as part of the transaction for the acquisition of ARI. On August 17, 2006 we completed our acquisition of all of the issued and outstanding common stock of ARI, a privately-owned Colorado corporation, pursuant to an agreement we entered into with ARI and its shareholders dated April 27, 2006, as amended on June 9, 2006 and further amended on July 13, 2006 and on July 21, 2006. On August 17, 2006 we issued 10,000,000 shares of our common stock to the shareholders of ARI, in exchange for all of the issued and outstanding common shares of ARI.

On September 29, 2006, we completed a private placement of four million shares of common stock at $0.40 per share for total gross proceeds of $1,600,000.

NOTE 13 STOCK OPTIONS

The board of directors adopted the 2006 Stock Option Plan (the “Plan”) on September 15, 2006 and reserved two million eight hundred thousand (2,800,000) common shares to be made available for grant under the Plan. The purpose of the Plan is to afford the persons who provide services to our company or any of its subsidiaries or affiliates, whether directors, officers, consultants or employees of our company or its subsidiaries or affiliates, an opportunity to obtain a proprietary interest in our company by permitting them to purchase common shares of our stock and to aid in attracting, as well as retaining and encouraging the continued involvement of such persons with us. Under the terms of the Plan, the board of directors has full authority to administer the Plan in accordance with the terms of the Plan and at any time amend or revise the terms of the Plan provided, however, that no amendment or revision shall alter the terms of options already granted. The aggregate number of shares to be delivered upon exercise of all options granted under the Plan shall not exceed the maximum of 2,800,000 shares.

Under the Plan, the exercise price of the shares covered by each option shall be determined by the directors and shall be not less than the closing price of our common shares on the stock exchange, quotation system or stock exchanges on which the shares are listed on the date of the grant or the day the fair market value is to be determined or the immediately preceding the day on which the stock is reported. If granted to an employee or director the per share exercise price shall be not less than the fair market value of the share on the date of the grant, unless the grant is to an employee who holds more than 10% of the voting power of our stock, in which case the per share exercise price shall be not less than 110% of the fair market value on the date of the grant. Options granted under the Plan vest immediately for non-employee directors and the vesting schedule for all others granted options under the Plan will be established by the Board or a committee appointed by the Board to administer the Plan on behalf of the Board. Our company has not established a separate committee to this date. Options granted under the Plan will not be transferable and, if they are not exercised, will expire thirty (30) days following the date the optionee ceases to be director, officer, employee or consultant of our company unless by of death, in which case the option may be exercised within 12 months following the date of death.

At December 31, 2006, 2,300,000 options were available for grant under the Plan.

A summary of the status of the Plan as of December 31, 2006 showing the grants during the seven months then ended is as follows:

 

     Options    Weighted Average
Exercise Price

Grants during the period (all exercisable)

   500,000    $ 0.81

Outstanding at year-end

   500,000    $ 0.81

The fair value of each option granted was estimated on the date of the grant using the Black-Scholes model with the following assumptions: volatility 81%; risk-free interest rate of 4.97%; dividend yield of Nil; an expected life of between one and two years; and immediate vesting of the options. The weighted-average grant date fair market value of stock options granted during the seven months ended December 31, 2006 was $0.34.

 

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NOTE 14 INCOME TAXES

The Company has net operating loss carry-forwards of approximately $1,069,276 (May 31, 2006 $112,055) available for deduction against future years’ taxable income. The valuation allowance increased to $378,590 (May 31, 2006 $39,219) during the period ended December 31, 2006, since the realization of the net operating loss carry-forwards is doubtful. It is reasonably possible that our estimate of the valuation allowance will change. The operating loss carry-forwards will expire between 2019 and 2022.

 

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ITEM 8 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

We have had no disagreements with our accountants on any matter any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedures, which disagreements if not resolved to the satisfaction of our accountants would have caused them to make reference thereto in their reports on our audited financial statements.

We engaged Mason Russell West, LLC, Certified Public Accountants, of Littleton, Colorado, as our principal independent auditors effective August 9, 2006. Our former principal independent auditors were Dohan and Company, Certified Public Accountants. Concurrent with the appointment of Mason Russell West, LLC Certified Public Accountants, Dohan and Company, Certified Public Accountants resigned as our principal independent auditors effective August 9, 2006. The decision to change principal independent auditors has been approved by our board of directors.

The report of Dohan and Company, Certified Public Accountants dated July 19, 2005 on our balance sheet for the year ended May 31, 2005, the related statement of stockholders’ equity for the period from February 19, 2004 (inception) to May 31, 2005 and the related statements of operations and cash flows for each of the years ended May 31, 2005 and 2004 and for the period from February 19, 2004 (inception) to May 31, 2005 did not contain an adverse opinion or disclaimer of opinion, nor was it modified as to uncertainty, audit scope, or accounting principles, other than to state that there is substantial doubt as to our ability to continue as a going concern.

In connection with the audit of the year ended May 31, 2005 and the period from February 19, 2004 (inception) to May 31, 2005 and during the subsequent interim period through to the date of their resignation, there were no disagreements with Dohan and Company, Certified Public Accountants on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedures, which disagreements if not resolved to the satisfaction of Dohan and Company, Certified Public Accountants would have caused them to make reference thereto in their reports on our audited financial statements.

 

ITEM 8A CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

We maintain disclosure controls and procedures designed to ensure that we are able to collect the information we are required to disclose in the reports we file with the Securities and Exchange Commission (SEC), and to process, summarize and disclose this information within the time periods specified in the rules of the SEC. As required by Rule 13a-15 under the Securities Exchange Act of 1934 (the “Exchange Act”), we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2006, being the date of our most recently completed fiscal year. Based on his evaluation of our disclosure controls and procedures, our Chief Executive Officer and Chief Financial Officer believe that these controls and procedures are effective to ensure that we are able to collect, process and disclose the information we are required to disclose in the reports we file with the SEC within the required time periods.

During our most recently completed fiscal period ended December 31, 2006, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to affect, our internal control over financial reporting. The term “internal control over financial reporting” is defined as a process designed by, or under the supervision of, our principal executive and principal financial officers, or persons performing similar functions, and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:

 

(a) Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect our transactions and dispositions of the assets;

 

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(b) Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and

 

(c) Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

 

ITEM 8B OTHER INFORMATION

None.

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