Unassociated Document
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
(Amendment No. 2)
FORM
10-K/A
x ANNUAL REPORT PURSUANT
TO SECTION 13 OR 15 (d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
FOR THE
FISCAL YEAR ENDED JULY 31, 2008
o TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
Commission
File No. 0-13078
CAPITAL GOLD
CORPORATION
(Exact
name of registrant as specified in its charter)
State of Delaware
|
13-31805030
|
(State
or other jurisdiction of
|
(I.R.S.
Employer
|
Incorporation
or organization)
|
Identification
No.)
|
|
|
76 Beaver Street, 14th Floor, New York, New York
|
10005
|
(Address
of principal executive offices)
|
(Zip
Code)
|
Registrant’s
telephone number, including area code: (212) 344-2785
Securities
registered under Section 12(b) of the Exchange
Act: none
Securities
registered under Section 12(g) of the Exchange Act: Common Stock, par value
$.0001 per share
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yeso No
x
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months
(or such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days. YES x NO
o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulations S-K is not contained herein, and will not be contained, to the best
of the registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
definition of "large accelerated filer,” “accelerated filer" and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
o Large
accelerated filer
|
x Accelerated
filer
|
o Non-accelerated
filer
|
o Smaller
Reporting Company
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No x
The
aggregate market value of the voting and non-voting common equity on January 31,
2008 held by non-affiliates computed by reference to the closing price of the
issuer’s Common Stock on that date, was $93,983,205 based upon the closing price
($0.70) multiplied by the 134,262,150 shares of the issuer’s Common Stock held
by non-affiliates.
The
number of shares outstanding of each of the issuer’s classes of common equity as
of October 24, 2008: 192,974,824.
DOCUMENTS
INCORPORATED BY REFERENCE: None.
Capital Gold Corporation (the “Company”) is filing this
Amendment No. 2 to its Form 10-K for the fiscal year ended July 31, 2008, which
was originally filed with the Securities and Exchange Commission (the "SEC") on
October 29, 2008, as amended by Amendment No. 1 on Form 10-K/A filed on February
13, 2009 (“Amendment No. 1”). This Amendment No. 2. amends and restates Item 9A
"Controls and Procedures" of Part II of Form 10-K as to the Company’s assessment
of its disclosure controls and procedures and internal control over financial
reporting, and includes the
attestation report of Wolinetz,
Lafazan & Company, P.C., the Company’s independent registered public
accountants, and their financial statement opinion in order to update their reference to such new attestation report, included in Item 8
"Consolidated Financial Statements and Supplementary Data" of Part II of Form
10-K. The only changes to the material included in Item 8 were the changes to
the reports of Wolinetz, Lafazan & Company, P.C. referred to above, and
expanded disclosure of how the Company recognizes revenue in Note 2.. However,
this Amendment No. 2 includes all of the disclosures required by both Items 8
and 9A of Part II of Form 10-K . Except as described above, Amendment No. 2 does
not amend any other item of the Form 10-K and does not modify or update in any
way the disclosures contained in the original filing on Form 10-K, as amended by
Amendment No. 1. Accordingly, this Amendment No. 2 to Form 10-K should be read
in conjunction with the Form 10-K, Amendment No. 1 and the Corporation's
subsequent reports filed with the SEC.
New certifications of our principal executive officer and
principal financial officer are included as exhibits to this amendment.
Item 9A. Controls and
Procedures.
The term "disclosure controls and procedures" is defined in Rules
13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). This term refers to the controls and procedures of a company
that are designed not only to ensure that information required to be disclosed
by a company in the reports that it files under the Exchange Act is recorded,
processed, summarized, and reported within the required time periods but also
ensure that information required to be disclosed is accumulated and communicated
to our Chief Executive Officer and our Chief Financial Officer to allow
timely decisions regarding required disclosure. Our Chief Executive Officer and
our Chief Financial Officer have evaluated the effectiveness of our disclosure
controls and procedures as of the end of the period covered by this report. They
have concluded that, as of that date, our disclosure controls and procedures
were effective.
No change in our internal control over financial reporting
occurred during the period covered by this report that has materially affected,
or is reasonably likely to materially affect, our internal control over
financial reporting.
Management’s Report on
Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting as such term is defined in
Rules 13a-15(f) or 15d-15(f), under the Exchange Act. Internal control over
financial reporting is a process designed by, or under the supervision of, our
principal executive and principal financial officers and affected by our Board
of Directors, management and other personnel, and 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. A company’s internal control over financial
reporting includes those policies and procedures that (i) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets of the company; (ii) provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on its financial
statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to
risk that controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies or procedures may
deteriorate.
Management has assessed the effectiveness of our internal control
over financial reporting as of July 31, 2008. In making this
assessment, management used the criteria set forth in the framework established
by the Committee of Sponsoring Organizations of the Treadway Commission Internal Control—Integrated
Framework, (COSO). Based on this assessment, management has
not identified any material weaknesses as of July 31, 2008. A
material weakness is a control deficiency, or combination of control
deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected.
Management has concluded that we did maintain effective
internal control over financial reporting as of July 31, 2008, based on the
criteria set forth in “Internal Control—Integrated
Framework” issued by the COSO.
The effectiveness of our internal controls over financial
reporting as of July 31, 2008, has been audited by Wolinetz, Lafazan &
Company, P.C., an independent registered public accounting firm, as stated in
their report which is included in Item 8 – Financial Statements.
PART IV
Item
15. Exhibits and
Financial Statement Schedules.
(a)
|
Financial
Statements and Schedules See index to financial
statements on page F-1 of this Annual
Report.
|
All other schedules called for under
regulation S-X are not submitted because they are not applicable or not
required, or because the required information is included in the financial
statements or notes thereto.
|
23.1
|
Consent
of Wolinetz, Lafazan & Company, P.C., independent registered public
accountants
|
|
31.1
|
Certification
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 from the
Company's Chief Executive Officer
|
|
31.2
|
Certification
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 from the
Company's Chief Financial Officer
|
|
32.1
|
Certification
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 from the
Company's Chief Executive Officer
|
|
32.2
|
Certification
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 from the
Company's Chief Financial Officer
|
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
CAPITAL
GOLD CORPORATION
Dated:
March 19, 2009
By:
/s/ Gifford A. Dieterle,
President
Gifford
A. Dieterle, President
REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
To The
Board of Directors and Stockholders of
Capital
Gold Corporation
New York,
New York
We have
audited the accompanying consolidated balance sheet of Capital Gold Corporation
and Subsidiaries (“the Company”) as of July 31, 2008 and July 31, 2007, and the
related consolidated statements of operations, changes in stockholders’ equity,
and cash flows for each of the three years in the period ended July 31,
2008. These consolidated financial statements are the responsibility
of the Company’s management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We
conducted our audits in accordance with 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 consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Capital Gold
Corporation and Subsidiaries as of July 31, 2008 and July 31, 2007 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended July 31, 2008 in conformity with accounting
principles generally accepted in the United States of America.
WOLINETZ,
LAFAZAN & COMPANY, P.C.
Rockville
Centre, New York
October
28, 2008 (Except for Notes 26 and 27, as to which the date is February
27, 2009)
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Capital Gold
Corporation:
We have audited the internal control over financial reporting
of Capital Gold Corporation and subsidiaries (the “Company”) as of July 31,
2008, based on criteria established in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. The Company’s management is responsible for
maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting,
included in the accompanying Report of Management on Internal Control Over
Financial Reporting. Our responsibility is to express an opinion on the
Company’s internal control over financial reporting based on our audit.
We conducted our audit 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 effective internal control over financial reporting was maintained in
all material respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material
weakness exists, testing and evaluating the design and operating effectiveness
of internal control based on the assessed risk, and performing such other
procedures as we considered necessary in the circumstances. We believe that
our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a
process designed by, or under the supervision of, the company’s principal
executive and principal financial officers, or persons performing similar
functions, and effected by the company’s 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. A
company’s internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that
receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a
material effect on the financial statements.
Because of the inherent limitations of internal control over
financial reporting, including the possibility of collusion or improper
management override of controls, material misstatements due to error or fraud
may not be prevented or detected on a timely basis. Also, projections of
any evaluation of the effectiveness of the internal control over financial
reporting to future periods are subject to the risk that the controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as of July 31,
2008, based on the criteria established in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the consolidated
financial statements as of and for the year ended July 31, 2008 of the Company
and our report dated October 28, 2008 (Except for Notes 26 and 27, as to which
the date is February 27, 2009) expressed an unqualified opinion on those
financial statements.
WOLINETZ,
LAFAZAN & COMPANY, P.C.
Rockville Centre, New York
February 27, 2009
CAPITAL
GOLD CORPORATION
|
|
CONSOLIDATED
BALANCE SHEET
(in
thousands, except for share and per share amounts)
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
Current
Assets:
|
|
July
31,
2008
|
|
|
July
31,
2007
|
|
Cash
and Cash Equivalents (Note 2)
|
|
$ |
10,992 |
|
|
$ |
2,225 |
|
Accounts
Receivable (Note 2)
|
|
|
1,477 |
|
|
|
— |
|
Stockpiles
and Ore on Leach Pads (Note 5)
|
|
|
12,176 |
|
|
|
2,997 |
|
Material
and Supply Inventories (Note 4)
|
|
|
937 |
|
|
|
174 |
|
Deposits
(Note 6)
|
|
|
9 |
|
|
|
879 |
|
Marketable
Securities (Note 3)
|
|
|
65 |
|
|
|
90 |
|
Prepaid
Expenses
|
|
|
219 |
|
|
|
72 |
|
Loans
Receivable – Affiliate (Note 12 and 14)
|
|
|
39 |
|
|
|
47 |
|
Other
Current Assets (Note 7)
|
|
|
490 |
|
|
|
1,675 |
|
Total
Current Assets
|
|
|
26,404 |
|
|
|
8,159 |
|
|
|
|
|
|
|
|
|
|
Mining
Concessions (Note 11)
|
|
|
59 |
|
|
|
68 |
|
Property
& Equipment – net (Note 8)
|
|
|
20,918 |
|
|
|
18,000 |
|
Intangible
Assets – net (Note 9)
|
|
|
181 |
|
|
|
577 |
|
|
|
|
|
|
|
|
|
|
Other
Assets:
|
|
|
|
|
|
|
|
|
Other
Investments
|
|
|
— |
|
|
|
28 |
|
Deferred
Financing Costs (Note 17)
|
|
|
599 |
|
|
|
581 |
|
Mining
Reclamation Bonds (Note 10)
|
|
|
82 |
|
|
|
36 |
|
Other
|
|
|
— |
|
|
|
42 |
|
Deferred
Tax Asset (Note 22)
|
|
|
573 |
|
|
|
— |
|
Security
Deposits
|
|
|
63 |
|
|
|
60 |
|
Total
Other Assets
|
|
|
1,317 |
|
|
|
747 |
|
Total
Assets
|
|
$ |
48,879 |
|
|
$ |
27,551 |
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
|
Accounts
Payable
|
|
$ |
788 |
|
|
$ |
617 |
|
Accrued
Expenses (Note 21)
|
|
|
2,673 |
|
|
|
603 |
|
Derivative
Contracts (Note 20)
|
|
|
930 |
|
|
|
596 |
|
Deferred
Tax Liability (Note 22)
|
|
|
2,063 |
|
|
|
— |
|
Current
Portion of Long-term Debt (Note 17)
|
|
|
4,125 |
|
|
|
— |
|
Total
Current Liabilities
|
|
|
10,579 |
|
|
|
1,816 |
|
|
|
|
|
|
|
|
|
|
Reclamation
and Remediation Liabilities (Note 13)
|
|
|
1,666 |
|
|
|
1,249 |
|
Other
liabilities
|
|
|
62 |
|
|
|
— |
|
Long-term
Debt (Note 17)
|
|
|
8,375 |
|
|
|
12,500 |
|
Total
Long-term Liabilities
|
|
|
10,103 |
|
|
|
13,749 |
|
Commitments
and Contingencies (Note 23)
|
|
|
— |
|
|
|
— |
|
Stockholders’
Equity:
|
|
|
|
|
|
|
|
|
Common
Stock, Par Value $.0001 Per Share;
|
|
|
|
|
|
|
|
|
Authorized
300,000,000 shares; Issued and
|
|
|
|
|
|
|
|
|
Outstanding
192,777,324 and 168,173,148 shares, respectively
|
|
|
19 |
|
|
|
17 |
|
Additional
Paid-In Capital
|
|
|
63,074 |
|
|
|
54,016 |
|
Accumulated
Deficit
|
|
|
(32,496 |
) |
|
|
(38,861 |
) |
Deferred
Financing Costs (Note 17)
|
|
|
(2,611 |
) |
|
|
(3,438 |
) |
Deferred
Compensation
|
|
|
(549 |
) |
|
|
(52 |
) |
Accumulated
Other Comprehensive Income (Note 14)
|
|
|
760 |
|
|
|
304 |
|
Total
Stockholders’ Equity
|
|
|
28,197 |
|
|
|
11,986 |
|
Total
Liabilities and Stockholders’ Equity
|
|
$ |
48,879 |
|
|
$ |
27,551 |
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of the financial
statements.
|
|
|
|
|
|
|
|
|
CAPITAL
GOLD CORPORATION
|
CONSOLIDATED
STATEMENT OF OPERATIONS
|
(in
thousands, except for share and per share
amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
The Year Ended
|
|
|
|
July
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
Sales
– Gold, net
|
|
$ |
33,104 |
|
|
$ |
— |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs
and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs
Applicable to Sales
|
|
|
10,690 |
|
|
|
— |
|
|
|
— |
|
Depreciation
and Amortization
|
|
|
3,438 |
|
|
|
891 |
|
|
|
39 |
|
General
and Administrative
|
|
|
5,586 |
|
|
|
2,893 |
|
|
|
2,225 |
|
Exploration
|
|
|
938 |
|
|
|
1,816 |
|
|
|
1,941 |
|
Total
Costs and Expenses
|
|
|
20,652 |
|
|
|
5,600 |
|
|
|
4,205 |
|
Income
(Loss) from Operations
|
|
|
12,452 |
|
|
|
(5,600 |
) |
|
|
(4,205 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Income (Expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Income
|
|
|
77 |
|
|
|
146 |
|
|
|
184 |
|
Interest
Expense
|
|
|
(1,207 |
) |
|
|
(792 |
) |
|
|
— |
|
Other
Income (Expense)
|
|
|
(95 |
) |
|
|
— |
|
|
|
(202 |
) |
Loss
on change in fair value of derivative
|
|
|
(1,356 |
) |
|
|
(1,226 |
) |
|
|
(582 |
) |
Total
Other Income (Expense)
|
|
|
(2,581 |
) |
|
|
(1,872 |
) |
|
|
(600 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(Loss) before Income Taxes
|
|
|
9,871 |
|
|
|
(7,472 |
) |
|
|
(4,805 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
Tax Expense (Note 22)
|
|
|
(3,507 |
) |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income (Loss)
|
|
$ |
6,364 |
|
|
$ |
(7,472 |
) |
|
$ |
(4,805 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(Loss) Per Common Share
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.04 |
|
|
$ |
(0.05 |
) |
|
$ |
(0.04 |
) |
Diluted
|
|
$ |
0.03 |
|
|
$ |
— |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
Weighted Average Common Shares Outstanding
|
|
|
175,039,996 |
|
|
|
149,811,266 |
|
|
|
112,204,471 |
|
Diluted
Weighted Average Common Shares Outstanding
|
|
|
195,469,129 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CAPITAL
GOLD CORPORATION
|
CONSOLIDATED
STATEMENT OF STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
Deferred
|
|
|
|
|
|
Total
|
|
|
|
Common
Stock
|
|
|
paid-in-
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
Financing
|
|
|
Deferred
|
|
|
Stockholders’
|
|
|
|
Shares
|
|
|
Amount
|
|
|
capital
|
|
|
Deficit
|
|
|
Income/(Loss)
|
|
|
Costs
|
|
|
Compensation
|
|
|
Equity
|
|
Balance
at July 31, 2005
|
|
|
95,969,216 |
|
|
|
96 |
|
|
|
31,852 |
|
|
|
(26,583 |
) |
|
|
157 |
|
|
|
(253 |
) |
|
|
— |
|
|
|
5,269 |
|
Change
in par value to $0.0001
|
|
|
— |
|
|
|
(86 |
) |
|
|
86 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Deferred
financing costs
|
|
|
1,000,000 |
|
|
|
— |
|
|
|
270 |
|
|
|
— |
|
|
|
— |
|
|
|
(270 |
) |
|
|
— |
|
|
|
— |
|
Issuance
of common stock upon
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
warrant
and option exercises, net
|
|
|
4,825,913 |
|
|
|
— |
|
|
|
742 |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
742 |
|
Issuance
of common stock upon
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
warrant
and option exercises, net
|
|
|
8,600,000 |
|
|
|
1 |
|
|
|
2,373 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
2,374 |
|
Private
placement, net
|
|
|
21,240,000 |
|
|
|
2 |
|
|
|
4,997 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
4,999 |
|
Options
and warrants issued for services
|
|
|
|
|
|
|
|
|
|
|
414 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
(52 |
) |
|
|
362 |
|
Net
loss for the year ended July 31, 2006
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(4,805 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(4,805 |
) |
Unrealized
loss on marketable securities
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
(60 |
) |
|
|
|
|
|
|
— |
|
|
|
(60 |
) |
Equity
adjustment from foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
49 |
|
|
|
|
|
|
|
— |
|
|
|
49 |
|
Total
comprehensive loss
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(4,816 |
) |
Balance
- July 31, 2006
|
|
|
131,635,129 |
|
|
|
13 |
|
|
|
40,734 |
|
|
|
(31,388 |
) |
|
|
146 |
|
|
|
(523 |
) |
|
|
(52 |
) |
|
|
8,930 |
|
The accompanying notes are an integral
part of the financial statements.
CAPITAL
GOLD CORPORATION
|
CONSOLIDATED
STATEMENT OF STOCKHOLDERS’ EQUITY - CONTINUED
|
(in
thousands, except for share and per share
amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
Deferred
|
|
|
|
|
|
Total
|
|
|
|
Common
Stock
|
|
|
paid-in-
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
Financing
|
|
|
Deferred
|
|
|
Stockholders’
|
|
|
|
Shares
|
|
|
Amount
|
|
|
capital
|
|
|
Deficit
|
|
|
Income/(Loss)
|
|
|
Costs
|
|
|
Compensation
|
|
|
Equity
|
|
Balance
at July 31, 2006
|
|
|
131,635,129 |
|
|
|
13 |
|
|
|
40,734 |
|
|
|
(31,388 |
) |
|
|
146 |
|
|
|
(523 |
) |
|
|
(52 |
) |
|
|
8,930 |
|
Deferred
financing costs
|
|
|
1,150,000 |
|
|
|
— |
|
|
|
351 |
|
|
|
— |
|
|
|
— |
|
|
|
(351 |
) |
|
|
— |
|
|
|
— |
|
Deferred
financing costs
|
|
|
— |
|
|
|
— |
|
|
|
3,314 |
|
|
|
— |
|
|
|
— |
|
|
|
(3,314 |
) |
|
|
— |
|
|
|
— |
|
Amortization
of deferred finance costs
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
750 |
|
|
|
— |
|
|
|
750 |
|
Options
and warrants issued for services
|
|
|
— |
|
|
|
— |
|
|
|
216 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
216 |
|
Private
placement, net
|
|
|
12,561,667 |
|
|
|
2 |
|
|
|
3,484 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,486 |
|
Common
stock issued for services provided
|
|
|
622,443 |
|
|
|
— |
|
|
|
276 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
276 |
|
Common
stock issued upon the exercising of options and warrants
|
|
|
22,203,909 |
|
|
|
2 |
|
|
|
5,641 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,643 |
|
Net
loss for the year ended July 31, 2007
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(7,472 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(7,472 |
) |
Change
in fair value on interest rate swaps
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(47 |
) |
|
|
— |
|
|
|
— |
|
|
|
(47 |
) |
Equity
adjustment from foreign currency translation
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
205 |
|
|
|
— |
|
|
|
— |
|
|
|
205 |
|
Total
comprehensive loss
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(7,314 |
) |
Balance
at July 31, 2007
|
|
|
168,173,148 |
|
|
$ |
17 |
|
|
$ |
54,016 |
|
|
$ |
(38,860 |
) |
|
$ |
304 |
|
|
$ |
(3,438 |
) |
|
$ |
(52 |
) |
|
$ |
11,987 |
|
The accompanying notes are an integral
part of the financial statements.
CAPITAL
GOLD CORPORATION
|
CONSOLIDATED
STATEMENT OF STOCKHOLDERS’ EQUITY – CONTINUED
|
(in
thousands, except for share and per share
amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
Deferred
|
|
|
|
|
|
Total
|
|
|
|
Common
Stock
|
|
|
paid-in-
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
Financing
|
|
|
Deferred
|
|
|
Stockholders’
|
|
|
|
Shares
|
|
|
Amount
|
|
|
capital
|
|
|
Deficit
|
|
|
Income/(Loss)
|
|
|
Costs
|
|
|
Compensation
|
|
|
Equity
|
|
Balance
at July 31, 2007
|
|
|
168,173,148 |
|
|
$ |
17 |
|
|
$ |
54,016 |
|
|
$ |
(38,860 |
) |
|
$ |
304 |
|
|
$ |
(3,438 |
) |
|
$ |
(52 |
) |
|
$ |
11,987 |
|
Amortization
of deferred finance costs
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
930 |
|
|
|
— |
|
|
|
930 |
|
Equity
based compensation
|
|
|
— |
|
|
|
— |
|
|
|
433 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
194 |
|
|
|
627 |
|
Common
stock issued upon the exercising of options and warrants
|
|
|
22,994,178 |
|
|
|
2 |
|
|
|
7,471 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,473 |
|
Issuance
of restricted common stock
|
|
|
1,610,000 |
|
|
|
— |
|
|
|
1,051 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(691 |
) |
|
|
360 |
|
Deferred
finance costs
|
|
|
— |
|
|
|
— |
|
|
|
103 |
|
|
|
— |
|
|
|
— |
|
|
|
(103 |
) |
|
|
— |
|
|
|
— |
|
Net
income for the year ended July 31, 2008
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
6,364 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
6,364 |
|
Change
in fair value on interest rate swaps
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(141 |
) |
|
|
— |
|
|
|
— |
|
|
|
(141 |
) |
Unrealized
loss on marketable securities
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(25 |
) |
|
|
— |
|
|
|
— |
|
|
|
(25 |
) |
Equity
adjustment from foreign currency translation
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
622 |
|
|
|
— |
|
|
|
— |
|
|
|
622 |
|
Total
comprehensive income
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
6,820 |
|
Balance
at July 31, 2008
|
|
|
192,777,236 |
|
|
$ |
19 |
|
|
$ |
63,074 |
|
|
$ |
(32,496 |
) |
|
$ |
760 |
|
|
$ |
(2,611 |
) |
|
$ |
(549 |
) |
|
$ |
28,197 |
|
The accompanying notes are an integral
part of the financial statements.
CAPITAL
GOLD CORPORATION
|
CONSOLIDATED
STATEMENT OF CASH FLOWS
|
(in
thousands, except for share and per share
amounts)
|
|
|
For
The
|
|
|
|
Year
Ended
|
|
|
|
July
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Cash
Flow From Operating Activities:
|
|
|
|
|
|
|
|
|
|
Net
Income (Loss)
|
|
$ |
6,364 |
|
|
$ |
(7,472 |
) |
|
$ |
(4,805 |
) |
Adjustments
to Reconcile Net Loss to
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Cash Provided by (Used in) Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and Amortization
|
|
|
3,388 |
|
|
|
891 |
|
|
|
39 |
|
Accretion
of Reclamation and Remediation
|
|
|
124 |
|
|
|
31 |
|
|
|
— |
|
Loss
on sale of property and equipment
|
|
|
— |
|
|
|
— |
|
|
|
201 |
|
Loss
on change in fair value of derivative
|
|
|
1,356 |
|
|
|
1,226 |
|
|
|
582 |
|
Equity
Based Compensation
|
|
|
987 |
|
|
|
492 |
|
|
|
362 |
|
Changes
in Operating Assets and Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in
Accounts Receivable
|
|
|
(1,477 |
) |
|
|
— |
|
|
|
— |
|
Increase
in Prepaid Expenses
|
|
|
(146 |
) |
|
|
(32 |
) |
|
|
(21 |
) |
Increase
in Inventory
|
|
|
(8,913 |
) |
|
|
(2,458 |
) |
|
|
— |
|
Increase
(Decrease) in Other Current Assets
|
|
|
1,185 |
|
|
|
2,975 |
|
|
|
(5,243 |
) |
Decrease
(Increase) in Other Deposits
|
|
|
870 |
|
|
|
(629 |
) |
|
|
(170 |
) |
Decrease
(Increase) in Other Assets
|
|
|
— |
|
|
|
(50 |
) |
|
|
1 |
|
Increase
in Mining Reclamation Bond
|
|
|
(46 |
) |
|
|
— |
|
|
|
— |
|
Increase
in Deferred Tax Asset
|
|
|
(573 |
) |
|
|
— |
|
|
|
— |
|
Increase
in Accounts Payable
|
|
|
171 |
|
|
|
358 |
|
|
|
167 |
|
Decrease
in Derivative Liability
|
|
|
(1,166 |
) |
|
|
(460 |
) |
|
|
— |
|
Increase
in Reclamation and Remediation
|
|
|
— |
|
|
|
1,218 |
|
|
|
— |
|
Increase
in Other Liability
|
|
|
62 |
|
|
|
— |
|
|
|
— |
|
Increase
in Deferred Tax Liability
|
|
|
2,063 |
|
|
|
— |
|
|
|
— |
|
Increase
in Accrued Expenses
|
|
|
2,069 |
|
|
|
247 |
|
|
|
166 |
|
Net
Cash Provided By (Used in) Operating Activities
|
|
|
6,318 |
|
|
|
(3,663 |
) |
|
|
(8,721 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Flow From Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease
(Increase) in Other Investments
|
|
|
28 |
|
|
|
(4 |
) |
|
|
— |
|
Purchase
of Mining, Milling and Other Property and
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment
|
|
|
(5,417 |
) |
|
|
(17,851 |
) |
|
|
(811 |
) |
Purchase
of Intangibles
|
|
|
(90 |
) |
|
|
(570 |
) |
|
|
— |
|
Proceeds
on Sale of Mining, Milling and Other Property and
Equipment
|
|
|
— |
|
|
|
— |
|
|
|
192 |
|
Net
Cash Used in Investing Activities
|
|
|
(5,479 |
) |
|
|
(18,425 |
) |
|
|
(619 |
) |
The
accompanying notes are an integral part of the financial
statements.
CAPITAL
GOLD CORPORATION
|
CONSOLIDATED
STATEMENT OF CASH FLOWS – CONTINUED
|
(in
thousands, except for share and per share
amounts)
|
|
|
|
|
For
The
|
|
|
|
Year
Ended
|
|
|
|
July
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Flow From Financing Activities:
|
|
|
|
|
|
|
|
|
|
Advances
to Affiliate
|
|
$ |
7 |
|
|
$ |
(5 |
) |
|
$ |
(10 |
) |
Proceeds
from Borrowing on Credit Facility
|
|
|
— |
|
|
|
12,500 |
|
|
|
— |
|
Proceeds
From Issuance of Common Stock
|
|
|
7,474 |
|
|
|
9,129 |
|
|
|
8,115 |
|
Deferred
Finance Costs
|
|
|
(175 |
) |
|
|
(257 |
) |
|
|
(351 |
) |
Net
Cash Provided By Financing Activities
|
|
|
7,306 |
|
|
|
21,367 |
|
|
|
7,754 |
|
Effect
of Exchange Rate Changes
|
|
|
622 |
|
|
|
205 |
|
|
|
46 |
|
Increase
(Decrease) In Cash and Cash Equivalents
|
|
|
8,767 |
|
|
|
(516 |
) |
|
|
(1,540 |
) |
Cash
and Cash Equivalents - Beginning
|
|
|
2,225 |
|
|
|
2,741 |
|
|
|
4,281 |
|
Cash
and Cash Equivalents – Ending
|
|
$ |
10,992 |
|
|
$ |
2,225 |
|
|
$ |
2,741 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Cash Flow Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Paid For Interest
|
|
$ |
1,235 |
|
|
$ |
879 |
|
|
$ |
— |
|
Cash
Paid For Income Taxes
|
|
$ |
1,373 |
|
|
$ |
23 |
|
|
$ |
15 |
|
Non-Cash
Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock and warrants as payment of financing costs
|
|
$ |
103 |
|
|
$ |
3,665 |
|
|
$ |
270 |
|
Change
in Fair Value of Derivative Instrument
|
|
$ |
141 |
|
|
$ |
47 |
|
|
$ |
— |
|
Change
in Fair Value of Asset Retirement Obligation
|
|
$ |
293 |
|
|
$ |
— |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of the financial
statements.
|
|
CAPITAL
GOLD CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
JULY 31,
2008
(in
thousands, except for per share and ounce amounts)
NOTE 1 –
Basis of Presentation
Capital
Gold Corporation ("Capital Gold", "the Company", "we" or "us") was incorporated
in February 1982 in the State of Nevada. During March 2003 the Company's
stockholders approved an amendment to the Articles of Incorporation to change
its name from Leadville Mining and Milling Corp. to Capital Gold Corporation. In
November 2005, the Company reincorporated in Delaware. The Company
owns rights to property located in the State of Sonora, Mexico and the
California Mining District, Lake County, Colorado. The Company is engaged in the
exploration, development and production for gold and other minerals from its
properties in Mexico. All of the Company's mining activities are being performed
in Mexico.
On June
29, 2001, the Company exercised an option and purchased from AngloGold North
America Inc. and AngloGold (Jerritt Canyon) Corp. (“AngloGold”) 100% of the
issued and outstanding stock of Minera Chanate, S.A. de C.V., a subsidiary of
those two companies (“Minera Chanate”). Minera Chanate's assets consisted of
certain exploitation and exploration concessions in the States of Sonora,
Chihuahua and Guerrero, Mexico. These concessions are sometimes referred to as
the El Chanate Concessions.
Pursuant
to the terms of the agreement, on December 15, 2001, the Company made a $50
payment to AngloGold. AngloGold is entitled to receive the remainder of the
purchase price by way of an ongoing percentage of net smelter returns of between
2% and 4% plus 10% net profits interest (until the total net profits interest
payment received by AngloGold equals $1,000). AngloGold's right to a payment of
a percentage of net smelter returns and the net profits interest will terminate
at such point as they aggregate $18,018. In accordance with the agreement, the
foregoing payments are not to be construed as royalty payments. Should the
Mexican government or other jurisdiction determine that such payments are
royalties, the Company could be subject to and would be responsible for any
withholding taxes assessed on such payments.
Under the
terms of the agreement, the Company has granted AngloGold the right to designate
one of its wholly-owned Mexican subsidiaries to receive a one time option (the
“Option”) to purchase 51% of Minera Chanate (or such entity that owns the Minera
Chanate concessions at the time of option exercise) (the “Back-In Right”). That
Option is exercisable over a 180 day period commencing at such time as the
Company notifies AngloGold that it has made a good faith determination that it
has gold-bearing ore deposits on any one of the identified group of El Chanate
Concessions, when aggregated with any ore that the Company has mined, produced
and sold from such concessions, of in excess of 2,000,000 troy ounces of
contained gold. The exercise price would equal twice the Company's project costs
on the properties during the period commencing on December 15, 2000 and ending
on the date of such notice.
In January 2008, pursuant to the terms
of the agreement, the Company made a good faith determination and notified
AngloGold that the drill indicated resources at the El Chanate gold mine
exceeded two million ounces of contained gold. The term "drill indicated
resources" is defined in the agreement. A drill indicated resource
number does not rise to the level of, and should not be considered proven and
probable reserves as those terms are defined under SEC
guidelines. AngloGold had 180 days from the date of
notification, or July 28, 2008, to determine whether or not it would choose to
exercise the Option for the Back-In Right. On July 1, 2008, AngloGold notified
the Company that it would not be exercising the Back-In Right.
During
the fiscal year ended July 31, 2007, The Company exited the development stage
since principal operations have commenced.
NOTE 2 –
Summary of Significant Accounting Policies
Principals of
Consolidation
The consolidated financial statements
include the accounts of Capital Gold Corporation and its wholly owned and
majority owned subsidiaries, Leadville Mining and Milling Holding Corporation,
Minera Santa Rita, S.A de R.L. de C.V.(“MSR”) and Oro de Altar S. de R. L. de
C.V. (“Oro”) as well as the accounts within Caborca Industrial S.A. de C.V.
(“Caborca Industrial”), a Mexican corporation 100% owned by two of the Company’s
officers and directors for mining support services. These services include, but
are not limited to, the payment of mining salaries and related costs. Caborca
Industrial bills the Company for these services at cost. This entity
is considered a variable interest entity under accounting rules provided under
FIN 46, “Consolidation of Variable Interest Entities”. All
significant intercompany accounts and transactions are eliminated in
consolidation.
Cash and Cash
Equivalents
The
Company considers highly liquid investments with original maturities of three
months or less from the date of purchase to be cash equivalents. Cash and cash
equivalents include money market accounts.
Accounts
Receivable
Accounts
receivable represents amounts due but not yet received from customers upon sales
of precious metals. The carrying amount of the Company’s accounts
receivable balances approximate fair value.
Marketable
Securities
The
Company accounts for its investments in marketable securities in accordance with
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities."
Management
determines the appropriate classification of all securities at the time of
purchase and re-evaluates such designation as of each balance sheet date. The
Company has classified its marketable equity securities as available for sale
securities and has recorded such securities at fair value using the closing
quoted market price on the exchange the securities are traded as of the balance
sheet date. The Company uses the specific identification method to determine
realized gains and losses. Unrealized holding gains and losses are excluded from
earnings and, until realized, are reported as a separate component of
stockholders' equity.
Ore on Leach Pads and
Inventories (“In-Process Inventory”)
Costs that are incurred in or benefit
the productive process are accumulated as ore on leach pads and inventories. Ore
on leach pads and inventories are carried at the lower of average cost or
market. The current portion of ore on leach pads and inventories is determined
based on the amounts to be processed within the next 12 months. The major
classifications are as follows:
Ore
on Leach Pads
The recovery of gold from certain gold
oxide ores is achieved through the heap leaching process. Under this method,
oxide ore is placed on leach pads where it is treated with a chemical solution,
which dissolves the gold contained in the ore. The resulting “pregnant” solution
is further processed in a plant where the gold is recovered. Costs are added to
ore on leach pads based on current mining costs, including applicable
depreciation, depletion and amortization relating to mining operations. Costs
are removed from ore on leach pads as ounces are recovered based on the average
cost per estimated recoverable ounce of gold on the leach pad.
The estimates of recoverable gold on
the leach pads are calculated from the quantities of ore placed on the leach
pads (measured tonnes added to the leach pads), the grade of ore placed on the
leach pads (based on fire assay data) and a recovery percentage (based on ore
type and column testwork). It is estimated that the Company’s leach pad at El
Chanate will recover all ounces placed within a one year period from date of
placement.
Although the quantities of recoverable
gold placed on the leach pads are reconciled by comparing the grades of ore
placed on pads to the quantities of gold actually recovered (metallurgical
balancing), the nature of the leaching process inherently limits the ability to
precisely monitor inventory levels. As a result, the metallurgical balancing
process needs to be constantly monitored and estimates need to be refined based
on actual results over time. The Company’s operating results may be impacted by
variations between the estimated and actual recoverable quantities of gold on
its leach pads.
In-process
Inventory
In-process inventories represent
materials that are currently in the process of being converted to a saleable
product. Conversion processes vary depending on the nature of the ore and the
specific processing facility, but include mill in-circuit, leach in-circuit,
flotation and column cells and carbon in-pulp inventories. In-process material
are measured based on assays of the material fed into the process and the
projected recoveries of the respective plants. In-process inventories are valued
at the average cost of the material fed into the process attributable to the
source material coming from the mines, stockpiles and/or leach pads plus the
in-process conversion costs, including applicable depreciation relating to the
process facilities incurred to that point in the process.
Precious
Metals Inventory
Precious metals inventories include
gold dor� and/or gold bullion. Precious metals that result from the Company’s
mining and processing activities are valued at the average cost of the
respective in-process inventories incurred prior to the refining process, plus
applicable refining costs.
Materials
and Supplies
Materials and supplies are valued at
the lower of average cost or net realizable value. Cost includes applicable
taxes and freight.
Property, Plant and Mine
Development
Expenditures for new facilities or
equipment and expenditures that extend the useful lives of existing facilities
or equipment are capitalized and depreciated using the straight-line method at
rates sufficient to depreciate such costs over the estimated productive lives,
which do not exceed the related estimated mine lives, of such facilities based
on proven and probable reserves.
Mineral exploration costs are expensed
as incurred. When it has been determined that a mineral property can be
economically developed as a result of establishing proven and probable reserves,
costs incurred prospectively to develop the property are capitalized as incurred
and are amortized using the units-of-production (“UOP”) method over the
estimated life of the ore body based on estimated recoverable ounces or pounds
in proven and probable reserves.
Impairment of Long-Lived
Assets
The Company reviews and evaluates its
long-lived assets for impairment when events or changes in circumstances
indicate that the related carrying amounts may not be recoverable. An impairment
is considered to exist if the total estimated future cash flows on an
undiscounted basis are less than the carrying amount of the assets, including
goodwill, if any. An impairment loss is measured and recorded based on
discounted estimated future cash flows. Future cash flows are estimated based on
quantities of recoverable minerals, expected gold and other commodity prices
(considering current and historical prices, price trends and related factors),
production levels and operating costs of production and capital, all based on
life-of-mine plans. Existing proven and probable reserves and value beyond
proven and probable reserves, including mineralization other than proven and
probable reserves and other material that is not part of the resource base, are
included when determining the fair value of mine site reporting units at
acquisition and, subsequently, in determining whether the assets are impaired.
The term “recoverable minerals” refers to the estimated amount of gold or other
commodities that will be obtained after taking into account losses during ore
processing and treatment. Estimates of recoverable minerals from exploration
stage mineral interests are risk adjusted based on management’s relative
confidence in such materials. In estimating future cash flows, assets are
grouped at the lowest level for which there are identifiable cash flows that are
largely independent of future cash flows from other asset groups. The Company’s
estimates of future cash flows are based on numerous assumptions and it is
possible that actual future cash flows will be significantly different than the
estimates, as actual future quantities of recoverable minerals, gold and other
commodity prices, production levels and operating costs of production and
capital are each subject to significant risks and uncertainties.
Reclamation and Remediation
Costs (“Asset Retirement Obligations”)
Reclamation costs are allocated to
expense over the life of the related assets and are periodically adjusted to
reflect changes in the estimated present value resulting from the passage of
time and revisions to the estimates of either the timing or amount of the
reclamation and abandonment costs. The Asset Retirement Obligation is based on
when the spending for an existing environmental disturbance and activity to date
will occur. The Company reviews, on an annual basis, unless otherwise deemed
necessary, the Asset Retirement Obligation at its mine site in accordance with
Statement of Financial Accounting Standards No. 143, “Accounting for Asset
Retirement Obligations” (“SFAS 143”)
Deferred Financing
Costs
Deferred
financing costs which were included in other assets and a component of
stockholders’ equity relate to costs incurred in connection with bank borrowings
and are amortized over the term of the related borrowings.
Intangible
Assets
Purchased
intangible assets consisting of rights of way, easements and net profit
interests are carried at cost less accumulated amortization. Amortization is
computed using the straight-line method over the economic lives of the
respective assets, generally five years or using the units of production method.
It is the Company’s policy to assess periodically the carrying amount of its
purchased intangible assets to determine if there has been an impairment to
their carrying value. Impairments of other
intangible
assets are determined in accordance with SFAS 144. There was no impairment at
July 31, 2008.
Fair Value of Financial
Instruments
The
carrying value of the Company's financial instruments, including cash and cash
equivalents and accounts payable approximated fair value because of the short
maturity of these instruments.
Long-term
Debt
The carrying value of the Company’s
long-term debt approximates fair value.
Revenue
Recognition
Revenue is recognized from the sale of gold dore when
persuasive evidence of an arrangement exists, the price is determinable, the
product has been delivered to the refinery, the title has been transferred to
the customer and collection of the sales price is reasonably assured from the
customer. The Company sells its precious metal content to a financial
institution. Revenues are determined by selling the precious metal content at
the spot price. Sales are calculated based upon assay of the dore’s precious
metal content and its weight. The Company receives 95% of the
precious metal content contained within the dore from the refinery based upon
the preliminary assay of the Company. The Company forwards an
irrevocable transfer letter to the refinery to authorize the transfer of the
precious metal content to the customer. The sale is recorded by the
Company upon the refinery pledging the precious metal content to the
customer. The Company waits until the dore precious metal content is
pledged to the customer at the refinery to recognize the sale because
collectibility is not ensured until the dore precious metal content is
pledged. The sale price is not subject to change subsequent to the
initial revenue recognition date.
Revenues from by-product sales, which consists of silver, will
be credited to Costs
applicable to sales as a by-product credit. By-product sales
amounted to $707, $0 and $0 for the fiscal years ended July 31, 2008, 2007 and
2006, respectively.”
Foreign Currency
Translation
Assets
and liabilities of the Company's Mexican subsidiaries are translated to US
dollars using the current exchange rate for assets and liabilities. Amounts on
the statement of operations are translated at the average exchange rates during
the year. Gains or losses resulting from foreign currency translation are
included as a component of other comprehensive income (loss).
Comprehensive Income
(Loss)
Comprehensive
income (loss) which is reported on the accompanying consolidated statement of
stockholders' equity as a component of accumulated other comprehensive income
(loss) consists of accumulated foreign translation gains and losses, the fair
value change in our interest rate swap agreement and net unrealized gains and
losses on available-for-sale securities.
Income
Taxes
The
Company adopted the provisions of FASB Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes" ("FIN 48") effective January 1, 2007. The purpose
of FIN 48 is to clarify and set forth consistent rules for accounting for
uncertain tax positions in accordance with Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" (“SFAS 109”). The
cumulative effect of applying the provisions of this interpretation are required
to be reported separately
as an
adjustment to the opening balance of retained earnings in the year of
adoption. The adoption of this standard did not have an impact on the
financial condition or the results of the Company’s operations.
On
October 1, 2007, the Mexican Government enacted legislation which introduces
certain tax reforms as well as a new minimum flat tax system. This new
flat tax system integrates with the regular income tax system and is based on
cash-basis net income that includes only certain receipts and
expenditures. The flat tax is set at 17.5% of cash-basis net income as
determined, with transitional rates of 16.5% and 17.0% in 2008 and 2009,
respectively. If the flat tax is positive, it is reduced by the regular
income tax and any excess is paid as a supplement to the regular income
tax. If the flat tax is negative, it may serve to reduce the regular
income tax payable in that year or can be carried forward for a period of up to
ten years to reduce any future flat tax.
Companies
are required to prepay income taxes on a monthly basis based on the greater of
the flat tax or regular income tax as calculated for each monthly period.
Annualized income projections indicate that the Company will not be liable for
any excess flat tax for calendar year 2008 and, accordingly, has recorded a
Mexican income tax provision as of July 31, 2008.
As the
new legislation was recently enacted, it remains subject to ongoing varying
interpretations. There is the possibility of implementation amendments by
the Mexican Government and the estimated future income tax liability recorded at
the balance sheet date may change.
Deferred
income tax assets and liabilities are determined based on differences between
the financial statement reporting and tax bases of assets and liabilities and
are measured using the enacted tax rates and laws in effect when the differences
are expected to reverse. The measurement of deferred income tax assets is
reduced, if necessary, by a valuation allowance for any tax benefits, which are
not expected to be realized. The effect on deferred income tax assets and
liabilities of a change in tax rates is recognized in the period that such tax
rate changes are enacted.
Equity Based
Compensation
In connection with offers of employment
to the Company’s executives as well as in consideration for agreements with
certain consultants, the Company issues options and warrants to acquire its
common stock. Employee and non-employee awards are made at the discretion of the
Board of Directors.
Such options and warrants may be
exercisable at varying exercise prices currently ranging from $0.24 to $0.85 per
share of common stock with certain of these grants becoming exercisable
immediately upon grant. Certain grants have vested or are vesting over a period
of five years. Also, certain grants contain a provision whereby they become
immediately exercisable upon a change of control.
Effective February 1, 2006, the Company
adopted the provisions of Statement of Financial Accounting Standards No. 123R
“Accounting for Stock Based Compensation” (“SFAS 123R”). Under SFAS 123R,
share-based compensation cost is measured at the grant date, based on the
estimated fair value of the award, and is recognized as expense over the
requisite service period. The Company adopted the provisions of SFAS 123R using
a modified prospective application. Under this method, compensation cost is
recognized for all share-based payments granted, modified or settled after the
date of adoption, as well as for any unvested awards that were granted prior to
the date of adoption. Prior periods are not revised for comparative purposes.
Because the Company previously adopted only the pro forma disclosure provisions
of SFAS 123, it will recognize compensation cost relating to the unvested
portion of awards granted prior to the date of adoption, using the same estimate
of the grant-date fair value and the same attribution method used to determine
the pro forma disclosures under SFAS 123, except that forfeitures rates will be
estimated for all options, as required by SFAS 123R.
The
cumulative effect of applying the forfeiture rates is not material. SFAS 123R
requires that excess tax benefits related to stock option exercises be reflected
as financing cash inflows instead of operating cash inflows.
The fair value of each option award is
estimated on the date of grant using a Black-Scholes option valuation model.
Expected volatility is based on the historical volatility of the price of the
Company stock. The risk-free interest rate is based on U.S. Treasury issues with
a term equal to the expected life of the option. The Company uses historical
data to estimate expected dividend yield, expected life and forfeiture rates.
The estimated per share weighted average grant-date fair values of stock options
and warrants granted during the fiscal years ended July 31, 2008, 2007 and 2006;
were $0.62, $0.33 and $0.38, respectively. The fair values of the
options and warrants granted were estimated based on the following weighted
average assumptions:
|
|
Year
ended July 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Expected
volatility
|
|
|
47.60
– 60.88%
|
|
|
|
73%
|
|
|
|
95
– 165%
|
|
Risk-free
interest rate
|
|
|
4.61%
|
|
|
|
5.75%
|
|
|
|
5.95%
|
|
Expected
dividend yield
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Expected
life
|
|
5.5
years
|
|
|
2.4
years
|
|
|
1-2
years
|
|
Stock
option and warrant activity for employees during the fiscal years ended July 31,
2008, 2007 and 2006 are as follows (all tables in thousands, except for option,
price and term data):
|
|
Number
of
Options
|
|
|
Weighted
average
exercise
price
|
|
|
Weighted
average
remaining
contracted
term
(years)
|
|
|
Aggregate
intrinsic
value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at July 31, 2005
|
|
|
4,711,363 |
|
|
$ |
.09 |
|
|
|
0.30 |
|
|
$ |
1,278 |
|
Options
granted
|
|
|
4,611,363 |
|
|
|
.13 |
|
|
|
— |
|
|
|
— |
|
Options
exercised
|
|
|
(590,909 |
) |
|
|
.05 |
|
|
|
— |
|
|
|
— |
|
Options
expired
|
|
|
(3,161,363 |
) |
|
|
.05 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at July 31, 2006
|
|
|
5,570,454 |
|
|
$ |
.16 |
|
|
|
— |
|
|
$ |
702 |
|
Options
granted
|
|
|
1,050,000 |
|
|
|
.36 |
|
|
|
— |
|
|
|
— |
|
Options
exercised
|
|
|
(3,570,909 |
) |
|
|
.08 |
|
|
|
— |
|
|
|
— |
|
Options
expired
|
|
|
(549,545 |
) |
|
|
.22 |
|
|
|
— |
|
|
|
— |
|
Warrants
and options outstanding at July 31, 2007
|
|
|
2,500,000
|
|
|
$ |
.34
|
|
|
|
1.20
|
|
|
$ |
255
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
granted*
|
|
|
2,500,000 |
|
|
|
.63 |
|
|
|
— |
|
|
|
— |
|
Options
exercised
|
|
|
(1,450,000 |
) |
|
|
.32 |
|
|
|
— |
|
|
|
— |
|
Options
expired
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Warrants
and options outstanding at July 31, 2008
|
|
|
3,550,000
|
|
|
$ |
.55
|
|
|
|
4.00
|
|
|
$ |
334
|
|
Warrants
and options exercisable at July 31, 2008
|
|
|
1,800,000
|
|
|
$ |
.47
|
|
|
|
2.83
|
|
|
$ |
308
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
Issuances
under 2006 Equity Incentive Plan.
|
Unvested
stock option and warrant balances for employees at July 31, 2008, 2007 and 2006
are as follows:
|
|
|
|
|
Weighted
average
exercise
price
|
|
|
Weighted
average
remaining
contracted
|
|
|
Aggregate
Intrinsic
value
|
|
Outstanding
at July 31, 2005
|
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
$ |
— |
|
Options
granted
|
|
|
150,000 |
|
|
|
.32 |
|
|
|
2.00 |
|
|
$ |
17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at July 31, 2006
|
|
|
150,000 |
|
|
$ |
.32 |
|
|
|
1.67 |
|
|
$ |
17 |
|
Options
granted
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at July 31, 2007
|
|
|
150,000 |
|
|
$ |
.32 |
|
|
|
0.67 |
|
|
$ |
18 |
|
Options
granted
|
|
|
2,500,000 |
|
|
|
.63 |
|
|
|
— |
|
|
|
— |
|
Options
vested
|
|
|
(900,000 |
) |
|
|
.58 |
|
|
|
— |
|
|
|
— |
|
Unvested
Options outstanding at July 31, 2008
|
|
|
1,750,000 |
|
|
$ |
.63 |
|
|
|
4.49 |
|
|
$ |
8 |
|
Stock
option and warrant activity for non-employees during the years ended July 31,
2008, 2007 and 2006 are as follows:
|
|
|
|
|
Weighted
average
exercise
price
|
|
|
Weighted
average
remaining
contracted
term
(years)
|
|
|
Aggregate
Intrinsic
value
|
|
Warrants
and options outstanding at July 31, 2005
|
|
|
31,902,004 |
|
|
$ |
.30 |
|
|
|
1.13 |
|
|
$ |
3,430 |
|
Options
granted
|
|
|
6,844,000 |
|
|
|
.28 |
|
|
|
— |
|
|
|
— |
|
Options
exercised
|
|
|
(12,835,004 |
) |
|
|
.29 |
|
|
|
— |
|
|
|
— |
|
Options
expired
|
|
|
(350,000 |
) |
|
|
.10 |
|
|
|
— |
|
|
|
— |
|
Warrants
and options outstanding at July 31, 2006
|
|
|
25,561,000 |
|
|
$ |
.29 |
|
|
|
1.33 |
|
|
$ |
1,940 |
|
Options
granted
|
|
|
16,982,542 |
|
|
|
.33 |
|
|
|
|
|
|
|
|
|
Options
exercised
|
|
|
(18,633,000 |
) |
|
|
.29 |
|
|
|
— |
|
|
|
— |
|
Options
expired
|
|
|
(1,375,000 |
) |
|
|
.31 |
|
|
|
— |
|
|
|
— |
|
Warrants
and options outstanding at July 31, 2007
|
|
|
22,535,542 |
|
|
$ |
.33 |
|
|
|
1.48 |
|
|
$ |
2,578 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
granted*
|
|
|
1,715,000 |
|
|
$ |
.66 |
|
|
|
— |
|
|
|
— |
|
Options
exercised
|
|
|
(21,555,542 |
) |
|
|
.33 |
|
|
|
— |
|
|
|
— |
|
Options
expired
|
|
|
(680,000 |
) |
|
|
.30 |
|
|
|
— |
|
|
|
— |
|
Warrants
and options outstanding at July 31, 2008
|
|
|
2,015,000 |
|
|
$ |
.62 |
|
|
|
3.54 |
|
|
$ |
54 |
|
Warrants
and options exercisable at July 31, 2008
|
|
|
1,560,000 |
|
|
$ |
.61 |
|
|
|
2.71 |
|
|
$ |
48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
1,115,000
issued under 2006 Equity Incentive
Plan.
|
Unvested
stock option and warrant balances for non-employees at July 31, 2008, 2007 and
2006 are as follows:
|
|
|
|
|
Weighted
Average
Exercise
|
|
|
Weighted
average
remaining
contracted
|
|
|
Aggregate
Intrinsic
value
|
|
Outstanding
at July 31, 2006
|
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
$ |
— |
|
Options
granted
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Options
vested |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Outstanding
at July 31, 2007
|
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
$ |
— |
|
Options
granted
|
|
|
650,000 |
|
|
|
.63 |
|
|
|
— |
|
|
|
— |
|
Options
vested
|
|
|
(195,000 |
) |
|
|
.63 |
|
|
|
— |
|
|
|
— |
|
Unvested
options outstanding at July 31, 2008
|
|
|
455,000 |
|
|
$ |
.63 |
|
|
|
4.49 |
|
|
$ |
3 |
|
The impact on the Company’s results of
operations of recording equity based compensation for the fiscal years ended
July 31, 2008, 2007 and 2006, for employees and non-employees was approximately
$987, $492 and $362 and reduced earnings per share by $0.01, $0.00 and $0.00 per
basic and diluted share, respectively. The Company has not recognized
any tax benefit or expense for the fiscal years ended July 31, 2008, 2007 and
2006, related to these items due to the Company’s net operating losses and
corresponding valuation allowance within the U.S. (See Note 22).
As of July 31, 2008, 2007 and 2006,
there was approximately $686, $53 and $53, respectively, of unrecognized equity
based compensation cost related to options granted to executives and employees
which have not yet vested.
Prior to
the adoption of FAS 123R, the Company applied the intrinsic value-based method
of accounting prescribed by Accounting Principles Board (“APB”) Opinion
No. 25, Accounting for
Stock Issued to Employees, and related interpretations including FASB
Interpretation No. 44, Accounting for Certain Transactions
involving Stock Compensation an interpretation of APB Opinion
No. 25
issued in March 2000 (“FIN 44”), to account for its fixed plan stock
options. Under this method, compensation expense was recorded on the
date of grant only if the current market price of the underlying stock exceeded
the exercise price. SFAS No. 123, Accounting for Stock-Based
Compensation, established accounting and disclosure requirements using a
fair value-based method of accounting for stock-based employee compensation
plans. In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation Transition and Disclosure, an amendment of FASB Statement
No. 123.
This Statement amended FASB Statement No. 123, Accounting for Stock-Based
Compensation, to provide alternative methods of transition for a
voluntary change to the fair value method of accounting for stock-based employee
compensation.
The
following table illustrates the effect on the net loss and net loss per share as
if the Company had applied the fair value recognition provisions of SFAS
No. 123 to stock based compensation prior to February 1, 2006:
|
|
Year
Ended
July
31, 2006
|
|
Net
Loss
|
|
$ |
(4,805 |
) |
Add
stock-based employee compensation expense (recovery) included in reported
net income loss
|
|
|
— |
|
Deduct
total stock-based employee compensation expense determined under fair
value based method for all awards, net of tax
|
|
|
(773 |
) |
Pro
forma net loss
|
|
$ |
(5,578 |
) |
Pro
forma net loss per common share (basic and diluted)
|
|
$ |
(.05 |
) |
Weighted
average of common share (basic and diluted)
|
|
|
112,204,471 |
|
Net
loss per common share basic and diluted
|
|
$ |
(.04 |
) |
Reclassifications
Certain
items in these financial statements have been reclassified to conform to the
current period presentation. These reclassifications had no impact on the
Company’s results of operations, stockholders’ equity or cash
flows.
Net Loss Per Common
Share
Basic and
diluted net loss per share is computed using the weighted average number of
shares of common stock outstanding during the period. Equivalent common shares,
consisting of stock options and warrants, which amounted to 25,035,542 and
31,131,454 shares, respectively, are excluded from the calculation of diluted
net loss per share for the fiscal years ended July 31, 2007 and 2006 since their
effect is antidilutive.
Concentrations of Credit
Risk
Financial
instruments that potentially subject the Company to significant concentrations
of credit risk consist principally of cash and cash equivalents and marketable
securities. The Company maintains cash balances at financial institutions which
exceed the Federal Deposit Insurance Corporation limit of $100,000 at times
during the year.
Accounting for Derivatives
and Hedging Activities
The
Company entered into two identically structured derivative contracts with
Standard Bank in March 2006. Each derivative consisted of a series of
forward sales of gold and a purchase gold cap. The Company agreed to
sell a total volume of 121,927 ounces of gold forward to Standard Bank at a
price of $500 per ounce on a quarterly basis during the period from March 2007
to September 2010. The Company also agreed to a purchase gold cap on
a quarterly basis during this same period and at identical volumes covering a
total volume of 121,927 ounces of gold at a price of $535 per
ounce. Although these contracts are not designated as hedging
derivatives, they serve an economic purpose of protecting the company from the
effects of a decline in gold prices. Because they are not designated
as hedges, however, special hedge accounting does not
apply. Derivative results are simply marked to market through
earnings, with these effects recorded in other income or other expense, as appropriate
under FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging
Activities” (“SFAS 133”).
The
Company entered into interest rate swap agreements in accordance with the terms
of its credit facility, which requires that the Company hedge at least 50
percent of the Company’s outstanding debt under this facility. The
agreements entered into cover $9,375 or 75% of the outstanding debt. Both swaps
covered this same notional amount of $9,375, but over different time
horizons. The first covered the six months commencing October 11,
2006 and terminated on March 31, 2007 and the second covering the period from
March 30, 2007 with a termination date of December 31, 2010. The
interest rate swap agreements are accounted for as cash flow hedges, whereby
“effective” hedge gains or losses are initially recorded in other comprehensive
income and later reclassified to the interest expense component of earnings
coincidently with the earnings impact of the interest expenses being hedged.
“Ineffective” hedge results are immediately recorded in earnings also under
interest expense. No component of hedge results will be excluded from
the assessment of hedge effectiveness.
Use of
Estimates
The
preparation of financial statements in conformity with U.S. generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosures 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 these estimates.
Recently Issued Accounting
Pronouncements
On
February 15, 2007, the FASB issued FASB Statement No. 159, The Fair Value Option
for Financial Assets and Financial Liabilities - Including an Amendment of FASB
Statement No. 115. This standard permits an entity to choose to measure many
financial instruments and certain other items at fair value. This option is
available to all entities, including not-for-profit organizations. Most of the
provisions in Statement 159 are elective; however, the amendment to FASB
Statement No. 115, Accounting for Certain Investments in Debt and Equity
Securities, applies to all entities with available-for-sale and trading
securities. Some requirements apply differently to entities that do not report
net income. The FASB's stated objective in issuing this standard is as follows:
"to improve financial reporting by providing entities with the opportunity to
mitigate volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions".
The fair value option established by
Statement 159 permits all entities to choose to measure eligible items at fair
value at specified election dates. A business entity will report unrealized
gains and losses on items for which the fair value option has been elected in
earnings (or another performance indicator if the business entity does not
report earnings) at each subsequent reporting date. A not-for-profit
organization will report unrealized gains and losses in its statement of
activities or similar statement. The fair value option: (a) may be applied
instrument by instrument, with a few exceptions, such as investments otherwise
accounted for by the equity method; (b) is irrevocable (unless a new election
date occurs); and (c) is applied only to entire instruments and not to portions
of instruments.
Statement
159 is effective as of the beginning of an entity's first fiscal year that
begins after November 15, 2007. The Company elected not to adopt the fair
value option for any eligible instruments.
On
December 4, 2007, the FASB issued FASB Statement No. 160, “Noncontrolling Interests in
Consolidated Financial Statements - An Amendment of ARB No. 51.”
Statement 160 establishes new accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. Specifically, this statement requires the recognition of a
noncontrolling interest (minority interest) as equity in the consolidated
financial statements and separate from the parent's equity. The amount of net
income attributable to the noncontrolling interest will be included in
consolidated net income on the face of the income statement. Statement 160
clarifies that changes in a
parent's
ownership interest in a subsidiary that do not result in deconsolidation are
equity transactions if the parent retains its controlling financial interest. In
addition, this statement requires that a parent recognize a gain or loss in net
income when a subsidiary is deconsolidated. Such gain or loss will be measured
using the fair value of the noncontrolling equity investment on the
deconsolidation date. Statement 160 also includes expanded disclosure
requirements regarding the interests of the parent and its noncontrolling
interest.
Statement
160 is effective for fiscal years, and interim periods within those fiscal
years, beginning on or after December 15, 2008. Earlier adoption is
prohibited. The Company believes adoption of this standard will not
have an impact on the financial condition or the results of the Company’s
operations.
On April
21, 2008, the FASB posted a revised FASB Statement No. 133 Implementation
guidance for Issues I1, Interaction of the Disclosure Requirements of Statement
133 and Statement 47, and K4, Miscellaneous: Income Statement Classification of
Hedge Ineffectiveness and the Component of a Derivative's Gain or Loss Excluded
from the Assessment of Hedge Effectiveness. The revisions relate to the issuance
of FASB Statement No. 161, Disclosures about Derivative Instruments and Hedging
Activities. The Company believes adoption of this standard will not
have a material impact on the financial condition or the results of the
Company’s operations.
The FASB
has issued FASB Statement No. 162, The Hierarchy of Generally Accepted
Accounting Principles. Statement 162 is intended to improve financial
reporting by identifying a consistent framework, or hierarchy, for selecting
accounting principles to be used in preparing financial statements that are
presented in conformity with U.S. generally accepted accounting principles for
nongovernmental entities. The hierarchy under Statement 162 is as
follows:
|
*
|
FASB
Statements of Financial Accounting Standards and Interpretations, FASB
Statement 133 Implementation Issues, FASB Staff Positions,
AICPA Accounting Research Bulletins and Accounting Principles Board
Opinions that are not superseded by actions of the FASB, and Rules and
interpretive releases of the SEC for SEC
registrants.
|
|
*
|
FASB
Technical Bulletins and, if cleared by the FASB, AICPA Industry Audit and
Accounting Guides and Statements of
Position.
|
|
*
|
AICPA
Accounting Standards Executive Committee Practice Bulletins that have been
cleared by the FASB, consensus positions of the EITF, and Appendix D EITF
topics.
|
Statement
162 is effective 60 days following the SEC's approval of the PCAOB amendments to
AU Section 411, The Meaning of
Present Fairly in Conformity with Generally Accepted Accounting
Principles. Since Statement 162 is only effective for nongovernmental
entities, the GAAP hierarchy will remain in AICPA Statement on Auditing
Standards (SAS) No. 69, The
Meaning of "Present Fairly in Conformity with Generally Accepted Accounting
Principles" in the Independent Auditor's Report, for state and local
governmental entities and federal governmental entities. The Company believes
the adoption of this standard will not have a material impact on the financial
condition or the results of the Company’s operations.
The FASB
issued FASB Statement No. 163, Accounting for Financial Guarantee
Insurance Contracts. This new standard clarifies how FASB Statement No.
60, Accounting and Reporting
by Insurance Enterprises, applies to financial guarantee insurance
contracts issued by insurance enterprises, including the recognition and
measurement of premium revenue and claim liabilities. It also requires expanded
disclosures about financial guarantee insurance contracts.
Statement
163 is effective for financial statements issued for fiscal years beginning
after December 15, 2008, and all interim periods within those fiscal years,
except for disclosures about the
insurance
enterprise's risk-management activities, which are effective the first period
(including interim periods) beginning after May 23, 2008. Except for the
required disclosures, earlier application is not permitted. The Company believes
the adoption of this standard will not have an impact on the financial condition
or the results of the Company’s operations.
NOTE 3 –
Marketable Securities
Marketable
securities are classified as current assets and are summarized as
follows:
|
|
(in
thousands)
|
|
|
|
July
31,
2008
|
|
|
July
31,
2007
|
|
Marketable
equity securities, at cost
|
|
$ |
50 |
|
|
$ |
50 |
|
Marketable
equity securities, at fair value
(See
Notes 12 & 14)
|
|
$ |
65 |
|
|
$ |
90 |
|
NOTE 4 –
Material and Supplies Inventories
|
|
(in
thousands)
|
|
|
|
July
31,
2008
|
|
|
July
31,
2007
|
|
Materials,
supplies and other
|
|
$ |
937 |
|
|
$ |
174 |
|
Total
|
|
$ |
937 |
|
|
$ |
174 |
|
NOTE 5 –
Ore on Leach Pads and Inventories (“In-Process Inventory”)
|
|
(in
thousands)
|
|
|
|
July
31,
2008
|
|
|
July
31,
2007
|
|
Ore
on leach pads
|
|
$ |
12,176 |
|
|
$ |
2,996 |
|
Total
|
|
$ |
12,176 |
|
|
$ |
2,996 |
|
Costs
that are incurred in or benefit the productive process are accumulated as ore on
leach pads and inventories. Ore on leach pads and inventories are carried at the
lower of average cost or net realizable value. Net realizable value represents
the estimated future sales price of the product based on current and long-term
metals prices, less the estimated costs to complete production and bring the
product to sale. Write-downs of ore on leach pads and inventories, resulting
from net realizable value impairments, will be reported as a component of Costs applicable to sales.
The current portion of ore on leach pads and inventories is determined based on
the expected amounts to be processed within the next 12 months. Ore on leach
pads and inventories not expected to be processed within the next 12 months
will be classified as long-term.
NOTE 6 –
Deposits
Deposits are classified as current
assets and represent payments made on mining equipment and contract for the
Company’s El Chanate Project in Sonora, Mexico. Deposits are summarized as
follows:
|
|
(in
thousands)
|
|
|
|
July
31,
2008
|
|
|
July
31,
2007
|
|
Advance
payment on Mining Contract to Sinergia (Note 18)
|
|
$ |
— |
|
|
$ |
683 |
|
Equipment
deposit
|
|
|
9 |
|
|
|
193 |
|
Other
|
|
|
— |
|
|
|
3 |
|
Total
Deposits
|
|
$ |
9 |
|
|
$ |
879 |
|
NOTE 7 –
Other Current Assets
Other
current assets consist of the following:
|
|
(in
thousands)
|
|
|
|
July
31,
2008
|
|
|
July
31,
2007
|
|
Value
added tax to be refunded
|
|
$ |
425 |
|
|
$ |
1,475 |
|
Asset
held for resale
|
|
|
— |
|
|
|
166 |
|
Other
|
|
|
65 |
|
|
|
34 |
|
Total
Other Current Assets
|
|
$ |
490 |
|
|
$ |
1,675 |
|
NOTE 8 –
Property and Equipment
Property
and Equipment consist of the following:
|
|
(in
thousands)
|
|
|
|
July
31,
2008
|
|
|
July
31,
2007
|
|
Process
equipment and facilities
|
|
$ |
21,693 |
|
|
$ |
17,503 |
|
Mining
equipment
|
|
|
974 |
|
|
|
863 |
|
Mineral properties
|
|
|
141 |
|
|
|
141 |
|
Construction
in progress
|
|
|
1,277 |
|
|
|
— |
|
Computer
and office equipment
|
|
|
316 |
|
|
|
212 |
|
Improvements
|
|
|
16 |
|
|
|
16 |
|
Furniture
|
|
|
38 |
|
|
|
23 |
|
Total
|
|
|
24,455 |
|
|
|
18,758 |
|
Less:
accumulated depreciation
|
|
|
(3,537 |
) |
|
|
(758 |
) |
Property
and equipment, net
|
|
$ |
20,918 |
|
|
$ |
18,000 |
|
Depreciation
expense for the fiscal years ended July 31, 2008, 2007 and 2006 was
approximately $2,779, $720 and $34, respectively.
NOTE 9 –
Intangible Assets
Intangible
assets consist of the following:
|
|
(in
thousands)
|
|
|
|
July
31,
2008
|
|
|
July
31,
2007
|
|
Repurchase
of Net Profits Interest
|
|
$ |
500 |
|
|
$ |
500 |
|
Water
Rights
|
|
|
134 |
|
|
|
— |
|
Mobilization
Payment to Mineral Contractor
|
|
|
70 |
|
|
|
70 |
|
Investment
in Right of Way
|
|
|
18 |
|
|
|
18 |
|
Total
|
|
|
722 |
|
|
|
588 |
|
Accumulated
Amortization
|
|
|
(541 |
) |
|
|
(11 |
) |
Intangible
assets, net
|
|
$ |
181 |
|
|
$ |
577 |
|
Purchased
intangible assets consisting of rights of way, water rights, easements and net
profit interests are carried at cost less accumulated amortization. Amortization
is computed using the straight-line method over the economic lives of the
respective assets, generally five years or using the UOP method. It is the
Company’s policy to assess periodically the carrying amount of its purchased
intangible assets to determine if there has been an impairment to their carrying
value. Impairments of other intangible assets are determined in accordance with
SFAS 144. There was no impairment at July 31, 2008.
On September 13, 2006, the Company
repurchased the 5% net profits interest formerly held by Grupo Minera FG (“FG”),
and subsequently acquired by Daniel Gutierrez Cibrian, with respect to the
operations at the El Chanate mine. That net profits interest had originally been
granted to FG in connection with the April 2004 termination of the joint venture
agreement between FG and MSR, the Company’s wholly owned Mexican
subsidiary. FG also received a right of first refusal to carry out
the works and render construction services required to effectuate the El Chanate
Project. This right of first refusal is not applicable where a
funding source for the project determines that others should render such works
or services. FG has assigned or otherwise transferred to MSR all
permits, licenses, consents and authorizations (collectively, “authorizations”)
for which FG had obtained in its name in connection with the development of the
El Chanate Project to the extent that the authorizations are
assignable. To the extent that the authorizations are not assignable
or otherwise transferable, FG has given its consent for the authorizations to be
cancelled so that they can be re-issued or re-granted in MSR’s
name. The foregoing has been completed. The purchase price
for the buyback of the net profits interest was $500, and was structured as part
of the project costs financed by the loan agreement with Standard Bank, Plc.
(See Note 17). Mr. Cibrian retained a 1% net profits interest in MSR, payable
only after a total US $20 million in net profits has been generated from
operations at El Chanate. The Company recorded this transaction on
its balance sheet as an intangible asset under guidance provided by FAS 142 –
Goodwill and Other Intangible
Assets to be amortized over the period of which the asset is expected to
contribute directly or indirectly to the Company’s cash flow. On
March 23, 2007, The Company reacquired the remaining 1% net profits interest
(see Note 18).
The Right of Way and the Mobilization
Payment were recorded at cost and are being amortized using the units of
production method. Amortization expense for the year ended July 31,
2008, 2007 and 2006 was approximately $530, $7 and $4,
respectively. The Repurchase of Net Profits Interest from FG was
fully amortized as of July 31, 2008.
NOTE 10 –
Mining Reclamation Bonds
These represent certificates of deposit
that have been deposited as security for Mining Reclamation Bonds in Colorado.
They bear interest at rates varying from 4.35% to 5.01% annually and mature at
various dates through 2010.
NOTE 11 –
Mining Concessions
Mining
concessions consists of the following:
|
|
(in
thousands)
|
|
|
|
July
31,
2008
|
|
|
July
31,
2007
|
|
El
Chanate
|
|
$ |
45 |
|
|
$ |
45 |
|
El
Charro
|
|
|
25 |
|
|
|
25 |
|
Total
|
|
|
70 |
|
|
|
70 |
|
Less:
accumulated amortization
|
|
|
(11 |
) |
|
|
(3 |
) |
Total
|
|
$ |
59 |
|
|
$ |
67 |
|
The El Chanate concessions are carried
at historical cost and are being amortized using the units of production method.
They were acquired in connection with the purchase of the stock of Minera
Chanate (see Note 1). Amortization expense for the years ended
July 31, 2008, 2007 and 2006 was approximately $8, $3 and $0,
respectively.
MSR acquired an additional mining
concession – El Charro. El Charro lies within the current El Chanate property
boundaries. MSR is required to pay 1 1/2% net smelter royalty in connection with
the El Charro concession.
NOTE 12 –
Loans Receivable - Affiliate
Loans receivable - affiliate consist of
expense reimbursements due from a publicly-owned corporation in which the
Company has an investment. The Company's president and chairman of the board of
directors was an officer and director of that corporation. On March 10, 2008, the Company’s
president and chairman of the board of directors resigned as both an officer and
director of this corporation. These loans are non-interest
bearing and due on demand (see Note 3 & 14).
NOTE 13 –
Reclamations and Remediation Liabilities (“Asset Retirement
Obligations”)
Reclamation costs are allocated to
expense over the life of the related assets and are periodically adjusted to
reflect changes in the estimated present value resulting from the passage of
time and revisions to the estimates of either the timing or amount of the
reclamation and abandonment costs. The Asset Retirement Obligation is
based on when the spending for an existing environmental disturbance and
activity to date will occur. The Company reviews, on an annual basis, unless
otherwise deemed necessary, the Asset Retirement Obligation at each mine
site. The Company reviewed the estimated present value of the El
Chanate mine reclamation and abandonment costs as of July 31,
2008. This review resulted in an increase in the Asset Retirement
Obligation by approximately $293. As of July 31, 2008 and 2007,
approximately $1,666 and $1,249, respectively, was accrued for reclamation
obligations relating to mineral properties in accordance with SFAS No. 143,
“Accounting for Asset Retirement Obligations.”
The
following is a reconciliation of the liability for long-term Asset Retirement
Obligations for the years ended July 31, 2008 and 2007:
|
|
(in
thousands)
|
|
Balance
as of July 31, 2006
|
|
$ |
— |
|
Additions,
changes in estimates and other
|
|
|
1,218 |
|
Liabilities
settled
|
|
|
— |
|
Accretion
expense
|
|
|
31 |
|
Balance
as of July 31, 2007
|
|
$ |
1,249 |
|
Additions,
changes in estimates and other
|
|
|
293 |
|
Liabilities
settled
|
|
|
— |
|
Accretion
expense
|
|
|
124 |
|
Balance
as of July 31, 2008
|
|
$ |
1,666 |
|
NOTE 14 –
Accumulated Other Comprehensive Income
Accumulated other comprehensive income
(loss) consists of foreign translation gains and losses, unrealized gains and
losses on marketable securities and fair value changes on derivative instruments
and is summarized as follows:
|
|
Foreign
currency items
|
|
|
Unrealized
gain
(loss) on securities
|
|
|
Change
in fair
value
on interest
rate swaps
|
|
|
Accumulated
other
comprehensive
income
|
|
Balance
as of July 31, 2005
|
|
$ |
57 |
|
|
$ |
100 |
|
|
$ |
— |
|
|
$ |
157 |
|
Income
(loss)
|
|
|
49 |
|
|
|
(60 |
) |
|
|
— |
|
|
|
(11 |
) |
Balance
as of July 31, 2006
|
|
$ |
106 |
|
|
$ |
40 |
|
|
$ |
— |
|
|
$ |
146 |
|
Income
(loss)
|
|
|
(47 |
) |
|
|
— |
|
|
|
205 |
|
|
|
158 |
|
Balance
as of July 31, 2007
|
|
|
59 |
|
|
|
40 |
|
|
|
205 |
|
|
|
304 |
|
Income
(loss)
|
|
|
622 |
|
|
|
(25 |
) |
|
|
(141 |
) |
|
|
456 |
|
Balance
as of July 31, 2008
|
|
$ |
681 |
|
|
$ |
15 |
|
|
$ |
64 |
|
|
$ |
760 |
|
The
Company has not recognized any income tax benefit or expense associated with
other comprehensive income items for the years ended July 31, 2008, 2007 and
2006.
NOTE 15 –
Related Party Transactions
In August 2002, the Company purchased
marketable equity securities of a related company. The Company recorded
approximately $6, $9 and $10 in expense reimbursements including office rent
from this entity for the years ended July 31, 2008, 2007 and 2006, respectively
(see Notes 3 and 12).
The Company utilizes Caborca
Industrial, a Mexican Corporation that is 100% owned by Gifford A. Dieterle, the
Company’s Chief Executive Officer, and Jeffrey W. Pritchard, the Company’s
Executive Vice President, for mining support services. These services include
but are not limited to the payment of mining salaries and related costs. Caborca
Industrial bills the Company for these services at slightly above cost. Mining
expenses charged by Caborca Industrial and eliminated upon consolidation
amounted to approximately $3,775, $702 and $122 for the year ended July 31,
2008, 2007 and 2006, respectively.
During the years ended July 31, 2008,
2007 and 2006, the Company paid Jack Everett, its former V.P. Exploration and
Director, consulting fees of $100, $0 and $69, respectively. In
addition, this individual earned wages of $120 and $50 during the years ended
July 31, 2007 and 2006, respectively. During the years ended July 31,
2007 and 2006, the Company paid its V.P. Exploration and Director, Roger Newell,
consulting fees of $0 and $89, respectively. In addition, Mr. Newell
earned wages of $120 during the year ended July 31, 2007. Also,
during the years ended July 31, 2008, 2007 and 2006, the Company paid Robert
Roningen, a director, legal and consulting fees of $35, $24 and $8,
respectively.
In January 2006, the Company extended
the following stock options through January 3, 2007, all of which are
exercisable at $0.05 per share: Gifford A. Dieterle, Chief Executive Officer and
Director – 1,250,000 shares; Robert Roningen, Director – 500,000 shares; Jeffrey
W. Pritchard, V.P. Investor Relations and Director – 327,727 shares; Roger
Newell, V.P. Development and Director – 500,000 shares; and Scott Hazlitt, V.P.
Mine Development – 25,000 shares. There was not a material
increase in the intrinsic value of these options at the date of modification as
compared to the intrinsic value of the original issuance of these stock options
on the applicable measurement date. All of these options were
exercised prior to their extended expiration.
On February 7, 2007, Robert Roningen
resigned as the Company’s Secretary and, on February 9, 2007, John Brownlie, the
Company’s Vice President of Operations, was appointed Chief Operating Officer
and Jeffrey W. Pritchard, the Company’s Vice President of Investor Relations,
was appointed Secretary.
The Company’s V.P. Development and
Director, Roger Newell, has, since 1995, been a senior consultant in the
Minerals Advisory Group, LLC, Tucson, Arizona, an entity that provided $3,000 of
services to the Company for the year ended July 31, 2006.
On December 20, 2007, at the
recommendation of the Compensation Committee of the Board of Directors, the
Company’s executive officers, directors and employees were granted 1,095,000
restricted shares under our 2006 Equity Incentive Plan. The
restricted shares granted vest equally over three years from the date of
grant. In addition, the Company’s executive officers were granted
3,150,000 stock options under our 2006 Equity Incentive Plan. The
stock options have a term of seven years and vest as follows: 20% vested upon
issuance and the balance vest 20% annually thereafter. The exercise
price of the stock options is $0.63 per share (per the Plan, the closing price
on the Toronto Stock Exchange on the trading day immediately prior to the day of
determination converted to U.S. Dollars). In the event of a
termination of continuous service (other than as a result of a change of
control, as defined in the Plan), unvested stock options shall terminate and,
with regard to vested stock options, the exercise period shall be the lesser of
the original expiration date or one year from the date continuous service
terminates. Upon the happening of a change of control, all unvested
stock options and unvested restricted stock grants immediately
vest.
On July 17, 2008, at the recommendation
of the Compensation Committee of the Board of Directors, the Company’s executive
officers and directors were granted 515,000 shares under its 2006 Equity
Incentive Plan. The restricted shares granted vested
immediately.
NOTE 16 –
Stockholders' Equity
Common
Stock
At various stages in the Company’s
development, shares of the Company’s common stock have been issued at fair
market value in exchange for services or property received with a corresponding
charge to operations, property and equipment or additional paid-in capital
depending on the nature of services provided or property received.
The Company issued 1,150,000 shares of
common stock and 12,600,000 common stock purchase warrants to Standard Bank as
part of a commitment fee to entering into the credit facility on August 15,
2006, with its wholly-owned subsidiaries MSR and Oro. The Company
recorded the issuance of the 1,150,000 shares of common stock and 12,600,000
warrants as deferred financing costs of approximately $351 and $3,314,
respectively, as a reduction of stockholders' equity on the Company's balance
sheet. The issuance of 1,150,000 shares was recorded at the fair market value of
the Company's common stock at the closing date or $0.305 per
share. The warrants were valued at approximately $3,314 using the
Black-Scholes option pricing model and were reflected as deferred financing
costs as a reduction of stockholders' equity on the Company’s balance sheet (See
Note 18). The balance of deferred financing costs, net of
amortization, as of July 31, 2008 and 2007, as a reduction of stockholders'
equity, was approximately $2,611 and $3,438. Amortization expense for
the years ended July 31, 2008, 2007 and 2006, was approximately $931, $750 and
$0, respectively.
The Company closed two private
placements in January 2007 pursuant to which it issued an aggregate of
12,561,667 units, each unit consisting of one share of its common stock and a
warrant to purchase � of a share of its common stock at $0.30 per unit for
proceeds of approximately $3,486, net of commissions of approximately
$283. Each warrant issued in the January 2007 placements
is exercisable for � of a share of common stock, at an exercise price equal to
$0.40 per share. Thus, a holder must exercise four warrants to
purchase one share of common stock. Each warrant has a term of
eighteen months and is fully exercisable from the date of
issuance. The Company issued to the placement agents eighteen month
warrants to purchase up to an aggregate of 942,125 shares of common stock at an
exercise price of $0.30 per share. Such placement agent warrants are
valued at approximately $142 using the Black-Scholes option pricing
method.
The Company also received proceeds of
approximately $7,473, $5,643 and $742 during the years ended July 31, 2008, 2007
and 2006, from the exercising of an aggregate of 22,994,178, 22,203,909 and
4,825,913 of warrants and options, respectively, issued to investors in past
private placements, to officers and directors as well as to outside parties for
services rendered.
On March 22, 2007, the Company issued
500,000 shares of common stock to John Brownlie, the Company’s Chief Operating
Officer under the Company’s 2006 Equity Incentive Plan. The fair value of the
shares issued in March 2007 amounted to $225 or $0.45 per share. The
shares, which were granted to Mr. Brownlie as compensation for services already
provided to the Company, vested immediately. The compensation expense
was fully recognized on the date of the grant.
In March 2007, the Company issued
65,625 shares of common stock to an independent contractor for services provided
related to the Company’s El Chanate project. The fair value of the services
provided amounted to $26 or $0.40 per share. In April 2007, this independent
contractor was engaged as the general manager of the Company’s El Chanate
project for a six month term with an option for an additional six month term, if
mutually agreed upon by both parties. Pursuant to the agreement, the Company
issued 113,636 shares of common stock with a fair value of $50 or $0.44 per
share at the fair market value of the Company’s common stock on the date of the
agreement. The issuance of these shares vest over the six-month
term. The independent contractor and the Company mutually agreed to
terminate the contractor after three months as construction was
complete. The Company issued 56,818 shares of the Company’s common
stock on the vested portion of the 113,636 shares or 50%.
On
December 20, 2007, at the recommendation of the Compensation Committee of the
Board of Directors, the Company’s executive officers, directors and employees
were granted 1,095,000 restricted shares under our 2006 Equity Incentive Plan
(the “Plan”). The restricted shares granted vest equally over
three years from the date of grant. The fair value of the Company’s
stock was $0.63 on the date of grant resulting in the Company recording
approximately $690 in deferred compensation cost. For the year ended
July 31, 2008, the Company has recorded approximately $194 in equity
compensation expense upon the vesting of a portion of restricted
shares.
On July
17, 2008, at the recommendation of the Compensation Committee of the Board of
Directors, the Company’s executive officers and directors were granted 515,000
shares under our 2006 Equity Incentive Plan. The restricted shares granted
vested immediately. The fair value of the Company’s stock was $0.70
on the date of grant resulting in the Company recording approximately $361 in
equity compensation expense.
Recapitalization
In February 2007, the Company's
Certificate of Incorporation was amended to increase the Company's authorized
shares of capital stock from 200,000,000 to 250,000,000 shares. In
January 2008, the Company amended its Certificate of Incorporation to increase
the Company’s authorized shares of capital stock from 250,000,000 to 300,000,000
shares.
Warrants and
Options
The fair value of each warrant and
option award is estimated on the date of grant using a Black-Scholes option
valuation model. The Company issues warrants and options to purchase
common stock with an exercise price of no less than fair market value of the
underlying stock at the date of grant.
On November 30, 2006, the Company’s
board of directors granted 100,000 common stock options to each of John Postle,
Ian A. Shaw and Mark T. Nesbitt, the Company’s independent directors. The
options are to purchase shares of the Company’s common stock at an exercise
price of $0.33 per share (the closing price of its common stock on that date)
for a period of two years. The Company utilized the Black-Scholes Method to fair
value the 300,000 options received by the directors and recorded approximately
$40 as equity based compensation expense. The grant date fair value
of each stock option was $0.13.
On December 13, 2006, the Company
issued two year options to purchase the Company’s common stock at an exercise
price of $0.36 per share to its Chief Operating Officer, Chief Financial Officer
and the Company’s Canadian counsel. These options are for the
purchase of 250,000 shares, 100,000 shares and 100,000 shares,
respectively. The Company utilized the Black-Scholes Method to fair
value the 450,000 options received by these individuals and recorded
approximately $61 as stock based compensation expense. The grant date
fair value of each stock option was $0.14.
On March 22, 2007, the Company issued
two year options to purchase the Company’s common stock at an exercise price of
$0.45 per share to the Company’s then SEC Counsel. These options are
for the purchase of 100,000 shares and were issued under the 2006
Equity-Incentive Plan. The Company utilized the Black-Scholes Method
to fair value these options and recorded approximately $15 as equity based
compensation expense. The grant date fair value of each stock option
was $0.15.
On June 13, 2007, the Company issued
two year options to purchase the Company’s common stock at an exercise price of
$0.384 per share to the Company’s CFO. These options are for the
purchase of 500,000 shares and were issued under the 2006 Equity-Incentive
Plan. The Company utilized the Black-Scholes Method to fair value
these options and recorded approximately $65 as equity based compensation
expense. The grant date fair value of each stock option was
$0.13.
On August 13, 2007, the Company issued
two year options to purchase the Company’s common stock at an exercise price
ranging from $0.43 to $0.50 per share to outside parties for services
provided. These options are for the purchase of 465,000 shares and
were issued under the 2006 Equity-Incentive Plan. The Company
utilized the Black-Scholes Method to fair value these options and recorded
approximately $58 as equity based compensation expense. The average
grant date fair value of each stock option was $0.12 with an exercise price of
no less than fair market value of the underlying stock at the date of
grant.
On December 20
2007, at the recommendation of the Compensation Committee of the
Board of Directors, the Company’s executive officers , directors and employees,
Gifford Dieterle, John Brownlie, Christopher Chipman, Jeffrey Pritchard, Scott
Hazlitt, Ian Shaw, John Postle, Mark Nesbitt, Roger Newell, Robert Roningen, and
employees were granted 500,000, 500,000, 500,000, 500,000, 350,000, 150,000,
150,000, 150,000, 100,000, 100,000 and 150,000 stock options, respectively,
aggregating 3,150,000 stock options under our 2006 Equity Incentive Plan . The
stock options have a term of seven years and vest as follows: 20% vested upon
issuance and the balance vest 20% annually thereafter. The exercise price of the
stock options is $0.63 per share (per the Plan, the closing price on the Toronto
Stock Exchange on the trading day immediately prior to the day of determination
converted to U.S. Dollars). In the event of a termination of continuous service
(other than as a result of a change of control, as defined in the Plan, unvested
stock options shall terminate and, with regard to vested stock options, the
exercise period shall be the lesser of the original expiration date or one year
from the date continuous service terminates. Upon the happening of a change of
control, all unvested stock options and unvested restricted stock grants
immediately vest. The Company utilized the Black-Scholes method to
fair value the 3,150,000 options received by these individuals totaling
$1,060. For the fiscal year ended July 31, 2008, the Company recorded
approximately $375 in equity compensation expense on the vested portion of these
stock options. The grant date fair value of each stock option was
$0.34.
On July 17, 2008, the Company closed in
escrow pending execution of Mexican collateral documents and certain other
ministerial matters an Amended And Restated Credit Agreement (the “Credit
Agreement”) involving our wholly-owned Mexican subsidiaries Minera Santa Rita S.
de R.L. de C.V. (“MSR”) and Oro de Altar S. de R.L. de C.V. (“Oro”), as
borrowers (“Borrowers”), the Company, as guarantor, and Standard Bank PLC
(“Standard Bank”), as the lender., Pursuant to the Credit Agreement, the Company
agreed to issue to Standard Bank a two year warrant to purchase an aggregate of
600,000 shares of our common stock at an exercise price of $0.852 per
share. The warrants were valued at approximately $103 using the
Black-Scholes option pricing model and were reflected as deferred financing
costs as a reduction of stockholders' equity on the Company’s balance sheet as
of July 31, 2008 (See Note 17). The grant date fair value of each
stock option was $0.17.
2006 Equity Incentive
Plan
The 2006 Equity Incentive Plan (the
“Plan”), approved by stockholders on February 21, 2007, is intended to attract
and retain individuals of experience and ability, to provide incentive to the
Company’s employees, consultants, and non-employee directors, to encourage
employee and director proprietary interests in the Company, and to encourage
employees to remain in the Company’s employ.
The Plan authorizes the grant of
non-qualified and incentive stock options, stock appreciation rights and
restricted stock awards (each, an “Award”). A maximum of 10,000,000 shares of
common stock are reserved for potential issuance pursuant to Awards under the
Plan. Unless sooner terminated, the Plan will continue in effect for
a period of 10 years from its effective date.
The Plan is administered by the
Company’s Board of Directors which has delegated the administration to the
Company’s Compensation Committee. The Plan provides for Awards to be
made to such of the Company’s employees, directors and consultants and its
affiliates as the Board may select.
Stock options awarded under the Plan
may vest and be exercisable at such times (not later than 10 years after the
date of grant) and at such exercise prices (not less than Fair Market Value at
the date of grant) as the Board may determine. Unless otherwise
determined by the Board, stock options shall not be transferable except by will
or by the laws of descent and distribution. The Board may provide for options to
become immediately exercisable upon a "change in control," as defined in the
Plan.
The exercise price of an option must be
paid in cash. No options may be granted under the Plan after the
tenth anniversary of its effective date. Unless the Board determines
otherwise, there are certain continuous service requirements and the options are
not transferable.
The Plan provides the Board with the
general power to amend the Plan, or any portion thereof at any time in any
respect without the approval of the Company’s stockholders, provided however,
that the stockholders must approve any amendment which increases the fixed
maximum percentage of shares of common stock issuable pursuant to the Plan,
reduces the exercise price of an Award held by a director, officer or ten
percent stockholder or extends the term of an Award held by a director, officer
or ten percent stockholder. Notwithstanding the foregoing,
stockholder approval may still be necessary to satisfy the requirements of
Section 422 of the Code, Rule 16b-3 of the Securities Exchange Act of 1934, as
amended or any applicable stock exchange listing requirements. The Board may
amend the Plan in any respect it deems necessary or advisable to provide
eligible Employees with the maximum benefits provided or to be provided under
the provisions of the Code and the regulations promulgated thereunder relating
to Incentive Stock Options and/or to bring the Plan and/or Incentive Stock
Options granted under it into compliance therewith. Rights under any
Award granted before amendment of the Plan cannot be impaired by any amendment
of the Plan unless the Participant consents in writing. The Board is
empowered to amend the terms of any one or more Awards; provided, however, that
the rights under any Award shall not be impaired by any such amendment unless
the applicable Participant consents in writing and further provided that the
Board cannot amend the exercise price of an option, the Fair Market Value of an
Award or extend the term of an option or Award without obtaining the approval of
the stockholders if required by the rules of the TSX or any stock exchange upon
which the common stock is listed.
Information regarding
the options approved by the Compensation Committee under the Equity Incentive
Plan for the fiscal years ended July 31, 2008 and 2007 is summarized
below:
|
|
2007
|
|
|
2008
|
|
|
|
Shares
|
|
|
Option
Price
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Shares
|
|
|
Option
Price
|
|
|
Weighted
Average
Exercise
Price
|
|
Outstanding
beginning at year
|
|
|
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
|
1,050,000 |
|
|
$ |
0.36-0.45 |
|
|
$ |
0.38 |
|
Granted
|
|
|
1,050,000 |
|
|
$ |
0.36-0.45 |
|
|
$ |
0.38 |
|
|
|
3,615,000 |
|
|
$ |
0.38-0.63 |
|
|
$ |
0.61 |
|
Canceled
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Exercised
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Outstanding
end of year
|
|
|
1,050,000 |
|
|
$ |
0.36-0.45 |
|
|
$ |
0.38 |
|
|
|
4,665,000 |
|
|
$ |
0.36-0.63 |
|
|
$ |
0.56 |
|
Exercisable
|
|
|
1,050,000 |
|
|
$ |
0.36-0.45 |
|
|
$ |
0.38 |
|
|
|
3,360,000 |
|
|
$ |
0.36-0.63 |
|
|
$ |
0.54 |
|
Weighted average
remaining contractual life (years)
|
|
1-2 years
|
|
|
|
— |
|
|
|
— |
|
|
5-6 years
|
|
|
|
— |
|
|
|
— |
|
Available
for future grants
|
|
|
8,450,000 |
|
|
|
— |
|
|
|
— |
|
|
|
3,225,000 |
|
|
|
— |
|
|
|
— |
|
Restricted
stock awards granted by the Compensation Committee under the Equity Incentive
Plan for the fiscal years ended July 31, 2008 and 2007, were 500,000 and
1,610,000 shares, respectively. There was no activity within the
equity incentive plan for the fiscal year ended July 31, 2006.
NOTE 17 –
Debt
Long term
debt consists of the following:
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
July
31,
2008
|
|
|
July
31,
2007
|
|
|
|
|
|
|
|
|
Total
long-term debt
|
|
$ |
12,500 |
|
|
$ |
12,500 |
|
|
|
|
|
|
|
|
|
|
Less
current portion
|
|
|
4,125 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
$ |
8,375 |
|
|
$ |
12,500 |
|
On August 15, 2006, the Company entered
into a credit facility (the “Credit Facility”) involving its wholly-owned
subsidiaries MSR and Oro, as borrowers, us, as guarantor, and Standard Bank plc
(“Standard Bank”), as the lender and the offshore account
holder. Under the Credit Facility, MSR and Oro have agreed to borrow
money in an aggregate principal amount of up to US$12,500 (the “Loan”) for the
purpose of constructing, developing and operating the Company’s El Chanate
Project (the “Mine”). The Company is guaranteeing the repayment of
the loan and the performance of the obligations under the Credit
Facility. The Loan is scheduled to be repaid in fourteen quarterly
payments with the first principal payment having been made on September 30,
2008. The Loan bears interest at LIBOR plus 4.00%, with LIBOR
interest periods of 1, 2, 3 or 6 months and with interest payable at the end of
the applicable interest period. As of July 31, 2008 and 2007, the
accrued interest on this facility was approximately $72 and $100,
respectively.
Approximate
future principal payments under this loan are as follows (in
thousands):
Fiscal
Years Ending July 31,
|
|
|
|
|
|
|
|
2009
|
|
$ |
4,125 |
|
2010
|
|
|
3,125 |
|
2011
|
|
|
3,500 |
|
2012
|
|
|
1,750 |
|
|
|
$ |
12,500 |
|
The Credit Facility contains covenants
customary for a project financing loan, including but not limited to
restrictions (subject to certain exceptions) on incurring additional debt,
creating liens on its property, disposing of any assets, merging with other
companies and making any investments. The Company
is required to meet and maintain certain financial covenants,
including (i) a debt service coverage ratio of not less than 1.2 to 1.0, (ii) a
projected debt service coverage ratio of not less than 1.2 to 1.0, (iii) a loan
life coverage ratio of at least 1.6 to 1.0, (iv) a project life coverage ratio
of at least 2.0 to 1.0 and (v) a minimum reserve tail. The Company
also is required to maintain a certain minimum level of unrestricted cash, and
upon meeting certain Mine start-up production and performance criteria, MSR and
Oro are required to maintain a specified amount of cash as a reserve for debt
repayment. As of July 31, 2008, the Company was in compliance with
these financial covenants.
The Loan is secured by all of the
tangible and intangible assets and property owned by MSR and Oro pursuant to the
terms of a Mortgage Agreement, a Non-Possessory Pledge Agreement, an Account
Pledge Agreement and certain other agreements entered into in Mexico (the
“Mexican Collateral Documents”). As additional collateral
for the Loan, the Company, together with its subsidiary, Leadville Mining &
Milling Holding Corporation, have pledged all of its ownership interest in MSR
and Oro. In addition to these collateral arrangements, MSR and Oro
are required to deposit all proceeds of the Loan and all cash proceeds received
from operations and other sources in an offshore, controlled
account
with Standard Bank. Absent a default under the loan documents, MSR
and Oro may use the funds from this account for specific purposes such as
approved project costs and operating costs.
As part of the fee for entering into
and closing the Credit Facility, the Company issued to Standard Bank 1,150,000
shares of its restricted common stock and a warrant for the purchase of
12,600,000 shares of its common stock at an exercise price of $0.317 per share,
expiring on the earlier of (a) December 31, 2010 or (b) the date one year after
the repayment of the Credit Facility. Previously, pursuant to the
mandate and commitment letter for the facility, the Company issued to Standard
Bank 1,000,000 shares of its restricted common stock and a warrant for the
purchase of 1,000,000 shares of its common stock at an exercise price of $0.32
per share, expiring on the earlier of (a) December 31, 2010 or (b) the date one
year after the repayment of the Credit Facility. The Company recorded
the issuance of the 1,000,000 shares of common stock as deferred financing costs
of approximately $270 as a reduction of stockholders' equity on its balance
sheet. The issuance of these shares was recorded at the fair market value of the
Company’s common stock at the commitment letter date or $0.27 per
share. In addition, the warrants were valued at approximately $253
using the Black-Scholes option pricing model and were reflected as deferred
financing costs as a reduction of stockholders' equity on the Company’s balance
sheet in 2006. The Company registered for public resale the 2,150,000 shares
issued to Standard Bank and the 13,600,000 shares issuable upon exercise of
warrants issued to Standard Bank.
In March 2006, the Company entered into
a gold price protection arrangement to protect it against future fluctuations in
the price of gold and interest rate swap agreements in October 2006 in
accordance with the terms of the Credit Facility both with Standard Bank (See
Note 20 for more details on these transactions).
On July 17, 2008, the Company closed in
escrow pending execution of Mexican collateral documents and certain other
ministerial matters an Amended And Restated Credit Agreement (the “Credit
Agreement”) involving our wholly-owned Mexican subsidiaries MSR and Oro, as
borrowers (“Borrowers”), the Company, as guarantor, and Standard Bank PLC
(“Standard Bank”), as the lender. The Credit Agreement amends and restates the
prior credit agreement between the parties dated August 15, 2006 (the “Original
Agreement”). Under the Original Agreement, MSR and Oro could borrow, and did
borrow, money in an aggregate principal amount of up to US$12,500 (the “Term
Loan”) for the purpose of constructing, developing and operating the El Chanate
gold mining project in Sonora State, Mexico. The Company guaranteed the
repayment of the Term Loan and the performance of the obligations under the
Original Agreement.
The
Credit Agreement establishes a new senior secured revolving credit facility that
permits the Borrowers to borrow up to $5,000 during the one year period after
the closing of the Credit Agreement. The Borrowers may request a borrowing of
the Revolving Commitment from time to time, provided that the Borrowers are not
entitled to request a borrowing more than once in any calendar month (each
borrowing a “Revolving Loan”). Repayment of the Revolving Loans will be secured
and guaranteed in the same manner as the Term Loan. Term Loan principal shall be
repaid quarterly commencing on September 30, 2008 and consisting of four
payments in the amount of $1,125, followed by eight payments in the amount of
$900 and two final payments in the amount of $400. There is no prepayment
fee. Principal under the Term Loan and the Revolving Loans shall bear
interest at a rate per annum equal to the LIBO Rate, as defined in the Credit
Agreement, for the applicable Interest Period plus the Applicable Margin. An
Interest Period can be one, two, three or six months, at the option of the
Borrowers. The Applicable Margin for the Term Loan and the Revolving Loans is
2.5% per annum and 2.0% per annum, respectively. The Borrowers are
required to pay a commitment fee in respect of the Revolving Commitment at the
rate of 1.5% per annum on the average daily unused portion of the Revolving
Commitment. Pursuant to the terms of the Original Credit
Agreement, Standard Bank exercised significant control over the operating
accounts of MSR located in Mexico and in the United States. Standard Bank’s
control over the accounts has been lifted significantly under the terms of the
Credit Agreement, giving the Borrowers authority to exercise primary day-to-day
control over the
accounts.
However, the accounts remain subject to an account pledge agreement between MSR
and the Lender.
In
connection with the refinance proceedings, the Borrowers, as a condition
precedent to closing, obtained a waiver letter from the Lender of any default or
event of default as a result of not being in compliance with regulations of
Mexican federal law with regard to certain filing and environmental bonding
issues in connection with the operation of mining the El Chanate concessions as
well as certain insurance requirements. The Borrowers have not yet complied with
these regulations due to the absence of professionals in the area qualified to
conduct studies to facilitate compliance. The Borrowers have agreed
to make a commercially reasonable effort to come into compliance with these
requirements. See also Note 25 “Subsequent Events”.
NOTE 18 –
Mining, Engineering and Supply Contracts
In early December 2005, the Company’s
wholly-owned Mexican subsidiary, MSR, which holds the rights to develop and mine
El Chanate Project, entered into a Mining Contract with a Mexican mining
contractor, Sinergia Obras Civiles y Mineras, S.A. de C.V,("Sinergia"). The
Mining Contract becomes effective if and when MSR sends the Contractor a formal
"Notice of Award".
On August 2, 2006, the Company amended
the November 24, 2005 Mining Contract between its subsidiary, MSR, and Sinergia.
Pursuant to the amendment, MSR's right to deliver the Notice to Proceed to
Sinergia was extended to November 1, 2006. Provided that this Notice was
delivered to Sinergia on or before that date, with a specified date of
commencement of the Work (as defined in the contract) not later than February 1,
2007, the mining rates set forth in the Mining Contract would still apply;
subject to adjustment for the rate of inflation between September 23, 2005
and the date of commencement of the work. As consideration for these
changes, the Company paid Sinergia $200 of the requisite advance payment
discussed below. On November 1, 2006, MSR delivered the Notice of
Award specifying January 25, 2007, as the date of commencement of
Work. Based on a revised crushing and stacking plan and since
MSR is placing the leach pad overliner material both Sinergia and MSR mutually
agreed to delay mining until the end of March 2007. Mining of the El Chanate
Project initiated on March 25, 2007.
Pursuant to the Mining Contract,
Sinergia, using its own equipment, generally is performing all of the mining
work (other than crushing) at the El Chanate Project for the life of the
mine. MSR delivered to the Contractor a mobilization payment of $70
and the advance payment of $520. The advance payments are recoverable
by MSR out of 100% of subsequent payments due to Sinergia under the Mining
Contract. Pursuant to the Mining Contract, upon termination, Sinergia
would be obligated to repay any portion of the advance payment that had not yet
been recouped. Sinergia’s mining rates are subject to escalation on
an annual basis. This escalation is tied to the percentage escalation
in Sinergia’s costs for various parts for its equipment, interest rates and
labor. One of the principals of Sinergia is one of the former
principals of FG. FG was the Company’s former joint venture
partner. As of July 31, 2008, the entire advance payment has been
recovered by MSR.
On March 23, 2007, the Company
reacquired the remaining 1% net profits interest in its Mexican affiliate, MSR
from one of the successors to FG (“FG’s Successor”). When the joint venture was
terminated in March 2004, FG received, among other things, a participation
certificate entitling it to receive 5% of the annual dividends of MSR, when
declared. The participation certificate also gave FG the right to participate,
but not to vote, in the meetings of MSR’s Board of Managers, Technical Committee
and Partners. In August 2006, the Company repurchased the participation
certificate from FG’s Successor for $500 with FG’s Successor retaining a 1% net
profits interest in MSR, payable only after a total $20 million in net profits
has been generated from operations at El Chanate. The Company reacquired the
remaining 1% net profits interest in consideration of its advancing $319 to
Sinergia under the Mining Contract. FG’s Successor is a principal of
Sinergia. As of July 31, 2008, the entire advance has been
recovered.
NOTE 19 –
Employee and Consulting Agreements
The Company entered into employment
agreements, effective July 31, 2006, with the following executive officers:
Gifford A. Dieterle, President and Treasurer, Roger A. Newell, Vice President of
Development, Jack V. Everett, Vice President of Exploration, and Jeffrey W.
Pritchard, Vice President of Investor Relations. On December 5, 2006,
effective January 1, 2007, the Company entered into an employment agreement with
J. Scott Hazlitt, Vice President of Mine Development.
On June 6, 2007, Jack V. Everett
resigned as Vice President of Exploration and a Director of the Company and
entered into a consulting agreement with the Company to provide mining and
mineral exploration consultation services.
On September 10, 2007, Roger A. Newell
resigned as Vice President of Development. He will continue to serve as a member
of the Company’s Board of Directors.
Mr. Dieterle is entitled to a base
annual salary of at least $180, Mr. Hazlitt is entitled to a base annual salary
of at least $125 and each of the other executives is entitled to a base annual
salary of at least $120. Each executive is entitled to a bonus or
salary increase in the sole discretion of the board of directors. In
addition, Messrs. Dieterle, Newell, Everett and Pritchard each received two year
options to purchase an aggregate of 250,000 shares of the Company’s common stock
at an exercise price of $0.32 per share (the closing price on July 31,
2006). These options have all been exercised. As discussed
below, these agreements have been amended to provide for salary
increases.
The Company has the right to terminate
any executive’s employment for cause or on 30 days’ prior written notice without
cause or in the event of the executive’s disability (as defined in the
agreements). The agreements automatically terminate upon an
executive’s death. “Cause” is defined in the agreements as (1) a
failure or refusal to perform the services required under the agreement; (2) a
material breach by executive of any of the terms of the agreement; or (3)
executive’s conviction of a crime that either results in imprisonment or
involves embezzlement, dishonesty, or activities injurious to the Company’s
reputation. In the event that the Company terminates an executive’s employment
without cause or due to the disability of the executive, the executive will be
entitled to a lump sum severance payment equal to one month’s salary, in the
case of termination for disability, and up to 12 month’s salary (depending upon
years of service), in the case of termination without cause.
Each executive has the right to
terminate his employment agreement on 60 days’ prior written notice or, in the
event of a material breach by the Company of any of the terms of the agreement,
upon 30 days’ prior written notice. In the event of a claim of
material breach by the Company of the agreement, the executive must specify the
breach and its failure to either (i) cure or diligently commence to cure the
breach within the 30 day notice period, or (ii) dispute in good faith the
existence of the material breach. In the event that an
agreement terminates due to the Company’s breach, the executive is entitled to
severance payments in equal monthly installments beginning in the month
following the executive’s termination equal to three month’ salary plus one
additional month’s salary for each year of service to the
Company. Severance payments cannot exceed 12 month’s
salary.
In conjunction with the employment
agreements, the Company’s board of directors deeming it essential to the best
interests of its stockholders to foster the continuous engagement of key
management personnel and recognizing that, as is the case with many publicly
held corporations, a change of control might occur and that such possibility,
and the uncertainty and questions which it might raise among management, might
result in the departure or distraction of management personnel to the detriment
of the company and its stockholders, determined to reinforce and encourage the
continued attention and dedication of members of the Company’s management to
their engagement without distraction in the face of potentially disturbing
circumstances arising from the possibility of a change in control of the
company, it entered into identical agreements regarding change in control with
the executives. Each of the agreements regarding change in control
continues through December 31, 2009 (December 31, 2010 for
Mr.
Hazlitt) and extends automatically to the third anniversary thereof unless the
Company gives notice to the executive prior to the date of such extension that
the agreement term will not be extended. Notwithstanding the foregoing, if a
change in control occurs during the term of the agreements, the term of the
agreements will continue through the second anniversary of the date on which the
change in control occurred. Each of the agreements entitles the
executive to change of control benefits, as defined in the agreements and
summarized below, upon his termination of employment with the Company during a
potential change in control, as defined in the agreements, or after a change in
control, as defined in the agreements, when his termination is caused (1) by the
Company for any reason other than permanent disability or cause, as defined in
the agreement (2) by the executive for good reason as defined in the agreements
or, (3) by the executive for any reason during the 30 day period commencing on
the first date which is six months after the date of the change in
control. Each executive would receive a lump sum cash payment of
three times his base salary and three times his bonus award from the prior year,
as well as outplacement benefits. In addition, the exercise price of
all Company options would decrease to $0.01 per share. Each agreement
also provides that the executive is entitled to a payment to make him whole for
any federal excise tax imposed on change of control or severance payments
received by him.
A “Change of Control” is deemed to
occur on the earlier of (1) the date any person is or becomes the beneficial
owner of securities representing 30% or more of the voting power of the
Company’s then outstanding securities; (2) the date on which the following
individuals cease for any reason to constitute a majority of the number of
directors then serving: (i)individuals who, as of the date of the Change of
Control Agreement, constitute the Board and (ii) any new director (other than a
director whose initial assumption of office is in connection with an actual or
threatened election contest, including but not limited to a consent
solicitation, relating to the election of directors of the Company) whose
appointment or election by the Board or nomination for election by the Company’s
stockholders was approved or recommended by a vote of at least two-thirds (2/3)
of the directors then still in office who either were directors on the date of
the Change of Control Agreement or whose appointment, election or nomination for
election was previously so approved or recommended; (3) the consummation of a
merger or consolidation of the Company or any direct or indirect subsidiary with
another entity, other than a transaction where the individuals serving on the
board of directors constitute at least a majority of the combined entity and the
outstanding securities continue to represent at least 50% of the combined voting
power of the combined entity or a transaction to effect a recapitalization of
the Company where no person is or becomes the holder of securities representing
30% or more of the combined voting power; (4) the approval by the stockholders
of the Company or a plan of complete liquidation or dissolution of the Company;
or (5) the sale or disposition or all or substantially all of the Company’s
assets, other than a sale or disposition to an entity of which 50% the combined
voting power is held by the Company’s stockholders.
However, a Change in Control will not
be deemed to occur if the record holders of the Company’s stock continue to have
substantially the same proportionate ownership of the Company following such
transaction or series of transactions.
A “Potential Change of Control”
occurs when (1) the Company enters into an agreement, the consummation of which
would result in a Change in Control; (2) a person publicly announces an
intention to take or to consider taking actions, the consummation of which would
result in a Change in Control, which announcement has not been rescinded; (3) a
person becomes the beneficial owner of securities representing 20% or more of
outstanding shares of common stock of the Company or the combined voting power
of the Company’s then outstanding securities; or (4) the Board adopts a
resolution that a Potential Change of Control exists, which resolution has not
been modified.
On September 14, 2007, the Company
entered into a Second Amended Engagement Agreement (the “Agreement”) with
Christopher Chipman, the Company’s Chief Financial Officer, effective May 1,
2007. The Agreement supersedes and replaces Mr. Chipman’s prior
agreement that expired on August 31, 2007. He receives an annual fee
of $175. Mr. Chipman can terminate the Agreement on 60 days prior
notice. The Company can terminate the Agreement without cause on 30
days prior notice and for
cause (as
defined in the Agreement). The Agreement also terminates upon Mr.
Chipman’s disability (as defined in the Agreement) or death. In the event that
the Company terminates the Agreement without cause, Mr. Chipman will be entitled
to a cash termination payment equal to his Annual Fee in effect upon the date of
termination, payable in equal monthly installments beginning in the month
following his termination. In the event the Agreement is terminated
by Mr. Chipman at his election or due to his death or disability, Mr. Chipman
will be entitled to the fees otherwise due and payable to him through the last
day of the month in which such termination occurs. In conjunction
with Agreement, the Company entered into a change of control agreement similar
to the agreements entered into with the Company’s other executive
officers. In connections with the original engagement
agreement with Mr. Chipman in March 2006, Mr. Chipman received a two year option
to purchase an aggregate of 50,000 shares of Company Common Stock at an exercise
price of $.34 per share. This option has been exercised in
full.
On May 12, 2006, the Company entered
into an employment agreement with John Brownlie, pursuant to which Mr. Brownlie
originally served as Vice President Operations. Mr. Brownlie became
our Chief Operating Officer in February 2007. Mr. Brownlie serves as
Vice President Operations. Mr. Brownlie receives a base annual salary of $150
and is entitled to annual bonuses. Upon his employment, he received options to
purchase an aggregate of 200,000 shares of the Company’s common stock at an
exercise price of $.32 per share. 50,000 options vested immediately and the
balance vest upon the Company achieving "Economic Completion" as that term is
defined in the Standard Bank Credit Facility (when the Company has commenced
mining operations and has been operating at anticipated capacity for 60 to 90
days). The term of the options is two years from the date of vesting. The
agreement runs for an initial two year period, and automatically renews
thereafter for additional one year periods unless terminated by either party
within 30 days of a renewal date. The Company can terminate the agreement for
cause or upon 30 days notice without cause. Mr. Brownlie can terminate the
agreement upon 60 days notice without cause or, if there is a breach of the
agreement by the Company that is not timely cured, upon 30 days notice. In the
event that the Company terminates him without cause or he terminates due to the
Company’s breach, he will be entitled to certain severance payments. The Company
utilized the Black-Scholes method to fair value the 200,000 options received by
Mr. Brownlie. The Company recorded approximately $70 as deferred compensation
expense as of the date of the agreement and recorded the vested portion or
$17,500 as stock based compensation expense for the year ended July 31,
2006.
On August 29, 2007, at the
recommendation of the Compensation Committee, the Board increased the salaries
of the Company’s executive officers to be commensurate with industry standards
and amended their respective agreements accordingly. The new salaries were as
follows: Gifford A. Dieterle, President, Treasurer and Chairman of the
Board, $250; John Brownlie, Chief Operating Officer, $225; Christopher Chipman,
Chief Financial Officer, $175 (consulting fee); Jeffrey W. Pritchard, Vice
President - Investor Relations and Secretary, $195; Roger A. Newell, Vice
President - Development, $135; and J. Scott Hazlitt, Vice President - Mine
Development, $135. The salary increase for Mr. Brownlie and the consulting fee
increase for Mr. Chipman were retroactive to May 1, 2007 and the salary increase
for Mr. Pritchard is retroactive to August 1, 2007.
On July 17, 2008, at the recommendation
of the Compensation Committee of our Board of Directors, our executive officers
were awarded salary increases effective August 1, 2008. The new salaries were as
follows: Gifford A. Dieterle, President, Treasurer and Chairman of the
Board, $288; John Brownlie, Chief Operating Officer, $259; Christopher Chipman,
Chief Financial Officer, $201 (consulting fee); Jeffrey W. Pritchard, Vice
President - Investor Relations and Secretary, $224; and J. Scott Hazlitt, Vice
President - Mine Development, $155.
See Note
25 – Subsequent Events for changes to executive agreements subsequent to the
fiscal year ended July 31, 2008.
NOTE 20 –
Sales Contracts, Commodity and Financial Instruments
In March
2006, in conjunction with the Company’s credit facility, the Company entered
into two identically structured derivative contracts with Standard Bank (See
Note 15). Each derivative consisted of a series of forward sales of gold and a
purchase gold cap. The Company agreed to sell a total volume of 121,927 ounces
of gold forward to Standard Bank at a price of $500 per ounce on a quarterly
basis during the period from March 2007 to September 2010. The Company also
agreed to purchase a gold cap, enabling the company to buy gold on a quarterly
basis during this same period and at identical volumes covering a total volume
of 121,927 ounces of gold at a price of $535 per ounce. This
combination of forward sales with purchased call options synthesizes a put
position, which, in turn, serves to put a floor on the Company’s sales
price. Critically, the volume of these derivative positions
represents about 86 percent of current sales, such that these derivative
positions serve only to mitigate the Company’s gold price risk, rather than
eliminate or reverse the natural exposure of the Company.
Under FASB Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"),
these contracts must be carried on the balance sheet at their fair value. The
Company records these changes in fair value and any cash settlements within
Other Income or Expense. The contracts were not designated as hedging
derivatives, and therefore special hedge accounting is not applied.
The following is a reconciliation of
the derivative contracts regarding the Company’s Gold Price Protection
agreement:
|
|
(in
thousands)
|
|
Asset
balance as of July 31, 2005
|
|
$ |
— |
|
Premium
paid
|
|
|
(800 |
) |
Loss
on change in fair value of derivative
|
|
|
582 |
|
Asset
balance as of July 31, 2006
|
|
$ |
(218 |
) |
Loss
on change in fair value of derivative
|
|
|
1,226 |
|
Net
cash settlements
|
|
|
(460 |
) |
Liability
balance as of July 31, 2007
|
|
$ |
548 |
|
Loss
on change in fair value of derivative
|
|
|
1,356 |
|
Net
cash settlements
|
|
|
(1,166 |
) |
Liability
balance as of July 31, 2008
|
|
$ |
738 |
|
Rather than modifying the original Gold
Price Protection agreement with Standard Bank to satisfy these forward sale
obligations, the Company has opted for a net cash settlement between the call
option purchase price of $535 and the forward sale price of $500, or $35.00 per
oz. Since inception, the Company has paid Standard Bank an aggregate
of approximately $1,641 on the settlement of 46,883 ounces with corresponding
reductions in the Company’s derivative liability ($1,166 or 25,329 ounces of
gold for the fiscal year ended July 31, 2008). These expenses
were incurred concurrently with sales revenues that reflected actual sales of
physical gold at market prices well above the option strike price of $535 per
ounce. The remaining ounces to settle with regard to this agreement
amounted to 75,044 as of July 31, 2008.
On
October 11, 2006, prior to our initial draw on the Credit Facility, the Company
entered into interest rate swap agreements in accordance with the terms of the
Credit Facility. Although the Credit Facility requires that it hedge
at least 50% of its outstanding debt under this facility, the Company elected to
cover $9,375 or 75% of the outstanding debt. The termination date on our
existing swap position is December 31, 2010. However, the Company intends
to use discretion in managing this risk as market conditions vary over time,
allowing for the possibility of adjusting the degree of hedge coverage as it
deems appropriate. In any case, the Company’s use of interest rate
derivatives will be restricted to use for risk management purposes.
The Company uses variable-rate debt to
finance a portion of the El Chanate Project. Variable-rate debt obligations
expose the Company to variability in interest payments due to changes in
interest
rates. As
a result of these arrangements, the Company will continuously monitor changes in
interest rate exposures and evaluate hedging opportunities. The Company’s risk
management policy permits it to use any combination of interest rate swaps,
futures, options, caps and similar instruments, for the purpose of fixing
interest rates on all or a portion of variable rate debt, establishing caps or
maximum effective interest rates, or otherwise constraining interest expenses to
minimize the variability of these effects.
The interest rate swap agreements are
accounted for as cash flow hedges, whereby “effective” hedge gains or losses are
initially recorded in other comprehensive income (“OCI”) and later reclassified
to the interest expense component of earnings coincidently with the earnings
impact of the interest expenses being hedged. “Ineffective” hedge results are
immediately recorded in earnings also under interest expense. No
component of hedge results will be excluded from the assessment of hedge
effectiveness. The amount expected to be reclassified from other
comprehensive income to earnings during the year ending July 31, 2009 from these
two swaps was determined to be immaterial.
The
following is a reconciliation of the derivative contract regarding the Company’s
Interest Rate Swap agreement:
|
|
(in
thousands)
|
|
Balance
as of July 31, 2005
|
|
$ |
— |
|
Change
in fair value of swap agreement
|
|
|
— |
|
Interest
expense (income)
|
|
|
— |
|
Balance
as of July 31, 2006
|
|
$ |
— |
|
Change
in fair value of swap agreement
|
|
|
48 |
|
Interest
expense (income)
|
|
|
— |
|
Net
cash settlements
|
|
|
— |
|
Liability
balance as of July 31, 2007
|
|
$ |
48 |
|
Change
in fair value of swap agreement
|
|
|
141 |
|
Interest
expense (income)
|
|
|
78 |
|
Net
cash settlements
|
|
|
(75 |
) |
Liability
balance as of July 31, 2008
|
|
$ |
192 |
|
The Company is exposed to credit losses
in the event of non-performance by counterparties to these interest rate swap
agreements, but the Company does not expect any of the counterparties to fail to
meet their obligations. To manage credit risks, the Company selects
counterparties based on credit ratings, limits its exposure to a single
counterparty under defined guidelines, and monitors the market position with
each counterparty as required by SFAS 133.
The
Effect of Derivative Instruments on the Statement of Financial Performance (in
thousands):
Quarter
Ended
|
|
Derivatives
in Cash
Flow
Hedging
Relationships
|
|
Effective
Results
Recognized
in
OCI
|
|
Location
of Results
Reclassifed
from AOCI to
Earnings
|
|
Amount
Reclassified
from
AOCI
to
Income
|
|
|
Ineffective
Results
Recognized
in
Earnings
|
|
|
Location
of
Ineffective
Results
|
|
10/31/07
|
|
Interest
Rate contracts
|
|
$ |
(66 |
) |
Interest
Income (Expense)
|
|
|
— |
|
|
|
|
|
|
N/A |
|
1/31/08
|
|
Interest
Rate contracts
|
|
$ |
(201 |
) |
Interest
Income (Expense)
|
|
|
(5 |
) |
|
|
— |
|
|
|
N/A |
|
4/30/08
|
|
Interest
Rate contracts
|
|
$ |
28 |
|
Interest
Income (Expense)
|
|
|
(24 |
) |
|
|
— |
|
|
|
N/A |
|
7/31/08
|
|
Interest
Rate contracts
|
|
$ |
19 |
|
Interest
Income (Expense)
|
|
|
(49 |
) |
|
|
(24 |
) |
|
|
N/A |
|
Quarter
Ended
|
|
Derivatives
Not
Designated
in Hedging
Relationships
|
|
Location
of Results
|
|
Amount
of
Gain
(Loss)
|
|
10/31/07
|
|
Gold
contracts
|
|
Other
Income (Expense)
|
|
$ |
(358 |
) |
1/31/08
|
|
Gold
contracts
|
|
Other
Income (Expense)
|
|
$ |
(345 |
) |
4/30/08
|
|
Gold
contracts
|
|
Other
Income (Expense)
|
|
$ |
(337 |
) |
7/31/08
|
|
Gold
contracts
|
|
Other
Income (Expense)
|
|
$ |
(319 |
) |
Fair
Value of Derivative Instruments in a Statement of Financial Position and the
Effect of Derivative Instruments on the Statement of Financial Performance (in
thousands):
|
|
Liability
Derivatives
|
|
October
31, 2007
|
|
Balance
Sheet Location
|
|
Fair
Values
|
|
Derivatives
designated as hedging instruments
|
|
|
|
|
|
Interest
rate derivatives
|
|
Other
Liabilities
|
|
$ |
115 |
|
Derivatives
designated as non-hedging instruments
|
|
|
|
|
|
|
Gold
derivatives
|
|
Other
Liabilities
|
|
$ |
613 |
|
|
|
|
|
|
|
|
January
31, 2008
|
|
Balance
Sheet Location
|
|
Fair
Values
|
|
Derivatives
designated as hedging instruments
|
|
|
|
|
|
|
Interest
rate derivatives
|
|
Other
Liabilities
|
|
$ |
313 |
|
Derivatives
designated as non-hedging instruments
|
|
|
|
|
|
|
Gold
derivatives
|
|
Other
Liabilities
|
|
$ |
660 |
|
|
|
|
|
|
|
|
April
30, 2008
|
|
Balance
Sheet Location
|
|
Fair
Values
|
|
Derivatives
designated as hedging instruments
|
|
|
|
|
|
|
Interest
rate derivatives
|
|
Other
Liabilities
|
|
$ |
274 |
|
Derivatives
designated as non-hedging instruments
|
|
|
|
|
|
|
Gold
derivatives
|
|
Other
Liabilities
|
|
$ |
702 |
|
|
|
|
|
|
|
|
July
31, 2008
|
|
Balance
Sheet Location
|
|
Fair
Values
|
|
Derivatives
designated as hedging instruments
|
|
|
|
|
|
|
Interest
rate derivatives
|
|
Other
Liabilities
|
|
$ |
192 |
|
Derivatives
designated as non-hedging instruments
|
|
|
|
|
|
|
Gold
derivatives
|
|
Other
Liabilities
|
|
$ |
738 |
|
|
|
|
|
|
|
|
NOTE 21 –
Accrued Expenses
Accrued
expenses at July 31, 2008 and 2007 consists of the following:
|
|
|
|
(in
thousands)
|
|
|
|
July
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Net
profit interest
|
|
$ |
753 |
|
|
$ |
— |
|
Net
smelter return
|
|
|
189 |
|
|
|
— |
|
Mining
contract
|
|
|
193 |
|
|
|
51 |
|
Income
tax payable
|
|
|
777 |
|
|
|
— |
|
Utilities
|
|
|
110 |
|
|
|
165 |
|
Interest
|
|
|
72 |
|
|
|
100 |
|
Other
liabilities
|
|
|
578 |
|
|
|
287 |
|
|
|
$ |
2,672 |
|
|
$ |
603 |
|
NOTE 22 –
Income Taxes
The
Company’s Income tax (expense) benefit consisted of:
|
|
(in
thousands)
|
|
|
|
|
|
|
July
31,
2007
|
|
|
July
31,
2006
|
|
Current:
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
Foreign
|
|
|
(2,111 |
) |
|
|
— |
|
|
|
— |
|
|
|
|
(2,111 |
) |
|
|
— |
|
|
|
— |
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Foreign
|
|
|
(1,396 |
) |
|
|
— |
|
|
|
— |
|
|
|
|
(1,396 |
) |
|
|
— |
|
|
|
— |
|
Total
|
|
$ |
(3,507 |
) |
|
$ |
— |
|
|
$ |
— |
|
The
Company’s Income (loss) from operations before income tax consisted
of:
|
|
(in
thousands)
|
|
|
|
July
31,
2008
|
|
|
July
31,
2007
|
|
|
July
31,
2006
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$ |
(6,556 |
) |
|
$ |
(5,514 |
) |
|
$ |
(4,005 |
) |
Foreign
|
|
|
16,427 |
|
|
|
(1,958 |
) |
|
|
(800 |
) |
Total
|
|
$ |
9,871 |
|
|
$ |
(7,472 |
) |
|
$ |
(4,805 |
) |
The
Company’s income tax expense differed from the amounts computed by applying the
United States statutory corporate income tax rate for the following
reasons:
|
|
(in
thousands)
|
|
|
|
July
31,
2008
|
|
|
July
31,
2007
|
|
|
July
31,
2006
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from operations before income tax
|
|
$ |
9,871 |
|
|
$ |
(7,472 |
) |
|
$ |
(4,805 |
) |
US
statutory corporate income tax rate
|
|
|
34 |
% |
|
|
34 |
% |
|
|
34 |
% |
Income
tax (expense) benefit computed at US statutory corporate income tax
rate
|
|
|
(3,356 |
) |
|
|
2,540 |
|
|
|
1,634 |
|
Reconciling
items:
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in valuation allowance on deferred tax assets
|
|
|
(1,137 |
) |
|
|
(2,540 |
) |
|
|
(1,634 |
) |
Difference
in foreign tax
|
|
|
986 |
|
|
|
— |
|
|
|
— |
|
Income
tax expense
|
|
$ |
(3,507 |
) |
|
$ |
— |
|
|
$ |
— |
|
Components
of the Company’s deferred income tax assets (liabilities) are as
follows:
|
|
(in
thousands)
|
|
|
|
July
31,
2008
|
|
|
July
31,
2007
|
|
|
July
31,
2006
|
|
Net
deferred income tax assets, non current:
|
|
|
|
|
|
|
|
|
|
Remediation
and reclamation costs
|
|
$ |
(29 |
) |
|
$ |
— |
|
|
$ |
— |
|
Net
operating losses
|
|
|
9,334 |
|
|
|
8,197 |
|
|
|
5,823 |
|
Depreciation
and amortization
|
|
|
602 |
|
|
|
— |
|
|
|
— |
|
|
|
$ |
9,907 |
|
|
$ |
8,197 |
|
|
$ |
5,823 |
|
Valuation
allowances
|
|
|
(9,334 |
) |
|
|
(8,197 |
) |
|
|
(5,823 |
) |
|
|
$ |
573 |
|
|
$ |
— |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
deferred income tax liabilities, current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
$ |
12 |
|
|
$ |
— |
|
|
$ |
— |
|
Foreign
currency exchange
|
|
|
2 |
|
|
|
— |
|
|
|
— |
|
Inventory
valuation
|
|
|
(1,925 |
) |
|
|
— |
|
|
|
— |
|
Accounts
receivable
|
|
|
(413 |
) |
|
|
— |
|
|
|
— |
|
Other
|
|
|
261 |
|
|
|
— |
|
|
|
— |
|
|
|
$ |
(2,063 |
) |
|
$ |
— |
|
|
$ |
— |
|
The
Company adopted the provisions of FASB Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes" ("FIN 48") effective January 1, 2007. The purpose
of FIN 48 is to clarify and set forth consistent rules for accounting for
uncertain tax positions in accordance with Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes". The cumulative
effect of applying the provisions of this interpretation are required to be
reported separately as an adjustment to the opening balance of retained earnings
in the year of adoption. The adoption of this standard did not have
an impact on the financial condition or the results of the Company’s
operations.
On
October 1, 2007, the Mexican Government enacted legislation which introduces
certain tax reforms as well as a new minimum flat tax system. This new
flat tax system integrates with the regular income tax system and is based on
cash-basis net income that includes only certain receipts and
expenditures. The flat tax is set at 17.5% of cash-basis net income as
determined, with transitional rates of 16.5% and 17.0% in 2008 and 2009,
respectively. If the flat tax is positive, it is reduced by the regular
income tax and any excess is paid as a supplement to the regular income
tax. If the flat tax is negative, it may serve to reduce the regular
income tax payable in that year or can be carried forward for a period of up to
ten years to reduce any future flat tax.
Companies
are required to prepay income taxes on a monthly basis based on the greater of
the flat tax or regular income tax as calculated for each monthly period.
Annualized income projections indicate that the Company will not be liable for
any excess flat tax for calendar year 2008 and, accordingly, has recorded a
Mexican income tax provision as of July 31, 2008.
As the
new legislation was recently enacted, it remains subject to ongoing varying
interpretations. There is the possibility of implementation amendments by
the Mexican Government and the estimated future income tax liability recorded at
the balance sheet date may change.
Deferred
income tax assets and liabilities are determined based on differences between
the financial statement reporting and tax bases of assets and liabilities and
are measured using the enacted tax rates and laws in effect when the differences
are expected to reverse. The measurement of deferred income tax assets is
reduced, if necessary, by a valuation allowance for any tax benefits, which are,
on a more likely than not basis, not expected to be realized. The
effect on deferred income tax assets and liabilities of a change in tax rates is
recognized in the period that such tax rate changes are enacted.
For income tax purposes in the United
States, the Company had available net operating loss carryforwards ("NOL") as of
July 31, 2008, 2007 and 2006 of approximately $22,179, $17,464 and $15,048,
respectively to reduce future federal taxable income. If any of the NOL's are
not utilized, they will expire at various dates through 2027. There may be
certain limitations as to the future annual use of the NOLs due to certain
changes in the Company's ownership.
NOTE 23 –
Commitments and Contingencies
Lease
Commitments
The Company occupies office space in
New York City under a non-cancelable operating lease that commenced on September
1, 2007 and terminates on August 31, 2012. In addition to base rent, the lease
calls for payment of utilities and other occupancy costs.
Approximate
future minimum payments under this lease are as follows (in
thousands):
Fiscal
Years Ending July 31,
|
|
|
|
|
|
2009
|
|
$ |
132 |
|
2010
|
|
|
142 |
|
2011
|
|
|
147 |
|
2012
|
|
|
151 |
|
2013
|
|
|
13 |
|
|
|
$ |
585 |
|
Rent expense was approximately $107,
$66 and $63 for the years ended July 31, 2008, 2007 and 2006,
respectively.
Land
Easement
On May 25, 2005, MSR entered into an
agreement for an irrevocable access easement and an irrevocable fluids
(electricity, gas, water and others) easement to land located at Altar, Sonora,
Mexico. The term of the agreement is five years, extendable for 1-year
additional terms, upon MSR’s request. The agreement would be suspended only by
force majeure or Acts of God; and extendable for the duration of the
suspension. In consideration for these easements, $18 was paid upon
the signing of the agreement and yearly advance payments equal to two annualized
general minimum wages (365 X 2 general minimum wages) in force in Altar, Sonora,
Mexico, are required. These yearly payments are to be made on September 1 of
each year, using the minimum wage in effect on that day for the calculation of
the amount payable. These payments are to be made for as long as the
construction and production mining works and activities of MSR are being carried
out, and are to cease as soon as such works and activities are permanently
stopped.
El
Charro
In May 2005, the Company acquired
rights to the El Charro concession for approximately $20 and a royalty of 1.5%
of net smelter return. The Company acquired the El Charro concession
because it is surrounded entirely by the Company’s other
concessions.
NOTE 24 –
Unaudited Supplementary Data
The
following is a summary of selected fiscal quarterly financial information
(unaudited and 000’s except per share data and price):
|
|
2008
|
|
|
|
Three
Months Ended
|
|
|
|
October
31
|
|
|
January
31
|
|
|
April
30
|
|
|
July
31
|
|
Revenues
|
|
$ |
6,526 |
|
|
$ |
8,043 |
|
|
$ |
8,730 |
|
|
$ |
9,805 |
|
Costs
applicable to sales
|
|
$ |
2,204 |
|
|
$ |
2,419 |
|
|
$ |
2,717 |
|
|
$ |
3,350 |
|
Net
income applicable to common shares
|
|
$ |
1,747 |
|
|
$ |
2,126 |
|
|
$ |
2,740 |
|
|
$ |
(249 |
) |
Net
income per common share, basic
|
|
$ |
0.01 |
|
|
$ |
0.01 |
|
|
$ |
0.02 |
|
|
$ |
0.00 |
|
Net
income per common share, diluted
|
|
$ |
0.01 |
|
|
$ |
0.01 |
|
|
$ |
0.01 |
|
|
$ |
0.00 |
|
Basic
weighted-average shares outstanding
|
|
|
170,855 |
|
|
|
174,765 |
|
|
|
175,645 |
|
|
|
175,040 |
|
Diluted
weighted-average shares outstanding
|
|
|
192,998 |
|
|
|
196,191 |
|
|
|
197,239 |
|
|
|
195,469 |
|
Closing
price of common stock
|
|
$ |
0.63 |
|
|
$ |
0.70 |
|
|
$ |
0.65 |
|
|
$ |
0.65 |
|
|
|
2007
|
|
|
|
Three
Months Ended
|
|
|
|
October
31
|
|
|
January
31
|
|
|
April
30
|
|
|
July
31
|
|
Revenues
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
Costs
applicable to sales
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
Net
loss applicable to common shares
|
|
$ |
(1,161 |
) |
|
$ |
(1,673 |
) |
|
$ |
(2,649 |
) |
|
$ |
(1,989 |
) |
Net
loss per common share, basic
|
|
$ |
(0.01 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.02 |
) |
|
$ |
(0.01 |
) |
Net
income loss per common share, diluted(1)
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
Basic
weighted-average shares outstanding
|
|
|
132,598 |
|
|
|
138,074 |
|
|
|
164,582 |
|
|
|
149,811 |
|
Diluted
weighted-average shares outstanding(1)
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Closing
price of common stock
|
|
$ |
0.31 |
|
|
$ |
0.40 |
|
|
$ |
0.41 |
|
|
$ |
0.44 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Net
loss per common share, diluted and computation of diluted weighted average
common shares was not included as their effect would have been
anti-dilutive.
|
|
|
2006
|
|
|
|
Three
Months Ended
|
|
|
|
October
31
|
|
|
January
31
|
|
|
April
30
|
|
|
July
31
|
|
Revenues
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
Costs
applicable to sales
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
Net
loss applicable to common shares
|
|
$ |
(813 |
) |
|
$ |
(921 |
) |
|
$ |
(1,482 |
) |
|
$ |
(1,589 |
) |
Net
loss per common share, basic
|
|
$ |
(0.01 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.01 |
) |
Net
income loss per common share, diluted(1)
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
Basic
weighted-average shares outstanding
|
|
|
95,969 |
|
|
|
98,507 |
|
|
|
124,884 |
|
|
|
112,204 |
|
Diluted
weighted-average shares outstanding(1)
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Closing
price of common stock
|
|
$ |
0.23 |
|
|
$ |
0.38 |
|
|
$ |
0.35 |
|
|
$ |
0.32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2)
|
Net
loss per common share, diluted and computation of diluted weighted average
common shares was not included as their effect would have been
anti-dilutive.
|
NOTE 25 –
Subsequent Events
On
September 18, 2008, the Company closed its Amended And Restated Credit
Agreement involving our wholly-owned Mexican subsidiaries MSR and
Oro, as Borrowers, the Company, as guarantor, and Standard Bank PLC (“Standard
Bank”), as the lender. The Company made its first principal payment
of $1,125 on September 30, 2008.
In
September 2008, our Board of Directors (the "Board") approved and recommended to
our stockholders a proposal to effect a reverse stock split of all outstanding
shares of our Common Stock in an amount which our Board of Directors deems
appropriate to result in a sustained per share market price above $2.00 per
share, to be at a ratio of not less than one-for-four and not more than
one-for-six (the "Reverse Stock Split"). In conjunction with the
Reverse Stock Split, our Board has approved and is recommending to our
stockholders a proposal to effect a reduction in the number of shares of Common
Stock authorized for issuance and an increase in the par value thereof in
proportion to the Reverse Stock Split. We will not issue fractional shares in
connection with the Reverse Stock Split. Any fractional shares that result from
the Reverse Stock Split will be rounded up to the next whole
share. However, if the Board determines that effecting these
capitalization changes would not be in the best interests of our stockholders,
the Board can determine not to effect any or all of the changes.
These
changes, if authorized by the stockholders at the Meeting and if subsequently
implemented by our Board of Directors, will be effected by the filing of an
Amendment to our Certificate of Incorporation.
On August
11, 2008, Jeffrey Pritchard was appointed our Executive Vice
President.
On
October 28, 2008, we entered into an Engagement Agreement with John Brownlie,
our Chief Operating Officer. The agreement supersedes a May 12, 2006
employment agreement between us and Mr. Brownlie. Pursuant to the
Engagement Agreement, Mr. Brownlie serves as our Chief Operating Officer and
receives a base annual fee of at least $259 and is entitled to annual
bonuses. The Engagement Agreement runs through August 31, 2009, and
automatically renews thereafter for additional one year periods unless
terminated by either party within 30 days of a renewal date. We can terminate
the agreement for cause or upon 30 days notice without cause. Mr. Brownlie can
terminate the agreement upon 60 days notice without cause or, if there is a
breach of the agreement by us that is not timely cured, upon 30 days notice. In
the event that we terminate him without cause or he terminates due to our
breach,
he will
be entitled to certain severance payments. We previously entered into a change
of control agreement with Mr. Brownlie similar to the agreements entered into
with our other executive officers.
NOTE 26 –
Securities and Exchange Commission Comment Letter
In response to a comment letter issued
by the staff of the Securities and Exchange Commission, or the SEC, the
accompanying consolidated financial statements include a statement of
stockholders' equity for the year ended July 31, 2006 and expanded disclosures
in the footnotes to the financial statements to cover each of the three years
ended July 31, 2008, 2007 and 2006. The Company has also expanded its
footnote disclosure regarding accounts receivable, marketable securities, ore on
leach pads and inventory, long term debt, revenue recognition, equity based
compensation, related party transactions, stockholders;' equity, employee and
consulting agreements, sales contracts, and financial instruments. In
addition, the Company made certain reclassifications that it determined were not
material. These reclassifications had no impact on the Company's
financial position, results of operations, stockholders' equity or cash
flows. In addition, it was determined that the Company
should have been an accelerated filer and accordingly was required to have an
audit performed of its internal controls over financial reporting.
NOTE 27 – Amendments to Employment and Engagement
Agreements
On January 20, 2009, the Company entered into (i) amended and
restated employment agreements with Gifford Dieterle, President and Treasurer,
and Jeffrey Pritchard, Executive Vice President and (ii) amended and restated
engagement agreements with Christopher Chipman, Chief Financial Officer, John
Brownlie, Chief Operating Officer, and Scott Hazlitt, Vice President of Mine
Development (collectively, the “Amended Agreements”). Among other
things, the Amended Agreements removed a provision from the Agreement Regarding
Change in Control, which is attached as an exhibit to each of the Amended
Agreements, that provided that, upon a change in control of the Company, the
exercise price of all issued and outstanding options would decrease to
$0.01.
F-48