Post by Zoinkers on May 23, 2006 5:21:01 GMT -5
Form 10QSB for EL CAPITAN PRECIOUS METALS INC
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22-May-2006
Quarterly Report
Item 2 - Management's Discussion and Analysis and Plan of Operation
THIS FORM 10-QSB MAY CONTAIN CERTAIN "FORWARD-LOOKING" STATEMENTS AS SUCH TERM IS DEFINED BY THE SECURITIES AND EXCHANGE COMMISSION IN ITS RULES, REGULATIONS AND RELEASES, WHICH REPRESENT THE REGISTRANT'S EXPECTATIONS OR BELIEFS, INCLUDING BUT NOT LIMITED TO, STATEMENTS CONCERNING THE REGISTRANT'S OPERATIONS, ECONOMIC PERFORMANCE, FINANCIAL CONDITION, GROWTH AND ACQUISITION STRATEGIES, INVESTMENTS, AND FUTURE OPERATIONAL PLANS. FOR THIS PURPOSE, ANY STATEMENTS CONTAINED HEREIN THAT ARE NOT STATEMENTS OF HISTORICAL FACT MAY BE DEEMED TO BE FORWARD-LOOKING STATEMENTS. WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, WORDS SUCH AS "MAY", "WILL", "EXPECT", "BELIEVE", "ANTICIPATE", "INTENT", "COULD", "ESTIMATE", "MIGHT", "PLAN", "PREDICT" OR "CONTINUE" OR THE NEGATIVE OR OTHER VARIATIONS THEREOF OR COMPARABLE TERMINOLOGY ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. THESE STATEMENTS BY THEIR NATURE INVOLVE SUBSTANTIAL RISKS AND UNCERTAINTIES, CERTAIN OF WHICH ARE BEYOND THE REGISTRANT'S CONTROL, AND ACTUAL RESULTS MAY DIFFER MATERIALLY DEPENDING ON A VARIETY OF IMPORTANT FACTORS, INCLUDING UNCERTAINTY RELATED TO ACQUISITIONS, GOVERNMENTAL REGULATION, MANAGING AND MAINTAINING GROWTH, THE OPERATIONS OF THE COMPANY AND ITS SUBSIDIARIES, VOLATILITY OF STOCK PRICE AND ANY OTHER FACTORS DISCUSSED IN THIS AND OTHER REGISTRANT FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION. THE COMPANY DOES NOT INTEND TO UNDERTAKE TO UPDATE THE INFORMATION IN THIS FORM 10-QSB IF ANY FORWARD-LOOKING STATEMENT LATER TURNS OUT TO BE INACCURATE. THE FOLLOWING SHOULD BE READ IN CONJUNCTION WITH THE INFORMATION PRESENTED IN THE COMPANY'S ANNUAL REPORT ON FORM 10-KSB FOR THE YEAR ENDED SEPTEMBER 30, 2005.
RESULTS OF OPERATIONS
Operating Results for the Three Months Ended March 31, 2006 and 2005
Revenues - We have not yet realized any revenue from operations, nor do we expect to realize potential revenues until late in the third calendar quarter of 2006. There is no guaranty that we will achieve proven viable precious metals at our various mine site locations.
Expenses and Net Loss - Our expenses increased by $552,539, from $630,142 for the three months ended March 31, 2005 to $1,182,681 for the three months ended March 31, 2006. The increase is primarily attributable to increased home office compensation approximating $158,000 occurring from stock bonuses to employees; increased exploration costs at the El Capitan property of $77,000; increased interest expense and accretion of discounts on notes payable aggregating $194,780 and an increase in costs associated with the issuance of options, warrants and conversion of debt aggregating $156,000.
The Company's total net loss for the three months ended March 31, 2006 increased $552,539 to $1,182,681 as compared to a net loss of $630,142 incurred for the comparable three month period ended March 31, 2005. The increased loss for the current period is attributable to the aforementioned increased expenses.
Operating Results for the Six Months Ended March 31, 2006 and 2005
Revenues - We have not yet realized any revenue from operations, nor do we expect to realize potential revenues until late in the third calendar quarter of 2006. There is no guaranty that we will achieve proven viable precious metals at any of our various property site locations.
Expenses and Net Loss - Our expenses increased by $203,210, from $1,806,820 for the six months ended March 31, 2005 to $2,010,030 for the six months ended March 31, 2006. The increase is primarily attributable to increased home office compensation approximating $161,000 occurring from stock bonuses to employees; increased other general and administrative of $50,000; increased exploration costs at the El Capitan property of $196,000; increased interest expense and accretion of discounts on notes payable aggregating $336,500 and an increase in costs associated with the issuance of options and conversion of debt aggregating $104,000. These increases were offset by decreases in professional fees approximating $597,000; management fees to a related party of $36,000 and legal and accounting fees of $29,000.
The Company's total net loss for the six months ended March 31, 2006 increased $203,210 to $2,010,030 as compared to a net loss of $1,806,820 incurred for the comparable six month period ended March 31, 2005. The increased loss for the current period is attributable to the aforementioned net increase in expenses
PLAN OF OPERATION
Liquidity Capital Resources - To address the going concern problem addressed in our audited financial statements at September 30, 2005, we will require additional working capital. We will also require additional working capital funds for continuing payments for necessary corporate personnel, related general and administrative expenses and for implementation of our necessary business strategies.
We can make no assurance, however, that we will be able to have access to the capital markets in the future, or that the financing will be available on terms acceptable to satisfy our cash requirements. Our inability to access various capital markets or acceptable financing could have a material effect on our results of operations and deployment of our business strategies and severely threaten our ability to operate as a going concern.
During the next two quarters the Company will continue to concentrate on raising the necessary working capital through equity financing and an acceptable debt facility to insure the Company's ability to implement its business strategies. To the extent that additional capital is raised through the sale of equity or equity related securities, the issuance of such securities could result in dilution of our shareholders. Upon effectiveness of the registration statement filed on January 30, 2006, it is the Company's intent to call the warrants that have the callable feature.
We currently intend to continue to prove up our various mining properties and finalize the formal report on the El Capitan property site with the intent to formalize and implement the marketing plan to sell this site. We also intend to finalize the proprietary process the Company has been working on for extraction of precious metal from various potential other property interest.
Liquidity.- As of March 31, 2006, we had $437,863 of cash on hand. We will be required to raise additional capital in financing transactions in order to satisfy our expected cash expenditures. The Company also contemplates the exercise of the call options on various warrants, which if exercised, would provide the Company significant working capital to continue its exploratory programs. We continually evaluate business opportunities such as joint venture processing agreements with the objective of creating cash flow to sustain the corporation and provide a source of funds for growth. While the Company believes it will be able to finance its continuing activities, there are no assurances of success in this regard or in the Company's ability to obtain continued financing through capital markets, joint ventures, or other acceptable arrangements. If management's plans are not successful, operations and liquidity may be adversely impacted. In the event that we are unable to obtain additional capital, we may be forced to reduce our operating expenditures or to cease development and operations altogether.
On March 3, the Company issued 136,364 restricted common shares to an accredited investor pursuant to a private placement of securities under Section 4(2) and Rule 506 promulgated under the Securities Act, in an aggregate amount of $300,000 (the Offering). The Offering also provided with each share of common stock a three-year warrant to purchase one share of common stock at an exercise price of $2.20 per share. The warrants are callable under certain circumstances
Factors Affecting Future Operating Results - The Company has generated no revenues, other than interest income, since its inception. As a result, we have only a limited operating history upon which to evaluate our future potential performance. The Company's potential must be considered by evaluation of all risks and difficulties encountered by new companies which have not yet established their business operations. For an evaluation of various risks, see the section entitled "RISK FACTORS" below.
The price of gold has experienced an increase in value over the past three years. Any significant drop in the price of gold, other precious metals may have a materially adverse affect on the future results of the Company's operations unless the Company is able to offset such a price drop by substantially increased precious metals findings on its properties.
The Company has no proven or probable reserves and has no ability to currently measure or prove its reserves other then relying on information produced by the government in the 1940's on its El Capitan mine site in New Mexico. We are currently having significant geological work performed at this site and having an economically feasible precious metals recovery process developed by an outside metallurgical firm for the ore at this site.
Off-Balance Sheet Arrangements - During the three months ended March 31, 2006, the Company did not engage in any off-balance sheet arrangements as defined in Item 303(c) of the SEC's Regulation S-B.
Critical Accounting Policies. Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, which require us to make estimates and judgments that significantly affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of the consolidated financial statements. NOTE 3, "Significant Accounting Policies" in the Notes to the Consolidated Financial Statements in our Form 10-KSB and Form 10-QSB describes our significant accounting policies which are reviewed by management on a regular basis.
An accounting policy is deemed by us as critical if it requires an accounting estimate to be made based on assumptions about matters that are uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the accounting estimates that are reasonable likely to occur periodically, could materially impact the financial statements. The policies and estimates that we believe are most critical to the preparation of our consolidated financial statements and that require a higher degree of judgment are:
Stock-based compensation; and Valuation of warrants under the Black Scholes option-pricing model.
RISK FACTORS
RISKS RELATING TO OUR COMMON STOCK
The limited trading of our Common Stock may make it difficult to sell shares of our Common Stock.
Trading of our common stock is conducted on the National Association of Securities Dealers' Over-the-Counter Bulletin Board, or "OTC Bulletin Board." This has an adverse effect on the liquidity of our common stock, not only in terms of the number of shares that can be bought and sold at a given price, but also through delays in the timing of transactions and reduction in security analysts' and the media's coverage of us. This may result in lower prices for our common stock than might otherwise be obtained and could also result in a larger spread between the bid and asked prices for our common stock.
Because our Common Stock is a "penny stock," it may be difficult to sell shares of our Common Stock at times and prices that are acceptable.
Our common stock is a "penny stock." Broker-dealers who sell penny stocks must provide purchasers of these stocks with a standardized risk disclosure document prepared by the SEC. This document provides information about penny stocks and the nature and level of risks involved in investing in the penny stock market. A broker must also give a purchaser, orally or in writing, bid and offer quotations and information regarding broker and salesperson compensation, make a written determination that the penny stock is a suitable investment for the purchaser, and obtain the purchaser's written agreement to the purchase. The penny stock rules may make it difficult for you to sell your shares of our stock. Because of the rules, there is less trading in penny stocks. Also, many brokers choose not to participate in penny stock transactions. Accordingly, you may not always be able to resell our shares of common stock publicly at times and prices that you feel are appropriate.
A significant number of shares of our Common Stock may become available for sale and their sale could depress the price of our Common Stock.
Future sales of a substantial number of shares of our Common Stock in the public market could adversely affect the market price for our Common Stock and make it more difficult for shareholders to sell our Common Stock at times and prices that they believe are appropriate. As of May 11, 2006, we had issued and outstanding 73,084,409 shares of Common Stock, warrants to purchase up to an aggregate amount of 7,795,000 shares of Common Stock, a convertible securities convertible into an aggregate amount of 2,600,000 shares of Common Stock and 1,684,770 shares issuable upon the exercise of outstanding options.
RISKS RELATING TO OUR FINANCIAL CONDITION
The volatility of precious metal prices may affect our earnings.
We anticipate that a significant portion of our future revenues will come from the sale of one or more of our properties. In such an event, our earnings will be directly affected by the prices of precious metals believed to be located on such properties. Demand for precious metals can be influenced by economic conditions, including worldwide production, attractiveness as an investment vehicle, the relative strength of the U.S. dollar and local investment currencies, interest rates, exchange rates, inflation and political stability. The aggregate effect of these factors is not within our control and is impossible to predict with accuracy. The price of precious metals has on occasion been subject to very rapid short-term changes due to speculative activities. Fluctuations in precious metal prices may adversely affect the value of any discoveries made at the sites with which we are involved. If the market prices for these precious metals falls below the mining and development costs we incur to produce such precious metals, we will experience losses and may have to discontinue operations at one or more of our properties.
Unless we develop or are able to sell one or more of our properties, we will not have enough cash to fund operations through the next fiscal year.
As of March 31, 2006, we had $437,863 of cash on hand. We will be required to raise additional capital in financing transactions in order to satisfy our expected cash expenditures. Based on our current monthly utilization of working capital, we have sufficient cash to fund operations through approximately June 2006. In the event that we are unable to obtain additional capital, we may be forced to reduce our operating expenditures or to cease development and operations altogether.
As of the end of our current quarter ending March 31, 2006, we have not had revenue-generating operations, and may never generate revenues.
We have not yet had revenue-generating operations, and it is possible that we will not find marketable amounts of minerals on our properties or that any of our properties will ever be sold. Should we fail to obtain revenues, our ability to continue to explore our properties or obtain any additional properties will likely be diminished and we may be required to sell one or more of our properties at a purchase price we do not believe to be reasonable.
Our independent auditors have reported that conditions exist that raise substantial doubt about our ability to continue as a going concern. We have had net losses for each of the years ended September 30, 2005 and September 30, 2004, and we have an accumulated deficit as of March 31, 2006 of $8,088,505. Since the financial statements for each of these periods were prepared assuming that we would continue as a going concern, in the view of our independent auditors, these conditions raise substantial doubt about our ability to continue as a going concern. Furthermore, since we may not generate significant revenues in the foreseeable future, our ability to continue as a going concern may depend, in large part, on our ability to raise additional capital through equity or debt financing transactions. If we are unable to raise additional capital, we may be forced to discontinue our business.
RISKS RELATING TO OUR BUSINESS
Until we locate precious metals on one or more of our properties, we may not have any potential of generating revenues.
Our ability to sell any of our properties depends on the success of our exploration program. Mineral exploration for precious metals is highly speculative, and is often unsuccessful. Even if exploration leads to a valuable deposit, it might take several years to enter into an agreement for the sale of a property. During that time, it might be financially or economically unfeasible to develop the property.
Our inability to establish the existence of mineral resources in commercially exploitable quantities on any of our properties may cause our business to fail.
All of our mineral properties are in the exploration stage. To date, we have not established a mineral reserve on any of these properties, and the probability of establishing a "reserve," as defined by the Securities and Exchange Commission's Industry Guide 7, is not ascertainable; it is possible that none of our properties contain a reserve and all resources we spend on exploration of our properties may be lost. In the event we are unable to establish our reserves or are otherwise able to sell any of our own properties, we will be unable to establish revenues and our business may fail.
Uncertainty of mineralization estimates may diminish our ability to properly value our properties.
The Company relies on estimates of the content of mineral deposits on its properties, which are inherently imprecise and depend to some extent on statistical inferences drawn from limited drilling. These estimates may prove unreliable. Further, the Company may utilize different testing and assaying methods, some of which may be experimental or uncommon, because of the nature of the sample material, and the results from such testing and assaying methods may be varied and inconsistent or prove to be unreliable. This testing may result in imprecise testing and assaying results, preventing us from accurately valuing our properties and ultimately affecting whether we can obtain an appropriate price for any of our properties in the event we sell any of such properties.
Any inability to retain key personnel may negatively affect our business.
We are highly dependent upon the abilities and experience of our officers. We may not be able to retain these individuals in the future, and the loss of one or more of these individuals could have a material effect or our operations. The strong competition within the mining industry makes the recruitment and retention of employees knowledgeable of the mining industry difficult and crucial to success.
Our inability to obtain additional financing would diminish our ability to fund our current exploration projects or acquire interests in other properties.
Additional financing will be needed in order to fund beyond the initial exploration of our properties. Our means of acquiring investment capital is limited to private equity and debt transactions. Other than the interest earned on our short-term investments or further financing, we have no other source of currently available funds to engage in additional exploration and development, which will be necessary to explore our current property interests or to acquire interests in other mineral exploration projects that may become available. See "Risks Relating to Our Financial Condition - We currently do not have enough cash to fund operations during the next fiscal year."
The nature of mineral exploration is inherently risky, and we may not ever discover marketable amounts of precious metals.
The exploration for and development of mineral deposits involves significant financial risks, which even experience and knowledge may not eliminate regardless of the amount of careful evaluation applied to the process. While the discovery of an ore body may result in substantial rewards, very few properties are ultimately developed into producing mines.
Whether a deposit will be commercially viable depends on a number of factors, including: financing costs; proximity to infrastructure; the particular attributes of the deposit, such as its size and grade; and governmental regulations, including regulations relating to prices, taxes, royalties, infrastructure, land use, importing and exporting of gold and environmental protection.
The effect of these factors cannot be accurately predicted, and the combination of any of these factors may prevent us from not receiving an adequate return on invested capital.
Extensive government regulation and environmental risks may require us to discontinue operations.
Our business is subject to extensive federal, state and local laws and regulations governing exploration, development, production, labor standards, occupational health, waste disposal, use of toxic substances, environmental regulations, mine safety and other matters. Additionally, new legislation and regulations may be adopted at any time that affect our business. Compliance with these changing laws and regulations could require increased capital and operating expenditures and could prevent or delay our ability to explore and ultimately sell one or more of our properties.
Mineral exploration is extremely competitive, and we may not have adequate resources to successfully compete.
There is a limited supply of desirable mineral properties available for claim staking, lease or other acquisition in the areas where we contemplate participating in exploration activities. We compete with numerous other companies and individuals, including competitors with greater financial, technical and other resources than we possess, and are thus in a better position to search for and the acquire attractive mineral properties. Additionally, due to our limited financial and other resources, we do not anticipate developing or producing any of our properties, but rather only exploration of our properties with the intent to sell any property on which exploration proves successful. Accordingly, our ability to acquire properties in the future will depend not only on our ability to explore and sell our present properties, but also on our ability to select and acquire suitable producing properties or prospects for future exploration. We may not be able to compete successfully with our competitors in acquiring such properties or prospects.
Title to any of our properties may prove defective, possibly resulting in a complete loss of our rights to such properties.
A material portion of our holdings includes unpatented mining claims. The validity of unpatented claims is often uncertain and may be contested. These claims are located on federal land or involve mineral rights that are subject to the claims procedures established by the General Mining Law of 1872, as amended. We are required make certain filings with the county in which the land or mineral is situated and annually with the Bureau of Land Management and pay an annual holding fee of $125 per claim. If we fail to make the annual holding payment or make the required filings, our mining claim would become invalid. In accordance with the mining industry practice, generally a company will not obtain title opinions until its determined to sell a property. Also no title insurance is available for mining. Accordingly, it is possible that title to some of our undeveloped properties may be defective and in that event we do not have good title to our properties, we would be forced to curtail or cease our business exploratory programs on the property site.
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22-May-2006
Quarterly Report
Item 2 - Management's Discussion and Analysis and Plan of Operation
THIS FORM 10-QSB MAY CONTAIN CERTAIN "FORWARD-LOOKING" STATEMENTS AS SUCH TERM IS DEFINED BY THE SECURITIES AND EXCHANGE COMMISSION IN ITS RULES, REGULATIONS AND RELEASES, WHICH REPRESENT THE REGISTRANT'S EXPECTATIONS OR BELIEFS, INCLUDING BUT NOT LIMITED TO, STATEMENTS CONCERNING THE REGISTRANT'S OPERATIONS, ECONOMIC PERFORMANCE, FINANCIAL CONDITION, GROWTH AND ACQUISITION STRATEGIES, INVESTMENTS, AND FUTURE OPERATIONAL PLANS. FOR THIS PURPOSE, ANY STATEMENTS CONTAINED HEREIN THAT ARE NOT STATEMENTS OF HISTORICAL FACT MAY BE DEEMED TO BE FORWARD-LOOKING STATEMENTS. WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, WORDS SUCH AS "MAY", "WILL", "EXPECT", "BELIEVE", "ANTICIPATE", "INTENT", "COULD", "ESTIMATE", "MIGHT", "PLAN", "PREDICT" OR "CONTINUE" OR THE NEGATIVE OR OTHER VARIATIONS THEREOF OR COMPARABLE TERMINOLOGY ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. THESE STATEMENTS BY THEIR NATURE INVOLVE SUBSTANTIAL RISKS AND UNCERTAINTIES, CERTAIN OF WHICH ARE BEYOND THE REGISTRANT'S CONTROL, AND ACTUAL RESULTS MAY DIFFER MATERIALLY DEPENDING ON A VARIETY OF IMPORTANT FACTORS, INCLUDING UNCERTAINTY RELATED TO ACQUISITIONS, GOVERNMENTAL REGULATION, MANAGING AND MAINTAINING GROWTH, THE OPERATIONS OF THE COMPANY AND ITS SUBSIDIARIES, VOLATILITY OF STOCK PRICE AND ANY OTHER FACTORS DISCUSSED IN THIS AND OTHER REGISTRANT FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION. THE COMPANY DOES NOT INTEND TO UNDERTAKE TO UPDATE THE INFORMATION IN THIS FORM 10-QSB IF ANY FORWARD-LOOKING STATEMENT LATER TURNS OUT TO BE INACCURATE. THE FOLLOWING SHOULD BE READ IN CONJUNCTION WITH THE INFORMATION PRESENTED IN THE COMPANY'S ANNUAL REPORT ON FORM 10-KSB FOR THE YEAR ENDED SEPTEMBER 30, 2005.
RESULTS OF OPERATIONS
Operating Results for the Three Months Ended March 31, 2006 and 2005
Revenues - We have not yet realized any revenue from operations, nor do we expect to realize potential revenues until late in the third calendar quarter of 2006. There is no guaranty that we will achieve proven viable precious metals at our various mine site locations.
Expenses and Net Loss - Our expenses increased by $552,539, from $630,142 for the three months ended March 31, 2005 to $1,182,681 for the three months ended March 31, 2006. The increase is primarily attributable to increased home office compensation approximating $158,000 occurring from stock bonuses to employees; increased exploration costs at the El Capitan property of $77,000; increased interest expense and accretion of discounts on notes payable aggregating $194,780 and an increase in costs associated with the issuance of options, warrants and conversion of debt aggregating $156,000.
The Company's total net loss for the three months ended March 31, 2006 increased $552,539 to $1,182,681 as compared to a net loss of $630,142 incurred for the comparable three month period ended March 31, 2005. The increased loss for the current period is attributable to the aforementioned increased expenses.
Operating Results for the Six Months Ended March 31, 2006 and 2005
Revenues - We have not yet realized any revenue from operations, nor do we expect to realize potential revenues until late in the third calendar quarter of 2006. There is no guaranty that we will achieve proven viable precious metals at any of our various property site locations.
Expenses and Net Loss - Our expenses increased by $203,210, from $1,806,820 for the six months ended March 31, 2005 to $2,010,030 for the six months ended March 31, 2006. The increase is primarily attributable to increased home office compensation approximating $161,000 occurring from stock bonuses to employees; increased other general and administrative of $50,000; increased exploration costs at the El Capitan property of $196,000; increased interest expense and accretion of discounts on notes payable aggregating $336,500 and an increase in costs associated with the issuance of options and conversion of debt aggregating $104,000. These increases were offset by decreases in professional fees approximating $597,000; management fees to a related party of $36,000 and legal and accounting fees of $29,000.
The Company's total net loss for the six months ended March 31, 2006 increased $203,210 to $2,010,030 as compared to a net loss of $1,806,820 incurred for the comparable six month period ended March 31, 2005. The increased loss for the current period is attributable to the aforementioned net increase in expenses
PLAN OF OPERATION
Liquidity Capital Resources - To address the going concern problem addressed in our audited financial statements at September 30, 2005, we will require additional working capital. We will also require additional working capital funds for continuing payments for necessary corporate personnel, related general and administrative expenses and for implementation of our necessary business strategies.
We can make no assurance, however, that we will be able to have access to the capital markets in the future, or that the financing will be available on terms acceptable to satisfy our cash requirements. Our inability to access various capital markets or acceptable financing could have a material effect on our results of operations and deployment of our business strategies and severely threaten our ability to operate as a going concern.
During the next two quarters the Company will continue to concentrate on raising the necessary working capital through equity financing and an acceptable debt facility to insure the Company's ability to implement its business strategies. To the extent that additional capital is raised through the sale of equity or equity related securities, the issuance of such securities could result in dilution of our shareholders. Upon effectiveness of the registration statement filed on January 30, 2006, it is the Company's intent to call the warrants that have the callable feature.
We currently intend to continue to prove up our various mining properties and finalize the formal report on the El Capitan property site with the intent to formalize and implement the marketing plan to sell this site. We also intend to finalize the proprietary process the Company has been working on for extraction of precious metal from various potential other property interest.
Liquidity.- As of March 31, 2006, we had $437,863 of cash on hand. We will be required to raise additional capital in financing transactions in order to satisfy our expected cash expenditures. The Company also contemplates the exercise of the call options on various warrants, which if exercised, would provide the Company significant working capital to continue its exploratory programs. We continually evaluate business opportunities such as joint venture processing agreements with the objective of creating cash flow to sustain the corporation and provide a source of funds for growth. While the Company believes it will be able to finance its continuing activities, there are no assurances of success in this regard or in the Company's ability to obtain continued financing through capital markets, joint ventures, or other acceptable arrangements. If management's plans are not successful, operations and liquidity may be adversely impacted. In the event that we are unable to obtain additional capital, we may be forced to reduce our operating expenditures or to cease development and operations altogether.
On March 3, the Company issued 136,364 restricted common shares to an accredited investor pursuant to a private placement of securities under Section 4(2) and Rule 506 promulgated under the Securities Act, in an aggregate amount of $300,000 (the Offering). The Offering also provided with each share of common stock a three-year warrant to purchase one share of common stock at an exercise price of $2.20 per share. The warrants are callable under certain circumstances
Factors Affecting Future Operating Results - The Company has generated no revenues, other than interest income, since its inception. As a result, we have only a limited operating history upon which to evaluate our future potential performance. The Company's potential must be considered by evaluation of all risks and difficulties encountered by new companies which have not yet established their business operations. For an evaluation of various risks, see the section entitled "RISK FACTORS" below.
The price of gold has experienced an increase in value over the past three years. Any significant drop in the price of gold, other precious metals may have a materially adverse affect on the future results of the Company's operations unless the Company is able to offset such a price drop by substantially increased precious metals findings on its properties.
The Company has no proven or probable reserves and has no ability to currently measure or prove its reserves other then relying on information produced by the government in the 1940's on its El Capitan mine site in New Mexico. We are currently having significant geological work performed at this site and having an economically feasible precious metals recovery process developed by an outside metallurgical firm for the ore at this site.
Off-Balance Sheet Arrangements - During the three months ended March 31, 2006, the Company did not engage in any off-balance sheet arrangements as defined in Item 303(c) of the SEC's Regulation S-B.
Critical Accounting Policies. Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, which require us to make estimates and judgments that significantly affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of the consolidated financial statements. NOTE 3, "Significant Accounting Policies" in the Notes to the Consolidated Financial Statements in our Form 10-KSB and Form 10-QSB describes our significant accounting policies which are reviewed by management on a regular basis.
An accounting policy is deemed by us as critical if it requires an accounting estimate to be made based on assumptions about matters that are uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the accounting estimates that are reasonable likely to occur periodically, could materially impact the financial statements. The policies and estimates that we believe are most critical to the preparation of our consolidated financial statements and that require a higher degree of judgment are:
Stock-based compensation; and Valuation of warrants under the Black Scholes option-pricing model.
RISK FACTORS
RISKS RELATING TO OUR COMMON STOCK
The limited trading of our Common Stock may make it difficult to sell shares of our Common Stock.
Trading of our common stock is conducted on the National Association of Securities Dealers' Over-the-Counter Bulletin Board, or "OTC Bulletin Board." This has an adverse effect on the liquidity of our common stock, not only in terms of the number of shares that can be bought and sold at a given price, but also through delays in the timing of transactions and reduction in security analysts' and the media's coverage of us. This may result in lower prices for our common stock than might otherwise be obtained and could also result in a larger spread between the bid and asked prices for our common stock.
Because our Common Stock is a "penny stock," it may be difficult to sell shares of our Common Stock at times and prices that are acceptable.
Our common stock is a "penny stock." Broker-dealers who sell penny stocks must provide purchasers of these stocks with a standardized risk disclosure document prepared by the SEC. This document provides information about penny stocks and the nature and level of risks involved in investing in the penny stock market. A broker must also give a purchaser, orally or in writing, bid and offer quotations and information regarding broker and salesperson compensation, make a written determination that the penny stock is a suitable investment for the purchaser, and obtain the purchaser's written agreement to the purchase. The penny stock rules may make it difficult for you to sell your shares of our stock. Because of the rules, there is less trading in penny stocks. Also, many brokers choose not to participate in penny stock transactions. Accordingly, you may not always be able to resell our shares of common stock publicly at times and prices that you feel are appropriate.
A significant number of shares of our Common Stock may become available for sale and their sale could depress the price of our Common Stock.
Future sales of a substantial number of shares of our Common Stock in the public market could adversely affect the market price for our Common Stock and make it more difficult for shareholders to sell our Common Stock at times and prices that they believe are appropriate. As of May 11, 2006, we had issued and outstanding 73,084,409 shares of Common Stock, warrants to purchase up to an aggregate amount of 7,795,000 shares of Common Stock, a convertible securities convertible into an aggregate amount of 2,600,000 shares of Common Stock and 1,684,770 shares issuable upon the exercise of outstanding options.
RISKS RELATING TO OUR FINANCIAL CONDITION
The volatility of precious metal prices may affect our earnings.
We anticipate that a significant portion of our future revenues will come from the sale of one or more of our properties. In such an event, our earnings will be directly affected by the prices of precious metals believed to be located on such properties. Demand for precious metals can be influenced by economic conditions, including worldwide production, attractiveness as an investment vehicle, the relative strength of the U.S. dollar and local investment currencies, interest rates, exchange rates, inflation and political stability. The aggregate effect of these factors is not within our control and is impossible to predict with accuracy. The price of precious metals has on occasion been subject to very rapid short-term changes due to speculative activities. Fluctuations in precious metal prices may adversely affect the value of any discoveries made at the sites with which we are involved. If the market prices for these precious metals falls below the mining and development costs we incur to produce such precious metals, we will experience losses and may have to discontinue operations at one or more of our properties.
Unless we develop or are able to sell one or more of our properties, we will not have enough cash to fund operations through the next fiscal year.
As of March 31, 2006, we had $437,863 of cash on hand. We will be required to raise additional capital in financing transactions in order to satisfy our expected cash expenditures. Based on our current monthly utilization of working capital, we have sufficient cash to fund operations through approximately June 2006. In the event that we are unable to obtain additional capital, we may be forced to reduce our operating expenditures or to cease development and operations altogether.
As of the end of our current quarter ending March 31, 2006, we have not had revenue-generating operations, and may never generate revenues.
We have not yet had revenue-generating operations, and it is possible that we will not find marketable amounts of minerals on our properties or that any of our properties will ever be sold. Should we fail to obtain revenues, our ability to continue to explore our properties or obtain any additional properties will likely be diminished and we may be required to sell one or more of our properties at a purchase price we do not believe to be reasonable.
Our independent auditors have reported that conditions exist that raise substantial doubt about our ability to continue as a going concern. We have had net losses for each of the years ended September 30, 2005 and September 30, 2004, and we have an accumulated deficit as of March 31, 2006 of $8,088,505. Since the financial statements for each of these periods were prepared assuming that we would continue as a going concern, in the view of our independent auditors, these conditions raise substantial doubt about our ability to continue as a going concern. Furthermore, since we may not generate significant revenues in the foreseeable future, our ability to continue as a going concern may depend, in large part, on our ability to raise additional capital through equity or debt financing transactions. If we are unable to raise additional capital, we may be forced to discontinue our business.
RISKS RELATING TO OUR BUSINESS
Until we locate precious metals on one or more of our properties, we may not have any potential of generating revenues.
Our ability to sell any of our properties depends on the success of our exploration program. Mineral exploration for precious metals is highly speculative, and is often unsuccessful. Even if exploration leads to a valuable deposit, it might take several years to enter into an agreement for the sale of a property. During that time, it might be financially or economically unfeasible to develop the property.
Our inability to establish the existence of mineral resources in commercially exploitable quantities on any of our properties may cause our business to fail.
All of our mineral properties are in the exploration stage. To date, we have not established a mineral reserve on any of these properties, and the probability of establishing a "reserve," as defined by the Securities and Exchange Commission's Industry Guide 7, is not ascertainable; it is possible that none of our properties contain a reserve and all resources we spend on exploration of our properties may be lost. In the event we are unable to establish our reserves or are otherwise able to sell any of our own properties, we will be unable to establish revenues and our business may fail.
Uncertainty of mineralization estimates may diminish our ability to properly value our properties.
The Company relies on estimates of the content of mineral deposits on its properties, which are inherently imprecise and depend to some extent on statistical inferences drawn from limited drilling. These estimates may prove unreliable. Further, the Company may utilize different testing and assaying methods, some of which may be experimental or uncommon, because of the nature of the sample material, and the results from such testing and assaying methods may be varied and inconsistent or prove to be unreliable. This testing may result in imprecise testing and assaying results, preventing us from accurately valuing our properties and ultimately affecting whether we can obtain an appropriate price for any of our properties in the event we sell any of such properties.
Any inability to retain key personnel may negatively affect our business.
We are highly dependent upon the abilities and experience of our officers. We may not be able to retain these individuals in the future, and the loss of one or more of these individuals could have a material effect or our operations. The strong competition within the mining industry makes the recruitment and retention of employees knowledgeable of the mining industry difficult and crucial to success.
Our inability to obtain additional financing would diminish our ability to fund our current exploration projects or acquire interests in other properties.
Additional financing will be needed in order to fund beyond the initial exploration of our properties. Our means of acquiring investment capital is limited to private equity and debt transactions. Other than the interest earned on our short-term investments or further financing, we have no other source of currently available funds to engage in additional exploration and development, which will be necessary to explore our current property interests or to acquire interests in other mineral exploration projects that may become available. See "Risks Relating to Our Financial Condition - We currently do not have enough cash to fund operations during the next fiscal year."
The nature of mineral exploration is inherently risky, and we may not ever discover marketable amounts of precious metals.
The exploration for and development of mineral deposits involves significant financial risks, which even experience and knowledge may not eliminate regardless of the amount of careful evaluation applied to the process. While the discovery of an ore body may result in substantial rewards, very few properties are ultimately developed into producing mines.
Whether a deposit will be commercially viable depends on a number of factors, including: financing costs; proximity to infrastructure; the particular attributes of the deposit, such as its size and grade; and governmental regulations, including regulations relating to prices, taxes, royalties, infrastructure, land use, importing and exporting of gold and environmental protection.
The effect of these factors cannot be accurately predicted, and the combination of any of these factors may prevent us from not receiving an adequate return on invested capital.
Extensive government regulation and environmental risks may require us to discontinue operations.
Our business is subject to extensive federal, state and local laws and regulations governing exploration, development, production, labor standards, occupational health, waste disposal, use of toxic substances, environmental regulations, mine safety and other matters. Additionally, new legislation and regulations may be adopted at any time that affect our business. Compliance with these changing laws and regulations could require increased capital and operating expenditures and could prevent or delay our ability to explore and ultimately sell one or more of our properties.
Mineral exploration is extremely competitive, and we may not have adequate resources to successfully compete.
There is a limited supply of desirable mineral properties available for claim staking, lease or other acquisition in the areas where we contemplate participating in exploration activities. We compete with numerous other companies and individuals, including competitors with greater financial, technical and other resources than we possess, and are thus in a better position to search for and the acquire attractive mineral properties. Additionally, due to our limited financial and other resources, we do not anticipate developing or producing any of our properties, but rather only exploration of our properties with the intent to sell any property on which exploration proves successful. Accordingly, our ability to acquire properties in the future will depend not only on our ability to explore and sell our present properties, but also on our ability to select and acquire suitable producing properties or prospects for future exploration. We may not be able to compete successfully with our competitors in acquiring such properties or prospects.
Title to any of our properties may prove defective, possibly resulting in a complete loss of our rights to such properties.
A material portion of our holdings includes unpatented mining claims. The validity of unpatented claims is often uncertain and may be contested. These claims are located on federal land or involve mineral rights that are subject to the claims procedures established by the General Mining Law of 1872, as amended. We are required make certain filings with the county in which the land or mineral is situated and annually with the Bureau of Land Management and pay an annual holding fee of $125 per claim. If we fail to make the annual holding payment or make the required filings, our mining claim would become invalid. In accordance with the mining industry practice, generally a company will not obtain title opinions until its determined to sell a property. Also no title insurance is available for mining. Accordingly, it is possible that title to some of our undeveloped properties may be defective and in that event we do not have good title to our properties, we would be forced to curtail or cease our business exploratory programs on the property site.