Post by Zoinkers on Aug 25, 2006 18:12:08 GMT -5
Form 10QSB for EL CAPITAN PRECIOUS METALS INC
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21-Aug-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 COMPANY'S EXPECTATIONS OR BELIEFS, INCLUDING BUT NOT LIMITED TO, STATEMENTS CONCERNING THE COMPANY'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 COMPANY 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 June 30, 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 fourth calendar quarter of 2006, if ever. There is no guaranty that we will achieve proven viable precious metals at our various property site locations.
Expenses and Net Loss - Our general and administrative expenses decreased by $16,110, from $573,379 for the three months ended June 30, 2005, to $557,269 for the three months ended June 30, 2006. The decrease is primarily attributable to decreased professional fees of $42,522 and decreased other general and administrative aggregating $40,450. These decreases were offset by increases in compensation aggregating $27,249 and increased legal and accounting of $35,366.
Other expense during the three months ended June 30,2006, increased $242,217 to $257,776 as compared to $15,559 for the comparable prior year period. This increase for the current period is mainly comprised of an increase in interest expense of $46,548, an increase in accretion of discounts on notes payable of $145,194 and an increase in expenses associated with debt issuance and conversion aggregating $49,824.
Our total net loss for the three months ended June 30, 2006, increased $226,107 to $815,045 as compared to a net loss of $588,938 incurred for the comparable three-month period ended June 30, 2005. The increased loss for the current period is attributable to the aforementioned increased other expenses.
Operating Results for the Nine Months Ended June 30, 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 fourth calendar quarter of 2006, if ever. There is no guaranty that we will achieve proven viable precious metals at our various property site locations.
Expenses and Net Loss - Our general and administrative expenses decreased by $245,756, from $2,288,367 for the nine months ended June 30, 2005, to $2,042,611 for the nine months ended June 30, 2006. The decrease is primarily attributable to decreased professional fees of $625,095 and decreased management fees to a related party of $36,000. These decreases were offset by increases in compensation aggregating $199,761, of which $175,000 is comprised of stock bonus compensation to management, and increased exploration aggregating $209,450.
Other expense during the nine months ended June 30,2006, increased $675,073 to $782,464 as compared to $107,391 for the comparable prior year period. This increase for the current period is mainly attributable to an increase in interest expense of $125,589, an increase in accretion of discounts on notes payable of $397,848 and an increase in expenses associated with debt issuance and conversion aggregating $156,761.
Our total net loss for the nine months ended June 30, 2006 increased $429,317 to $2,825,075 as compared to a net loss of $2,395,758 incurred for the comparable nine-month period ended June 30, 2005. The increased loss for the current period is attributable to the aforementioned increased other expense and offset by the decrease in expenses in general and administrative..
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 terms 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, deployment of our business strategies and severely threaten our ability to operate as a going concern.
During the next twelve months the Company will 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 would result in dilution of our current shareholders.
We will continue to prove up our various properties and finalize the formal report on the El Capitan property site with the intent to formalize and implement the marketing plan for the sale of this site. During this period we also intend to finalize the proprietary process the Company has been working on for extraction of precious metal from various other property interests.
Liquidity - As of June 30, 2006, we had $64,378 of cash on hand. We will be required to raise additional capital in financing transactions in order to satisfy our expected cash expenditures and collect the receivable from Minerals. At June 30, 2006, Minerals owed us $321,912 for cost advances on the El Capitan project. As of August 11, 2006, the affiliate has made $255,000 in payments on this obligation. We also contemplate the exercise of the call options on various warrants, which if exercised, would provide us significant working capital to continue our 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. There are no assurances of success in our 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 April 3, 2006, we 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 placement 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 - We have 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. Our potential must be considered by evaluation of all risks and difficulties encountered by new companies that 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 our operations unless the we are able to offset such a price drop by substantially increased precious metals findings on its properties.
We have no proven or probable reserves and have no ability to currently measure or prove our 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 June 30, 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 and note discounts 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 August 11, 2006, we had issued and outstanding 73,134,409 shares of common stock, warrants to purchase up to an aggregate amount of 7,931,364 shares of common stock, a convertible securities convertible into an aggregate amount of 2,600,000 shares of common stock and 1,673,000 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, should we even sell a property. 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.
We will be required to raise additional capital in financing transactions in order to satisfy our expected cash expenditures. We continually evaluate business opportunities, such as joint venture processing agreements, with the aim of creating cash flow for working capital. Based on our current monthly utilization of working capital, we have sufficient cash to fund operations through approximately July 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 June 30, 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 June 30, 2006, of $8,967,482. 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 and the use of non-conventional testing and assaying methods may diminish our ability to properly value our properties.
We rely on estimates of the content of mineral deposits in our properties, which estimates are inherently imprecise and depend to some extent on statistical inferences drawn from both limited drilling our properties and the placement of drill holes that are not spaced close enough to one another to enable us establish probable or proven testing results. These estimates may prove unreliable. Additionally, we have relied upon small independent laboratories to assay our samples, which may produce results that are not as consistent as a larger commercial laboratory might produce.
Further, due to the unique nature of the mineralization of our properties, we have at times utilized, and may continue to utilize, testing and assaying methods that may be uncommon, including the use of alkali fusion assays, a more aggressive form of assay which completely converts the sample into a water soluble salt. Some of these methods, including the alkali fusion assay, are not, or may not, be industry standard methods, 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, and we may not realize any mineral discovery.
Certain elements of El Capitan Ltd.'s preliminary testing on the El Capitan property may question the integrity of the results of such testing and limit our ability to rely on such results.
In January 2005, El Capitan Ltd. completed the first of multiple samplings on the El Capitan property, the initial sampling being 32 surface samples prepared for assaying. This preliminary sampling was performed by Dr. Smith. An employee of AuRIC Metallurgical Labs, which subsequently performed the assay on the samples, assisted Dr. Smith in collecting a portion of the samples in the latter stages of the sampling. AuRIC's participation in both the sampling process and completion of the assay on those samples creates the potential question as to the independence of the involved parties and the integrity of the results.
To date, El Capitan Ltd. has not provided AuRIC and the other assayers a blank quality control sample at the time it provided samples from the property. A blank quality control sample is a man-made sample that incorporates the same mineral components as a sample taken from the property in question, but absent the precious mineral components located in the property. Blank quality control samples are relatively common practice in the industry and are used effectively as a placebo in the assay process to ensure that samples are not contaminated at the lab. The Company's failure to use a blank check sample as often used in the industry may have some effect on the integrity of the results of such testing. As part of its internal controls, however, AuRIC instead obtained two certified standard samples from the Nevada Bureau of Mines and Geology (one for gold and silver and one for gold, platinum and paladium) and two from the CDN Resource Laboratories Ltd. of Delta, British Columbia (both of which were for gold, platinum and platinum); a certified standard sample is a sample that is made available to labs to again act as a placebo and tested to determine a standard testing result, to which the assayer's results can be compared as a check against contamination or other flaws in the assaying process. A portion of these certified standard samples were also provided to Michael J. Wendell with respect to a later assay completed by Mr. Wendell.
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21-Aug-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 COMPANY'S EXPECTATIONS OR BELIEFS, INCLUDING BUT NOT LIMITED TO, STATEMENTS CONCERNING THE COMPANY'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 COMPANY 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 June 30, 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 fourth calendar quarter of 2006, if ever. There is no guaranty that we will achieve proven viable precious metals at our various property site locations.
Expenses and Net Loss - Our general and administrative expenses decreased by $16,110, from $573,379 for the three months ended June 30, 2005, to $557,269 for the three months ended June 30, 2006. The decrease is primarily attributable to decreased professional fees of $42,522 and decreased other general and administrative aggregating $40,450. These decreases were offset by increases in compensation aggregating $27,249 and increased legal and accounting of $35,366.
Other expense during the three months ended June 30,2006, increased $242,217 to $257,776 as compared to $15,559 for the comparable prior year period. This increase for the current period is mainly comprised of an increase in interest expense of $46,548, an increase in accretion of discounts on notes payable of $145,194 and an increase in expenses associated with debt issuance and conversion aggregating $49,824.
Our total net loss for the three months ended June 30, 2006, increased $226,107 to $815,045 as compared to a net loss of $588,938 incurred for the comparable three-month period ended June 30, 2005. The increased loss for the current period is attributable to the aforementioned increased other expenses.
Operating Results for the Nine Months Ended June 30, 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 fourth calendar quarter of 2006, if ever. There is no guaranty that we will achieve proven viable precious metals at our various property site locations.
Expenses and Net Loss - Our general and administrative expenses decreased by $245,756, from $2,288,367 for the nine months ended June 30, 2005, to $2,042,611 for the nine months ended June 30, 2006. The decrease is primarily attributable to decreased professional fees of $625,095 and decreased management fees to a related party of $36,000. These decreases were offset by increases in compensation aggregating $199,761, of which $175,000 is comprised of stock bonus compensation to management, and increased exploration aggregating $209,450.
Other expense during the nine months ended June 30,2006, increased $675,073 to $782,464 as compared to $107,391 for the comparable prior year period. This increase for the current period is mainly attributable to an increase in interest expense of $125,589, an increase in accretion of discounts on notes payable of $397,848 and an increase in expenses associated with debt issuance and conversion aggregating $156,761.
Our total net loss for the nine months ended June 30, 2006 increased $429,317 to $2,825,075 as compared to a net loss of $2,395,758 incurred for the comparable nine-month period ended June 30, 2005. The increased loss for the current period is attributable to the aforementioned increased other expense and offset by the decrease in expenses in general and administrative..
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 terms 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, deployment of our business strategies and severely threaten our ability to operate as a going concern.
During the next twelve months the Company will 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 would result in dilution of our current shareholders.
We will continue to prove up our various properties and finalize the formal report on the El Capitan property site with the intent to formalize and implement the marketing plan for the sale of this site. During this period we also intend to finalize the proprietary process the Company has been working on for extraction of precious metal from various other property interests.
Liquidity - As of June 30, 2006, we had $64,378 of cash on hand. We will be required to raise additional capital in financing transactions in order to satisfy our expected cash expenditures and collect the receivable from Minerals. At June 30, 2006, Minerals owed us $321,912 for cost advances on the El Capitan project. As of August 11, 2006, the affiliate has made $255,000 in payments on this obligation. We also contemplate the exercise of the call options on various warrants, which if exercised, would provide us significant working capital to continue our 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. There are no assurances of success in our 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 April 3, 2006, we 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 placement 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 - We have 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. Our potential must be considered by evaluation of all risks and difficulties encountered by new companies that 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 our operations unless the we are able to offset such a price drop by substantially increased precious metals findings on its properties.
We have no proven or probable reserves and have no ability to currently measure or prove our 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 June 30, 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 and note discounts 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 August 11, 2006, we had issued and outstanding 73,134,409 shares of common stock, warrants to purchase up to an aggregate amount of 7,931,364 shares of common stock, a convertible securities convertible into an aggregate amount of 2,600,000 shares of common stock and 1,673,000 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, should we even sell a property. 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.
We will be required to raise additional capital in financing transactions in order to satisfy our expected cash expenditures. We continually evaluate business opportunities, such as joint venture processing agreements, with the aim of creating cash flow for working capital. Based on our current monthly utilization of working capital, we have sufficient cash to fund operations through approximately July 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 June 30, 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 June 30, 2006, of $8,967,482. 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 and the use of non-conventional testing and assaying methods may diminish our ability to properly value our properties.
We rely on estimates of the content of mineral deposits in our properties, which estimates are inherently imprecise and depend to some extent on statistical inferences drawn from both limited drilling our properties and the placement of drill holes that are not spaced close enough to one another to enable us establish probable or proven testing results. These estimates may prove unreliable. Additionally, we have relied upon small independent laboratories to assay our samples, which may produce results that are not as consistent as a larger commercial laboratory might produce.
Further, due to the unique nature of the mineralization of our properties, we have at times utilized, and may continue to utilize, testing and assaying methods that may be uncommon, including the use of alkali fusion assays, a more aggressive form of assay which completely converts the sample into a water soluble salt. Some of these methods, including the alkali fusion assay, are not, or may not, be industry standard methods, 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, and we may not realize any mineral discovery.
Certain elements of El Capitan Ltd.'s preliminary testing on the El Capitan property may question the integrity of the results of such testing and limit our ability to rely on such results.
In January 2005, El Capitan Ltd. completed the first of multiple samplings on the El Capitan property, the initial sampling being 32 surface samples prepared for assaying. This preliminary sampling was performed by Dr. Smith. An employee of AuRIC Metallurgical Labs, which subsequently performed the assay on the samples, assisted Dr. Smith in collecting a portion of the samples in the latter stages of the sampling. AuRIC's participation in both the sampling process and completion of the assay on those samples creates the potential question as to the independence of the involved parties and the integrity of the results.
To date, El Capitan Ltd. has not provided AuRIC and the other assayers a blank quality control sample at the time it provided samples from the property. A blank quality control sample is a man-made sample that incorporates the same mineral components as a sample taken from the property in question, but absent the precious mineral components located in the property. Blank quality control samples are relatively common practice in the industry and are used effectively as a placebo in the assay process to ensure that samples are not contaminated at the lab. The Company's failure to use a blank check sample as often used in the industry may have some effect on the integrity of the results of such testing. As part of its internal controls, however, AuRIC instead obtained two certified standard samples from the Nevada Bureau of Mines and Geology (one for gold and silver and one for gold, platinum and paladium) and two from the CDN Resource Laboratories Ltd. of Delta, British Columbia (both of which were for gold, platinum and platinum); a certified standard sample is a sample that is made available to labs to again act as a placebo and tested to determine a standard testing result, to which the assayer's results can be compared as a check against contamination or other flaws in the assaying process. A portion of these certified standard samples were also provided to Michael J. Wendell with respect to a later assay completed by Mr. Wendell.