Filed
Pursuant to Rule 424(b)(3)
Registration
No. 333-140008
PROSPECTUS
5,859,700
Shares
of
Common Stock
Offered
by
Selling
Shareholders
The
selling shareholders identified in this prospectus are offering 5,859,700 shares
of our common stock. Of the shares of common stock offered by the selling
shareholders, 4,322,000 shares were sold in a private placement completed on
December 7, 2006 (“Private Placement”). A total of 257,700 shares of common
stock offered by the selling shareholders were issued to certain selling
shareholders as a finder’s fee in connection with the Private Placement. The
remaining shares are comprised of 280,000 shares issued as compensation to
consultants of the company to whom we granted “piggy-back” registration rights
in connection with those shares and 1,000,000 shares previously issued to
William Reid, our Chairman, President and Chief Executive Officer, as “founder’s
shares.” All of these shares of common stock are being offered by the selling
shareholders named in this prospectus, or their transferees, pledgees, donees
or
successors in interest. The selling shareholders will receive all of the
proceeds from the sale of the shares of the common stock being offered by this
prospectus.
The
selling shareholders may sell the shares of common stock being offered by them
from time to time in the over the counter market, on one or more stock
exchanges, in market transactions, in negotiated transactions or otherwise,
and
at prices and at terms that will be determined by the then-prevailing market
price for the shares of our common stock or at negotiated prices directly or
through broker-dealers, who may act as agent or as principal, or by a
combination of such methods of sale. For additional information on the methods
of sale, you should refer to the section entitled “PLAN OF DISTRIBUTION” on page
36.
Our
common stock currently trades over the counter and is quoted on the Bulletin
Board maintained by the National Association of Securities Dealers, Inc.
(“OTCBB”) under the symbol “GORO.” On February 7, 2007, the closing price of our
common stock was $ 2.13.
Investing
in our common stock involves risks that are described in the "RISK FACTORS"
section beginning on page 3 of this prospectus.
___________________
Neither
the Securities and Exchange Commission nor any state securities commission
has
approved or disapproved of our common stock or passed upon the adequacy or
accuracy of this prospectus. Any representation to the contrary is a criminal
offense.
The
date of this prospectus is February 7, 2007
TABLE
OF CONTENTS
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27
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33
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34
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36
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37
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38
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39
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39
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39
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F-1
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Back
Cover
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Additional
Information
This
prospectus contains descriptions of certain contracts, agreements or other
documents affecting our business. These descriptions are not necessarily
complete. For the complete text of these documents, you can refer to the
exhibits filed with, or incorporated by reference into, the registration
statement of which this prospectus is a part. (See
"WHERE
YOU CAN FIND MORE INFORMATION").
You
should rely only on the information contained in this prospectus, or to which
we
have referred you. We have not authorized anyone to provide you with information
other than as contained or referred to in this prospectus. This document may
only be used where it is legal to sell these securities. The information in
this
document may only be accurate as of the date of this document.
Special
Note Regarding Forward-Looking Statements
Please see the note under "RISK FACTORS" for a description of special factors
potentially affecting forward-looking statements included in this
prospectus.
The
following summary highlights information contained elsewhere in this prospectus.
It does not contain all of the information you should consider before investing
in our stock. You should read the entire prospectus carefully, including the
sections entitled “RISK FACTORS” and “FINANCIAL STATEMENTS.”
As
used
in this prospectus, unless the context requires otherwise, the terms “Gold
Resource,” “we,” “our” or “us” refer to Gold Resource Corporation and where the
context requires, our consolidated subsidiaries.
Our
Company
We
are an
exploration stage company organized in Colorado on August 24, 1998 to search
for
gold and silver. We currently have an interest in two properties located in
Mexico, one known as the El
Aguila project
and one known as the El
Rey project.
In October 2002, we leased some mineral claims in the State of Oaxaca, Mexico,
designated the El
Aguila
project.
These claims cover approximately 1,896 hectares (4,685
acres)(1)
and are
located in the historic San
Jose de Gracia
mining
district in the State of Oaxaca. The El
Aguila
project
is an exploration property in which we lease a 100% interest. Since acquiring
that interest, we have drilled approximately 6,700 meters (21,981 feet) of
test
holes in one section of the property and have encountered gold and silver
mineralized material. We are continuing our exploration efforts on this
property.
In
2005,
we obtained some additional mineral claims in the Mexican State of Oaxaca which
we call the El
Rey project.
The El
Rey
project
is an exploration stage property in which we acquired mineral claims by filing
mineral concessions with the Mexican government. We have conducted very limited
exploration of this property to date.
We
are an
exploration stage company, and there is no assurance that a commercially viable
mineral deposit exists on either of our properties. Additional exploration
will
be required before a final evaluation as to the economic feasibility is
determined. There is no assurance that we will be successful in obtaining enough
capital to complete necessary exploration, evaluation and feasibility
studies.
Recent
Events
On
December 7, 2006, we completed a private placement of 4,322,000 shares of our
common stock for $1.20 per share (“Private Placement”), from which we received
$4,928,700 in net proceeds. In connection with the Private Placement, we paid
an
aggregate finder’s fee comprised of cash of $257,700 and 257,700 shares of our
common stock to certain of the selling shareholders named in this prospectus
who
acted as finders for our company. At the time we paid the finder’s fee, the
finders had no prior relationship with our company. See“MANAGEMENT’S
DISCUSSION AND ANALYSIS” for additional information regarding this
offering.
___________________
(1)
Please see the Glossary appearing at the end of the section titled "BUSINESS
AND
PROPERTIES" for a description of certain terms used in this prospectus,
including conversion of metric units.
___________________
On
August
14, 2006, we completed our initial public offering (“IPO”), from which we
received net proceeds of $4,351,200. The proceeds we received enabled us to
begin the third stage of our exploration program at the El
Aguila
project.
In October 2006, we signed a contract for a minimum of 3,333 meters (10,935
feet) of additional core drilling which commenced in November 2006, and expect
to contract for additional drilling of up to 10,000 meters (32,808 feet) in
2007.
Our
operations in Mexico are conducted through our wholly-owned Mexican
subsidiaries, Don David Gold, S.A. de C.V. and Golden Trump S.A. de C.V. All
references to us or our company in this prospectus include our subsidiaries.
Our
principal executive offices are located at 222 Milwaukee Street, Suite 301,
Denver, Colorado 80206, and our telephone number is (303) 320-7708. We
maintain a website at www.goldresourcecorp.com.
The
information available on or through our website is not part of this
prospectus.
The
Offering
|
Common
Stock outstanding before and after the Offering
|
28,139,552
shares(1)(2)(3)
|
|
|
Common
Stock offered by the selling shareholders
|
5,859,700
|
|
|
Use
of Proceeds
|
None
|
|
|
Stock
Symbol
|
“GORO”
on the OTCBB
|
_____________________________________
(1) Adjusted
to reflect a two for one stock split effective February 21, 2005. All references
in this prospectus have been adjusted to reflect the results of that
split.
(2) Excludes
2,550,000 shares of common stock underlying options which are presently
exercisable.
(3) Includes
shares to be offered by the selling shareholders.
___________________________________________________
Risk
Factors
An
investment in our common stock is subject to a number of risks. Risk factors
relating to our company include a history of operating losses, lack of proven
or
probable reserves, location of our properties in a foreign country and
dependence on key personnel. Risk factors relating to our common stock include
our limited trading market, lack of dividends and volatility of our stock price.
See
“RISK
FACTORS” for a full discussion of these and other risks.
Summary
Financial Data
The
following tables present certain selected historical consolidated financial
data
about our company. Historical consolidated financial information as of and
for
the years ended December 31, 2005 and 2004 has been derived from our
consolidated financial statements, which have been audited by Stark Winter
Schenkein & Co., LLP, our independent registered public accounting firm.
Historical consolidated financial information as of and for the nine months
ended September 30, 2006 and 2005 have been derived from our unaudited
consolidated financial statements.
All
amounts included in these tables and elsewhere in this prospectus are stated
in
United States dollars. You should read the data set forth below in conjunction
with the section entitled "MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION," our financial statements and related notes included elsewhere in
this prospectus.
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Balance Sheet Data
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|||||||
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September
30,
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December 31,
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||||||
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2006
|
2005
|
||||||
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(unaudited)
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|||||||
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Cash
and Cash Equivalents
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$
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3,298,609
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$
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176,182
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|||
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Total
Assets
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3,342,279
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246,980
|
|||||
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Current
Liabilities
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290,519
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33,607
|
|||||
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Total
Liabilities
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290,519
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33,607
|
|||||
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Shareholders’
Equity
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3,051,760
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213,373
|
|||||
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Operating Data
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|||||||||||||
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Nine
months ended
September
30,
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Year ended
December 31,
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||||||||||||
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2006
|
2005
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2005
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2004
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||||||||||
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(unaudited)
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|||||||||||||
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Other
Revenue
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$
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7,954
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$
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3,311
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$
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6,174
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$
|
113
|
|||||
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General
and Administrative Expenses
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781,090
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103,142
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286,219
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27,732
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|||||||||
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Stock
Compensation
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516,350
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87,500
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87,500
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500,000
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|||||||||
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Property
Acquisition Related Costs
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100,000
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95,796
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103,548
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68,591
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|||||||||
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Exploration
Costs
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361,735
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393,783
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739,570
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257,383
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|||||||||
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Net
Comprehensive (Loss)
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(1,764,163
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)
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(680,662
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)
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(1,217,711
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)
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(853,666
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)
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|||||
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Net
(Loss) per Share
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$
|
(0.09
|
)
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$
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(0.04
|
)
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$
|
(0.08
|
)
|
$
|
(0.08
|
)
|
|
Investment
in our common stock involves a high degree of risk and could result in a loss
of
your entire investment. Prior to making an investment decision, you should
carefully consider all of the information in this prospectus and, in particular,
you should evaluate the risk factors set forth below. Additional risks and
uncertainties not currently known to us or that we currently deem to be
immaterial may also impair our business operations. If we are unable to prevent
events that have a negative effect from occurring, then our business may
suffer.
Risks
Relating to Our Company
Since
we are a new business with no operating history, investors have no basis to
evaluate our ability to operate profitably. We
were
organized in 1998 but have had no revenue from operations since our inception.
Our activities to date have been limited to organizational efforts, raising
financing, acquiring mining properties and conducting limited exploration.
We
face all of the risks commonly encountered by other new businesses, including
the lack of an established operating history, need for additional capital and
personnel, and intense competition. There is no assurance that our business
plan
will be successful.
The
report of our independent accountants on our financial statements for the year
ended December 31, 2005 includes a "going concern" qualification, meaning
that there is substantial doubt about our ability to continue in
operation.
The
report cited the following factors in support of our accountant's conclusion:
(i) the substantial losses we incurred for the years ended December 31, 2005
and
2004; (ii) our lack of operating revenue; and (iii) our dependence on sale
of
equity securities and receipt of capital from outside sources to continue in
operation. From inception to September 30, 2006, we have accumulated a loss
of
$5,673,478. If we are unable to obtain additional financing or eventually
produce revenue, we may be forced to sell our assets, curtail or cease
operations. In any event, investors in our common stock could lose all or part
of their investment. (See
"FINANCIAL STATEMENTS").
The
probability of an individual prospect having reserves is extremely remote.
Therefore, in all likelihood, our properties do not contain any reserves, and
any funds spent by us on exploration will probably be
lost.
A
“reserve,” as defined by regulation of the Securities and Exchange Commission
(“SEC”), is that part of a mineral deposit which could be economically and
legally extracted or produced at the time of the reserve determination.
Statistically, most mineral prospects do not contain reserves which can be
economically extracted. For this reason, it is unlikely that our properties
contain any reserves. The funds we have spent on exploration, as well as funds
which we might spend in the future, will probably be lost.
We
are dependent upon receipt of additional working capital to fund our business
plan. We
may
require additional capital for exploration of one or both of our existing
properties, or acquisition of additional properties. If our exploration program
proves successful, we will require significant additional capital to fund
development of the El
Aguila
project
and to construct a mill in order to place it into production. In addition,
we
will require additional working capital to fund operations pending sale of
any
gold or other precious metals. We completed our IPO on August 17, 2006 for
net
proceeds of $4,351,200 and a private placement on December 7, 2006 for net
proceeds of $4,928,700. Of the proceeds received, approximately $532,800 has
been spent on exploration as of December 31, 2006, and a total of $4 million
is
allocated for future exploration costs. Depending on the results of our
exploration program, we may need to obtain additional financing from outside
sources within the next 12 months in order to continue to fund our business
needs.
We
have no proved or probable reserves, meaning there is no assurance that we
can
economically produce gold or other precious minerals from our properties.
In
order
to demonstrate the availability of proved or probable reserves, it will first
be
necessary for us to continue exploration to demonstrate the availability of
sufficient mineralized material. Exploration is inherently risky, with few
properties ultimately proving economically successful. If our exploration
efforts are successful, it will then be necessary for us to engage an outside
engineering firm to assess geological and other data and develop an economic
model demonstrating commercial feasibility of the property. This feasibility
study will require significant additional time and investment. There is no
assurance that we can economically produce gold or other precious metals from
our properties.
At
the present time, we are totally dependent upon production of gold or other
precious metals from two properties, raising the risk if either or both of
those
properties should prove unproductive.
Since we
have never produced gold or other precious metals from either of our properties,
and since we have no proved or probable reserves, there is no assurance that
gold or other precious metals can be economically produced under existing and
future costs and expenses. If we are unable to economically produce gold from
either or both of these properties, we would be forced to identify and invest
substantial sums in one or more additional properties, and there is no assurance
that such properties would be available on terms favorable to us.
Our
properties are located in Mexico and are subject to changes in political
conditions and regulations in that country. Our
existing properties are located in Mexico. In the past, Mexico has been subject
to political instability, changes and uncertainties which may cause changes
to
existing government regulations affecting mineral exploration and mining
activities. Civil or political unrest could disrupt our operations at any time.
Our mineral exploration and mining activities in Mexico may be adversely
affected in varying degrees by changing governmental regulations relating to
the
mining industry or shifts in political conditions that increase the costs
related to our activities or maintaining our properties. Finally, Mexico's
status as a developing country may make it more difficult for us to obtain
required financing for our project.
Our
business operations may be adversely affected by social and political unrest
in
Oaxaca.
The
property which we are currently exploring for mineralization is located in
the
State of Oaxaca, Mexico. Oaxaca City, the capital of the State of Oaxaca,
recently experienced a period of social and political unrest. Certain civilian
groups seeking political reform staged protests and demonstrations in various
locations in Oaxaca City, including schools, government offices and major
roadways. Although our property is roughly a 90 minute drive from Oaxaca City
and the civil disturbances appear to have dissipated, these events may still
negatively impact our business operations if Oaxaca experiences another such
event. Our exploration program may be interrupted if we are unable to hire
qualified personnel or if we are denied access to the site where our property
is
located. We may also be required to make additional expenditures to provide
increased security in order to protect property or personnel located at our
exploration site. Significant delays in exploration or increases in expenditures
will likely have a material adverse affect on our financial condition and
results of operations.
Our
ability to continue exploration and extract any minerals that we discover are
subject to payment of concession fees and if we fail to make these payments,
we
may lose our interest in the properties.
Mining
concessions in Mexico are subject to payment of concession fees to the federal
government or lease payments to the owner of the concessions. The payments
are
based on the size of the property we are exploring. Our failure or inability
to
pay the concession fees to the government may cause us to lose our interest
in
one or both of our properties.
Our
primary exploration target is subject to a lease in favor of a third party
which
provides for royalties on production.
We lease
our El
Aguila
property
from a third party. Our lease for the El
Aguila
project
is
subject to a net smelter return royalty of 4% where production is sold in
the
form of gold/silver doré and 5% where production is sold in concentrate form.
The requirement to pay royalties to the owner of the lease at our El Aguila
property will reduce
our
profitability if we commence commercial production of gold or other precious
metals.
Our
ability to develop our property, even if warranted by exploration results,
is
subject to the rights of the Ejido (local inhabitants) to surface use for
agricultural purposes. If
we are
successful in discovering sufficient amounts of mineralized material to warrant
production, our ability to mine minerals is subject to making satisfactory
arrangements with the Ejido
for
access and surface disturbances. Ejidos
are
groups of local inhabitants who were granted rights to conduct agricultural
activities on the property. We must negotiate a satisfactory arrangement with
these inhabitants in order to disturb or discontinue their rights to farm.
Our
inability to successfully negotiate such agreements could impair or impede
our
ability to successfully mine the properties.
The
volatility of the price of gold could adversely affect our future operations
and, if warranted, our ability to develop our properties.
The
commercial feasibility of our properties and our ability to raise funding to
conduct continued exploration and development if warranted, is dependent on
the
price of gold and other precious metals. The price of gold may also have a
significant influence on the market price of our common stock and the value
of
our properties. Our decision to put a mine into production and to commit the
funds necessary for that purpose must be made long before the first revenue
from
production would be received. A decrease in the price of gold may prevent our
property from being economically mined or result in the writeoff of assets
whose
value is impaired as a result of lower gold prices. The price of gold is
affected by numerous factors beyond our control, including inflation,
fluctuation of the United States Dollar and foreign currencies, global and
regional demand, the sale of gold by central banks, and the political and
economic conditions of major gold producing countries throughout the world.
During the last five years, the average annual market price of gold has
fluctuated between $310 per ounce and $604 per ounce, as shown in the table
below. Although it is possible for us to protect some price fluctuations by
hedging in certain circumstances, the volatility of mineral prices represents
a
substantial risk, which no amount of planning or technical expertise can
eliminate.
|
2002
|
2003
|
2004
|
2005
|
2006
|
|
$310
|
$364
|
$406
|
$445
|
$
604
|
Competition
in the mining industry is intense, and we have limited financial and personnel
resources with which to compete.
Competition in the mining industry for desirable properties, investment capital
and personnel is intense. Numerous companies headquartered in the United States,
Canada and elsewhere throughout the world compete for properties on a global
basis. We are an insignificant participant in the gold mining industry due
to
our limited financial and personnel resources. We may be unable to attract
the
necessary investment capital to fully explore and if warranted, develop our
properties and unable to acquire other desirable properties.
An
adequate supply of water may not be available to complete desired development
of
our property.
If we
make a discovery sufficient to warrant putting our property into production,
we
will require additional amounts of water for our operations. We would be
required to pump water from the Totolapan River to any facility we may construct
on our property. Water rights are owned by the Mexican nation and are
administered by a Mexican government agency. This agency has granted water
concessions to private parties throughout the area defined as the Oaxaca
Hydrologic Basin, however there is no assurance that we will be granted such
concessions. Accordingly, we may not have access to the amount of water needed
to operate a mine at the property.
Since
most of our expenses are paid in Mexican pesos, and we anticipate selling any
production from our properties in United States dollars, we are subject to
adverse changes in currency values that will be difficult to prevent.
Our
operations in the future could be affected by changes in the value of the
Mexican peso against the United States dollar. At the present time, since we
have no production, we have no plans or policies to utilize forward sales
contracts or currency options to minimize this exposure. If and when these
measures are implemented, there is no assurance they will be cost effective
or
be able to fully offset the effect of any currency fluctuations.
Our
activities in Mexico are subject to significant environmental regulations,
which
could raise the cost of doing business.
Mining
operations are subject to environmental regulation by SEMARNAT, the
environmental protection agency of Mexico. Regulations require that an
environmental impact statement, known in Mexico as a Manifiestacion
de Impacto Ambiental,
be
prepared by a third party contractor for submission to SEMARNAT. Studies
required to support this impact statement include a detailed analysis of many
subject areas, including soil, water, vegetation, wildlife, cultural resources
and socio-economic impacts. We may also be required to submit proof of local
community support for a project to obtain final approval. Significant
environmental legislation exists in Mexico, including fines and penalties for
spills, release of emissions into the air, seepage and other environmental
damage.
The
nature of mineral exploration and production activities involves a high degree
of risk and the possibility of uninsured losses. Exploration
for minerals is highly speculative and involves greater risk than many other
businesses. Our operations are subject to all of the operating hazards and
risks
normally incident to exploring for mineral properties, such as, but not limited
to:
|
|
•
|
|
encountering
unusual or unexpected formations;
|
|
|
•
|
|
environmental
pollution;
|
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|
•
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personal
injury, flooding and landslides;
|
|
•
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variations
in grades of ore;
|
||
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•
|
labor
disputes; and
|
||
|
|
•
|
|
decrease
in reserves due to a lower gold
price.
|
We
currently have no insurance to guard against any of these risks. If we determine
that capitalized costs associated with any of our mineral interests are not
likely to be recovered, we would incur a writedown on our investment in such
property interest. All of these factors may result in losses in relation to
amounts spent which are not recoverable.
We
depend upon a limited number of personnel and the loss of any of these
individuals could adversely affect our business.
If any
of our current employees or our principal consultant in Mexico were to die,
become disabled or leave the company, we would be forced to identify and retain
individuals to replace them. Messrs. William, David and Jason Reid are our
only
employees at this time. Jose Perez Reynoso is our consultant in Mexico who
oversees our properties and operations. There is no assurance that we can find
suitable individuals to replace them or to add to our employee base if that
becomes necessary. We are entirely dependent on these individuals as our only
personnel at this time. We have no life insurance on any individual at this
time, and we may be unable to hire a suitable replacement for them on favorable
terms, should that become necessary.
In
the event of a dispute regarding title to our property or any facet of our
operations, it will likely be necessary for us to resolve the dispute in Mexico,
where we would be faced with unfamiliar laws and procedures.
The
resolution of disputes in foreign countries can be costly and time consuming,
similar to the situation in the United States. However, in a foreign country,
we
face the additional burden of understanding unfamiliar laws and procedures.
We
may not be entitled to a jury trial, as we might be in the United States.
Further, to litigate in any foreign country, we would be faced with the
necessity of hiring lawyers and other professionals who are familiar with the
foreign laws. For these reasons, we may incur unforeseen losses if we are forced
to resolve a dispute in Mexico or any other foreign country.
While
we believe we have adequate internal controls over financial reporting, we
will
be required to evaluate our internal controls under Section 404 of the
Sarbanes-Oxley Act of 2002 and any adverse results from such evaluation could
result in a loss of investor confidence in our financial reports and have a
material adverse effect on the price of our common stock.
Pursuant
to Section 404 of the Sarbanes-Oxley Act of 2002, we expect that we will be
required to furnish a report by our management on internal controls for the
fiscal year ending December 2007. Such a report must contain, among other
matters, an assessment of the effectiveness of our internal controls over
financial reporting, including a statement as to whether or not our internal
controls are effective. This assessment must include disclosure of any material
weaknesses in our internal controls over financial reporting identified by
our
management. Such a report must also contain a statement that our auditors have
issued an attestation report on our management’s assessment of such internal
controls. While we believe our internal controls over financial reporting are
effective, we are still constructing the system, processing documentation and
performing the evaluations needed to comply with Section 404, which is both
costly and challenging. We may not be able to complete our evaluation, testing
and any required remediation in a timely fashion. If we are unable to assert
that our internal controls over financial reporting are effective, or if we
disclose significant deficiencies or material weaknesses in our internal
controls, investors could lose confidence in the accuracy and completeness
of
our financial reports, which would have a material adverse effect on our stock
price.
The
laws of the State of Colorado and our Articles of Incorporation may protect
our
directors from certain types of lawsuits. The
laws
of the State of Colorado provide that our directors will not be liable to us
or
our shareholders for monetary damages for all but certain types of conduct
as
directors of the company. Our Articles of Incorporation permit us to indemnify
our directors and officers against all damages incurred in connection with
our
business to the fullest extent provided or allowed by law. The exculpation
provisions may have the effect of preventing shareholders from recovering
damages against our directors caused by their negligence, poor judgment or
other
circumstances. The indemnification provisions may require us to use our limited
assets to defend our directors and officers against claims, including claims
arising out of their negligence, poor judgment, or other circumstances.
(See
“MANAGEMENT-Indemnification
and Limitation on Liability of Directors”).
Risks
Related to Our Common Stock
The
sale of a substantial number of shares of our common stock may cause the price
of our common stock to decline.
In
addition to the 5,859,700 shares of common stock that may be offered by the
selling shareholders from time to time under this prospectus, we filed a
registration statement with the SEC that was declared effective on May 15,
2006
to qualify the resale of approximately 8,900,000 shares of common stock from
time to time and recently completed our IPO during which we sold 4,600,000
shares. Additionally, a significant number of shares of our common stock are
currently eligible for sale under Rule 144. Under Rule 144, and under certain
circumstances, an owner is permitted to sell every three months the greater
of:
(i) 1% of the amount of our outstanding common stock, or (ii) the average weekly
trading volume of our common stock for the four weeks preceding the sale. It
is
likely that market sales of large amounts of common stock (or the potential
for
those sales even if they do not actually occur) may cause the market price
of
our common stock to decline, which may make it difficult to sell our common
stock in the future at a time and price which we deem reasonable or appropriate
and may also cause you to lose all or a part of your investment. (See
“SHARES
ELIGIBLE FOR FUTURE SALE”).
Since
there is presently a limited trading market for our common stock, purchasers
of
our common stock may have difficulty selling their shares, should they desire
to
do so.
Due to
a number of factors, including the lack of listing of our common stock on a
national securities exchange, the trading volume in our common stock is limited.
Since we were approved for trading on the OTCBB on September 14, 2006, our
trading volume has averaged approximately 58,900 shares per day. As a result,
the sale of a significant amount of common stock by the selling shareholders
may
depress the price of our common stock and you may lose all or a portion of
your
investment.
A
small number of existing shareholders own a significant amount of our common
stock, which could limit your ability to influence the outcome of any
shareholder vote. Our
executive officers and directors beneficially own approximately 33.7% of our
common stock as of the date of this prospectus. Under our Articles of
Incorporation and Colorado law, the vote of a majority of the shares outstanding
is generally required to approve most shareholder action. As a result, these
individuals will be able to influence the outcome of shareholder votes for
the
foreseeable future, including votes concerning the election of directors,
amendments to our Articles of Incorporation or proposed mergers or other
significant corporate transactions. We have no existing agreements or plans
for
mergers or other corporate transactions that would require a shareholder vote
at
this time. However, shareholders should be aware that they may have limited
ability to influence the outcome of any vote in the future. (See
“SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT”).
Since
our common stock is not presently quoted on Nasdaq or listed on a national
securities exchange, trading in our shares will likely be subject to rules
governing "penny stocks," which will impair trading activity in our shares.
Our
common stock may be subject to rules adopted by the SEC regulating broker-dealer
practices in connection with transactions in penny stocks. Those disclosure
rules applicable to penny stocks require a broker-dealer, prior to a transaction
in a penny stock not otherwise exempt from the rules, to deliver a standardized
disclosure document required by the SEC. These rules also require a cooling
off
period before the transaction can be finalized. These requirements may have
the
effect of reducing the level of trading activity in any secondary market for
our
common stock. Many brokers may be unwilling to engage in transactions in our
common stock because of the added disclosure requirements, thereby making it
more difficult for stockholders to dispose of their shares. (See
"MARKET
INFORMATION").
A
contract right allowing one of our largest shareholders the first opportunity
to
purchase any common stock offered by us in the future may result in a change
in
control.
Under
the terms of an agreement entered into with one of our largest shareholders,
we
are obligated to offer this entity the first right to purchase our common stock
in any future offering until August 2008. The holder of this right is Heemskirk
Consolidated Limited. If Heemskirk exercises this right in connection with
any
future offering of our common stock, the percentage interest in our company
owned by it could increase. This may result in a change in control and could
allow Heemskirk the ability to influence the management or policies of our
company. For example, if Heemskirk acquires enough stock to become the holder
of
a majority of our outstanding voting stock, it could elect the entire Board
of
Directors. Even if it does not acquire an absolute majority of our stock but
increases its voting interest in the company, it could wage a proxy battle
and
influence who our Board of Directors nominates as directors in the future.
These
and other events could have the effect of changing the way that our company
is
operated.
Our stock price may be volatile and as a result you could lose
all
or part of your investment.
In
addition to volatility associated with over the counter securities in general,
the value of your investment could decline due to the impact of any of the
following factors upon the market price of our common stock:
| · |
Changes
in the worldwide price for gold;
|
| · |
Disappointing
results from our exploration
efforts;
|
| · |
Failure
to meet our revenue or profit goals or operating
budget;
|
| · |
Decline
in demand for our common stock;
|
| · |
Downward
revisions in securities analysts' estimates or changes in general
market
conditions;
|
| · |
Technological
innovations by competitors or in competing
technologies;
|
| · |
Investor
perception of our industry or our prospects; and
|
| · |
General
economic trends
|
In
addition, stock markets have experienced extreme price and volume fluctuations
and the market prices of securities have been highly volatile. These
fluctuations are often unrelated to operating performance and may adversely
affect the market price of our common stock. As a result, investors may be
unable to resell their shares at a fair price.
Issuances
of our stock in the future could dilute existing shareholders and adversely
affect the market price of our common stock.
We have
the authority to issue up to 60,000,000 shares of common stock, 5,000,000 shares
of preferred stock, and to issue options and warrants to purchase shares of
our
common stock without stockholder approval. Because our common stock is not
currently quoted in Nasdaq or listed on an exchange, we are not required to
solicit shareholder approval prior to issuing large blocks of our stock. These
future issuances could be at values substantially below the price paid for
our
common stock by our current shareholders. In addition, we could issue large
blocks of our common stock to fend off unwanted tender offers or hostile
takeovers without further stockholder approval. Because we believe that trading
in our common stock will initially be limited, the issuance of our stock may
have a disproportionately large impact on its price compared to larger
companies.
We
have never paid dividends on our common stock and we do not anticipate paying
any in the foreseeable future.
We have
not paid dividends on our common stock to date, and we may not be in a position
to pay dividends for the foreseeable future. Our ability to pay dividends will
depend on our ability to successfully develop one or more properties and
generate revenue from operations. Further, our initial earnings, if any, will
likely be retained to finance our operations. Any future dividends will depend
upon our earnings, our then-existing financial requirements and other factors,
and will be at the discretion of our Board of Directors. (See
“MARKET
INFORMATION”).
Forward-Looking
Statements
This
prospectus contains or incorporates by reference forward-looking statements
within the meaning of the United States Private Securities Litigation Reform
Act
of 1995 concerning our future business plans and strategies, the proposed
exploration and development of our property, the receipt of working capital,
future revenues and other statements that are not historical in nature. In
this
prospectus, forward-looking statements are often identified by the words
“anticipate,” “plan,” “believe,” “expect,” “estimate,” and the like. These
forward-looking statements reflect our current beliefs, expectations and
opinions with respect to future events, and involve future risks and
uncertainties which could cause actual results to differ materially from those
expressed or implied.
In
addition to the specific factors identified under “RISK
FACTORS”
above,
other uncertainties that could affect the accuracy of forward-looking statements
include:
• decisions
of foreign countries and banks within those countries;
• technological
changes in the mining industry;
• our
costs;
• the
level
of demand for our products;
• changes
in our business strategy;
• interpretation
of drill hole results and the geology, grade and continuity of
mineralization;
• the
uncertainty of reserve estimates and timing of development expenditures;
and
• commodity
price fluctuations.
This
list, together with the factors identified under “RISK
FACTORS,”
is
not
exhaustive of the factors that may affect any of our forward-looking statements.
You should read this prospectus completely and with the understanding that
our
actual future results may be materially different from what we expect. These
forward-looking statements represent our beliefs, expectations and opinions
only
as of the date of this prospectus. We do not intend to update these forward
looking statements except as required by law. We qualify all of our
forward-looking statements by these cautionary statements.
Our
History
We
were
organized under the laws of the State of Colorado in 1998 to engage in the
exploration of mining properties. From inception to 2000, we were essentially
dormant. In July 2000, we entered into a management agreement with U.S. Gold
Corporation, an entity engaged in the exploration and mining business, with
shares traded on the American Stock Exchange. At that time, our officers,
directors and principal shareholders were also officers and directors of U.S.
Gold. The arrangement with U.S. Gold was designed to supplement the management
services available to us while allowing that entity to participate in our
business as an equity owner. We issued U.S. Gold a total of 2,560,000 shares
of
common stock for services rendered under the original management agreement
through December 31, 2001.
Effective
January 1, 2002, the management agreement was amended to provide for cash
compensation to U.S. Gold. As amended, the agreement provided us the following
services from U.S. Gold:
• Executive
management, in the form of services provided by executive officers of U.S.
Gold,
including William Reid, David Reid and William Pass;
• Office
services, in the form of non-exclusive access to office facilities and
equipment;
• Consulting
services, in the form of advice regarding potential agreements with third
parties and the preparation of draft agreements on behalf of our company;
• Financial
consulting, in the form of advice regarding potential contacts for financing
and
structure of that financing; and
• Other
administrative services.
We
agreed
to pay U.S. Gold a monthly fee of $30,000 during the term of that agreement.
Prior to termination of that agreement on December 31, 2002, we became indebted
to U.S. Gold in the amount of $330,000. In 2005, we satisfied the remaining
obligation of $330,000 by paying U.S. Gold $10,000 in cash and issuing 1,280,000
shares of our common stock, valued at a fair market value of $0.25 per share.
In
July
2005, the employment agreements of Messrs. William Reid, David Reid and William
Pass with U.S. Gold were terminated in connection with a change in control
of
that company. In partial payment for the obligations of U.S. Gold under those
agreements, U.S. Gold transferred our common stock to the three individuals
and
no longer owns an interest in our company. The following table depicts the
amount of our stock assigned to the three individuals and the value of that
stock, as determined and reported by U.S. Gold:
|
Name
of Officer
|
|
Share
Distribution
(#
of shares)
|
|
Assigned
Value
|
|
William
W. Reid
|
|
2,439,606
|
|
$287,874
|
|
David
C. Reid
|
|
1,565,539
|
|
184,734
|
|
William
F. Pass
|
|
1,186,207
|
|
139,972
|
In
August
2001, we leased our first property, known as the Zimapan
project,
located in the State of Hidalgo, Mexico. After drilling approximately 1,800
meters (5,905 feet) of test holes, we abandoned that property. In connection
with the acquisition of the lease and our exploration activities on the
Zimapan
property, we spent approximately $294,000.
In
August
2006, we completed our IPO and received net proceeds of $4,351,200 and in
December 2006, we completed the Private Placement of our common stock for net
proceeds of $4,928,700. We expect to use $4 million of the proceeds from the
offerings for exploration purposes. In October 2006, we contracted with
Servicios de Perforacion Insemin S.A. de C.V., a Mexican subsidiary of R&R
Incorporated and commenced the third stage of our drilling program at the
El
Aguila project.
We have initially contracted for a minimum of 3,333 meters (10,935 feet) of
core
drilling and believe the program will ultimately cover 10,000 meters (32,808
feet). We will be testing geological targets including areas which we believe
have yielded favorable results during a recent geochemical survey. The drilling
program is expected to be complete in May 2007.
Our
Properties
We
currently have an interest in two properties, the El
Aguila
project
and the El
Rey
project.
We lease the El
Aguila
property
from an individual who serves as our consultant in Mexico and we own mining
concessions in the El
Rey
property. Both of these properties are in the exploration stage and have no
proven or probable reserves.
The
El
Aguila Project
Background.
Effective October 14, 2002, we leased a prospective gold/silver property
comprised of three concessions, El
Aguila,
El
Aire
and
La
Tehuana,
from
Jose Perez Reynoso, a consultant to our company. The lease agreement is subject
to a 4% net smelter return royalty where production is sold in the form of
gold/silver dore and 5% for production sold in concentrate form. We have made
periodic advance royalty payments under the lease totaling $260,000 and no
further advance royalty payments are due.
Under
Mexican mining laws, rights to minerals are obtained by filing concessions
and
fees are paid to the federal government for the privilege of holding these
concessions. The fees are based on the size of the concession, calculated at
the
rate of approximately $4 per hectare every six months, based on the exchange
rate at February 2, 2007. Based on the size of our concessions at the
El
Aguila
project,
this amounts to approximately $7,600 every six months.
The
table
below summarizes the concessions that we have leased and that give us the right
to explore and mine the properties and the ensuing map shows their general
location. The mineral concessions making up the El
Aguila
project
are located within the San
Pedro Totolapam Ejido.
|
Concession
|
Type
|
Expediente/
Titulo
No.
|
Hectares
|
Acres
|
|
El
Aire
|
Exploitation
|
158272
|
72.00
|
177.92
|
|
El
Aguila
|
Exploitation
|
222844
|
899.00
|
2,221.47
|
|
La
Tehuana
|
Exploration
|
210029
|
925.00
|
2,285.72
|
|
Total
|
1,896.00
|
4,685.11
|
Location
Map for the El
Aguila
and El
Rey
Projects
Location
and Access. The
El
Aguila
project
is located in the Sierra
Madre del Sur
of
southern Mexico, in the central part of the State of Oaxaca. Access to the
property is by way of the Pan American Highway (Highway # 190), approximately
120 kilometers (75 miles) southeast of Oaxaca City, the state’s capital city. At
the village of San
Jose de Gracia,
a
gravel road goes approximately four kilometers northwest to the
property.
The
climate of the El
Aguila
area is
dry and warm to very warm with most rainfall occurring in the summer and annual
precipitation averaging only 423.7 mm (17 inches). The average yearly
temperature is 26.6 degrees centigrade (80° F). The area is very rocky with
scarce vegetation. Subsistence farming occurs and the main agricultural crop
is
agave cactus that is cultivated for the production of mescal.
Exploration
Activities.
The
early history of activity at the El
Aguila
property, as known by us, is prospecting and limited mining for gold and silver
from the early 1900's to the mid 1960's. In 1998, Mr. Perez Reynoso acquired
the
concessions and leased them to Apex Silver Corporation of Denver, Colorado.
Apex
carried out an exploration program involving geologic mapping, surface sampling
and an 11-hole drilling program (1,242 meters, or 4,074 feet). The results
did
not meet Apex's expectations so it dropped the lease on the property in 2002.
We
leased the property from Mr. Perez Reynoso in October of 2002.
In
August
2003, we entered into an exploration agreement with Canyon Resources Corporation
pertaining to our interest in the El
Aguila
property
whereby Canyon loaned us $500,000 for exploration costs, and subsequently
converted its note into 1,200,000 shares of our common stock in 2004. The
drilling program was completed in 2004 and included approximately 3,900 meters
(12,795 feet) of drilling in 69 holes focused on one target area of the
property. This exploration drilling encountered some gold intercepts which
required additional exploratory drilling in order to fully evaluate. Through
September 30, 2006, we have spent or incurred approximately $1,811,000 in
acquisition, exploration and related costs for the El
Aguila
project,
of which approximately $462,000 was spent during the first nine months of 2006.
We
have
carried out exploration on the project that has included geologic mapping,
surface sampling, geochemical sampling and two rounds of exploratory drilling.
We expect to undertake a geophysical survey and a feasibility study in the
near
future. We recently commended a third round of exploratory drilling for up
to
10,000 meters (32,800 feet) of core drilling which is expected to last until
spring 2007. We have contracted for an additional drill rig in the hopes of
accelerating our current exploration program. The results of the drilling
programs completed thus far have resulted in some gold and silver intercepts
which are listed in the table below.
[Space
intentionally blank]
|
EL
AGUILA PROJECT SELECTED DRILL HOLE
INTERCEPTS
|
|
|
|
Interval
Starting
At
|
Interval
Starting
At
|
Interval
Length
|
Interval
Length
|
Gold
|
Gold
|
Silver
|
Silver
|
|
Hole
No.
|
Drill
Type
|
(Meters)
|
(Feet)
|
(Meters)
|
(Feet)
|
g/t
|
oz./ton
|
g/t
|
oz./ton
|
|
301
|
RC
|
40
|
131.2
|
16
|
52.5
|
6.56
|
0.19
|
23
|
0.67
|
|
302
|
RC
|
30
|
98.4
|
6
|
19.7
|
16.65
|
0.49
|
112
|
3.27
|
|
303
|
RC
|
22
|
72.2
|
6
|
19.7
|
18.79
|
0.55
|
133
|
3.88
|
|
306
|
RC
|
4
|
13.1
|
4
|
13.1
|
14.58
|
0.43
|
74
|
2.16
|
|
and
|
24
|
78.7
|
6
|
19.7
|
8.99
|
0.26
|
76
|
2.22
|
|
|
307
|
RC
|
18
|
59
|
4
|
13.1
|
3.91
|
0.11
|
84
|
2.45
|
|
and
|
26
|
85.3
|
2
|
6.6
|
3.69
|
0.11
|
70
|
2.04
|
|
|
309
|
RC
|
56
|
183.7
|
2
|
6.6
|
3.79
|
0.11
|
37
|
1.08
|
|
311
|
RC
|
16
|
52.5
|
2
|
6.6
|
4.53
|
0.13
|
25
|
0.73
|
|
314
|
RC
|
6
|
19.7
|
2
|
6.6
|
6.89
|
0.2
|
69
|
2.01
|
|
326
|
RC
|
2
|
6.6
|
4
|
13.1
|
3.84
|
0.11
|
83
|
2.42
|
|
327
|
RC
|
8
|
26.2
|
8
|
26.2
|
3.54
|
0.1
|
136
|
3.97
|
|
327A
|
RC
|
12
|
39.4
|
8
|
26.2
|
3.97
|
0.12
|
78
|
2.28
|
|
330
|
RC
|
6
|
19.7
|
6
|
19.7
|
8.46
|
0.25
|
111
|
3.24
|
|
331
|
RC
|
50
|
164
|
4
|
13.1
|
54.71
|
1.6
|
701
|
20.47
|
|
332
|
RC
|
16
|
52.5
|
8
|
26.2
|
6.07
|
0.18
|
18
|
0.53
|
|
333
|
RC
|
2
|
6.6
|
2
|
6.6
|
3.67
|
0.11
|
63
|
1.84
|
|
and
|
8
|
26.2
|
6
|
19.7
|
15.69
|
0.46
|
101
|
2.95
|
|
|
334
|
RC
|
6
|
19.7
|
6
|
19.7
|
9.4
|
0.27
|
25
|
0.73
|
|
338
|
RC
|
20
|
65.6
|
10
|
32.8
|
3.71
|
0.11
|
65
|
1.9
|
|
343
|
RC
|
60
|
196.8
|
14
|
45.9
|
6.89
|
0.2
|
40
|
1.17
|
|
349
|
RC
|
34
|
111.5
|
6
|
19.7
|
7.5
|
0.22
|
78
|
2.28
|
|
354
|
RC
|
34
|
111.5
|
4
|
13.1
|
7.5
|
0.22
|
68
|
1.99
|
|
363
|
RC
|
4
|
13.1
|
6
|
19.7
|
11.63
|
0.34
|
100
|
2.92
|
|
365
|
RC
|
0
|
0
|
4
|
13.1
|
5.73
|
0.17
|
10
|
0.29
|
|
366
|
RC
|
0
|
0
|
4
|
13.1
|
3.74
|
0.11
|
100
|
2.92
|
|
509
|
CORE
|
20
|
65.6
|
6
|
19.7
|
10.38
|
0.3
|
329
|
9.61
|
|
511
|
CORE
|
40
|
131.2
|
12
|
39.4
|
10.18
|
0.3
|
20
|
0.58
|
|
512
|
CORE
|
34.6
|
113.5
|
12
|
39.4
|
4.67
|
0.14
|
74
|
2.16
|
|
523
|
CORE
|
1.5
|
4.9
|
1
|
3.3
|
7.7
|
0.22
|
918
|
26.81
|
|
and
|
6.4
|
21
|
8.1
|
26.6
|
1.39
|
0.04
|
146
|
4.26
|
|
|
530
|
CORE
|
24
|
78.7
|
10
|
32.8
|
0.96
|
0.03
|
387
|
11.3
|
|
601
|
CORE
|
31
|
101.7
|
5
|
16.4
|
0.82
|
0.02
|
72.2
|
2.11
|
|
602
|
CORE
|
27
|
88.6
|
1
|
3.3
|
1.22
|
0.04
|
20.2
|
0.59
|
|
603
|
CORE
|
38
|
124.7
|
3
|
9.8
|
1.22
|
0.04
|
34.6
|
1.01
|
|
603
|
CORE
|
45
|
147.6
|
6
|
19.7
|
3.65
|
0.11
|
231.7
|
6.75
|
|
and
|
47
|
154.2
|
3
|
9.8
|
5.54
|
0.16
|
404.3
|
11.79
|
|
|
604
|
CORE
|
29
|
95.1
|
2
|
6.6
|
5.49
|
0.16
|
180.3
|
5.26
|
|
605
|
CORE
|
35
|
114.8
|
6
|
19.7
|
0.81
|
0.02
|
90.1
|
2.63
|
|
606
|
CORE
|
21
|
68.9
|
15
|
49.2
|
5.6
|
0.16
|
59.7
|
1.74
|
|
607
|
CORE
|
40
|
131.2
|
3
|
9.8
|
5.5
|
0.16
|
41.1
|
1.2
|
|
608
|
CORE
|
46
|
150.9
|
2
|
6.6
|
3.8
|
0.11
|
33.6
|
0.98
|
|
609
|
CORE
|
55
|
180.4
|
1
|
3.3
|
0.75
|
0.02
|
17.4
|
0.51
|
|
610
|
CORE
|
Assays
Pending
|
|||||||
|
611
|
CORE
|
47
|
154.2
|
19
|
62.3
|
1.45
|
0.04
|
22.2
|
0.65
|
|
and
|
|
47
|
154.2
|
4
|
3.9
|
0.11
|
77.5
|
2.26
|
|
|
612
|
CORE
|
69
|
226.4
|
2
|
13.1
|
3.55
|
0.1
|
45.6
|
1.33
|
|
612
|
CORE
|
78
|
255.9
|
1
|
3.3
|
0.04
|
0
|
354.0
|
10.32
|
|
613
|
CORE
|
89
|
292
|
1
|
3.3
|
0.05
|
0
|
97.4
|
2.84
|
|
RC:
Reverse Circulation Drilling
|
|||||||||
|
CORE:
Diamond Core Drilling
|
|||||||||
Facilities.
The
El
Aguila
project
does not have any plant or equipment at this time. Rudimentary access roads
have
been developed to various parts of the project for exploration activities.
The
federal power grid is located along the Pan American Highway and could be
utilized in operations, if any. Water would be available from the Totolapam
River and would require pumping to any facilities. Water rights are owned by
the
Mexican nation and administered by the CNA, an agency of the federal government.
The CNA has granted water concessions to private parties throughout the defined
Oaxaca Hydrologic Basin and water concessions for development and operation
of
the El
Aguila
project,
if any, are expected to be available.
Geology
and Mineralization. The
El
Aguila
project
is located in the San
Jose de Gracia
Mining
District in the Sierra
Madre del Sur of
southern Mexico. Multiple volcanic domes of various scales, and probably
non-vented intrusive domes, dominate the district geology. These volcanogenic
features are imposed on a pre-volcanic basement of sedimentary rocks. Gold
and
silver mineralization in this district is related to the manifestations of
this
classic volcanogenic system and is considered epithermal in character. This
geology suggests the presence of mineralization which our exploration program
is
designed to test and define.
The
deposits on the El
Aguila
property
are primarily hosted in a quartz rich, stratiform zone (manto). There appear
to
be several manto units on the property, one main manto and one or more lower
mantos. The main manto is conformable with the sedimentary and volcanic rock
above and below the manto. It varies in thickness from less than two meters
(6.6
feet) to more than 30 meters (98.4 feet).
Surface
sampling yielded anomalous gold and silver values from early district-wide
exploration where silicified zones were encountered. In addition, a small,
shallow adit and winze provided limited sampling underground, yielding
indications of gold values in a silicified, sub-horizontal manto. Based on
these
early anomalous exploration samples, a limited drilling program was carried
out
by us that in fact resulted in defining a central zone of continuous, shallow,
sub-horizontal mineralization. The fact that the mineralization is relatively
shallow would make mining less difficult and less expensive from an open pit
mine compared to an underground mine, if we determine to develop and mine the
property.
The
graphic image below depicts an underground cross section of the property in
which several holes have been drilled and an estimated area of mineralized
material which resulted from the drilling. It illustrates the outline of an
area
within the cross section estimated to contain at least one gram of gold per
ton.
Higher grade intercepts within the outline are separately indicated. Underground
workings are also depicted.
[Space
intentionally blank]
The
El
Rey
Project
Background.
We
have
acquired claims in another area of the Sierra
Madre del Sur
region
by filing concessions under the Mexican mining laws. The following table
summarizes the concessions that give us the right to the properties for
exploration and mining purposes and the map on page 11 shows their general
location. As of September 30, 2006, we have spent $8,431 in concession fees
and
other costs on this property, and we are required to pay continuing fees which
we do not believe are material. The mineral concessions making up the
El
Rey
Property
are located within the San
Baltazar Chichicapam Ejido.
|
Concession
|
Type
|
Expediente/
Titulo
No.
|
Hectares
|
Acres
|
|
El
Rey
|
Exploration
|
225373
|
164.00
|
405.25
|
|
La
Reyna
|
Exploration
|
225401
|
700.00
|
1,729.73
|
|
El
Virrey
|
Exploration
|
629662
|
36.00
|
89.96
|
|
Total
|
900.00
|
2,224.94
|
Location
and Access. The
El
Rey
project
is an exploration stage property with no known reserves and is also located
in
the Sierra
Madre del Sur
region
of southern Mexico in the central part of the state of Oaxaca. Like the
El
Aguila project,
the property is presently undeveloped. Access to the property is by way of
the
Pan American Highway (Highway # 190) approximately 80 kilometers (49.7 miles)
southeast of the state's capital city, Oaxaca, where a right turn heads west
approximately 15 kilometers (9.3 miles) to the village of San
Baltasar Chichicapan.
At the
village, another gravel road leads another 3 kilometers (1.9 miles) to the
site.
(See
location
map on page 11).
Exploration
Activities.
The
El
Rey
property
is an exploration stage property and is undeveloped at this time. There is
no
plant or equipment on the property, and presently no roads. Electricity would
be
available from the village of San
Baltazar Chichicapam
approximately 3 kilometers (1.9 miles) from the property. Power is also
available from portable generators unless and until the need for a permanent
energy source arises.
Not
much
is known about this property by us and we have not yet undertaken any
exploration except for two surface samples from an existing waste dump to an
old
existing vertical shaft. The mine shaft appears to be left from prior
exploration on the property, although we do not know when it was dug, how deep
it is or whether it is caved, and we do not believe records exist to obtain
this
information.
Geology
and Mineralization.
The
El
Rey
project
concessions are underlain by Cretaceous mudstones and dolostones that are mostly
covered by younger tertiary andesites and rhyolites. In this region the rocks
have been generally faulted in a northwest-southeast striking direction and
in
places block faults forming horsts and grabens are found along with cross faults
striking northeast-southwest. No detailed geologic mapping has been done on
the
concession area yet but examining the rocks remaining at an old mine dump on
the
concession suggests that mineralizing solutions may have used these fault
contacts and intersections as pathways for migration and deposition. The vein
material found in the andesite host rock primarily consist of quartz with minor
amounts of sulfides including pyrite. No visible gold or silver were noticed
in
hand specimen; however the assays of those rocks indicate they are present.
We
believe the property is located in volcanic terrain and the old dump possesses
quartz material. We intend to explore this property in the future with a view
to
evaluating the potential for gold mineralization.
If
exploration is successful, any mining would probably require an underground
mine
but any mineralized material could be processed at the El
Aguila
project
mill if one was to be built in the future. Hauling any El
Rey
material
to the El
Aguila
project
would be approximately 64.4 kilometers (40 miles).
Mineral
Concessions
Mineral
rights in Mexico belong to the Mexican government and are administered pursuant
to Article 27 of the Mexican Constitution. Exploration and exploitation
concessions may be granted or transferred to Mexican citizens and corporations.
Our leases or concessions are held by our Mexican subsidiaries. Exploration
concessions are granted for a term of six years, with the right to convert
to an
exploitation concession with a term of 50 years. Concessions grant the holder
the right to explore and exploit all minerals found in the ground. Maintenance
of concessions requires the semi-annual payment of mining duties (due in January
and July) and the performance of assessment work, on a calendar year basis,
with
assessment work reports required to be filed in the month of May for the
preceding calendar year. The amount of mining duties and annual assessment
are
set by regulation and may increase over the life of the concession (if the
concession changes from exploration to exploitation) and include periodic
adjustments for inflation. Mining concessions are registered at the Public
Registry of Mining in Mexico City and in regional offices in Mexico.
Ejido
Lands and Surface Right Acquisitions
Surface
lands in the El
Aguila
property
area are Ejido
lands
(agrarian cooperative lands granted by the federal government to groups of
Campesinos
pursuant
to Article 27 of the Mexican Constitution of 1917). Prior to January 1, 1994,
Ejidos
could
not transfer Ejido
lands
into private ownership. Amendments to Article 27 of the Mexican Constitution
in
1994 now allow individual property ownership within Ejidos
and
allow Ejidos
to enter
into commercial ventures with individuals or entities, including foreign
corporations. We have an agreement with the local San
Pedro Totolapam Ejido
allowing
exploration of the El
Aguila
property. In order to begin mining at the property, we will have to secure
surface rights agreements for all lands to be disturbed by, or adjacent to,
any
such proposed operation.
Mexican
law recognizes mining as a land use generally superior to agricultural. However,
the law also recognizes the rights of the Ejidos
to
compensation in the event mining activity interrupts or discontinues their
use
of the agricultural lands. Compensation is typically made in the form of a
cash
payment to the holder of the agricultural rights. The amount of such
compensation is generally related to the perceived value of the agricultural
rights as negotiated in the first instance between the Ejidos
and the
owner of the mineral rights. If the parties are unable to reach agreement on
the
amount of the compensation, the decision will be referred to the government.
At
this
time, due to the absence of any specific development plan, it is impossible
to
determine the potential amount of compensation that might be required to obtain
surface rights necessary to mine our property. However, we expect such amount
to
be low in relation to other anticipated cost of commencing operations.
Competition
The
exploration for, and the acquisition of gold and silver properties are subject
to intense competition. Due to our recent organization, limited capital and
personnel, we may be at a competitive disadvantage compared to other companies
with regard to exploration and, if warranted, development. In general,
properties with a higher grade of recoverable material or which are more readily
mineable afford the owner a competitive advantage. Our present limited funding
means that our ability to compete for properties to be explored and developed
is
limited. We believe that competition for acquiring mineral prospects will
continue to be intense in the future.
The
availability of funds for exploration is sometimes limited, and we may find
it
difficult to compete with larger and more well-known companies for capital.
Even
though we have the right to the minerals on our claims, there is no guarantee
we
will be able to raise sufficient funds in the future to maintain our mineral
claims in good standing. Therefore, if we do not have sufficient funds for
exploration, our claims might lapse and be staked by other mining interests.
We
might be forced to seek a joint venture partner to assist in the exploration
of
our mineral claims. In this case, there is the possibility that we might not
be
able to pay our proportionate share of the exploration costs and might be
diluted to an insignificant carried interest. Our inability to develop our
mining properties due to lack of funding, even if warranted, could have a
material adverse effect on our operation and financial position.
Government
Regulations and Permits
In
connection with mining, milling and exploration activities, we are subject
to
extensive Mexican federal, state and local laws and regulations governing the
protection of the environment, including laws and regulations relating to
protection of air and water quality, hazardous waste management and mine
reclamation as well as the protection of endangered or threatened species.
The
department responsible for environmental protection in Mexico is SEMARNAT,
which
is similar to the United States Environmental Protection Agency. SEMARNAT has
broad authority to shut down and/or levy fines against facilities that do not
comply with its environmental regulations or standards. Potential areas of
environmental consideration for mining companies, including ours if we are
successful in commencing mining operations, include acid rock drainage, cyanide
containment and handling, contamination of water courses, dust and noise.
Prior
to
the commencement of any mining operations at the El
Aguila
property, if any, we will have to secure various regulatory permits from
federal, state and local agencies. These governmental and regulatory permits
generally govern the processes being used to operate, the stipulations
concerning air quality and water issues, and the plans and obligations for
reclamation of the properties at the conclusion of operations. Regulations
require that an environmental impact statement, known in Mexico as a
Manifiestacion
de Impacto Ambiental
("MIA"),
be prepared by a third-party contractor for submission to SEMARNAT. Studies
required to support the MIA include a detailed analysis of these areas, among
others: soil, water, vegetation, wildlife, cultural resources and socio-economic
impacts. Although the regulatory process in Mexico has a public review
component, proof of local community support for a project is required to gain
final MIA approval. A lack of support from the local community may make
obtaining an MIA difficult. A risk analysis must also be prepared in conjunction
with the MIA for approval by SEMARNAT.
The
most
significant other approvals that might be necessary for our operations would
be
permits to extract water from the Totolapam River and an explosives permit,
issued by the Mexican army, to purchase, store and use explosives. In Mexico,
water rights are managed by the CNA. According to Mexican water law, all users
must pay for the right to use national waters regardless of how the rights
were
obtained, with the rates being determined by the availability of water and
the
method of extraction.
We
have
obtained, and will obtain at the appropriate time, environmental permits,
licenses or approvals required for potential operations, if any. We are not
aware of any material violations of environmental permits, licenses or approvals
issued with respect to our operations.
Employees
We
currently have three full-time employees, two of whom serve as our executive
officers. These individuals devote all of their business time to our affairs.
We
also engage two consultants, one to oversee our property and activities in
Mexico and one to assist with our administrative and financial affairs. Our
consultant in Mexico serves on a full-time basis and the other as his services
are necessary. We engage independent contractors in connection with the
exploration of our mining properties.
Facilities
Effective
October 1, 2005, we leased approximately 1,000 square feet of office space
under
a three year agreement with an independent third party. Monthly rent equals
$1,428 the first year, $1,469 the second year and $1,490 the third year, plus
our share of operating expense escalations. We believe this space is adequate
for our needs for the foreseeable future.
Legal
Proceedings
We
are
not currently subject to any legal proceedings, and to the best of our
knowledge, no such proceeding is threatened, the results of which would have
a
material impact on our properties, results of operation, or financial condition.
Nor, to the best of our knowledge, are any of our officers or directors involved
in any legal proceedings in which we are an adverse party.
Glossary
|
Adit:
|
A
more or less horizontal drive (walk-in mine) into a hill that is
usually
driven for the purpose of intersecting or mining an ore body. An
adit may
also be driven into a hill to intersect or connect a shaft for the
purpose
of dewatering. Adits were commonly driven on a slight incline to
enable
loaded mine trucks to have the advantage of a downhill run out, while
the
empty (lighter) truck was pushed uphill back into the hill. The incline
also allows water to drain out of the adit. An adit only becomes
a tunnel
if it comes out again on the hill somewhere, like a train
tunnel.
|
|
Andesite:
|
A
gray to black volcanic rock with between about 52 to 63 weight percent
silica (SiO2).
Andesite magma commonly erupts from stratovolcanoes as thick lava
flows,
some reaching several km in length.
|
|
Cretaceous
period:
|
Flowering
plants appeared and dinosaurs were at their height during the Cretaceous
period. 146-65 million years ago. There was a mass extinction (the
K-T
extinction) at the end of the Cretaceous, marking the end of the
dinosaurs
and many other species.
|
|
Doré:
|
Unrefined
gold and silver bars usually containing more than 90% precious
metal.
|
|
Epithermal:
|
Used
to describe gold deposits found on or just below the surface close
to
vents or volcanoes, formed at low temperature and
pressure.
|
|
Felsic:
|
The
minerals feldspar and quartz or an igneous rock or metamorphic rock
made
predominantly of feldspar and quartz; poor in iron and magnesium.
Light-colored.
|
|
Gram:
|
A
metric unit of weight and mass, equal to 1/1000th
of
a kilogram. One gram equals .035 ounces. One ounce equals 31.103
grams.
|
|
Hectare:
|
Another
metric unit of measurement, for surface area. One hectare equals
1/200th
of
a square kilometer, 10,000 square meters, or 2.47 acres. A hectare
is
approximately the size of a soccer field.
|
|
Horst-graben:
|
Horst
and graben are formed by widespread block faults giving rise to a
mountain
and valley topography that owes its origin in part at least to regional
block faulting.
|
|
Kilometer:
|
Another
metric unit of measurement, for distance. The prefix "kilo" means
1000, so
one kilometer equals 1,000 meters, one kilometer equals 3,280.84
feet,
which equals 1,093.6 yards, which equals 0.6214 miles.
|
|
Manto:
|
A
mineralogy term meaning a layer or stratum.
|
|
Minerals
or Mineralized Material:
|
Any
mass of host rock in which minerals of potential commercial value
occur.
|
|
Net
Smelter Return Royalty:
|
A
share of the net revenue generated from the sale of metal produced
by the
mine.
|
|
Ore
or Ore Deposit:
|
Rocks
that contain economic amounts of minerals in them and that are expected
to
be profitably mined.
|
|
Rhyolite:
|
A
type of volcanic lava or rock that is usually light in color: it
contains
greater than 68% silica, by weight, and is high in potassium and
sodium.
|
|
Silicified:
|
Is
combined or impregnated with silicon or silica.
|
|
Tertiary
period:
|
This
period lasted from 65 to 1.8 million years ago. It followed the Cretaceous
period (the end of the Mesozoic Era) and the K-T extinction. Many
mammals
developed then, including primitive whales, rodents, pigs, cats,
rhinos,
etc.
|
|
Tonne:
|
A
metric ton. One tonne equals 1000 kg. It
is approximately equal to 2,204.62 pounds.
|
|
Volcanogenic:
|
Of
volcanic origin.
|
|
Volcanic
domes:
|
These
are mounds that form when viscous lava is erupted slowly and piles
up over
the vent, rather than moving away as lava flow. The sides of most
domes
are very steep and typically are mantled with unstable rock debris
formed
during or shortly after dome emplacement. Most domes are composed
of
silica-rich lava which may contain enough pressurized gas to cause
explosions during dome extrusion.
|
|
Winze:
|
Secondary
or tertiary vertical or near-vertical opening sunk from a point inside
a
mine for the purpose of connecting with a lower level or of exploring
the
ground for a limited depth below a
level.
|
|
Conversion
Table
|
|
|
Metric
System
|
Imperial
System
|
|
1
metre
(m)
|
3.2808
feet (ft)
|
|
1
kilometer (km)
|
0.6214
mile (mi)
|
|
1
square kilometer (km2)
|
0.3861
square mile (mi2)
|
|
1
square kilometer (km2)
|
100
hectares (has)
|
|
1
hectare (ha)
|
2.471
acres (ac)
|
|
1
gram
(g)
|
0.0322
troy ounce (oz)
|
|
1
kilogram (kg)
|
2.2046
pounds (lbs)
|
|
1
tonne
(t)
|
1.1023
tons (t)
|
|
1
gram/tonne (g/t)
|
0.0292
ounce/ton (oz/t)
|
MARKET
FOR COMMON STOCK
Market
Information
Effective
September 14, 2006, our common stock began trading over the counter and is
quoted on the OTCBB under the symbol “GORO.” The table below sets forth the high
and low bid prices for our common stock as reflected on the OTCBB as reported
by
the Nasdaq Stock Market, Inc. for the period commencing September 14, 2006
to
date. Quotations represent prices between dealers, do not include retail
markups, markdowns or commissions, and do not necessarily represent prices
at
which actual transactions were effected.
|
Year Ending
|
High
|
Low
|
|||||
|
December
31, 2007
|
|||||||
|
First
Quarter (to February 7)
|
$
|
2.20
|
$
|
1.30
|
|||
|
December
31, 2006
|
|||||||
|
Third
Quarter (commencing September 14)
|
$
|
1.15
|
$
|
0.90
|
|||
|
Fourth
Quarter
|
1.90
|
1.00
|
|||||
On
February 7, 2007 the high and low sales price of our common stock on the OTCBB
were $ 2.20 and $ 2.00, respectively and we had approximately 101 holders
of record of our common stock.
Penny
Stock Rules
Due
to
the price of our common stock, as well as the fact that we do not expect to
be
listed on Nasdaq or a national securities exchange, our stock will likely be
characterized as "penny stocks" under applicable securities regulations. Our
stock will therefore be subject to rules adopted by the SEC regulating
broker-dealer practices in connection with transactions in penny stocks. The
broker or dealer proposing to effect a transaction in a penny stock must furnish
his customer a document containing information prescribed by the SEC and obtain
from the customer an executed acknowledgment of receipt of that document. The
broker or dealer must also provide the customer with pricing information
regarding the security prior to the transaction and with the written
confirmation of the transaction. The broker or dealer must also disclose the
aggregate amount of any compensation received or receivable by him in connection
with such transaction prior to consummating the transaction and with the written
confirmation of the trade. The broker or dealer must also send an account
statement to each customer for which he has executed a transaction in a penny
stock each month in which such security is held for the customer's account.
The
existence of these rules may have an effect on the price of our stock, and
the
willingness of certain brokers to effect transactions in our stock.
Dividend
Policy
We
have
never declared or paid dividends on our common stock. Payment of future
dividends, if any, will be at the discretion of our Board of Directors after
taking into account various factors, including the terms of any credit
arrangements, our financial condition, operating results, current and
anticipated cash needs and plans for expansion. At the present time, we are
not
party to any agreement that would limit our ability to pay dividends.
MANAGEMENT'S
DISCUSSION AND ANALYSIS
Introduction
The
following discussion updates our plan of operation for the foreseeable future.
Additional information about our exploration plans can be found in the section
titled “BUSINESS AND PROPERTIES - The El
Aguila
Project
- Exploration Activities” on page 10 of this prospectus.
This
discussion also analyzes our financial condition at September 30, 2006 and
compares it to our financial condition at December 31, 2005. This
discussion summarizes the results of our operations for the three months and
nine months ended September 30, 2006 and compares those results to the
corresponding periods ended September 30, 2005. This discussion and analysis
should be read in conjunction with our audited financial statements for the
two
years ended December 31, 2005, including footnotes, appearing elsewhere in
this
prospectus.
On
February 21, 2005, we effected a two-for-one split of our outstanding common
stock. All of the financial information included in this discussion and in
the
financial statements appearing in this report has been adjusted to reflect
the
results of that stock split.
On
August
17, 2006, we completed what we believe to be our successful IPO. We sold a
total
of 4,600,000 shares of common stock for a price of $1.00 per share for total
proceeds of $4,351,200, net of offering costs.
On
December 7, 2006, we completed a Private Placement of 4,322,000 shares of our
common stock for $1.20 per share, from which we received net cash proceeds
of
$4,928,700. The shares were issued to United States holders pursuant to an
exemption from registration under Section 4(2) and to offshore holders in
accordance with Regulation S of the Securities Act of 1933, as amended
(“Securities Act”). In connection with the Private Placement, we agreed to pay a
finder’s fee to individuals and entities who assisted us with locating
purchasers and who were not affiliated with our company consisting of 5% cash
and 6% shares of our common stock to certain of the selling shareholders
listed in this prospectus. We issued 257,700 shares of our common stock and
paid
a total of $257,700 to the finders.
The
Private Placement subscription agreement contained a registration rights
provision for the investors. The provision requires us to file a registration
statement, of which this prospectus forms a part, with the SEC as soon as
practicable after the closing of the Private Placement. In the event we are
unable to have the registration statement declared effective by the SEC on
or
before June 7, 2007, we must issue to the Private Placement investors one
additional share of common stock for every ten shares of common stock issued
during the Private Placement as liquidated damages.
Plan
of Operation
Our
plan
of operation is to continue exploration of the El
Aguila
property
until we discover sufficient mineralization to justify placing the property
into
production or alternatively, determine to abandon the lease. We also intend
to
undertake exploration of the El
Rey
property, a property that is in an earlier stage of exploration. Our ultimate
objective is to become a producer of gold and other precious metals. We are
unable at this time to predict when, if ever, that objective will be achieved.
Exploration.
Exploration carried out by us to date at the El
Aguila
project
has included 106 drill holes totaling approximately 22,000 feet. The results
so
far suggest the presence of mineralized material in sufficient grade and
quantity to justify continued exploration. For a more detailed summary of the
results of exploration to date, see “BUSINESS AND PROPERTIES - The El
Aguila
Project”
above.
Exploration
at the El
Aguila
project
will continue to be the central focus of our activities for the foreseeable
future. We have budgeted $3 million of the public offering proceeds and $1
million from the Private Placement proceeds for continued exploration of the
El
Aguila
property. We recently completed a geochemical survey of the property and expect
to conduct a geophysical survey and additional mapping in the foreseeable
future. In response to what we perceived as positive results from the
geochemical survey, we signed a drilling contract in October 2006 for a minimum
of 33,000 feet of additional core drilling. This contract represents a minimum
financial commitment of $300,000 and a maximum financial commitment of $1
million over the term of the agreement. There are numerous exploration targets
that will now be tested with the objective of delineating and expanding the
previously identified mineralization. Some new targets were developed and some
old targets were amplified by a recent geochemical survey carried out on the
property over the last few months.
We
believe our exploration results have been positive enough to warrant conducting
a feasibility study for the mineralization we have identified. This study is
designed to determine the economic feasibility of placing the property into
production and producing gold and silver. It would analyze the estimated
quantity and quality of the mineralization discovered during the exploration
stage, present estimates of the cost of mining and processing the material
and
compare the estimated sales price of the finished product. We expect that this
study would be conducted by one or more independent engineering firms on our
behalf, for which we estimate a cost of approximately $1 million. Proceeds
from
the Private Placement will likely fund this feasibility study. If the results
of
the feasibility study are positive, and assuming the availability of necessary
capital, a decision will be made to place the property into production. The
timing of any production would be primarily a function of the timing of
acceptable exploration results, the availability of working capital and the
timing of required regulatory permits.
In
addition to our efforts at the El
Aguila
project,
we will begin limited exploration at our El
Rey
property. The program will be staged, whereby limited funds will be initially
spent to evaluate the property with increasing amounts spent if the results
are
positive.
Capital
Investment.
In
addition to expenses of exploration, we also anticipate making infrastructure
improvements at the El
Aguila
project.
Foremost among these expenses would be the construction of an improved road
to
the proposed mill site and camp improvements. We estimate costs of approximately
$1 million to complete these improvements. In order to complete these
improvements, we would likely attempt to acquire the surface rights to our
property prior to making capital improvements. We currently do not have any
agreements in place regarding acquisition of the surface rights of either
property and do not know when, if ever, such arrangement will be made available
to us.
If
a
decision is made to commence mining, we would incur significant capital costs
in
construction of a mill and acquisition of necessary equipment. At present,
our
cash position is not sufficient to fund these capital requirements and we would
anticipate obtaining such funding through additional equity financing, although
we have no specific plans at this time. Only after a mine and a mill are
constructed and operational could we expect any revenue.
At
some
time in the future, we may also investigate the acquisition of additional
properties. This decision will be made on the basis of opportunities presented.
Corporate
Overhead.
Included in our plan of operation are the expenses of overseeing our business
and paying other general and administrative expenses. These expenses primarily
include salaries and consulting fees, rent, travel and professional fees. We
currently estimate these expenses at $90,000 per month based on existing
commitments and expectations. We expect these expenses will be paid from our
cash position and future equity offerings, if necessary, until such time, if
ever, we are successful in placing one or more of our properties in production.
Liquidity
and Capital Resources
September
30, 2006.
As of
September 30, 2006, we had working capital of $3,008,090 comprised of current
assets of $3,298,609 and current liabilities of $290,519. This represents an
increase of $2,850,538 from the working capital balance of $157,552 at fiscal
year end December 31, 2005. Proceeds from our IPO improved our working capital
position. The completion of a Private Placement in December 2006 which resulted
in net proceeds of $4,928,700 further improved our working capital position.
We
expect
that the proceeds from the IPO and the Private Placement will be used to fund
our exploration and operating expenses. At present, we have allocated
approximately $4 million to future exploration. We do not anticipate the need
to
raise more funding in the next 12 months unless a decision is made to commence
mining operations. The most significant of our future operating expenses include
(i) the amount of $4 million for payments to contractors in connection with
our
current exploration program; (ii) approximately $90,000 per month for salaries
and other corporate overhead; and (iii) legal and accounting fees associated
with our status as a public traded company.
The
report of our independent accountants on our financial statements at December
31, 2005 contains a qualification about our ability to continue as a going
concern. This qualification is based on our lack of operating revenue and
limited working capital, among other things. We remain dependent on receipt
of
capital from outside sources, and ultimately, generating revenue from
operations, to continue as a going concern.
Due
to
our lack of proved or probable reserves at this time, all of our investment
in
mining properties has been expensed, and does not appear as an asset on our
balance sheet. However, during the first nine months of 2006, we spent $461,735
on acquisition, exploration and evaluation expenses. This compares to $489,579
for the comparable period in 2005. From inception to September 30, 2006, we
have
spent $2,603,556 on the acquisition and exploration of our properties of which
$1,811,000 was spent on the El
Aguila
project.
All
of
our capital resources to date have been provided exclusively through the sale
of
equity securities. From inception through September 30, 2006, we received
$6,615,123 in cash, services and other consideration from the issuance of our
common stock. Since we are an exploration company and have not generated any
cash from operations, we have relied on sale of equity to fund all of our
capital needs. In the future, and consistent with our history, we may consider
raising additional funds through possible private placements of our common
stock.
Net
cash
used in operating activities was $1,238,773 during the first nine months of
2006, compared to $654,203 during the first nine months of 2005. As more fully
explained in preceding paragraphs, we expect that our expenditures will increase
during the remainder of this year and into next year commensurate with the
increase in exploration of the El
Aguila
property. Also as mentioned above, cash spent on general and administrative
expenses during 2006 increased compared to 2005, primarily related to costs
of
our common stock offering and salaries.
December
31, 2005.
As of
December 31, 2005, we had working capital of $157,552, consisting of $191,159
of
current assets and $33,607 of current liabilities, which was an improvement
of
$904,887 from our working capital deficit at December 31, 2004.
We
have
never received revenue from our operations. We have historically relied on
equity financings or loans from our officers to continue funding our operations.
We experienced net losses for the years ended December 31, 2005 and 2004 of
$1,217,911 and $853,593, respectively. We are dependent on additional financing
to continue our exploration efforts in the future. Since we do not believe
that
we are a candidate for conventional debt financing, we may be forced to postpone
or curtail our exploration efforts, including consulting fees, until we can
obtain equity financing, if necessary.
The
report of our independent accountants on our financial statements at December
31, 2005 contains a qualification about our ability to continue as a going
concern. This qualification is based on our lack of operating revenue and
limited working capital, among other things. We remain dependent on receipt
of
capital from outside sources, and ultimately, generating revenue from
operations, to continue as a going concern.
Due
to
our lack of proved or probable reserves at this time, all of our investment
in
mining properties has been expensed, and does not appear as an asset on our
balance sheet. However, during 2005, we spent $843,118 on acquisition,
exploration and evaluation expenses. This compares to $325,974 for 2004, when
we
utilized the proceeds of the Canyon funding. During the years 2002 through
2005,
we spent $424,325, $438,066, $325,974 and $843,118, respectively, on the
acquisition and exploration of our properties.
From
inception through December 31, 2005, we received $4,123,341 in cash, services
and other consideration through issuance of our common stock in private
transactions. During 2005, we issued 3,156,500 shares of our common stock for
cash of $1,405,000, 10,000 shares from exercise of stock options for $2,500,
1,750,000 shares as stock grants valued at $437,500 and 1,280,000 shares in
satisfaction of payables totaling $320,000.
Our
operating activities during 2005 used $1,179,278 of cash compared to $378,289
during 2004. The use of cash from our net loss during the year was reduced
by
non-cash stock compensation in the amount of $87,500.
Results
of Operations
Three
Months Ended September 30, 2006.
For the
three months ended September 30, 2006, we recorded a net loss of $(839,203),
or
$(0.04) per share, compared to a loss for the corresponding period of 2005
of
$(464,109) or $(0.03) per share. In general, a decrease in exploration expenses
during the nine months ended September 30, 2006 to the comparable period ending
in 2005 was offset by an increase in general and administrative expenses of
$253,614 and stock compensation expense of $275,000.
Mineral
property costs for the three months ended September 30, 2006, including
acquisition and exploration costs, decreased $149,776 from the comparable period
in 2005. We delayed some spending on exploration activities primarily as we
awaited funding from our public offering. We are now increasing our exploration
activities at the El
Aguila
project.
We
are
considered an exploration stage company for accounting purposes, since we have
not received any revenue from operations. We are unable to predict with any
degree of accuracy when that situation will change. Since we have not identified
any proved or probable mineral reserves on our property, all of our exploration
costs are currently expensed, contributing to the increased loss in 2006
compared to 2005. We expect to incur losses until such time, if ever, as we
begin generating revenue from operations.
Nine
Months Ended September 30, 2006. For
the
nine months ended September 30, 2006, we recorded a net loss of $(1,763,371),
or
$(0.09) per share, compared to a loss for the corresponding period of 2005
of
$(680,827) or $(.04) per share. In neither period did we report any revenue
except interest income. The effect of the increase in general and administrative
expenses was more pronounced in the nine month period than in the three month
period ended September 30, 2006.
General
and administrative expense for the nine months ended September 30, 2006
increased to $781,090 compared to $103,142 during the same period of 2005.
The
increase of $677,948 primarily reflects approximately $355,000 of salaries,
$123,000 in increased legal and accounting fees associated with our transition
to public company status, investor relations expenses of $91,000, and $68,000
related to increased travel.
We
also
incurred stock compensation expenses of $516,350 in the first nine months of
2006. We issued 100,000 restricted shares of common stock valued at $1.00 per
share to a director as partial compensation for his service to the Board of
Directors. During this same period, we accrued $125,000 of stock-based
compensation expenses, representing the allocable portion of investor relations
services that we expect to be rendered over the third and fourth quarters and
that will be paid by issuing shares of our common stock. Finally, we granted
options to two individuals to purchase a total of 1,100,000 shares of common
stock at an exercise price of $1.00 per share. We used an option pricing model
to value these options at $141,350 and recorded an expense of $141,350 during
the second quarter of 2006.
Year Ended December 31, 2005 and 2004.
During
the year ended December 31, 2005, we reported a net loss of $(1,217,911), or
$(0.08) per share, compared to a net loss of $(853,593), or $(0.08) per share,
for 2004. In neither period did we report any revenue except interest income.
We
expect to incur losses until such time, if ever, as we begin generating revenue
from operations. In neither year did we report any revenue except interest
income.
General and administrative expenses increased in 2005 compared to the prior
year, primarily reflecting $111,399 in corporate salaries where none was
expensed in 2004, $42,694 in higher legal and accounting fees reflecting
increased corporate activities, and $24,000 in consulting expense related to
corporate management, more than offset by lower stock compensation expense.
In
2005, we recorded $87,500 in stock compensation expense while $500,000 was
recorded in 2004. Property acquisition and exploration expenses increased
significantly in 2005 to $843,118 as comparable to $325,974 of 2004, an increase
of $517,144, attributable to our accelerated 2005 evaluation and exploration
program at the El
Aguila
project.
Critical
Accounting Policies
We
believe the following more critical accounting policies are used in the
preparation of our consolidated financial statements:
Exploration
and Development Costs.
Mineral
property acquisition, exploration and related costs are expensed as incurred
unless proven and probable reserves exist and the property is a commercially
minable property. If it is determined that a mineral property can be
economically developed, the costs incurred to develop such property, including
costs to further delineate the ore body and develop the property for production,
may be capitalized. In addition, we may capitalize previously expensed
acquisition and exploration costs if it is later determined that the property
can economically be developed. Interest costs, if any, allocable to the cost
of
developing mining properties and constructing new facilities would be
capitalized until operations commence. Mine
development costs incurred either to develop new ore deposits, expand the
capacity of operating mines, or to develop mine areas substantially in advance
of current production would also be capitalized.
All
such
capitalized costs, and estimated future development costs, if any, are then
amortized using the units-of-production method over the estimated life of the
ore body. Costs
incurred to maintain current production or to maintain assets on a standby
basis
are charged to operations. Costs of abandoned projects are charged to operations
upon abandonment. We evaluate, at least quarterly, the carrying value of
capitalized mining costs and related property, plant and equipment costs, if
any, to determine if these costs are in excess of their net realizable value
and
if a permanent impairment needs to be recorded. The periodic evaluation of
carrying value of capitalized costs and any related property, plant and
equipment costs are based upon expected future cash flows and/or estimated
salvage value in accordance with Statement of Financial Accounting Standards
(“SFAS”) No. 144, "Accounting for Impairment or Disposal of Long-Lived Assets."
Property
Retirement Obligation.
We
implemented SFAS No. 143, "Accounting for Asset Retirement Obligations,"
effective January 1, 2003. SFAS No. 143 requires the fair value of a liability
for an asset retirement obligation to be recognized in the period that it is
incurred if a reasonable estimate of fair value can be made. The associated
asset retirement costs are capitalized as part of the carrying amount of the
long-lived asset. We have determined that we have no property retirement
obligations as of September 30, 2006.
Stock
Compensation. Effective
January 1, 2006, we implemented SFAS No. 123(R), “Accounting for Stock-Based
Compensation,” which requires us to provide compensation costs for our stock
option plans determined in accordance with the fair value based method
prescribed in SFAS No. 123(R). We estimate the fair value of each stock option
at the grant date by using the Black-Scholes option-pricing model and provides
for expense recognition over the service period, if any, of the stock
option.
Prior
to
January 1, 2006, we applied APB Opinion 25, “Accounting for Stock Issued to
Employees,” and related interpretations in accounting for all stock option
plans. Under APB Opinion 25, no compensation cost was recognized for stock
options issued to employees as the exercise price of the stock options we
granted equaled or exceeded the market price of the underlying common stock
on
the date of grant.
Foreign
Operations.
Our
present activities are in Mexico. As with all types of international business
operations, currency fluctuations, exchange controls, restrictions on foreign
investment, changes to tax regimes, political action and political instability
could impair the value of our company's investments.
Foreign
Currency Translation.
The
local currency is the functional currency for our subsidiaries. Assets and
liabilities are translated using the exchange rate in effect at the balance
sheet date. Income and expenses are translated at the average exchange rate
for
the year. Translation adjustments are reported as a separate component of
stockholders' equity.
Estimates.
The
preparation of our consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires us to make estimates and assumptions that affect the amount of assets
and liabilities, the disclosure of contingent assets and liabilities at the
date
of the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Recent
Accounting Pronouncements
In
November 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No.
151, “Inventory Costs.” This statement amends the guidance in ARB No. 43,
Chapter 4, Inventory Pricing, to clarify the accounting for abnormal amounts
of
idle facility expense, freight, handling costs, and wasted material (spoilage).
In addition, this statement requires that allocation of fixed production
overhead to the costs of conversion be based on the normal capacity of the
production facilities. The provisions of this statement will be effective
beginning with our fiscal year ending December 31, 2006. We are currently
evaluating the impact this new standard will have on our operations, but believe
that it will not have a material impact on our financial position, results
of
operations or cash flows.
In
December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based
Payment.” This statement requires that the cost resulting from all share-based
transactions be recorded in the financial statements. The statement establishes
fair value as the measurement objective in accounting for share-based payment
arrangements and requires all entities to apply a fair-value-based measurement
in accounting for share-based payment transactions with employees. The statement
also establishes fair value as the measurement objective for transactions in
which an entity acquires goods or services from non-employees in share-based
payment transactions. The statement replaces SFAS No. 123, “Accounting for
Stock-Based Compensation,” and supersedes APB Opinion No. 25 “Accounting for
Stock Issued to Employees.” The provisions of this statement will be effective
beginning with our fiscal year ending December 31, 2007. We are currently
evaluating the impact this new standard will have on our financial position,
results of operations or cash flows.
In
March
2005, the SEC issued Staff Accounting Bulletin No. 107 (“SAB 107”) which
provides guidance regarding the interaction of SFAS No. 123(R) and certain
SEC
rules and regulations. The new guidance includes the SEC's view on the valuation
of share-based payment arrangements for public companies and may simplify some
of SFAS No. 123(R)'s implementation challenges for registrants and enhance
the
information investors receive.
In
August
2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections.”
This statement applies to all voluntary changes in accounting principle and
to
changes required by an accounting pronouncement if the pronouncement does not
include specific transition provisions, and it changes the requirements for
accounting for and reporting them. Unless it is impractical, the statement
requires retrospective application of the changes to prior periods' financial
statements. This statement is effective for accounting changes and correction
of
errors made in fiscal years beginning after December 15, 2005.
Directors
and Executive Officers
The
following individuals presently serve as our officers and directors:
|
Name
|
Age
|
Positions
With the Company
|
Board
Position Held Since
|
|
William
W. Reid
|
57
|
President,
Chief Executive Officer and Director
|
1998
|
|
David
C. Reid
|
56
|
Vice
President, Secretary, Treasurer and Director
|
1998
|
|
Bill
M. Conrad
|
50
|
Director
|
2006
|
|
Frank
L. Jennings
|
55
|
Chief
Financial Officer
|
N/A
|
Each
of
our directors is serving a term which expires at the next annual meeting of
shareholders and until his successor is elected and qualified or until he
resigns or is removed. Our officers serve at the will of our Board of Directors.
Messrs.
William and David Reid should be considered founders of our company, as each
has
taken initiative in the organization of our business. William Reid and David
Reid are brothers.
The
following information summarizes the business experience of each of our officers
and directors for at least the last five years:
William
W. Reid.
Mr. Reid
has served as a director and our President and Chief Executive Officer since
our
inception in 1998. Since August 2005, Mr. Reid has devoted all of his business
time to our affairs, averaging 40 hours per week. Mr. Reid received a Bachelor
of Science in physics in 1970 and a Master's in Economic Geology in 1972 from
Purdue University. From 1977 to August 18, 2005, he served as the President,
Chief Executive Officer and Chairman of the Board of Directors of U.S. Gold
Corporation, a Colorado corporation engaged in the exploration of gold mining
properties. During his tenure with U.S. Gold, that entity acquired, developed
and produced gold from five different mines, but has not produced any revenue
since 1990.
David
C. Reid.
Mr.
David Reid has served as a director and our Vice President since our inception
in 1998. Since August 2005, he has devoted all of his time to our business
and
affairs, also averaging 40 hours per week. From 1977 to August 18, 2005, he
was
the Vice President and a director of U.S. Gold during the time that it acquired,
developed and produced gold. Mr. Reid received a Bachelor of Science degree
in
geology from Ball State University in 1972.
Bill
M. Conrad.
Mr.
Conrad was elected to the Board of Directors on June 1, 2006. Mr. Conrad is
presently the vice-president, secretary and a director of Blue Star Energy,
Inc., a private Colorado corporation engaged in the energy industry. Prior
to
that, he served as president and a director of Wyoming Oil & Minerals, Inc.,
a publicly traded Wyoming corporation, and New Frontier Energy, Inc., a publicly
traded Colorado corporation, both engaged in the oil and gas industry. The
securities of Wyoming Oil & Mineral and New Frontier Energy are quoted on
the OTCBB. Mr. Conrad’s term of office as a director of our company will expire
at the next annual meeting of shareholders and when his successor has been
elected and qualifies.
Frank
L. Jennings.
Mr.
Jennings was appointed to serve as our principal financial officer to replace
William F. Pass, who resigned from that position effective June 1, 2006. Mr.
Pass served as our financial consultant since 2002 and resigned due to the
demands of other obligations. Mr. Jennings serves our company on a part-time
basis as his services are deemed necessary. Since 2001, Mr. Jennings has been
a
financial consultant and provides management and financial consulting services
primarily to smaller public companies. From 2000 to 2005, he served as the
chief
financial officer and a director of Global Casinos, Inc., a publicly traded
Utah
corporation, and from 2001 to 2005, he served as the chief financial officer
and
a director of OnSource Corporaton, now known as Ceragenix Pharmaceuticals,
Inc.,
a publicly traded Delaware corporation. During his tenure with Global Casinos
and Ceragenix Pharmaceuticals, each company was engaged in the gaming industry
and each had common stock quoted on the OTC Bulletin Board.
Other
Significant Employees or Consultants
In
addition to our officers and directors, we also utilize the services of the
following significant consultants:
Jose
Perez Reynoso.
Mr.
Reynoso, a Mexican national, has served our company as a full time consultant
since 2002. In that capacity, he oversees all our operations in Mexico, and
provides advice in relations with the Mexican Government. From 1995 to 2002,
he
was a consulting geologist for mining companies operating in Mexico. Mr. Reynoso
received an undergraduate degree in geology and engineering in 1974 and a
master's degree in economic geology in 1979 from the National University of
Mexico. We leased the El
Aguila
property
from Mr. Reynoso in 2002.
Board
Committees
Our
Board
of Directors established a standing Audit, Compensation and Nominating Committee
during 2006. The Audit Committee, comprised of Bill Conrad as chairman and
William Reid, recommends the selection and appointment of our independent
accountants to the Board of Directors and reviews the proposed scope, content
and results of the audit performed by the accountants and any reports and
recommendations made by them. Only Mr. Bill Conrad meets the definition of
“independent” as defined in Rule 4200(a)(15) of the Marketplace Rules of the
NASDAQ Stock Market, Inc. (“Marketplace Rules”), since William Reid also serves
as our Chairman and Chief Executive Officer. As of the date of this report,
the
Audit Committee has not adopted a formal charter, however the committee expects
to do so in the near future.
Our
Board
of Directors has determined that Bill Conrad, the chairman of the Audit
Committee, qualifies as an audit committee financial expert in that he has
(i)
an understanding of generally accepted accounting principles and financial
statements; (ii) the ability to assess the general application of such
principles in connection with the accounting for estimates, accruals and
reserves; (iii) experience preparing, auditing, analyzing or evaluating
financial statements that present a breadth and level of complexity of
accounting issues that are generally comparable to the breadth and complexity
of
issues that can reasonably be expected to be raised by our financial statements,
or experience actively supervising one or more persons engaged in such
activities; (iv) an understanding of internal controls over financial reporting;
and (v) an understanding of the audit committee functions. Mr. Conrad acquired
these attributes through experience in analyzing financial statements of
companies, and through his experience as an executive officer of other publicly
traded companies.
The
Nominating Committee has the responsibility for identifying potential candidates
for the Board of Directors. The committee will establish qualifications for
candidacy, assess potential candidates and make recommendations to the board,
based upon the committee’s assessment of the candidate’s past business and
management experience, their special expertise in an area of strategic interest
to our business, the candidate’s ability to devote sufficient time and attention
to our business, and their willingness to serve and actively contribute to
our
business. The Nominating Committee is comprised of two members, being David
Reid
as chairman, and William Reid. None of the members of the Nominating Committee
are independent within the meaning of Rule 4200(a)(15) of the Marketplace Rules
since both members are also our executive officers.
The
Compensation Committee, comprised of Bill Conrad as chairman and David Reid,
is
responsible for reviewing the compensation of our executive officers and
directors on an ongoing basis. In performing this function, the Compensation
Committee may consider, among other things, the types of compensation and
amounts paid to executives and directors of public companies of equivalent
size,
stage of development in the industry and activity levels. The findings of this
compensation review are used to determine an appropriate level of compensation
for the executives and directors, reflecting the need to maintain
competitiveness and recruit and retain qualified personnel within the context
of
our financial and other resources. Mr. Conrad qualifies as independent under
Rule 4200(a)(15) of the Marketplace Rules.
Director
Compensation
In
June
2006, we retained Bill Conrad to serve on our Board of Directors. Mr. Conrad
is
independent under the definition set forth in Rule 4200(a)(15) of the
Marketplace Rules. Mr. Conrad receives cash compensation in the amount of $3,000
per month and also received a stock grant of 100,000 shares of our common stock,
valued at $1.00 per share and options to acquire up to 500,000 shares of stock
on or before March 9, 2009 for $1.00 per share. The table below summarizes
the
compensation of our only director who is not also one of our executive officers
and whose compensation is not disclosed in the Summary Compensation Table,
for
the fiscal year ended December 31, 2006:
|
Name
|
Fees
Earned or Paid in Cash
|
Stock
Awards
|
Option
Awards
|
Non-Equity
Incentive Plan Compensation
|
All
Other
Compensation
|
Total
|
||||||||
|
Bill
M. Conrad
|
$
21,000
|
|
|
$
100,000
|
|
$
141,350
|
|
$
—
|
|
|
$
—
|
|
$
262,350
|
|
All
directors are reimbursed for reasonable and necessary expenses incurred in
their
capacities as such.
Executive
Compensation
The
following table summarizes the total compensation of our executive officers
for
the two fiscal years ended December 31, 2006:
Summary
Compensation Table
|
Name and
Principal Position
|
Year
|
Salary
|
Bonus
|
Stock
Awards
|
Option
Awards
|
Non-Equity
Incentive Plan Compensation
|
All
Other
Compensation
|
Total
|
|||||||||
|
William
W. Reid
|
2006
|
$
240,000
|
$
—
|
$
—
|
$
—
|
$
—
|
$
—
|
$240,000
|
|||||||||
|
Chairman,
C.E.O
|
2005
|
$
60,000
|
$
—
|
$
—
|
$
—
|
$
—
|
$
9,600(2)
|
$
69,600
|
|||||||||
|
and
President(1)
|
|||||||||||||||||
|
David
C. Reid,
|
2006
|
$
170,000
|
$
—
|
$
—
|
$
—
|
$
—
|
$
—
|
$170,000
|
|||||||||
|
Vice
President and
|
2005
|
$
42,500
|
$
—
|
$
—
|
$
—
|
$
—
|
$
9,600(2)
|
$
52,100
|
|||||||||
|
Director(1)
|
|||||||||||||||||
______________________
(1) The
executive officer was not compensated for his service as a director of our
company.
(2) The
executive officer was paid this amount as a consultant during the year.
______________________
Effective
January 1, 2006, we entered into employment agreements with our executive
officers which extend for a three-year term. Pursuant to the terms of those
agreements, William Reid receives $240,000 and David Reid receives $170,000
annually as salary. Each individual also participates in health and other
insurance programs that we maintain. The employment agreements are automatically
renewable for one-year terms on each anniversary of the effective date unless
either party gives notice to the other that they do not wish to renew the
agreement, not less than 120 days prior to expiration.
Pursuant
to the terms of the employment agreements, the employee would be entitled to
certain payments in the event their employment is terminated under certain
circumstances. If we terminate the agreement without cause, or either executive
officer terminates the agreement “with good reason,” we would be obligated to
pay two years of compensation in accordance with our regular pay periods.
Termination by an executive officer with good reason includes a “change in
control.”
In
addition to our executive officers, we engage two consultants on a regular
basis. Jose Perez Reynoso is the manager of our operations in Mexico and is
paid
at the rate of $9,000 per month. Frank Jennings, our financial consultant,
is
paid on an hourly basis, which we expect will not exceed $3,000 per month in
the
aggregate. We do not have a written agreement with either consultant.
Outstanding
Equity Awards at Fiscal Year-End
The
following table summarizes the amount of our executive officers’ equity-based
compensation outstanding at the fiscal year ended December 31, 2006:
|
Option
Awards
|
Stock
Awards
|
|||||||||||||||||
|
Name
|
Equity
Incentive Plan Awards: Number of Securities Underlying Unexercised
Unearned Options
|
Option
Exercise Price
|
Option
Expiration Date
|
Number
of
Shares
or
Units
of
Stock
That Have
Not
Vested
|
Market
Value
of
Shares
Or
Units That Have Not
Vested
|
Equity
Incentive Plan Awards: Number of Unearned Shares, Units or Other
Rights
That Have Not Vested
|
Equity
Incentive Plan Awards: Market or Payout Value of Unearned Shares,
Units or
Other Rights That Have Not
Vested
|
|||||||||||
|
Number
of Securities Underlying Unexercised
Options Exercisable |
Number
of Securities Underlying Unexercised
Options Unexercisable |
|||||||||||||||||
|
(#)
|
(#)
|
(#)
|
($)
|
(#)
|
(#)
|
(#)
|
($)
|
|||||||||||
|
William
W. Reid
|
400,000
|
0
|
0
|
$0.25
|
10/9/2013
|
—
|
|
—
|
|
—
|
|
$
—
|
||||||
|
William
W. Reid
|
|
400,000
|
|
0
|
|
0
|
|
$0.25
|
|
4/22/2014
|
|
—
|
|
—
|
|
—
|
|
$
—
|
|
David
C. Reid
|
|
400,000
|
|
0
|
|
0
|
|
$0.25
|
|
10/9/2013
|
|
—
|
|
—
|
|
—
|
|
$
—
|
|
David
C. Reid
|
|
200,000
|
|
0
|
|
0
|
|
$0.25
|
|
4/22/2014
|
|
—
|
|
—
|
|
—
|
|
$
—
|
We
did
not grant any options to our executive officers during 2006 or 2005. During
the
year ended December 31, 2004, we granted options to acquire a total of 700,000
shares of our common stock to our officers and a consultant, which represented
100% of the options we granted to our employees in that year. Our executive
officers did not exercise any stock options awarded in prior years during
2006.
Equity
Incentive Plan
Our
Non-Qualified Stock Option and Stock Grant Plan (also as referred to as the
"Plan") was adopted by us effective March 4, 1999. The Plan terminates by its
terms on March 3, 2009. Under the Plan, as approved by shareholders on March
4,
2005, a total of 6,000,000 shares of common stock are reserved for issuance
thereunder. Set forth below is information as of December 31, 2006 with respect
to compensation plans (including individual compensation arrangements) under
which our equity securities are authorized for issuance.
Non-Qualified
Stock Option and Stock Grant Plan
Information
|
Plan Category
|
Number of
securities to be
issued upon
exercise of
outstanding
options, warrants
and rights
(a)
|
Weighted-
average exercise
price of
outstanding
options,
warrants and
rights
(b)
|
Number of
securities remaining
available for future
issuance under
equity compensation
plans (excluding
securities reflected
in column (a))
(c)
|
||||||||||
|
Equity
compensation plans approved by shareholders
|
2,500,000
|
$0.58
per share
|
3,215,000
|
||||||||||
|
Equity
compensation plans not approved by shareholders
|
0
|
—
|
0
|
||||||||||
|
TOTAL
|
2,500,000
|
3,215,000
|
|||||||||||
Under
the
Plan, non-qualified stock options and/or grants of our common stock may be
issued to key persons. Key persons include officers, directors, employees,
consultants and others providing service to us. The Plan was established to
advance the interests of our company and our stockholders by affording key
persons, upon whose judgment, initiative and efforts we may rely for the
successful conduct of our businesses, an opportunity for investment in our
company and the incentive advantages inherent in stock ownership in our company.
This Plan gives our Board of Directors broad authority to grant options and
make
stock grants to key persons selected by the Board while considering criteria
such as employment position or other relationship with us, duties and
responsibilities, ability, productivity, length of service or association,
morale, interest in us, recommendations by supervisors, and other matters,
and
to set the option price, term of option, and other broad authorities. Options
may not be granted at less than the fair market value at the date of grant
and
may not have a term in excess of 10 years.
Options
granted under the Plan do not generally give rise to taxable income to the
recipient or any tax consequence to us, since the Plan requires that the options
be issued at a price not less than the fair market value of the common stock
on
the date of grant. However, when an option is exercised, the holder is subject
to tax on the difference between the exercise price of the option and the fair
market value of the stock on the date of exercise. We receive a corresponding
deduction for income tax purposes. Recipients of stock grants are subject to
tax
on the fair market value of the stock on the date of grant and we receive a
corresponding deduction. The foregoing is intended as a summary of the income
tax consequences to an individual recipient of an option or stock grant, and
should not be construed as tax advice. Holders of stock options or common stock
should consult their own tax advisors.
Shares
issued upon exercise of options or upon stock grants under the Plan are
"restricted securities" as defined under the Securities Act, unless a
registration statement covering such shares is effective. Restricted shares
cannot be freely sold and must be sold pursuant to an exemption from
registration (such as Rule 144) which exemptions typically impose conditions
on
the sale of the shares.
As
of
December 31, 2006, options to purchase an aggregate of 3,050,000 shares of
our
common stock have been granted under the Plan, of which 2,500,000 remain
outstanding.
Indemnification
and Limitation on Liability of Directors
Our
Articles of Incorporation and Bylaws provide that we must indemnify, to the
fullest extent permitted by Colorado law, any of our directors, officers,
employees or agents made or threatened to be made a party to a proceeding,
by
reason of the person serving or having served in a capacity as such, against
judgments, penalties, fines, settlements and reasonable expenses incurred by
the
person in connection with the proceeding if certain standards are met. At
present, there is no pending litigation or proceeding involving any of our
directors, officers, employees or agents where indemnification will be required
or permitted. Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to our directors, officers and controlling
persons pursuant to the foregoing provisions, or otherwise, we have been advised
that in the opinion of the SEC, such indemnification is against public policy
as
expressed in the Securities Act and is, therefore, unenforceable.
The
Colorado Business Corporation Act (the "CBCA") allows indemnification of
directors, officers, employees and agents of a company against liabilities
incurred in any proceeding in which an individual is made a party because he
was
a director, officer, employee or agent of the company if such person conducted
himself in good faith and reasonably believed his actions were in, or not
opposed to, the best interests of the company, and with respect to any criminal
action or proceeding, had no reasonable cause to believe his conduct was
unlawful. A person must be found to be entitled to indemnification under this
statutory standard by procedures designed to assure that disinterested members
of the board of directors have approved indemnification or that, absent the
ability to obtain sufficient numbers of disinterested directors, independent
counsel or shareholders have approved the indemnification based on a finding
that the person has met the standard. Indemnification is limited to reasonable
expenses.
Our
Articles of Incorporation limit the liability of our directors to the fullest
extent permitted by the CBCA. Specifically, our directors will not be personally
liable for monetary damages for breach of fiduciary duty as directors, except
for:
| · |
any
breach of the duty of loyalty to our company or our
stockholders;
|
| · |
acts
or omissions not in good faith or that involved intentional misconduct
or
a knowing violation of law;
|
| · |
dividends
or other distributions of corporate assets that are in contravention
of
certain statutory or contractual
restrictions;
|
| · |
violations
of certain laws; or
|
| · |
any
transaction from which the director derives an improper personal
benefit.
|
Liability
under federal securities law is not limited by the Articles.
Certain
Relationships and Related Transactions
Transactions
with Officers and Directors. In
1998
and 1999, we issued a total of 1,900,000 shares of common stock each to William
and David Reid, our officers and directors. The shares, commonly called
"founders' shares," were issued for a price of $.0005 per share in the form
of
services rendered in connection with the organization of our company.
During
2001, William and David Reid purchased an additional 100,000 shares each in
exchange for the cancellation of debentures purchased by them. The shares issued
in those transactions were valued at a total of $50,000, or $0.25 per share.
On
January 2, 2005, we issued a total of 1,750,000 shares to William and David
Reid
and William Pass for services rendered. William Pass was our financial
consultant, and the owner of more than five percent of our common stock at
that
time. Of that amount, 1,000,000 shares were issued to William Reid, 500,000
to
David Reid and 250,000 shares to William Pass. The shares were valued at a
total
of $437,500, or $0.25 per share, based on the contemporaneous sales of our
stock
to independent third parties. Messrs. William and David Reid were the only
members of our Board of Directors participating in the decision to issue the
shares in these transactions. However, our Board determined that the
transactions were no less favorable than could have been obtained from an
unaffiliated third party.
Each
of
our officers advanced money to us to meet short-term working capital
requirements. The loans were represented by promissory notes totaling $160,000,
which were non-interest bearing and due on demand. We used the proceeds of
the
IPO to repay the notes.
U.S.
Gold Corporation.
During
the period July 1, 2000 through December 31, 2001, we issued a total of
2,560,000 shares to U.S. Gold Corporation in connection with a management
agreement executed with that entity. U.S. Gold Corporation was previously the
owner of more than five percent of our common stock. Each of the shares issued
in those transactions was valued at between $0.14 and $0.17 per share, based
on
the estimated fair market value of our stock as of the date of the transaction.
Effective
January 1, 2002, we executed a new management agreement with U.S. Gold which
continued through December 31, 2002. Under the terms of that agreement, we
agreed to pay U.S. Gold $30,000 per month, or a total of $360,000. During 2002,
we paid a total of $30,000 under that agreement. During 2005, we satisfied
the
remaining obligation by paying $10,000 in cash and issuing 1,280,000 shares
of
our common stock at its fair market value of $0.25 per share. Messrs. William
and David Reid were officers and directors of our company and of U.S. Gold
at
the time of these transactions.
Subscription
with Heemskirk.
During
2005, we issued a total of 2,150,000 shares of our common stock to Heemskirk
Consolidated Limited, an Australian corporation. Heemskirk is the owner of
more
than five percent of our common stock, but had no relationship before it
purchased the stock. Heemskirk paid a total of $1,075,000 for its stock, or
$0.50 per share.
Under
the
terms of its agreement with us, Heemskirk also has the first right to acquire
all or a part, but not less than 25%, of any securities offered by us in the
future and to participate in any debt financing that we propose during the
period until August 2008. Heemskirk also holds a first right of refusal to
acquire any or all of our interest in mining properties located in Mexico if
we
receive an offer from a third party and propose to sell our interest pursuant
to
that offer.
SECURITY
OWNERSHIP OF
As
of
February 7, 2007, there are a total of 28,139,552 shares of our common stock
outstanding, our only class of voting securities currently outstanding. The
following table describes the ownership of our voting securities by: (i) each
of
our officers and directors; (ii) all of our officers and directors as a group;
and (iii) each shareholder known to us to own beneficially more than 5% of
our
common stock. All share amounts have been adjusted to reflect a two-for-one
split of our outstanding stock effective February 21, 2005. Unless otherwise
stated, the address of each of the individuals is our address, 222 Milwaukee
Street, Suite 301, Denver, Colorado 80206. All ownership is direct, unless
otherwise stated.
In
calculating the percentage ownership for each shareholder, we assumed that
any
options owned by an individual exercisable within 60 days is exercised, but
not
the options owned by any other individual.
|
Name
and Address of
|
Shares
Beneficially Owned
|
|
|
Beneficial
Owner
|
Number
|
Percentage
(%)
|
|
William
W. Reid(1)
|
5,219,606(5)(6)
|
18.0%
|
|
David
C. Reid(1)
|
4,311,539(7)
|
15.0%
|
|
Bill
M. Conrad(2)
|
600,000(8)
|
2.1%
|
|
Frank
Jennings
(3)
|
0
|
0.0%
|
|
Beth
Reid
|
5,219,606(9)
|
18.0%
|
|
25
Downing Street, #1-501
|
||
|
Denver,
CO 80218
|
||
|
Heemskirk
Consolidated Limited(4)
|
2,400,000
|
8.5%
|
|
Box
96, Collins Street West
|
||
|
Melbourne,
Victoria 8007 Australia
|
||
|
All
officers and directors as a group
|
||
|
(4
persons)
|
10,131,145(5)(6)(7)(8)
|
33.7%
|
____________________
(1) Officer
and director.
(2) Director.
(3) Officer.
(4) Heemskirk
Consolidated Limited identified Kevin Robinson as the individual with the
authority to vote and dispose of these shares. Mr. Robinson has no affiliation
or relationship to our company or our management except as a representative
of
Heemskirk.
(5) Includes
options to purchase 800,000 shares which are currently exercisable.
(6) Includes
2,200,000 shares owned by the reporting person's spouse, of which he disclaims
beneficial ownership.
(7) Includes
options to purchase 600,000 shares which are currently exercisable.
(8) Includes
options to purchase 500,000 shares which are currently exercisable.
(9) Includes
3,019,606 shares owned by the reporting person's spouse, of which she disclaims
beneficial ownership.
_______________________________
Changes
in Control
One
of
the holders of more than 5% of our common stock, Heemskirk Consolidated Limited,
holds the first right to acquire any stock offered by us in the future. While
we
have no plans to issue any other stock in the future, to the extent we do and
this entity exercises its right to acquire all or a portion of that stock,
its
percentage ownership interest in our company may increase. This may result
in a
change in control.
On
behalf
of certain of our shareholders, we have filed a registration statement with
the SEC covering the resale of our common stock as described in the table below.
Of the shares offered by the selling shareholders under this prospectus,
4,322,000 shares were sold in a Private Placement and 257,700 were issued as
a
finder’s fee in connection with the Private Placement. Of the remaining shares
offered by the selling shareholders, 280,000 shares were issued as compensation
to consultants of our company to whom we granted “piggy-back” registration
rights in connection with those shares and 1,000,000 shares are being registered
by William Reid, our Chairman and Chief Executive Officer. All of these
outstanding shares have been held by our shareholders for less than two years
except the shares held by Mr. Reid. We have also agreed to use our best efforts
to keep the registration statement effective and update the prospectus until
the
securities owned by the selling shareholders have been sold or may be sold
without registration or prospectus delivery requirements under the Securities
Act. We will pay the costs and fees of registering the shares, but the selling
shareholders will pay any brokerage commissions, discounts or other expenses
relating to the sale of the shares.
The
registration statement which we have filed with the SEC, of which this
prospectus forms a part, covers the resale of our common stock by the selling
shareholders from time to time under Rule 415 of the 1933 Act. Our agreement
with the selling shareholders is designed to provide those shareholders some
liquidity in their ownership of common stock and to permit secondary public
trading of our securities. The selling shareholders may offer our securities
covered under this prospectus for resale from time to time. The selling
shareholders may also sell, transfer or otherwise dispose of all or a portion
of
our securities in transactions exempt from the registration requirements of
the
1933 Act. (See
"PLAN OF
DISTRIBUTION").
The
table
below presents information as of February 7, 2007 regarding the selling
shareholders and our common stock that the selling shareholders may offer and
sell from time to time under this prospectus. The table is prepared based on
information supplied to us by those shareholders. Except as otherwise noted,
the
individuals listed in the table below have sole voting and investment power
over
the shares. Although we have assumed, for purposes of the table below, that
the
selling shareholders will sell all of the securities offered by this prospectus,
because they may offer all or some of the securities in transactions covered
by
this prospectus or in another manner, no assurance can be given as to the actual
number of shares that will be resold by the selling shareholders. Information
covering the selling shareholders may change from time to time, and changed
information will be presented in a supplement to this prospectus if and when
required. If there is a change in the selling shareholders, and the new selling
shareholders, any pledges, donees or transferees wish to rely upon this
prospectus in the resale of their shares, we will file an amendment to the
registration statement of which this prospectus is a part. Except as described
above, there are no agreements, arrangements or understandings with respect
to
resale of any of the securities covered by this prospectus.
|
|
Number
of
|
Number
|
|
|
||||||||||||||
|
|
Shares
Owned
|
of
Shares
|
Shares
Owned
|
|||||||||||||||
|
Name
of
|
Prior
to the
|
to
be
|
After
Offering (1)
|
|||||||||||||||
|
Selling
Shareholder
|
Offering
|
Offered
|
Number
|
Percent
|
||||||||||||||
|
Suzanne
Veilleux, IRA
|
||||||||||||||||||
| Contributory Account: | ||||||||||||||||||
| 9061-1902(2) |
|
23,000
|
20,000
|
3,000
|
*
|
|||||||||||||
|
Stuart
G. Gauld
|
35,000
|
25,000
|
10,000
|
*
|
||||||||||||||
|
Verne
P. Collier
|
77,000
|
17,000
|
60,000
|
*
|
||||||||||||||
|
Semper
Gestion SA(3)
|
350,000
|
350,000
|
0
|
0.0
|
%
|
|||||||||||||
|
Sequoia
Diversified Growth Fund
|
||||||||||||||||||
|
℅
Semper Gestion SA(4)
|
400,000
|
400,000
|
0
|
0.0
|
%
|
|||||||||||||
|
Sequoia
Aggressive Growth Fund
|
||||||||||||||||||
|
℅
Semper Gestion SA(4)
|
900,000
|
900,000
|
0
|
0.0
|
%
|
|||||||||||||
|
RIG
Fund II
|
||||||||||||||||||
|
℅
Semper Gestion SA(4)
|
250,000
|
250,000
|
0
|
0.0
|
%
|
|||||||||||||
|
Global
Gold & Precious
|
||||||||||||||||||
|
℅
Global Gestion(5)
|
300,000
|
300,000
|
0
|
0.0
|
%
|
|||||||||||||
|
Aran
Asset Management SA(6)
|
150,000
|
150,000
|
0
|
0.0
|
%
|
|||||||||||||
|
Quilvest
Banque Privee(7)
|
135,000
|
135,000
|
0
|
0.0
|
%
|
|||||||||||||
|
PIM
Gestion France SA
|
||||||||||||||||||
|
℅
UG Agri Croissance(8)
|
515,000
|
515,000
|
0
|
0.0
|
%
|
|||||||||||||
|
CBarney
Investments, Ltd.(9)
|
100,000
|
100,000
|
0
|
0.0
|
%
|
|||||||||||||
|
Stuart
G. Gauld IRA Rollover
|
||||||||||||||||||
|
SEC
CORP CTDN(10)
|
25,000
|
25,000
|
0
|
0.0
|
%
|
|||||||||||||
|
Lazarus
Investment Partners
|
||||||||||||||||||
|
LLLP(11)
|
563,000
|
563,000
|
0
|
0.0
|
%
|
|||||||||||||
|
Phillip
M. Barone
|
15,000
|
15,000
|
0
|
0.0
|
%
|
|||||||||||||
|
Andrew
P. Vander Ploeg, TTEE
|
150,000
|
150,000
|
0
|
0.0
|
%
|
|||||||||||||
|
Felix
Martinez, Jr., M.D.
|
20,000
|
20,000
|
0
|
0.0
|
%
|
|||||||||||||
|
Kenneth
D. Wasserman
|
25,000
|
25,000
|
0
|
0.0
|
%
|
|||||||||||||
|
Susan
K. Huebner
|
12,500
|
12,500
|
0
|
0.0
|
%
|
|||||||||||||
|
James
B. Jaqua
|
20,000
|
20,000
|
0
|
0.0
|
%
|
|||||||||||||
|
Robert
M. Nieder
|
25,000
|
25,000
|
0
|
0.0
|
%
|
|||||||||||||
|
Lawrence
Chimerine
|
20,000
|
20,000
|
0
|
0.0
|
%
|
|||||||||||||
|
Steve
Plissy
|
8,000
|
8,000
|
0
|
0.0
|
%
|
|||||||||||||
|
Kent
J. Lund
|
8,000
|
8,000
|
0
|
0.0
|
%
|
|||||||||||||
|
Thomas
D. Wolf
|
8,000
|
8,000
|
0
|
0.0
|
%
|
|||||||||||||
|
Wendell
D. Holt
|
10,000
|
10,000
|
0
|
0.0
|
%
|
|||||||||||||
|
Elmer
F. Molitor
|
10,000
|
10,000
|
0
|
0.0
|
%
|
|||||||||||||
|
Jerry
D. Barney
|
25,000
|
25,000
|
0
|
0.0
|
%
|
|||||||||||||
|
Jeffrey
L. Zimmerman
|
50,000
|
50,000
|
0
|
0.0
|
%
|
|||||||||||||
|
Gary
Blake & Patricia Blake
|
10,000
|
10,000
|
0
|
0.0
|
%
|
|||||||||||||
|
Deadbug
Partnership
(12) (13)
|
20,000
|
20,000
|
0
|
0.0
|
%
|
|||||||||||||
|
Michael
Donnelly
(13)
|
5,572
|
5,572
|
0
|
0.0
|
%
|
|||||||||||||
|
Robert
J. Richmeier Jr.
(13)
|
8,144
|
8,144
|
0
|
0.0
|
%
|
|||||||||||||
|
John
P. Schmaker
(13)
|
5,450
|
5,450
|
0
|
0.0
|
%
|
|||||||||||||
|
Vicki
Barone(13)
|
18,780
|
18,780
|
0
|
0.0
|
%
|
|||||||||||||
|
Margaret
M. Bathgate
(13)
|
100,000
|
100,000
|
0
|
0.0
|
%
|
|||||||||||||
|
Brian
Curd
(13)
|
8,653
|
8,653
|
0
|
0.0
|
%
|
|||||||||||||
|
Marc
Bathgate
(13)
|
10,320
|
10,320
|
0
|
0.0
|
%
|
|||||||||||||
|
David
Drennan
(13)
|
1,500
|
1,500
|
0
|
0.0
|
%
|
|||||||||||||
|
Andrea
Bauer
(13)
|
1,500
|
1,500
|
0
|
0.0
|
%
|
|||||||||||||
|
Steven
Bathgate
(13)
|
10,544
|
10,544
|
0
|
0.0
|
%
|
|||||||||||||
|
Richard
Huebner
(13)
|
9,563
|
9,563
|
0
|
0.0
|
%
|
|||||||||||||
|
Joseph
Lavigne
(13)
|
11,574
|
11,574
|
0
|
0.0
|
%
|
|||||||||||||
|
Wilson
Davis & Co.(14)
|
4,500
|
4,500
|
0
|
0.0
|
%
|
|||||||||||||
|
Ian
J. Cassel
|
47,100
|
47,100
|
0
|
0.0
|
%
|
|||||||||||||
|
Tara
Capital Ventures(15)
|
430,000
|
430,000
|
0
|
0.0
|
%
|
|||||||||||||
|
William
W. Reid(16)
|
5,219,606
|
(17)(18)
|
1,000,000
|
4,219,606
|
(17)(18)
|
14.6
|
%
|
|||||||||||
|
TOTAL:
|
|
5,859,700
|
|
|
||||||||||||||
____________________
* Less
than
1%
(1) Assumes
that all of the shares offered hereby are sold, of which there is no assurance.
(2) The
selling shareholder identified Suzanne Veilleux as the individual who has voting
and investment power over these shares.
(3) The
selling shareholder identified Henri de Raemy as the individual who has voting
and investment power over these shares.
(4) The
selling shareholder identified Olivier Couriel as the individual who has voting
and investment power over these shares.
(5) The
selling shareholder identified Jean Bernard Guyon as the individual who has
voting and investment power over these shares.
(6) The
selling shareholder identified Michael C. Thalmann as the individual who has
voting and investment power over these shares.
(7) The
selling shareholder identified Catherine Lamarre as the individual who has
voting and investment power over these shares.
(8) The
selling shareholder identified Jacques de Pontac as the individual who has
voting and investment power over these shares.
(9) The
selling shareholder identified Cynthia M. Malloy as the individual who has
voting and investment power over these shares.
(10)
The
selling shareholder identified Stuart G. Gauld as the individual who has voting
and investment power over these shares.
(11)
The
selling shareholder identified Justin Borus as the individual who has voting
and
investment power over these shares.
(12) The
selling shareholder identified Joseph A. Lavigne as the individual who has
voting and investment power over these shares.
(13)
The
selling shareholder is associated with a registered United States broker-dealer,
Bathgate Capital Partners, LLC. The listed individual has voting and investment
power over these shares.
(14) The
selling shareholder is a registered United States broker-dealer. The selling
shareholder identified Lyle Davis as the individual who has voting and
investment power over these shares.
(15)
The
selling shareholder identified Peter Grut as the individual who has voting
and
investment power over these shares.
(16)
Chairman, President and Chief Executive Officer of our company.
(17) Includes
options to purchase 800,000 shares which are currently exercisable.
(18) Includes
2,200,000 shares owned by the reporting person's spouse, of which he disclaims
beneficial ownership.
___________________________
Except
as
otherwise noted in the table above and to the best of our knowledge, the selling
shareholders are not associated with or affiliates of United States
broker-dealers, nor at the time of purchase did any of the selling shareholders
have any agreements or understandings, directly or indirectly, with any persons
to distribute the securities. Further, except as otherwise stated, none of
the
selling shareholders have any relationship to our company, except as a
shareholder.
The
selling shareholders and their pledgees, donees, transferees or other successors
in interest may offer the shares of our common stock from time to time after
the
date of this prospectus and will determine the time, manner and size of each
sale in the over the counter market, in privately negotiated transactions or
otherwise. The shares may be offered at prices prevailing in the market or
at
privately negotiated prices. The selling shareholders may negotiate, and may
pay, brokers or dealers commissions, discounts or concessions for their
services. In effecting sales, brokers or dealers engaged by the selling
shareholders may allow other brokers or dealers to participate. However, the
selling shareholders and any brokers or dealers involved in the sale or resale
of the shares may qualify as "underwriters" within the meaning of Section
2(a)(11) of the Securities Act. In addition, the brokers' or dealers'
commissions, discounts or concessions may qualify as underwriters' compensation
under the Securities Act.
The
methods by which the selling shareholders may sell the shares of our common
stock include:
| · |
A
block trade in which a broker or dealer so engaged will attempt to
sell
the shares as agent but may position and resell a portion of the
block, as
principal, in order to facilitate the
transaction;
|
| · |
Sales
to a broker or dealer, as principal, in a market maker capacity or
otherwise and resale by the broker or dealer for its
account;
|
| · |
Ordinary
brokerage transactions and transactions in which a broker solicits
purchases;
|
| · |
Privately
negotiated transactions;
|
| · |
Short
sales;
|
| · |
Any
combination of these methods of sale;
or
|
| · |
Any
other legal method.
|
In
addition to selling their shares under this prospectus, the selling shareholders
may transfer their shares in other ways not involving market makers or
established trading markets, including directly by gift, distribution, or other
transfer, or sell their shares under Rule 144 of the Securities Act rather
than
under this prospectus, if the transaction meets the requirements of Rule 144.
Any selling shareholder who uses this prospectus to sell his shares will be
subject to the prospectus delivery requirements of the SecuritiesAct.
Regulation
M under the Securities Exchange Act of 1934 provides that during the period
that
any person is engaged in the distribution of our shares of common stock, as
defined in Regulation M, such person generally may not purchase our common
stock. The selling shareholders are subject to these restrictions, which may
limit the timing of purchases and sales of our common stock by the selling
shareholders. This may affect the marketability of our common
stock.
The
selling shareholders may use agents to sell the shares. If this happens, the
agents may receive discounts or commissions. The selling shareholders do not
expect these discounts and commissions to exceed what is customary for the
type
of transaction involved. If required, a supplement to his prospectus will set
forth the applicable commission or discount, if any, and the names of any
underwriters, brokers, dealers or agents involved in the sale of the shares.
The
selling shareholders and any underwriters, brokers, dealers or agents that
participate in the distribution of our common stock offered hereby may be deemed
to be "underwriters" within the meaning of the Securities Act, and any profit
on
the sale of shares by them and any discounts, commissions, concessions or other
compensation received by them may be deemed to be underwriting discounts and
commissions under the Securities Act. The selling shareholders may agree to
indemnify any broker or dealer or agent against certain liabilities relating
to
the selling of the shares, including liabilities arising under the Securities
Act.
Upon
notification by the selling shareholders that any material arrangement has
been
entered into with a broker or dealer for the sale of the shares through a block
trade, special offering, exchange distribution or secondary distribution or
a
purchase by a broker or dealer, we will file a supplement to this prospectus,
if
required, pursuant to Rule 424(b) under the Securities Act, disclosing the
material terms of the transaction.
Our
authorized capital consists of 60,000,000 shares of common stock, $0.001 par
value per share, and 5,000,000 shares of preferred stock, $0.001 per share.
As
of February 7, 2007, we had 28,139,552 shares of common stock issued and
outstanding, and no shares of preferred stock outstanding.
The
following discussion summarizes the rights and privileges of our capital stock.
This summary is not complete, and you should refer to our Articles of
Incorporation, as amended, which have been incorporated by reference as an
exhibit to the registration statement of which this prospectus forms a part.
Common
Stock
The
holders of our common stock are entitled to one vote for each share held of
record on all matters submitted to stockholders, including the election of
directors. Cumulative voting for directors is not permitted. Except as provided
by special agreement, the holders of common stock are not entitled to any
preemptive rights and the shares are not redeemable or convertible. All
outstanding common stock is, and all common stock offered hereby will be, when
issued and paid for, fully paid and nonassessable. The number of authorized
shares of common stock may be increased or decreased (but not below the number
of shares then outstanding or otherwise reserved under obligations for issuance
by us) by the affirmative vote of a majority of shares cast at a meeting of
our
shareholders at which a quorum is present.
Our
Articles of Incorporation and Bylaws do not include any provision that would
delay, defer or prevent a change in control of our company. However, as a matter
of Colorado law, certain significant transactions would require the affirmative
vote of a majority of the shares eligible to vote at a meeting of shareholders
which requirement could result in delays to or greater cost associated with
a
change in control of the company.
The
holders of our common stock are entitled to dividends if, as and when declared
by our Board of Directors from legally available funds, subject to the
preferential rights of the holders of any outstanding preferred stock. Upon
any
voluntary or involuntary liquidation, dissolution or winding up of our affairs,
the holders of our common stock are entitled to share, on a pro rata basis,
all
assets remaining after payment to creditors and prior to distribution rights,
if
any, of any series of outstanding preferred stock.
Preferred
Stock
Our
Articles of Incorporation vest our Board of Directors with authority to divide
the preferred stock into series and to fix and determine the relative rights
and
preferences of the shares of any such series so established to the full extent
permitted by the laws of the State of Colorado and our Articles of Incorporation
in respect to, among other things, (i) the number of shares to constitute such
series and the distinctive designations thereof; (ii) the rate and preference
of
dividends, if any, the time of payment of dividends, whether dividends are
cumulative and the date from which any dividend shall accrue; (iii) whether
preferred stock may be redeemed and, if so, the redemption price and the terms
and conditions of redemption; (iv) the liquidation preferences payable on
preferred stock in the event of involuntary or voluntary liquidation; (v)
sinking fund or other provisions, if any, for redemption or purchase of
preferred stock; (vi) the terms and conditions by which preferred stock may
be
converted, if the preferred stock of any series are issued with the privilege
of
conversion; and (vii) voting rights, if any.
As
of the
date of this prospectus, we have not designated or authorized any preferred
stock for issuance.
Restrictions
on Future Sales of Our Common Stock
Under
the
terms of an agreement entered into with one holder of our common stock, we
are
obligated to offer that entity the first right to purchase our common stock
in
any future offering until August 2008. We do not believe the terms of this
arrangement will affect the market for our common stock, or our future
operations. However, it provides the holder the ability to preserve or increase
its percentage interest in our company.
Transfer
Agent
We
have
appointed Corporate Stock Transfer, Inc. ("CST") in Denver as transfer agent
for
our common stock. CST is located at 3200 Cherry Creek Drive South, Suite 430,
Denver, Colorado 80209 and its telephone number is (303) 282-4800.
Reports
to Shareholders
Following
the date of this prospectus, we will be required to file periodic reports with
the SEC, including quarterly and annual reports containing financial information
about our company. In the future, we may register our common stock with the
SEC
under the Securities Exchange Act of 1934. At that time, we would be required
to
deliver an annual report to our shareholders in conjunction with each annual
meeting of shareholders. Copies of the reports that we file with the SEC can
be
viewed on the SEC website. (See
"WHERE
YOU
CAN FIND MORE INFORMATION").We
may
also deliver quarterly or other periodic information to our shareholders.
Sales
of
substantial amounts of common stock (including shares issued upon the exercise
of outstanding options) in the public market after this offering could cause
the
market price of our common stock to decline. Those sales also might make it
more
difficult for us to sell equity-related securities in the future or reduce
the
price at which we could sell any equity-related securities.
In
May
2006, the SEC declared effective a registration statement covering the resale
of
approximately 8,900,000 share of common stock by the selling shareholders
named
in that prospectus, as well as 4,600,000 shares sold by us. Of the outstanding
shares which were not registered in the May 2006 registration, all are
immediately eligible for sale under Rule 144. As a result, all of our
outstanding shares of common stock are currently eligible for
sale.
Rule
144
In
general, under Rule 144 as currently in effect, a person deemed to be our
affiliate, or a person holding restricted shares who beneficially owns shares
that were not acquired from us or our affiliate within the previous one year,
would be entitled to sell within any three-month period a number of shares
that
does not exceed the greater of:
| · |
1%
of the then outstanding shares of our common stock,
or
|
| · |
the
average weekly trading volume of our common stock during the four
calendar
weeks preceding the date on which notice of the sale is filed with
the SEC
if our common stock is listed on a national securities exchange or
quoted
on the automated quotation system of a national securities organization
at
the time of the proposed sale. Otherwise the volume limitation is
limited
to 1% of our then-outstanding common stock.
|
Sales
under Rule 144 are subject to requirements relating to manner of sale, notice
and availability of current public information about us.
Rule
144(k)
A
person
who is not deemed to have been our affiliate at any time during the 90 days
immediately preceding a sale and who owned shares for at least two years,
including the holding period of any prior owner who is not an affiliate, would
be entitled to sell restricted shares following this offering under Rule 144(k)
without complying with the volume limitations, manner of sale provisions, public
information or notice requirements of Rule 144.
You
may
read and copy any document we file at the SEC's Public Reference Rooms at 100
F
Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330
for
further information on the Public Reference Rooms. You can also obtain copies
of
our SEC filings by going to the SEC's website at http://www.sec.gov.
We
have
filed with the SEC a registration statement on Form SB-2 to register the shares
of our common stock. This prospectus is part of that registration statement
and,
as permitted by the SEC's rules, does not contain all of the information set
forth in the registration statement. For further information about us or our
common stock, you may refer to the registration statement and to the exhibits
filed as part of the registration statement. The description of all agreements
or the terms of those agreements contained in this prospectus are specifically
qualified by reference to the agreements, filed or incorporated by reference
in
the registration statement.
We
will
provide copies of our reports and other information which we file with the
SEC
without charge to each person who receives a copy of this prospectus. Your
request for this information should be directed to our President, William Reid,
at our corporate office in Denver, Colorado. You can also review this
information at the public reference rooms of the SEC and on the SEC's website
as
described above.
We
have
been advised on the legality of the shares included in this prospectus by
Dufford & Brown, P.C., of Denver, Colorado.
Our
financial statements as of December 31, 2005 and for the two years then ended
included in this prospectus have been included in reliance on the report of
Stark Winter Schenkein & Co., LLP, our independent registered public
accounting firm. These financial statements have been included on the authority
of this firm as an expert in auditing and accounting.
|
Page
|
|
|
Index
to Financial Statements
|
F-1
|
|
Consolidated
Balance Sheet (unaudited) as of September 30, 2006
|
F-2
|
|
|
|
|
Consolidated
Statements of Operations (unaudited) for the
|
|
|
three
months ended September 30, 2006 and 2005
|
F-3
|
|
|
|
|
Consolidated
Statements of Operations (unaudited) for the
|
|
|
nine
months ended September 30, 2006 and 2005, and
|
|
|
Inception
to September 30, 2006
|
F-4
|
|
|
|
|
Consolidated
Statements of Cash Flows (unaudited) for the
|
|
|
nine
months ended September 30, 2006 and 2005, and
|
|
|
Inception
to September 30, 2006
|
F-5
|
|
|
|
|
Notes
to Consolidated Financial Statements (unaudited)
|
F-6
|
|
Years
Ended December 31, 2005 and 2004
|
|
|
Report
of Independent Registered Public Accounting Firm
|
F-11
|
|
Consolidated
Statements of Operations for the years
|
|
|
ended
December 31, 2005 and 2004 and the period
|
|
|
August
24, 1998 (Inception) to December 31, 2005
|
F-12
|
|
Consolidated
Balance Sheet at December 31, 2005
|
F-13
|
|
Consolidated
Statements of Changes in Shareholders' Equity
|
|
|
(Deficit)
for the period from Inception (August 24, 1998)
|
|
|
to
December 31, 2005
|
F-14
|
|
Consolidated
Statements of Cash Flows for the years ended
|
|
|
December
31, 2005 and 2004, and the period
|
|
|
August
24, 1998 (Inception) to December 31, 2005
|
F-15
|
|
Notes
to Consolidated Financial Statements
|
F-16
|
|
GOLD
RESOURCE CORPORATION AND SUBSIDIARIES
|
|||||||
|
(An
Exploration Stage Company)
|
|||||||
|
CONSOLIDATED
BALANCE SHEET
|
|||||||
|
as
of September 30, 2006
|
|||||||
|
(Unaudited)
|
|||||||
|
ASSETS
|
|
||||||
|
Current
assets:
|
|||||||
|
Cash
and cash equivalents
|
$
|
3,298,609
|
|||||
|
Total
current assets
|
3,298,609
|
||||||
|
Investment
in mineral properties
|
-
|
||||||
|
Fixed
assets - net
|
42,201
|
||||||
|
Other
assets
|
1,469
|
||||||
|
Total
assets
|
$
|
3,342,279
|
|||||
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|||||||
|
Current
liabilities:
|
|||||||
|
Accounts
payable and accrued expenses
|
$
|
15,519
|
|||||
|
Accrued
stock compensation
|
275,000
|
||||||
|
Total
current liabilities
|
290,519
|
||||||
|
Shareholders'
equity:
|
|||||||
|
Preferred
stock - $0.001 par value, 5,000,000 shares authorized:
|
|||||||
|
No
shares issued or outstanding
|
-
|
||||||
|
Common
stock - $0.001 par value, 60,000,000 shares authorized:
|
|||||||
|
23,044,852
shares issued and outstanding
|
23,045
|
||||||
|
Additional
paid-in capital
|
8,702,846
|
||||||
|
Accumulated
(deficit) during the exploration stage
|
(5,673,478
|
)
|
|||||
|
Other
comprehensive income:
|
|||||||
|
Currency
translation adjustment
|
(653
|
)
|
|||||
|
Total
shareholders' equity
|
3,051,760
|
||||||
|
Total
liabilities and shareholders' equity
|
$
|
3,342,279
|
|||||
The
accompanying notes are an integral part of these consolidated financial
statements.
|
GOLD
RESOURCE CORPORATION AND SUBSIDIARIES
|
|||||||
|
(An
Exploration Stage Company)
|
|||||||
|
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|||||||
|
for
the three months ended September 30, 2006 and 2005
|
|||||||
|
(Unaudited)
|
|||||||
|
2006
|
2005
|
||||||
|
Other
Revenues:
|
|||||||
|
Interest
income
|
$
|
7,113
|
$
|
3,248
|
|||
|
Costs
and Expenses:
|
|||||||
|
General
and administrative
|
316,619
|
63,005
|
|||||
|
Stock
Based Compensation - general and administrative
|
|||||||
|
Stock
awards
|
275,000
|
-
|
|||||
|
Property
acquisition
|
100,000
|
79,051
|
|||||
|
Property
exploration and evaluation
|
150,647
|
321,384
|
|||||
|
Depreciation
|
4,050
|
3,917
|
|||||
|
Total
costs and expenses
|
846,316
|
467,357
|
|||||
|
Net
(loss)
|
(839,203
|
)
|
(464,109
|
)
|
|||
|
Other
comprehensive income:
|
|||||||
|
Currency
translation gain (loss)
|
197
|
(81
|
)
|
||||
|
Net
comprehensive (loss)
|
$
|
(839,006
|
)
|
$
|
(464,190
|
)
|
|
|
Net
(loss) per common share:
|
|||||||
|
Basic
and Diluted
|
$
|
(0.04
|
)
|
$
|
(0.03
|
)
|
|
|
Weighted
average shares outstanding:
|
|||||||
|
Basic
and Diluted
|
19,597,963
|
16,547,781
|
|||||
The
accompanying notes are an integral part of these consolidated financial
statements.
|
GOLD
RESOURCE CORPORATION AND SUBSIDIARIES
|
||||||||||
|
(An
Exploration Stage Company)
|
||||||||||
|
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
||||||||||
|
for
the nine months ended September 30, 2006 and 2005,
|
||||||||||
|
and
for the period from Inception (August 24, 1998) to September 30,
2006
|
||||||||||
|
(Unaudited)
|
||||||||||
|
Inception
|
||||||||||
|
(August
24, 1998) to
|
||||||||||
|
2006
|
2005
|
September
30, 2006
|
||||||||
|
Other
Revenues:
|
||||||||||
|
Interest
income
|
$
|
7,954
|
$
|
3,311
|
$
|
15,913
|
||||
|
Costs
and Expenses:
|
||||||||||
|
General
and administrative
|
781,090
|
103,142
|
1,210,396
|
|||||||
|
Stock
Based Compensation - general and administrative
|
||||||||||
|
Stock
awards
|
375,000
|
87,500
|
962,500
|
|||||||
|
Grant
of stock options
|
141,350
|
-
|
141,350
|
|||||||
|
Management
contract - U. S. Gold, related party
|
-
|
-
|
752,191
|
|||||||
|
Property
acquisition
|
100,000
|
95,796
|
458,681
|
|||||||
|
Property
exploration and evaluation
|
361,735
|
393,783
|
2,144,875
|
|||||||
|
Depreciation
|
12,150
|
3,917
|
19,398
|
|||||||
|
Total
costs and expenses
|
1,771,325
|
684,138
|
5,689,391
|
|||||||
|
Net
(loss)
|
(1,763,371
|
)
|
(680,827
|
)
|
(5,673,478
|
)
|
||||
|
Other
comprehensive income:
|
||||||||||
|
Currency
translation gain (loss)
|
(792
|
)
|
165
|
(653
|
)
|
|||||
|
Net
comprehensive (loss)
|
$
|
(1,764,163
|
)
|
$
|
(680,662
|
)
|
$
|
(5,674,131
|
)
|
|
|
Net
(loss) per common share:
|
||||||||||
|
Basic
and Diluted
|
$
|
(0.09
|
)
|
$
|
(0.04
|
)
|
||||
|
Weighted
average shares outstanding:
|
||||||||||
|
Basic
and Diluted
|
18,794,296
|
15,425,922
|
||||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
|
GOLD
RESOURCE CORPORATION AND SUBSIDIARIES
|
||||||||||
|
(An
Exploration Stage Company)
|
||||||||||
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
||||||||||
|
for
the nine months ended September 30, 2006 and 2005,
|
||||||||||
|
and
for the period from Inception (August 24, 1998) to September 30,
2006
|
||||||||||
|
(Unaudited)
|
||||||||||
|
Inception
|
||||||||||
|
(August
24, 1998) to
|
||||||||||
|
2006
|
2005
|
September
30, 2006
|
||||||||
|
Cash
flows from operating activities:
|
||||||||||
|
Net
cash (used in) operating activities
|
$
|
(1,238,773
|
)
|
$
|
(654,203
|
)
|
$
|
(3,804,782
|
)
|
|
|
Cash
flows from investing activities:
|
||||||||||
|
Capital
expenditures
|
-
|
(39,271
|
)
|
(61,732
|
)
|
|||||
|
Net
cash (used in) investing activities
|
-
|
(39,271
|
)
|
(61,732
|
)
|
|||||
|
Cash
flows from financing activities:
|
||||||||||
|
Cash
proceeds from sale of stock and exercise of options
|
4,361,200
|
1,422,500
|
6,615,123
|
|||||||
|
Proceeds
from debentures - founders
|
-
|
-
|
50,000
|
|||||||
|
Proceeds
from exploration funding agreement - Canyon Resources
|
-
|
-
|
500,000
|
|||||||
|
Net
cash provided by financing activities
|
4,361,200
|
1,422,500
|
7,165,123
|
|||||||
|
Net
increase in cash and equivalents
|
3,122,427
|
729,026
|
3,298,609
|
|||||||
|
Cash
and equivalents at beginning of period
|
176,182
|
9,560
|
-
|
|||||||
|
Cash
and equivalents at end of period
|
$
|
3,298,609
|
$
|
738,586
|
$
|
3,298,609
|
||||
The
accompanying notes are an integral part of these consolidated financial
statements.
GOLD
RESOURCE CORPORATION AND SUBSIDIARIES
(AN
EXPLORATION STAGE COMPANY)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2006
(Unaudited)
1. Summary
of Significant Accounting Policies
Basis
of Presentation. The
interim consolidated financial statements included herein have been prepared
by
Gold Resource Corporation (the "Company"), without audit, pursuant to the rules
and regulations of the Securities and Exchange Commission (“SEC”) pursuant to
Item 310 of Regulation S-B. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America (“US GAAP”) have
been condensed or omitted pursuant to such SEC rules and regulations. In the
opinion of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation of financial position as of
September 30, 2006, results of operations for the three months and nine months
ended September 30, 2006 and 2005, and cash flows for the nine months ended
September 30, 2006 and 2005, as applicable, have been made. The results for
these interim periods are not necessarily indicative of the results for the
entire year. The accompanying financial statements should be read in conjunction
with the financial statements and the notes thereto included in the Company’s
prospectus dated May 15, 2006.
The
Company was organized under the laws of the State of Colorado on August 24,
1998. The Company has been engaged in the exploration for precious and base
metals, primarily in Mexico, as an exploration stage company. The Company has
not generated any revenues from operations. The consolidated financial
statements included herein are expressed in United States dollars, the Company's
functional currency.
Basis
of Consolidation.
The
consolidated financial statements include the accounts of the Company and its
wholly owned Mexican corporate subsidiaries, Don David Gold S.A. de C.V. and
Golden Trump S.A. de C.V. The expenditures of Don David Gold and Golden Trump
are generally incurred in Mexican pesos. Significant inter-company accounts
and
transactions have been eliminated.
Estimates.
The
preparation of financial statements in conformity with US GAAP requires
management to make estimates and assumptions that affect the reported amount
of
assets and liabilities and disclosure of contingent assets and liabilities
at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. Management routinely makes judgments and estimates about the effects
of matters that are inherently uncertain. Estimates that are critical to the
accompanying consolidated financial statements include the identification and
valuation of derivative instruments, and the amortization of discounts on
convertible securities arising from warrants and bifurcated derivative
instruments. Management bases its estimates and judgements on historical
experience and on various other factors that are believed to be reasonable
under
the circumstances, the results of which form the basis for making judgments
about the carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results could differ from these estimates.
Estimates and assumptions are revised periodically and the effects of revisions
are reflected in the financial statements in the period it is determined to
be
necessary.
Per
Share Amounts.
SFAS
128, “Earnings Per Share,” provides for the calculation of “Basic” and “Diluted”
earnings per share. Basic earnings per share includes no dilution and is
computed by dividing income available to common shareholders by the
weighted-average number of shares outstanding during the period. Diluted
earnings per share reflect the potential dilution of securities that could
share
in the earnings of the Company, similar to fully diluted earnings per share.
Potentially dilutive securities, such as common stock options, are excluded
from
the calculation when their effect would be anti-dilutive. As of September 30,
2006, options to purchase 2,700,000 shares of common stock would have an
anti-dilutive effect and were therefore excluded from the
calculation.
GOLD
RESOURCE CORPORATION AND SUBSIDIARIES
(AN
EXPLORATION STAGE COMPANY)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2006
(Unaudited)
Stock
Option Plans.
Effective January 1, 2006, the Company implemented SFAS 123(R), “Accounting for
Stock-Based Compensation,” requiring the Company to provide compensation costs
for the Company's stock option plans determined in accordance with the fair
value based method prescribed in SFAS 123(R). The Company estimates the fair
value of each stock option at the grant date by using the Black-Scholes
option-pricing model and provides for expense recognition over the service
period, if any, of the stock option.
Prior
to
January 1, 2006, the Company applied APB Opinion 25, “Accounting for Stock
Issued to Employees,” and related interpretations in accounting for all stock
option plans. Under APB Opinion 25, no compensation cost was recognized for
stock options issued to employees as the exercise price of the stock options
granted by the Company equaled or exceeded the market price of the underlying
common stock on the date of grant.
Foreign
Operations.
The
Company's present exploration activities are in Mexico. As with all types of
international business operations, currency fluctuations, exchange controls,
restrictions on foreign investment, changes to tax regimes, political action
and
political instability could impair the value of the Company's investments.
Foreign
Currency Translation.
The
local currency, the Mexican peso, is the functional currency for the Company's
subsidiaries. Assets and liabilities are translated using the exchange rate
in
effect at the balance sheet date. Income and expenses are translated at the
average exchange rate for the year. Translation adjustments are reported as
a
separate component of shareholders' equity.
2. Going
Concern
The
Company's financial statements are prepared on a going concern basis, which
contemplates the realization of assets and satisfaction of obligations in the
normal course of business. The Company has no source of operating revenue and
has financed operations through the sale and exchange of equity. The Company
has
incurred losses since its inception aggregating $5,673,478.
The
Company's ability to continue as a going concern is contingent upon its ability
to raise funds through the sale of equity, joint venture or sale of its assets,
and attaining profitable operations. The Company sold 4,600,000 shares of common
stock in a public offering under a Form SB-2 that was declared effective on
May
15, 2006. The Company received cash proceeds of $4,351,200 (net of finders'
fees
of $248,800). Additional funds will be necessary in the future. The financial
statements do not include any adjustments to the amount and classification
of
assets and liabilities that may be necessary should the Company not continue
as
a going concern.
3. Mineral
Properties
El
Aguila. Effective
November 1, 2002, the Company, through its subsidiary, Don David Gold S.A.
de
C.V., leased a prospective gold/silver property located in the State of Oaxaca,
Mexico, designated the "El Aguila" property, from Jose Perez Reynoso, a
consultant to the Company. The El Aguila property is an exploration stage
property and incorporates approximately 4,685 acres. The lease agreement for
El
Aguila is subject to a 4% net smelter return royalty to the lessor where
production is sold in the form of gold/silver ore and 5% for production sold
in
concentrate form. The Company has made periodic payments, in prior years,
required under the lease which aggregated $260,000 through September 30, 2006.
The final advance royalty payment of $100,000 was paid in September 2006.
GOLD
RESOURCE CORPORATION AND SUBSIDIARIES
(AN
EXPLORATION STAGE COMPANY)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2006
(Unaudited)
Through
September 30, 2006, the Company has spent or incurred approximately $1,811,000
in acquisition, exploration and related costs for El Aguila of which
approximately $462,000 was spent in 2006.
4. Property
and Equipment
At
September 30, 2006, property and equipment consisted of the
following:
|
Trucks
and autos
|
$
|
37,998
|
||
|
Office
furniture and equipment
|
23,602
|
|||
|
Subtotal
|
61,600
|
|||
|
Less:
accumulated depreciation
|
(19,399
|
)
|
||
|
Total
|
$
|
42,201
|
5. Income
Taxes
The
Company and its subsidiaries are subject to income taxes on income arising
in,
or derived from, the tax jurisdictions in which they operate.
Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes
and
the amounts used for income tax purposes. Deferred tax assets are comprised
mainly of net operating loss carry-forwards.
The
reconciliation between the statutory federal tax rate and the effective tax
rate
as a percentage is as follows:
|
2006
|
2005
|
||||||
|
Statutory
federal income tax rate
|
34
|
%
|
34
|
%
|
|||
|
Effect
of net operating loss carry-forward
|
(24
|
)
|
(31
|
)
|
|||
|
Effect
of stock grants
|
(10
|
)
|
(3
|
)
|
|||
|
Tax
provision
|
-
|
%
|
-
|
%
|
|||
At
September 30, 2006, the Company estimates that its tax loss carry-forwards
are
approximately $3,808,000. These net operating loss carry-forwards (“NOL”) are
available to offset future taxable income, if any, and expire at various dates
through 2025. The principal difference between the accumulated deficit for
book
purposes and the NOL for income tax purposes relates to stock compensation
expense which is not deductible for tax purposes.
At
this
time, the Company is unable to determine if it will be able to utilize the
potential benefit of the tax loss carry-forward. Accordingly, the Company has
provided a valuation allowance for the entire amount of the deferred tax
asset.
6. Shareholders’
Equity
Effective
February 21, 2005, the Company declared and effected a 100% forward stock split
where one share of common stock, par value $.001, was issued for each share
outstanding as of that date. These financial statements reflect the effect
of
this 100% stock split.
GOLD
RESOURCE CORPORATION AND SUBSIDIARIES
(AN
EXPLORATION STAGE COMPANY)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2006
(Unaudited)
During
the nine months ended September 30, 2006, the Company sold 4,600,000 shares
of
common stock in a public offering under a Form SB-2 registration statement
that
was declared effective by the Securities and Exchange Commission ("SEC") on
May
15, 2006. The Company received cash proceeds of $4,351,200 (net of finders'
fees
of $248,800).
In
addition to the sale of stock in its public offering, the Company issued shares
of common stock in the following transactions during the nine months ended
September 30, 2006. Cash proceeds of $10,000 were received pursuant to the
exercise of options to purchase 40,000 shares of common stock. The Company
also
issued 100,000 restricted shares of common stock to a director, valued at
$100,000, as partial consideration for his service on the Board of Directors.
During
the nine months ended September 30, 2006, the Company agreed to issue 250,000
shares of restricted common stock in exchange for investor relations services.
These shares were valued at $1.10 per share and a charge of $275,000 was
recorded during the third quarter. These shares were issued subsequent to
September 30, 2006.
Stock
Options.
The
Company has a non-qualified stock option and stock grant plan under which stock
options and stock grants may be granted to key employees, directors and others
(the "Plan"). Options to purchase shares under the Plan must be granted at
fair
value as of the date of the grant. A total of 6,000,000 shares of common stock
have been reserved under the Plan.
Effective
January 1, 2006, the Company implemented the rules of SFAS 123(R), “Accounting
for Stock-Based Compensation,” which requires the Company to expense as
compensation the value of grants and options under the Company's stock option
plan as determined in accordance with the fair value based method prescribed
in
SFAS 123(R). The Company estimates the fair value of each stock option at the
grant date by using the Black-Scholes option-pricing model.
During
the nine months ended September 30, 2006, stock options were granted to purchase
1,100,000 shares of common stock at an exercise price of $1.00. The Company
recorded stock option compensation expense of $141,350 based upon the minimum
value method using the following assumptions: expected life of 2.75 years,
stock
price and fair market value on date of grant of $1.00, dividend yield of 0%,
and
interest rate of 5%.
The
following table summarizes information about outstanding stock options at
September 30, 2006:
|
Number
of
shares
|
|
Weighted
average
exercise
price
|
|||||
|
Outstanding,
beginning of year
|
1,640,000
|
$
|
0.25
|
||||
|
Granted
|
1,100,000
|
$
|
1.00
|
||||
|
Exercised
|
(40,000
|
)
|
$
|
0.25
|
|||
|
Outstanding,
September 30, 2006
|
2,700,000
|
$
|
0.56
|
||||
GOLD
RESOURCE CORPORATION AND SUBSIDIARIES
(AN
EXPLORATION STAGE COMPANY)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2006
(Unaudited)
7. General
and Administrative Expenses
General
and administrative expense included the following for the nine months ended
September 30, 2006 and 2005:
|
2006
|
|
2005
|
|
||||
|
Salaries,
consulting fees and benefits
|
$
|
374,094
|
$
|
19,200
|
|||
|
Legal
and accounting
|
151,407
|
28,586
|
|||||
|
Investor
relations
|
95,001
|
3,788
|
|||||
|
Travel
related
|
83,202
|
15,356
|
|||||
|
Other
|
77,386
|
36,212
|
|||||
|
$
|
781,090
|
$
|
103,142
|
||||
8.
Related
Party Transactions
During
the nine months ended September 30, 2006, Messrs. William Reid and David Reid
each loaned $160,000 to the Company. The loans were non-interest bearing and
were due on demand. These loans were paid in full in September,
2006.
9. Subsequent
Events
Subsequent
to September 30, 2006, the Company entered into agreements with various
consulting firms to provide investor relations services in exchange for a
combination of cash and shares of the Company’s common stock. These agreements
are for various periods of time up to one year and provide for the issuance
of
up to 120,000 shares of restricted common stock and the issuance of up to
100,000 options to purchase common stock for an exercise price of $1.00. As
of
the date that this report was filed, 10,000 of these shares had been issued.
Also
subsequent to September 30, 2006, the Company issued 200,000 shares of common
stock pursuant to the exercise of stock options, and received cash proceeds
of
$50,000. The Company also issued 250,000 restricted common shares pursuant
to
the investor relations services agreement described in footnote 6.
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Shareholders
and Board of Directors
Gold
Resource Corporation
We
have audited the accompanying consolidated balance sheet of Gold Resource
Corporation (an exploration stage company) as of December 31, 2005, and the
related consolidated statements of operations, shareholders' equity and cash
flows for the years ended December 31, 2004 and 2005, and the period
August 24, 1998 (inception) to December 31, 2005. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on
our audits.
We
conducted our audits in accordance with the auditing standards of the Public
Company Accounting Oversight Board (United States.) Those standards require
that
we plan and perform the audits to obtain reasonable assurance about whether
the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates be management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide
a reasonable basis for our opinion.
In
our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Gold Resource
Corporation (an exploration stage company) as of December 31, 2005, and the
results of its operations and its cash flows for the years ended
December 31, 2004 and 2005, and the period August 24, 1998 (inception)
to December 31, 2005, in conformity with accounting principles generally
accepted in the United States of America.
The
accompanying consolidated financial statements have been prepared assuming
that
the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has suffered recurring losses
and
has no revenue generating activities. These factors raise substantial doubt
about the Company's ability to continue as a going concern. Management's
plans
in regard to these matters are also discussed in Note 2. The consolidated
financial statements do not include any adjustments that might result from
the
outcome of this uncertainty.
/s/
Stark
Winter Schenkein & Co., LLP
March 15,
2006
Denver,
Colorado
GOLD
RESOURCE CORPORATION
(An
Exploration Stage Company)
CONSOLIDATED
STATEMENTS OF OPERATIONS
For
the Years Ended December 31, 2005 and 2004,
and
Inception to December 31, 2005
|
|
2005
|
2004
|
Inception
(August 24,
1998) to
December 31,
2005
|
|||||||
|
Other
Revenues:
|
|
|
|
|||||||
|
Interest
income
|
$
|
6,174
|
$
|
113
|
$
|
7,959
|
||||
|
|
||||||||||
|
Costs
and Expenses:
|
|
|
|
|||||||
|
General,
administration
|
286,219
|
27,732
|
429,306
|
|||||||
|
General
adminstration—stock compensation expense
|
87,500
|
500,000
|
587,500
|
|||||||
|
Management
contract—U.S. Gold, related party
|
—
|
—
|
752,191
|
|||||||
|
Property
acquisition related
|
103,548
|
68,591
|
358,681
|
|||||||
|
Property
exploration and evaluation
|
739,570
|
257,383
|
1,783,140
|
|||||||
|
Depreciation
|
7,248
|
—
|
7,248
|
|||||||
|
|
||||||||||
|
Total
Expenses
|
1,224,085
|
853,706
|
3,918,066
|
|||||||
|
|
||||||||||
|
Net
(loss)
|
(1,217,911
|
)
|
(853,593
|
)
|
(3,910,107
|
)
|
||||
|
|
||||||||||
|
Comprehensive
income (loss):
|
|
|
|
|||||||
|
Translation
gain (loss)
|
200
|
(73
|
)
|
139
|
||||||
|
|
||||||||||
|
Net
comprehensive (loss)
|
$
|
(1,217,711
|
)
|
$
|
(853,666
|
)
|
$
|
(3,909,968
|
)
|
|
|
|
||||||||||
|
Basic
and diluted per share data:
|
|
|
|
|||||||
|
Net
(loss)
|
||||||||||
|
Basic
and diluted
|
$
|
(0.08
|
)
|
$
|
(0.08
|
)
|
||||
|
|
||||||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
GOLD
RESOURCE CORPORATION
(An
Exploration Stage Company)
CONSOLIDATED
BALANCE SHEET
December 31,
2005
|
ASSETS
|
|
|
|
|
|||
|
Current
assets:
|
|
|
|
|
|||
|
|
Cash
and cash equivalents
|
|
$
|
176,182
|
|
||
|
|
Prepaid
rent
|
|
|
14,977
|
|
||
|
|
|
|
|||||
|
|
|
Total
current assets
|
|
|
191,159
|
|
|
|
|
|
|
|||||
|
Investment
in mineral properties
|
|
|
—
|
|
|||
|
Fixed
assets-net
|
|
|
54,352
|
|
|||
|
Other
assets
|
|
|
1,469
|
|
|||
|
|
|
|
|||||
|
|
|
Total
assets
|
|
$
|
246,980
|
|
|
|
|
|
|
|||||
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|||
|
Current
liabilities:
|
|
|
|
|
|||
|
|
Accounts
payable and accrued liabilities
|
|
$
|
24,837
|
|
||
|
|
Other
liabilities-related parties
|
|
|
8,770
|
|
||
|
|
|
|
|||||
|
|
|
Total
current liabilities
|
|
|
33,607
|
|
|
|
|
|
|
|||||
|
Shareholders'
equity:
|
|
|
|
|
|||
|
|
Preferred
stock, $.001 par value, 5,000,000 shares authorized, none issued
or
outstanding
|
|
|
—
|
|
||
|
|
Common
stock, $.001 par value, 60,000,000 shares authorized, 18,304,852
shares
issued and outstanding
|
|
|
18,305
|
|
||
|
|
Additional
paid-in capital
|
|
|
4,105,036
|
|
||
|
|
Accumulated
(deficit) during the exploration stage
|
|
|
(3,910,107
|
)
|
||
|
|
Other
comprehensive income:
|
|
|
|
|
||
|
|
Currency
translation adjustment
|
|
|
139
|
|
||
|
|
|
|
|||||
|
|
|
Total
shareholders' equity
|
|
|
213,373
|
|
|
|
|
|
|
|||||
|
|
|
|
Total
liabilities and shareholders' equity
|
|
$
|
246,980
|
|
|
|
|
|
|||||
The
accompanying notes are an integral part of these consolidated financial
statements.
GOLD
RESOURCE CORPORATION
(An
Exploration Stage Company)
CONSOLIDATED
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For
the period from Inception (August 24, 1998) to December 31, 2005
|
|
Number
of
Common
Shares
|
Stock
Par
Value
|
Additional
Paid-in
Capital
|
Accumulated
(Deficit)
|
Comprehensive
Income
(Loss)
|
Total
Shareholders'
Equity
(Deficit)
|
|||||||||||||
|
Balance—Inception
August 24, 1998
|
—
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
—
|
||||||||
|
Shares
for contributed capital at $.005 per share—related parties
|
2,800,000
|
2,800
|
(1,400
|
)
|
—
|
—
|
1,400
|
||||||||||||
|
Net
(loss)
|
—
|
—
|
—
|
(1,657
|
)
|
—
|
(1,657
|
)
|
|||||||||||
|
|
|||||||||||||||||||
|
Balance,
December 31, 1998
|
2,800,000
|
2,800
|
(1,400
|
)
|
(1,657
|
)
|
—
|
(257
|
)
|
||||||||||
|
Shares
for contributed capital at $.005 per share—related parties
|
1,000,000
|
1,000
|
(500
|
)
|
—
|
—
|
500
|
||||||||||||
|
Net
(loss)
|
—
|
—
|
—
|
(663
|
)
|
—
|
(663
|
)
|
|||||||||||
|
|
|||||||||||||||||||
|
Balance,
December 31, 1999
|
3,800,000
|
3,800
|
(1,900
|
)
|
(2,320
|
)
|
—
|
(420
|
)
|
||||||||||
|
Shares
issued for management contract—related party at $.17 per
share
|
1,226,666
|
1,226
|
202,578
|
—
|
—
|
203,804
|
|||||||||||||
|
Net
(loss)
|
—
|
—
|
—
|
(205,110
|
)
|
—
|
(205,110
|
)
|
|||||||||||
|
|
|||||||||||||||||||
|
Balance,
December 31, 2000
|
5,026,666
|
5,026
|
200,678
|
(207,430
|
)
|
—
|
(1,726
|
)
|
|||||||||||
|
Shares
issued for management contract—related party at $.14 per
share
|
1,333,334
|
1,334
|
187,053
|
—
|
—
|
188,387
|
|||||||||||||
|
Conversion
of debenture—related parties at $.25 per share
|
200,000
|
200
|
49,800
|
—
|
—
|
50,000
|
|||||||||||||
|
Sale
of shares for cash at $.25 per share
|
820,000
|
820
|
204,180
|
—
|
—
|
205,000
|
|||||||||||||
|
Net
(loss)
|
—
|
—
|
—
|
(346,498
|
)
|
—
|
(346,498
|
)
|
|||||||||||
|
|
|||||||||||||||||||
|
Balance,
December 31, 2001
|
7,380,000
|
7,380
|
641,711
|
(553,928
|
)
|
—
|
95,163
|
||||||||||||
|
Shares
issued for cash at $.25 per share
|
392,000
|
392
|
97,608
|
—
|
—
|
98,000
|
|||||||||||||
|
Shares
issued for cash at $.17 per share
|
1,351,352
|
1,351
|
223,322
|
—
|
—
|
224,673
|
|||||||||||||
|
Net
(loss)
|
—
|
—
|
—
|
(788,629
|
)
|
(17
|
)
|
(788,646
|
)
|
||||||||||
|
|
|||||||||||||||||||
|
Balance,
December 31, 2002
|
9,123,352
|
9,123
|
962,641
|
(1,342,557
|
)
|
(17
|
)
|
(370,810
|
)
|
||||||||||
|
Shares
issued for cash at $.25 per share
|
577,000
|
577
|
143,673
|
—
|
—
|
144,250
|
|||||||||||||
|
Share
issuance costs forgiven
|
—
|
—
|
25,327
|
—
|
—
|
25,327
|
|||||||||||||
|
Net
(loss)
|
—
|
—
|
—
|
(496,046
|
)
|
29
|
(496,017
|
)
|
|||||||||||
|
|
|||||||||||||||||||
|
Balance,
December 31, 2003
|
9,700,352
|
9,700
|
1,131,641
|
(1,838,603
|
)
|
12
|
(697,250
|
)
|
|||||||||||
|
Shares
issued for cash at $.25 per share
|
608,000
|
608
|
151,392
|
—
|
—
|
152,000
|
|||||||||||||
|
Shares
issued in repayment of loan related to exploration agreement at
$.42 per
share
|
1,200,000
|
1,200
|
498,800
|
—
|
—
|
500,000
|
|||||||||||||
|
Shares
issued as stock grant at $.25 per share
|
600,000
|
600
|
149,400
|
—
|
—
|
150,000
|
|||||||||||||
|
Net
(loss)
|
—
|
—
|
—
|
(853,593
|
)
|
(73
|
)
|
(853,666
|
)
|
||||||||||
|
|
|||||||||||||||||||
|
Balance,
December 31, 2004
|
12,108,352
|
12,108
|
1,931,233
|
(2,692,196
|
)
|
(61
|
)
|
(748,916
|
)
|
||||||||||
|
Stock
grant at $.25 per share
|
1,750,000
|
1,750
|
435,750
|
—
|
—
|
437,500
|
|||||||||||||
|
Stock
option exercised at $.25 per share
|
10,000
|
10
|
2,490
|
—
|
—
|
2,500
|
|||||||||||||
|
Shares
issued for cash at $.25 per share
|
276,000
|
276
|
68,724
|
—
|
—
|
69,000
|
|||||||||||||
|
Shares
issued for satisfaction of payables at $.25 per share
|
1,280,000
|
1,280
|
318,720
|
—
|
—
|
320,000
|
|||||||||||||
|
Shares
issued for cash at $.47 per share
|
2,728,500
|
2,729
|
1,272,271
|
—
|
—
|
1,275,000
|
|||||||||||||
|
Shares
issued for cash at $.50 per share
|
122,000
|
122
|
60,878
|
—
|
—
|
61,000
|
|||||||||||||
|
Shares
issued for cash at $.50 per share
|
30,000
|
30
|
14,970
|
—
|
—
|
15,000
|
|||||||||||||
|
Net
(loss)
|
—
|
—
|
—
|
(1,217,911
|
)
|
200
|
(1,217,711
|
)
|
|||||||||||
|
|
|||||||||||||||||||
|
Balance,
December 31, 2005
|
18,304,852
|
$
|
18,305
|
$
|
4,105,036
|
$
|
(3,910,107
|
)
|
$
|
139
|
$
|
213,373
|
|||||||
|
|
|||||||||||||||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
GOLD
RESOURCE CORPORATION
(An
Exploration Stage Company)
CONSOLIDATED
STATEMENTS OF CASH FLOWS
For
the Years Ended December 31, 2005 and 2004,
and
Inception (August 23, 1998) to December 31, 2005
|
|
2005
|
2004
|
Inception
(August 24,
1998) to
December 31,
2005
|
|||||||
|
Cash
flows from operating activities:
|
|
|
|
|||||||
|
Cash
paid to property owners, consultants, contractors and
suppliers
|
$
|
(1,185,452
|
)
|
$
|
(387,402
|
)
|
$
|
(2,571,468
|
)
|
|
|
Interest
received
|
6,174
|
113
|
7,959
|
|||||||
|
Income
taxes paid
|
—
|
—
|
—
|
|||||||
|
|
||||||||||
|
Cash
(used in) operating activities
|
(1,179,278
|
)
|
(378,289
|
)
|
(2,563,509
|
)
|
||||
|
|
||||||||||
|
Cash
flows from investing activities:
|
|
|
|
|||||||
|
Capital
expenditures
|
(61,600
|
)
|
—
|
(61,732
|
)
|
|||||
|
|
||||||||||
|
Cash
(used in) investing activities
|
(61,600
|
)
|
—
|
(61,732
|
)
|
|||||
|
|
||||||||||
|
Cash
flows from financing activities:
|
|
|
|
|||||||
|
Sale
of stock for cash and exercise of stock options
|
1,407,500
|
152,000
|
2,251,423
|
|||||||
|
Conversion
of debentures into stock-founders
|
—
|
—
|
50,000
|
|||||||
|
Exploration
agreement funding—Canyon Resources
|
—
|
100,000
|
500,000
|
|||||||
|
|
||||||||||
|
Cash
provided by financing activities
|
1,407,500
|
252,000
|
2,801,423
|
|||||||
|
|
||||||||||
|
Increase
(decrease) in cash and cash equivalents
|
166,622
|
(126,289
|
)
|
176,182
|
||||||
|
|
||||||||||
|
Cash
and cash equivalents, beginning of period
|
9,560
|
135,849
|
—
|
|||||||
|
|
||||||||||
|
Cash
and cash equivalents, end of period
|
$
|
176,182
|
$
|
9,560
|
$
|
176,182
|
||||
|
|
||||||||||
|
Reconciliation
of net (loss) to cash (used in) operating activities:
|
|
|
|
|||||||
|
Net
(loss)
|
$
|
(1,217,911
|
)
|
$
|
(853,593
|
)
|
$
|
(3,910,107
|
)
|
|
|
Items
not requiring cash:
|
||||||||||
|
Depreciation
|
7,248
|
—
|
7,248
|
|||||||
|
Management
fee paid in stock
|
—
|
—
|
392,191
|
|||||||
|
Stock
compensation
|
87,500
|
500,000
|
587,500
|
|||||||
|
Issuance
cost forgiven
|
—
|
—
|
25,327
|
|||||||
|
Currency
translation adjustment
|
200
|
(73
|
)
|
139
|
||||||
|
(Increase)
decrease in assets related to operations
|
(11,446
|
)
|
—
|
(19,414
|
)
|
|||||
|
Increase
(decrease) in liabilities related to operations—
|
||||||||||
|
Other
liabilities-related parties
|
(384,962
|
)
|
—
|
8,770
|
||||||
|
Accounts
payable and accrued liabilities
|
20,093
|
38,635
|
24,837
|
|||||||
|
Related
party payable paid with stock
|
320,000
|
(93,599
|
)
|
320,000
|
||||||
|
|
||||||||||
|
Cash
(used in) operating activities
|
$
|
(1,179,278
|
)
|
$
|
(378,289
|
)
|
$
|
(2,563,509
|
)
|
|
|
|
||||||||||
|
Non-cash
financing and investing activities:
|
|
|
|
|||||||
|
Conversion
of Canyon Resources funding to common stock
|
$
|
—
|
$
|
500,000
|
$
|
500,000
|
||||
|
|
||||||||||
|
Conversion
of debentures into common stock
|
$
|
—
|
$
|
—
|
$
|
50,000
|
||||
|
|
||||||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
GOLD
RESOURCE CORPORATION
(An
Exploration Stage Company)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December 31,
2005
1. Summary
of Significant Accounting Policies
Basis
of Presentation: Gold
Resource Corporation (the "Company") was organized under the laws of the
State
of Colorado on August 24, 1998. The Company has been engaged in the
exploration for precious and base metals, primarily in Mexico, as an exploration
stage company. The Company has not generated any revenues from operations.
The
consolidated financial statements included herein are expressed in United
States
dollars, the Company's functional currency.
Effective
February 21, 2005, the Company declared and effected a 100% forward stock
split where one additional share of common stock, par value $.001, was issued
for each common share outstanding as of that date. These financial statements
reflect the effect of this 100% stock split.
Basis
of Consolidation: The
consolidated financial statements include the accounts of the Company and
its
wholly owned Mexican corporation subsidiaries, Don David Gold S.A. de C.V.
and
Golden Trump S.A. de C.V. The expenditures of Don David Gold and Golden Trump
are generally incurred in Mexican pesos. Significant intercompany accounts
and
transactions have been eliminated.
Statements
of Cash Flows: The
Company considers cash in banks, deposits in transit, and highly liquid debt
instruments purchased with original maturities of three months or less to
be
cash and cash equivalents.
Exploration
and Development Costs: Mineral
property acquisition, exploration and related costs are expensed as incurred
unless proven and probable reserves exist and the property is a commercially
minable property. When it has been determined that a mineral property can
be
economically developed, the costs incurred to develop such property, including
costs to further delineate the ore body and develop the property for production,
may be capitalized. In addition, the Company may capitalize previously expensed
acquisition and exploration costs if it is later determined that the property
can economically be developed. Interest costs, if any, allocable to the cost
of
developing mining properties and to constructing new facilities are capitalized
until operations commence. Mine development costs incurred either to develop
new
ore deposits, expand the capacity of operating mines, or to develop mine
areas
substantially in advance of current production are also capitalized. All
such
capitalized costs, and estimated future development costs, are then amortized
using the units-of-production method over the estimated life of the ore body.
Costs incurred to maintain current production or to maintain assets on a
standby
basis are charged to operations. Costs of abandoned projects are charged
to
operations upon abandonment. The Company evaluates, at least quarterly, the
carrying value of capitalized mining costs and related property, plant and
equipment costs, if any, to determine if these costs are in excess of their
net
realizable value and if a permanent impairment needs to be recorded. The
periodic evaluation of carrying value of capitalized costs and any related
property, plant and equipment costs are based upon expected future cash flows
and/or estimated salvage value in accordance with Statement of Financial
Accounting Standards (SFAS) No. 144, "Accounting for Impairment or Disposal
of Long-Lived Assets."
GOLD
RESOURCE CORPORATION
(An
Exploration Stage Company)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December 31,
2005
Property
and Equipment: Office
furniture, equipment and vehicles are carried at cost not in excess of their
estimated net realizable value. Normal maintenance and repairs are charged
to
earnings while expenditures for major maintenance and betterments are
capitalized. Gains or losses on disposition are recognized in operations.
Depreciation: Depreciation
of office furniture, equipment and vehicles is computed using straight-line
methods. Office furniture, equipment and vehicles are being depreciated over
the
estimated economic lives ranging from 3 to 5 years.
Property
Retirement Obligation: The
Company implemented SFAS 143, "Accounting for Asset Retirement
Obligations," effective January 1, 2003. SFAS 143 requires the fair
value of a liability for an asset retirement obligation to be recognized
in the
period that it is incurred if a reasonable estimate of fair value can be
made.
The
associated asset retirement costs are capitalized as part of the carrying
amount
of the long-lived asset. The Company has determined that it has no property
retirement obligations as of December 31, 2005.
Stock
Option Plans: The
Company applies APB Opinion 25, "Accounting for Stock Issued to Employees",
and related Interpretations in accounting for all stock option plans. Under
APB
Opinion 25, no compensation cost has been recognized for stock options issued
to
employees as the exercise price of the Company's stock options granted equals
or
exceeds the market price of the underlying common stock on the date of grant.
SFAS 123,
"Accounting for Stock-Based Compensation," requires the Company to provide
pro
forma information regarding net income as if compensation costs for the
Company's stock option plans had been determined in accordance with the fair
value based method prescribed in SFAS No. 123.
Per
Share Amounts: SFAS 128,
"Earnings Per Share," provides for the calculation of "Basic" and "Diluted"
earnings per share. Basic earnings per share includes no dilution and is
computed by dividing income available to common shareholders by the
weighted-average number of shares outstanding during the period (16,164,715
for
2005 and 10,827,672 for 2004). Diluted earnings per share reflect the potential
dilution of securities that could share in the earnings of the Company, similar
to fully diluted earnings per share. As of December 31, 2005 and 2004,
stock options are not considered in the computation of diluted earnings per
share as their inclusion would be antidilutive.
Income
Taxes: The
Company accounts for income taxes under SFAS 109, "Accounting for Income
Taxes". Temporary differences are differences between the tax basis of assets
and liabilities and their reported amounts in the financial statements that
will
result in taxable or deductible amounts in future years.
GOLD
RESOURCE CORPORATION
(An
Exploration Stage Company)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December 31,
2005
Use
of Estimates: The
preparation of the Company's consolidated financial statements in conformity
with generally accepted accounting principles requires the Company's management
to make estimates and assumptions that affect the amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date
of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Business
Risks: The
Company continually reviews the mining and political risks it encounters
in its
operations. It mitigates the likelihood and potential severity of these risks
through the application of high operating standards. The Company's operations
have been and in the future may be, affected to various degrees by changes
in
environmental regulations, including those for future site restoration and
reclamation costs. The Company's business is subject to extensive licensing,
permitting, governmental legislation, control and regulations. The Company
endeavors to be in compliance with these regulations at all times.
Fair
Value of Financial Instruments: SFAS 107,
"Disclosures About Fair Value of Financial Instruments," requires disclosure
of
fair value information about financial instruments. Fair value estimates
discussed herein are based upon certain market assumptions and pertinent
information available to management as of December 31, 2005.
The
respective carrying value of certain on-balance-sheet financial instruments
approximate their fair values. These financial instruments include cash,
cash
equivalents, accounts payable and accrued liabilities. Fair values were assumed
to approximate carrying values for these financial instruments since they
are
short term in nature and their carrying amounts approximate fair value, or
they
are receivable or payable on demand.
Concentration
of Credit Risk: The
Company's cash balances are maintained in bank depositories and periodically
exceed federally insured limits. At December 31, 2005, the Company's
balances exceeded insured limits by $76,182.
Foreign
Operations: The
Company's present activities are in Mexico. As with all types of international
business operations, currency fluctuations, exchange controls, restrictions
on
foreign investment, changes to tax regimes, political action and political
instability could impair the value of the Company's investments.
Foreign
Currency Translation: The
local currency, the Mexican peso, is the functional currency for the Company's
subsidiaries. Assets and liabilities are translated using the exchange rate
in
effect at the balance sheet date. Income and expenses are translated at the
average exchange rate for the year. Translation adjustments are reported
as a
separate component of stockholders' equity.
GOLD
RESOURCE CORPORATION
(An
Exploration Stage Company)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December 31,
2005
Recent
Pronouncements:
In
November 2004, the Financial Accounting Standards Board (FASB) issued
SFAS 151, "Inventory Costs." This Statement amends the guidance in ARB
No. 43, Chapter 4, Inventory Pricing, to clarify the accounting for
abnormal amounts of idle facility expense, freight, handling costs, and wasted
material (spoilage). In addition, this Statement requires that allocation
of
fixed production overhead to the costs of conversion be based on the normal
capacity of the production facilities. The provisions of this Statement will
be
effective for the Company beginning with its fiscal year ending
December 31, 2006. The Company is currently evaluating the impact this new
Standard will have on its operations, but believes that it will not have
a
material impact on the Company's financial position, results of operations
or
cash flows.
In
December 2004, the FASB issued SFAS 153, "Exchanges of Non monetary
Assets—an amendment of APB Opinion No. 29." This Statement amended APB
Opinion 29 to eliminate the exception for non monetary exchanges of similar
productive assets and replaces it with a general exception for exchanges
of non
monetary assets that do not have commercial substance. A non monetary exchange
has commercial substance if the future cash flows of the entity are expected
to
change significantly as a result of the exchange. The adoption of this Standard
is not expected to have any material impact on the Company's financial position,
results of operations or cash flows.
In
December 2004, the FASB issued SFAS 123 (revised 2004), "Share-Based
Payment." This Statement requires that the cost resulting from all share-based
transactions be recorded in the financial statements. The Statement establishes
fair value as the measurement objective in accounting for share-based payment
arrangements and requires all entities to apply a fair-value-based measurement
in accounting for share-based payment transactions with employees. The Statement
also establishes fair value as the measurement objective for transactions
in
which an entity acquires goods or services from non-employees in share-based
payment transactions. The Statement replaces SFAS 123, "Accounting for
Stock-Based Compensation," and supersedes APB Opinion No. 25 "Accounting
for Stock Issued to Employees." The provisions of this Statement will be
effective for the Company beginning with its fiscal year ending
December 31, 2007. The Company is currently evaluating the impact this new
Standard will have on its financial position, results of operations or cash
flows.
In
March 2005, the Securities and Exchange Commission (SEC) issued Staff Accounting
Bulletin No. 107 (SAB 107) which provides guidance regarding the
interaction of SFAS 123(R) and certain SEC rules and regulations. The new
guidance includes the SEC's view on the valuation of share-based payment
arrangements for public companies and may simplify some of SFAS 123(R)'s
implementation challenges for registrants and enhance the information investors
receive.
GOLD
RESOURCE CORPORATION
(An
Exploration Stage Company)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December 31,
2005
In
March 2005, the FASB issued FIN 47, "Accounting for Conditional Asset
Retirement Obligations," which clarifies that the term "conditional asset
retirement obligation' as used in SFAS 143, "Accounting for Asset
Retirement Obligations," refers to a legal obligation to perform an asset
retirement activity in which the timing and/or method of settlement are
conditional on a future event that may or may not be within the control of
the
entity. FIN 47 requires an entity to recognize a liability for the fair
value of a conditional asset retirement obligation if the fair value can
be
reasonably estimated. FIN 47 is effective no later than the end of the
fiscal year ending after December 15, 2005. The Company does not believe
that FIN 47 will have a material impact on its financial position or
results from operations.
In
August 2005, the FASB issued SFAS 154, "Accounting Changes and Error
Corrections." This statement applies to all voluntary changes in accounting
principle and to changes required by an accounting pronouncement if the
pronouncement does not include specific transition provisions, and it changes
the requirements for accounting for and reporting them. Unless it is
impractical, the statement requires retrospective application of the changes
to
prior periods' financial statements. This statement is effective for accounting
changes and correction of errors made in fiscal years beginning after
December 15, 2005.
2. Going
Concern
The
Company's financial statements are prepared on a going concern basis, which
contemplates the satisfaction of obligations in the normal course of business.
The Company has no source of operating revenue and has financed operations
through the sale and exchange of equity. The Company has incurred losses
since
its inception aggregating $3,910,107.
The
Company's ability to continue as a going concern is contingent upon its ability
to raise funds through the sale of equity, joint venture or sale of its assets,
and attaining profitable operations. The financial statements do not include
any
adjustments to the amount and classification of assets and liabilities that
may
be necessary should the Company not continue as a going concern.
3. Mineral
Properties
El
Aguila
Effective
November 1, 2002, the Company, through its subsidiary, Don David Gold S.A.
de C.V. leased a prospective gold/silver property located in the state of
Oaxaca, Mexico, designated the "El Aguila" property, from Jose Perez
Reynoso, a consultant to the Company. The El Aguila property is an
exploration stage property and incorporates approximately 4,685 acres as
of
December 31, 2005. The lease agreement for El Aguila is subject to a
4% net smelter return royalty to the lessor where production is sold in the
form
of gold/silver dore and 5% for production sold in concentrate form. The Company
has made periodic payments required under the lease of $105,000 in 2005 and
$30,000 in 2004. One remaining advance royalty payment of $100,000 is due
in
October 2006.
GOLD
RESOURCE CORPORATION
(An
Exploration Stage Company)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December 31,
2005
In
August 2003, the Company entered into an exploration agreement with Canyon
Resources Corporation, a public company with shares traded on the American
Stock
Exchange under symbol "CAU" ("Canyon"), whereby Canyon had the right to earn
a
50% interest in the El Aguila property from the Company in exchange for funding
$3.5 million in exploration and development costs at the El Aguila
property, or alternatively, Canyon could receive 1,200,000 shares of the
common
stock of the Company for funding $500,000 for exploration drilling at El
Aguila.
The $500,000 funding from Canyon was structured as a non-interest bearing
loan.
The drilling programs were completed in 2003 and included approximately 12,939
feet of drilling focused on one target area of the property. This exploration
drilling encountered some mineralization which will require additional
exploration drilling in order to fully evaluate. Effective September 1,
2004, Canyon elected to convert its loan of $500,000 into 1,200,000 shares
of
common stock of the Company, which represent approximately 6.6% of the
outstanding shares at December 31, 2005.
Through
December 31, 2005, the Company has spent or incurred approximately
$1,349,000 in acquisition, exploration and related costs for El Aguila of
which
approximately $743,900 was spend in 2005.
4. Property
and Equipment
At
December 31, 2005, property and equipment consisted of the following:
|
Trucks
and autos
|
$
|
37,998
|
||
|
Office
furniture and equipment
|
23,602
|
|||
|
|
||||
|
Subtotal
|
61,600
|
|||
|
Accumulated
depreciation
|
(7,248
|
)
|
||
|
|
||||
|
Total
|
$
|
54,352
|
||
|
|
5. Income
Taxes
At
December 31, 2005, the Company estimates tax loss carry forwards to be
approximately $3,000,000 expiring through 2025. The principal difference
between
the net loss for book purposes and the net loss for income tax purposes relates
to the $320,000 payment in shares to U.S. Gold Corporation ("U.S. Gold")
which
is deductible for tax purposes when recognized as income by U.S. Gold, and
$587,500 expense for stock grants and stock bonus.
GOLD
RESOURCE CORPORATION
(An
Exploration Stage Company)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December 31,
2005
The
tax effects of temporary differences that give rise to significant portions
of
the deferred tax assets and deferred tax liabilities at December 31, 2005,
are presented below:
|
Deferred
tax assets:
|
|
|||
|
Net
operating (loss) carryforward
|
$
|
1,020,000
|
||
|
Total
gross deferred tax assets
|
||||
|
Less
valuation allowance
|
$
|
1,020,000
|
||
|
Net
deferred tax assets
|
(1,020,000
|
)
|
||
|
|
||||
|
|
—
|
|||
|
|
||||
|
Deferred
tax liabilities:
|
—
|
|||
|
|
||||
|
Total
net deferred tax asset
|
$
|
—
|
||
|
|
||||
The
Company believes at this time that it is unlikely that the net deferred tax
asset will be realized. Therefore, a valuation allowance has been provided
for
net deferred tax asset. The change in valuation allowance was approximately
$264,000 during 2005.
A
reconciliation of the tax provision for 2005 and 2004 at statutory rates
is
comprised of the following components:
|
|
2005
|
2004
|
|||||
|
Statutory
rate tax provision on book (loss)
|
$
|
(421,000
|
)
|
$
|
(295,000
|
)
|
|
|
Book
to tax adjustments:
|
|||||||
|
Stock
grants
|
30,000
|
175,000
|
|||||
|
Valuation
allowance
|
391,000
|
120,000
|
|||||
|
|
|||||||
|
Tax
provision
|
$
|
—
|
$
|
—
|
|||
|
|
|||||||
6. Shareholders'
Equity (Deficit)
Effective
February 21, 2005, the Company declared and effected a 100% forward stock
split where one additional share of common stock, par value $.001, was issued
for each common share outstanding as of that date. These financial statements
have been restated to reflect the effect of this 100% stock split and the
increase in authorized shares.
The
Company was formed August 24, 1998 by William W. Reid and David C. Reid
(the "Founders"). During 1998 and 1999, the Founders received 3,800,000 shares
of common stock valued at $1,900 for administrative and organization expenses.
The Company remained generally inactive through 1999.
GOLD
RESOURCE CORPORATION
(An
Exploration Stage Company)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December 31,
2005
Commencing
July 1, 2000, the Company and U.S. Gold, a publicly traded Colorado
corporation, entered into a management contract whereby U.S. Gold provided
general management of the business activities of the Company through
December 31, 2001. Under this management contract, U.S. Gold was issued
2,560,000 shares of common stock of the Company. The 2,560,000 shares were
valued at $392,191 or approximately $.15 per share. Through this arrangement
the
Company benefited from experienced management
without the need to raise cash funding for the related cost of such management
and administration. The Company was, however, responsible for all additional
funding needed.
During
2001, the Founders made convertible debenture loans to the Company and then
converted $50,000 in convertible debentures into 200,000 shares of common
stock
of the Company at a conversion price of $.25 per share.
In
September 2001, the Company commenced the sale of its common shares under
exemptions offered by federal and state securities regulations. During 2001
the
Company sold 820,000 shares at $.25 per share to various parties, and as
noted
above, Founders converted debenture debt of $50,000 into 200,000 shares at
$.25
per share.
During
2002, the Company sold 392,000 shares at $.25 per share ($98,000) to various
parties and 1,351,352 shares at approximately $.17 per share ($224,673) to
an
institutional investor, RMB International (Dublin) Limited ("RMB").
During
2003, the Company sold 577,000 shares at $.25 per share raising net proceeds
of
$144,250. Effective September 30, 2003, U.S. Gold acquired the RMB shares
in exchange for U.S. Gold shares, and terminated the obligation of the Company
to pay RMB approximately $25,327 in transaction costs, which was added back
into
paid-in-capital.
In
August 2003, the Company entered into an exploration agreement with Canyon
Resources Corporation, a public company with shares traded on the American
Stock
Exchange under symbol "CAU" ("Canyon"), whereby Canyon, effective
September 1, 2004, elected to convert their prior funding of $500,000 into
1,200,000 shares of common stock of the Company representing approximately
6.5%
of the outstanding shares as of December 31, 2005. Related to this
agreement, Canyon shall have a right of first offer related to any sale of
common shares by the Company with 14 days after written notice by the
Company to elect to accept the offer and 10 days thereafter to close any
such purchase.
During
2004, the Company sold 608,000 shares at $.25 per share raising net proceeds
of
$152,000. Also during 2004, as explained further in Note 3, the Company
issued 1,200,000 shares at approximately $.42 per share to Canyon for $500,000
in repayment of a loan for funding of exploration cost at the El Aguila
property. Also during 2004, the Company made a stock grant of 600,000 shares
at
$.25 per share or $150,000 to a consultant of the Company, Jose Perez Reynoso.
GOLD
RESOURCE CORPORATION
(An
Exploration Stage Company)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December 31,
2005
Effective
January 2, 2005, the Company made common stock awards to its two executive
officers and a consultant of an aggregate 1,750,000 shares valued at $.25
per
share for an aggregate $437,500 for services to the Company for 2004 and
through
June 30, 2005 of which $306,250 was expensed and accrued during the nine
months ended September 30, 2004, $43,750 was expensed during the fourth
quarter of 2004 and $87,500 was expensed in 2005. Of this total William W.
Reid
received 1,000,000 shares, David C. Reid received 500,000 shares and
William F. Pass received 250,000 shares. Also effective January 2, 2005, a
stock option agreement with William F. Pass covering 400,000 shares of
common stock at exercise price of $.25 per share was reduced by 250,000 shares
leaving 150,000 shares remaining subject to option.
During
2005, the Company sold 3,156,500 shares for an aggregate $1,420,000. Included
in
this total, in July and August 2005, the Company closed transactions under
a
Subscription Agreement and Stock Purchase Option Agreement with Heemskirk
Consolidated Limited ("Heemskirk"), an Australian global mining house, whereby
Heemskirk purchased 2,000,000 shares of common stock of the Company at $.47
per
share net of a finders fee paid to a third party of 140,000 shares valued
at
$.47 per share. Heemskirk had already been a shareholder of the Company and
with
these transactions they currently own a total of 2,150,000 shares as of
December 31, 2005, representing approximately 11.75% of the outstanding
shares of the Company. The Company agreed to give Heemskirk a first right
of
offer for any financings, including sale of equity, the Company may pursue,
subject to the prior rights of Canyon discussed above. During August 2005,
the
Company sold 400,000 shares to another investor raising $200,000 with a finders
fee paid to a third party of 28,000 shares.
In
addition, during 2005 an individual exercised stock options for 10,000 shares
for $2,500. In June 2005, the Company issued 1,280,000 shares to U.S. Gold
Corporation in satisfaction of $320,000 owed for a prior years management
contract.
The
Company may continue to raise capital through the sale of its common shares
and
may also seek other funding or corporate transactions to achieve its business
objectives.
As
of December 31, 2005, the Founders beneficially own a total of 8,131,145
shares or approximately 44% of the outstanding shares.
GOLD
RESOURCE CORPORATION
(An
Exploration Stage Company)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December 31,
2005
The
Company has a non-qualified stock option and stock grant plan under which
stock
options and stock grants may be granted to key employees, directors and others
(the "Plan"). Options to purchase shares under the Plan must be granted at
fair
value as of the date of the grant. A total of 6,000,000 common shares have
been
reserved under the Plan. In 2004, the option agreement with Mr. Reynoso was
terminated and as discussed above, the Company awarded Mr. Reynoso a stock
award of 600,000 common shares outside of the Plan valued at $.25 per share.
Also during 2004, the Company granted stock options covering 400,000 shares
with
an exercise price of $.25 per share to William Reid, 200,000 shares to David
Reid and 100,000 shares to Mr. Pass. Effective January 2, 2005, the
stock option agreement with Mr. Pass covering 400,000 shares of common
stock at exercise price of $.25 per share was reduced by 250,000 shares leaving
150,000 shares remaining subject to option at December 31, 2005. All of
these individuals were determined to be a key person to the benefit of the
Company. No compensation
costs were recorded related to the issuances of stock options. No other stock
options have been granted under the Plan.
|
|
2005
|
2004
|
|||||||||||
|
|
Shares
|
Weighted
Average
Exercise
Prices
|
Shares
|
Weighted
Average
Exercise
Prices
|
|||||||||
|
Outstanding,
beginning of year
|
1,900,000
|
$
|
.25
|
1,800,000
|
$
|
.25
|
|||||||
|
Granted
|
—
|
$
|
.25
|
700,000
|
$
|
.25
|
|||||||
|
Terminated
|
(250,000
|
)
|
$
|
.25
|
(600,000
|
)
|
$
|
.25
|
|||||
|
Exercised
|
(10,000
|
)
|
—
|
—
|
—
|
||||||||
|
|
|
|
|||||||||||
|
Outstanding,
end of year
|
1,640,000
|
$
|
.25
|
1,900,000
|
$
|
.25
|
|||||||
|
Options
exercisable, end of year
|
1,640,000
|
$
|
.25
|
1,900,000
|
$
|
.25
|
|||||||
|
|
|||||||||||||
|
Weighted
average fair value of Option granted during year
|
$
|
.25
|
$
|
.25
|
|||||||||
|
|
|||||||||||||
SFAS 123
requires the Company to provide proforma information regarding net income
and
earnings per share as if compensation cost for the Company's stock option
plans
had been determined in accordance with the fair value based method prescribed
in
SFAS 123. The fair value of the option grants is estimated on the date of
grant utilizing the minimum value option-pricing model using the following
assumptions: Expected life 10 years, stock price on date of grant $.25,
fair market value on date of grant $.25, dividend yield 0% and interest rate
3%.
These results may not be representative of those to be expected in future
years.
The pro-forma results of operations for 2005 and 2004 are as follows:
GOLD
RESOURCE CORPORATION
(An
Exploration Stage Company)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December 31,
2005
|
|
2005
|
2004
|
|||||
|
Net
(loss)
|
|
|
|||||
|
As
reported
|
$
|
(1,217,911
|
)
|
$
|
(853,666
|
)
|
|
|
Proforma
|
$
|
(1,217,911
|
)
|
$
|
(899,166
|
)
|
|
|
Basic
and diluted (loss) per share
|
|||||||
|
As
reported
|
$
|
(.08
|
)
|
$
|
(.08
|
)
|
|
|
Proforma
|
$
|
(.08
|
)
|
$
|
(.08
|
)
|
|
7. Rental
Expense and Commitment and Contingencies
In
September 2005, the Company entered into a 3 year lease on office space in
Denver, Colorado. Annual minimum rental obligations over the life of the
lease
total $52,621. The Company prepaid the initial 12 month lease obligation.
Remaining minimum lease obligations for calendar year 2006 total $4,406,
for
2007 $17,683, and for 2008 $13,400.
8. General
and administrative expenses
General
and administrative expense included the following for the years ended
December 31, 2005 and 2004:
|
|
|
2005
|
|
2004
|
||
|
Salaries,
consulting fees and benefits
|
|
$
|
140,434
|
|
$
|
—
|
|
Legal
and accounting
|
|
|
73,856
|
|
|
11,923
|
|
Investor
relations
|
|
|
11,038
|
|
|
—
|
|
Travel
related
|
|
|
22,393
|
|
|
15,809
|
|
Other
|
|
|
38,498
|
|
|
—
|
|
|
|
|
||||
|
|
|
$
|
286,219
|
|
$
|
27,732
|
|
|
|
|
||||
GOLD
RESOURCE CORPORATION
(An
Exploration Stage Company)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December 31,
2005
9. Related
Party Transactions:
U.S.
Gold—
Effective
July 1, 2000, the Company and U.S. Gold entered into a management contract
whereby U.S. Gold provided general management of the business activities
of the
Company through December 31, 2001 in exchange for 2,560,000 shares of
common stock of the Company valued at $392,191 or approximately $.15 per
share,
representing the actual allocated internal costs recorded by U.S. Gold in
its
performance of the contract. Effective January 1, 2002, the Company and
U.S. Gold entered into a second Management Contract with a duration of one
year
(the "2002 Management Contract"). Under the 2002 Management Contract, U.S.
Gold
provided general management of the business activities of the Company through
December 31, 2002 in exchange for payment of $30,000 per month to U.S.
Gold. The Company paid U.S. Gold $30,000 under the 2002 Management Contract
and
owed U.S. Gold $330,000 at December 31, 2004. In June 2005, the
Company paid $10,000 and issued 1,280,000 shares to U.S. Gold Corporation
in
satisfaction of $320,000 owed.
In
July 2005, in connection with a change in control of U.S. Gold, the
employment agreements of Messrs. William Reid, David Reid and William Pass
with that entity were terminated. In partial payment of the obligations of
U.S.
Gold under those agreements, that entity transferred all its shares in the
company to the two former U.S. Gold employees and Mr. Pass and U.S. Gold no
longer owns an interest in our Company.
Jose
Perez Reynoso—
The
Company has certain contractual business arrangements with Jose Perez Reynoso,
a
Mexican national and consultant to the Company. Mr. Reynoso has been
retained as a full-time consultant to the Company at $5,000 per month during
2004 and increased to $7,000 per month effective July 2005 under a
month-to-month arrangement. Mr. Reynoso was granted as a finders fee a 1%
percent net smelter return royalty on the Zimapan property which royalty
was
terminated upon the Company dropping the Zimapan lease in August 2003. The
Company also leased the El Aguila Property from Mr. Reynoso, paying
him $5,000 advance royalty during 2002, $25,000 in 2003, $20,000 in 2004,
and
$105,000 in 2005. Also as noted in Footnote 4 above, Mr. Reynoso was
granted a stock bonus of 600,000 common shares valued at $.25 per share for
$150,000 during 2004 and a stock option agreement with Mr. Reynoso covering
600,000 common shares at exercise price of $.25 per share of the Company
was
terminated by mutual consent.
Other—
During
2005 the executive officers and Mr. Reynoso have made certain cash advances
to the Company to allow payment of certain obligations. The net amount of
such
advances was $8,770 which is reflected as a liability on the consolidated
balance sheet as of December 31, 2005.
GOLD
RESOURCE CORPORATION
(An
Exploration Stage Company)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December 31,
2005
10. Subsequent
Events—
Effective
January 1, 2006, the Company entered into employment agreements with its
executive officers which extend for a three-year term. Pursuant to the terms
of
those agreements, William Reid is being paid $240,000 and David Reid is being
paid $170,000 annually. Each individual also participates in health and other
insurance programs that the Company maintains. The employment agreements
are
automatically renewable for one-year terms unless either party gives notice
to
the other that they do not wish to renew the agreement, not less than
120 days prior to expiration.
Pursuant
to the terms of the employment agreements, the employee would be entitled
to
certain payments in the event their employment is terminated under certain
circumstances. If the Company terminates the agreement without cause, or
either
executive officer terminates the agreement "with good reason," the Company
would
be obligated to pay two years of compensation in accordance with its regular
pay
periods. Termination by an executive officer with good reason includes a
change
in control.
In
February and March 2006, William and David Reid each loaned $50,000 to the
Company. The loans are non-interest bearing and due on demand.
|
You
should rely only on the information contained in this document
or that we
have referred you to. We have not authorized anyone to provide
you with
information that is different. This prospectus is not an offer
to sell
common stock and is not soliciting an offer to buy common stock
in any
state where the offer or sale is not permitted.
Until
March 14, 2007, all dealers that effect transactions in these
securities,
whether or not participating in this offering, may be required
to deliver
a prospectus. This is in addition to the dealers' obligation
to deliver a
prospectus when acting as underwriters and with respect to their
unsold
allotments or subscriptions.
|
5,859,700 Shares
GOLD
RESOURCE CORPORATION
Common
Stock
|
|
|
TABLE OF CONTENTS
|
||
|
|
____________
PROSPECTUS
____________
|
|
|
February
7, 2007
|
||