UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2010
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____.
Commission File No. 000-22905
GOLDEN PHOENIX MINERALS, INC.
(Exact Name of Registrant as Specified in Its Charter)
| Nevada | 41-1878178 | |
(State or Other Jurisdiction Of Incorporation or Organization) | (I.R.S. Employer Identification Number) | |
| 1675 East Prater Way, Suite 102, Sparks, Nevada | 89434 | |
| (Address of Principal Executive Offices) | (Zip Code) |
Registrant’s telephone number, including area code (775) 853-4919
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days.
Yes x No ¨
Indicate by checkmark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes ¨ No ¨
Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-3 of the Exchange Act. (Check one):
| Large accelerated filer | ¨ | Accelerated filer | ¨ | |
| Non-accelerated filer | ¨ | Smaller reporting company | x | |
| (Do not check if a smaller reporting company) | ||||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.
Yes ¨ No x
As of November 10, 2010 there were 247,738,900 outstanding shares of the registrant’s common stock.
1
GOLDEN PHOENIX MINERALS, INC.
FORM 10-Q INDEX
Page Number | |
| PART I – FINANCIAL INFORMATION | |
| Item 1. Financial Statements | |
| Condensed Balance Sheets as of September 30, 2010 (Unaudited) and December 31, 2009 | 3 |
| Condensed Statements of Operations for the Three Months and Nine Months Ended September 30, 2010 and 2009 (Unaudited) | 4 |
| Condensed Statements of Cash Flows for the Nine Months Ended September 30, 2010 and 2009 (Unaudited) | 6 |
| Notes to Condensed Financial Statements (Unaudited) | 7 |
| Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations | 33 |
| Item 3. Quantitative and Qualitative Disclosures About Market Risk | 50 |
| Item 4T. Controls and Procedures | 51 |
| PART II – OTHER INFORMATION | |
| Item 1. Legal Proceedings | 51 |
| Item 1A. Risk Factors | 51 |
| Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | 51 |
| Item 3. Defaults Upon Senior Securities | 52 |
| Item 5. Other Information | 52 |
| Item 6. Exhibits | 52 |
| Signature Page | 53 |
2
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
GOLDEN PHOENIX MINERALS, INC.
Condensed Balance Sheets
| September 30, 2010 | ||||||||
| (Unaudited) | December 31, 2009 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 934,300 | $ | 94,785 | ||||
| Receivables, net | 40,539 | — | ||||||
| Prepaid expenses and other current assets | 17,555 | 15,504 | ||||||
| Total current assets | 992,394 | 110,289 | ||||||
| Property and equipment, net | 217,129 | 285,006 | ||||||
| Other assets: | ||||||||
| Deposits | 81,250 | 106,590 | ||||||
| Note receivable | — | — | ||||||
| Assets of discontinued operations | — | 2,552,400 | ||||||
| Total other assets | 81,250 | 2,658,990 | ||||||
| $ | 1,290,773 | $ | 3,054,285 | |||||
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 621,358 | $ | 1,273,547 | ||||
| Accrued liabilities | 586,686 | 1,005,433 | ||||||
| Current portion of severance obligations | — | 165,201 | ||||||
| Current portion of long-term debt | 289,554 | 2,535,782 | ||||||
| Amounts due to related parties | 222,441 | 432,173 | ||||||
| Deposits received | — | 900,000 | ||||||
| Total current liabilities | 1,720,039 | 6,312,136 | ||||||
| Long-term liabilities: | ||||||||
| Long-term debt | 30,239 | 61,173 | ||||||
| Amounts due to related parties | 371,757 | — | ||||||
| Liabilities of discontinued operations | — | 3,036,430 | ||||||
| Total long-term liabilities | 401,996 | 3,097,603 | ||||||
| Total liabilities | 2,122,035 | 9,409,739 | ||||||
| Commitments and contingencies | ||||||||
| Stockholders’ equity (deficit): | ||||||||
| Preferred stock, no par value, 50,000,000 shares authorized, none issued | — | — | ||||||
| Common stock; $0.001 par value, 400,000,000 shares authorized, 242,078,762 and 223,180,210 shares issued and outstanding, respectively | 242,079 | 223,180 | ||||||
| Additional paid-in capital | 42,282,606 | 40,842,415 | ||||||
| Accumulated deficit | (43,355,947 | ) | (47,421,049 | ) | ||||
| Total stockholders’ deficit | (831,262 | ) | (6,355,454 | ) | ||||
| $ | 1,290,773 | $ | 3,054,285 | |||||
See accompanying notes to condensed financial statements
3
GOLDEN PHOENIX MINERALS, INC.
(Unaudited)
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
| Rental Income | $ | 43,000 | $ | 63,056 | $ | 43,000 | $ | 63,056 | ||||||||
| Operating costs and expenses: | ||||||||||||||||
| Exploration, development and mineral property lease expenses | 924,772 | — | 1,224,758 | — | ||||||||||||
| General and administrative expenses | 528,423 | 379,764 | 1,306,417 | 1,308,089 | ||||||||||||
| Depreciation and amortization expense | 18,924 | 20,560 | 55,303 | 60,520 | ||||||||||||
| Royalties | — | — | 489,002 | 70,090 | ||||||||||||
| Total operating costs and expenses | 1,472,119 | 400,324 | 3,075,480 | 1,438,699 | ||||||||||||
| Loss from operations | (1,429,119 | ) | (337,268 | ) | (3,032,480 | ) | (1,375,643 | ) | ||||||||
| Other income (expense): | ||||||||||||||||
| Interest and other income | 36,678 | 4,289 | 47,799 | 4,541 | ||||||||||||
| Interest expense | (36,601 | ) | (66,912 | ) | (149,933 | ) | (637,881 | ) | ||||||||
| Gain on extinguishment of debt | — | 8,123 | 36,901 | 982,579 | ||||||||||||
| Foreign currency gain (loss) | 104,559 | — | (50,845 | ) | — | |||||||||||
| Loss on sale of marketable securities | (1,681,571 | ) | — | (1,681,571 | ) | — | ||||||||||
| Gain (loss) on disposal of property and equipment | — | — | (6,322 | ) | 127 | |||||||||||
| Total other income (expense) | (1,576,935 | ) | (54,500 | ) | (1,803,971 | ) | 349,366 | |||||||||
| Loss before income taxes | (3,006,054 | ) | (391,768 | ) | (4,836,451 | ) | (1,026,277 | ) | ||||||||
| Provision for income taxes | — | — | — | — | ||||||||||||
| Loss from continuing operations | (3,006,054 | ) | (391,768 | ) | (4,836,451 | ) | (1,026,277 | ) | ||||||||
| Income (Loss) from discontinued operations: | ||||||||||||||||
| Gain (loss) on sale of Mineral Ridge net assets | (8,256 | ) | — | 8,982,772 | — | |||||||||||
| Loss on sale of interest in joint venture | — | — | — | (235,303 | ) | |||||||||||
| Loss from discontinued operations | — | (94,479 | ) | (81,219 | ) | (1,150,266 | ) | |||||||||
| Income (loss) from discontinued operations | — | (94,479 | ) | 8,901,553 | (1,385,569 | ) | ||||||||||
| Loss from discontinued operations attributable to noncontrolling interest | — | — | — | 267,274 | ||||||||||||
| Income (loss) from discontinued operations attributable to the Company | (8,256 | ) | (94,479 | ) | 8,901,553 | (1,118,295 | ) | |||||||||
| Net income (loss) attributable to the Company | $ | (3,014,310 | ) | $ | (486,247 | ) | $ | 4,065,102 | $ | (2,144,572 | ) | |||||
| Other comprehensive income (loss): | ||||||||||||||||
| Loss from continuing operations | $ | (3,006,054 | ) | $ | (391,768 | ) | $ | (4,836,451 | ) | $ | (1,026,277 | ) | ||||
| Income (loss) from discontinued operations | (8,256 | ) | (94,479 | ) | 8,901,553 | (1,385,569 | ) | |||||||||
| Net income (loss) | (3,014,310 | ) | (486,247 | ) | 4,065,102 | (2,411,846 | ) | |||||||||
| Unrealized gain (loss) on marketable securities | 152,892 | — | — | — | ||||||||||||
| Other comprehensive income (loss) | (2,861,418 | ) | (486,247 | ) | 4,065,102 | (2,411,846 | ) | |||||||||
| Other comprehensive loss attributable to noncontrolling interest | — | — | — | 267,274 | ||||||||||||
| Other comprehensive income (loss) attributable to the Company | $ | (2,861,418 | ) | $ | (486,247 | ) | $ | 4,065,102 | $ | (2,144,572 | ) | |||||
See accompanying notes to condensed financial statements
4
GOLDEN PHOENIX MINERALS, INC.
Condensed Consolidated Statements of Operations (Continued)
(Unaudited)
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
| Income (loss) per common share, basic and diluted: | ||||||||||||||||
| Continuing operations | $ | (0.01 | ) | $ | (0.00 | ) | $ | (0.02 | ) | $ | (0.00 | ) | ||||
| Discontinued operations | (0.00 | ) | (0.00 | ) | 0.04 | (0.01 | ) | |||||||||
| Total | $ | (0.01 | ) | $ | (0.00 | ) | $ | 0.02 | $ | (0.01 | ) | |||||
| Weighted average number of shares outstanding: | ||||||||||||||||
| Basic | 241,092,349 | 211,948,713 | 233,732,479 | 210,328,353 | ||||||||||||
| Diluted | 241,092,349 | 211,948,713 | 242,437,914 | 210,328,353 | ||||||||||||
See accompanying notes to condensed consolidated financial statements
5
GOLDEN PHOENIX MINERALS, INC.
(Unaudited)
| Nine Months Ended September 30, | ||||||||
| 2010 | 2009 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income (loss) attributable to the Company | $ | 4,065,102 | $ | (2,144,572 | ) | |||
| Adjustments to reconcile net income (loss) to net cash used in operating activities: | ||||||||
| (Income) loss from discontinued operations attributable to the Company | (8,901,553 | ) | 1,118,295 | |||||
| Depreciation and amortization | 55,303 | 60,520 | ||||||
| Stock-based compensation | 21,439 | 51,672 | ||||||
| Issuance of common stock for services | 29,500 | — | ||||||
| Issuance of common stock for exploration properties expense | 280,000 | — | ||||||
| Issuance of warrants for exploration properties expense | 236,390 | — | ||||||
| Loss on sale of marketable securities | 1,681,571 | — | ||||||
| (Gain) loss on disposal of property and equipment | 6,322 | (127 | ) | |||||
| Debt issued for royalty expense | 489,002 | 70,090 | ||||||
| Issuance of warrants for interest expense | — | 448,804 | ||||||
| Gain on extinguishment of debt | (36,901 | ) | (982,579 | ) | ||||
| Foreign currency gain | (12,615 | ) | — | |||||
| Changes in operating assets and liabilities: | ||||||||
| (Increase) Decrease in receivables | (21,659 | ) | (88,662 | ) | ||||
| Increase in prepaid expenses and other current assets | (2,051 | ) | (43 | ) | ||||
| Decrease in deposits | 25,340 | — | ||||||
| Increase (decrease) in accounts payable | (508,591 | ) | 235,489 | |||||
| Increase in accrued and other liabilities | (79,440 | ) | 523,009 | |||||
| Net cash used in operating activities | (2,672,841 | ) | (708,104 | ) | ||||
| Cash flows from investing activities: | ||||||||
| Net proceeds from the sale of marketable securities | 3,832,626 | — | ||||||
| Purchase of property and equipment | (12,629 | ) | (1,500 | ) | ||||
| Proceeds from the sale of property and equipment | — | 353 | ||||||
| Net cash provided by (used in) investing activities | 3,819,997 | (1,147 | ) | |||||
| Cash flows from financing activities: | ||||||||
| Proceeds from the issuance of common stock | 240,000 | 139,674 | ||||||
| Proceeds from the issuance of debt | — | 1,000,000 | ||||||
| Proceeds from amounts due related parties | — | 6,000 | ||||||
| Purchase of option to buy back warrants | (10,000 | ) | — | |||||
| Payments of severance obligations | (65,201 | ) | (9,179 | ) | ||||
| Payments of notes payable and long-term debt | (2,415,196 | ) | (30,710 | ) | ||||
| Payments of amounts due to related parties | (606,205 | ) | (40,070 | ) | ||||
| Net cash provided by (used in) financing activities | (2,856,602 | ) | 1,065,715 | |||||
| Cash flows from discontinued operations: | ||||||||
| Net cash used in operating activities | (66,039 | ) | (948,725 | ) | ||||
| Net cash provided by investing activities | 2,615,000 | 490,000 | ||||||
| Net cash provided by financing activities | — | 108,183 | ||||||
| Net cash provided by (used in) discontinued operations | 2,548,961 | (350,542 | ) | |||||
| Net increase in cash | 839,515 | 5,922 | ||||||
| Cash and cash equivalents, beginning of period | 94,785 | 231 | ||||||
| Cash and cash equivalents, end of period | $ | 934,300 | $ | 6,153 | ||||
See accompanying notes to condensed financial statements
6
GOLDEN PHOENIX MINERALS, INC.
| Notes to Condensed Financial Statements |
| September 30, 2010 |
| (Unaudited) |
NOTE 1 - DESCRIPTION OF BUSINESS AND BASIS OF FINANCIAL STATEMENT PRESENTATION
Golden Phoenix Minerals, Inc. (the “Company” or “Golden Phoenix”) is a mineral exploration, development and production company specializing in acquiring and consolidating mineral properties with potential production and future growth through exploration discoveries. Acquisition emphasis is focused on properties containing gold, silver, molybdenum and other strategic minerals that present low political and financial risk and exceptional upside potential.
The Company was formed in Minnesota on June 2, 1997. On May 30, 2008, the Company reincorporated in Nevada.
As discussed in Note 3, on March 10, 2010, the Company closed an agreement dated December 31, 2009 for the purpose of selling a 70% interest in its Mineral Ridge mining property and related assets (“Mineral Ridge Mine”) and contributing the remaining 30% interest into a joint venture to place the Mineral Ridge Mine into production. Previously, on May 13, 2009, the Company completed the sale of 100% of its ownership interest in the Ashdown Project LLC (“Ashdown LLC”). As a result, the Mineral Ridge Mine and the Ashdown LLC are classified as discontinued operations for all periods presented in the accompanying condensed financial statements.
The interim financial information of the Company as of September 30, 2010 and for the three months and nine months ended September 30, 2010 and 2009 is unaudited, and the balance sheet as of December 31, 2009 is derived from audited financial statements. The accompanying condensed financial statements have been prepared in accordance with U. S. generally accepted accounting principles for interim financial statements. Accordingly, they omit or condense notes and certain other information normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles. The accounting policies followed for quarterly financial reporting conform with the accounting policies disclosed in Note 1 to the Notes to Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2009. In the opinion of management, all adjustments that are necessary for a fair presentation of the financial information for the interim periods reported have been made. All such adjustments are of a normal recurring nature. The results of operations for the three months and nine months ended September 30, 2010 are not necessarily indicative of the results that can be expected for the fiscal year ending December 31, 2010. The unaudited condensed financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2009.
Certain amounts in the condensed financial statements for the three months and nine months ended September 30, 2009 have been reclassified to conform to the current year presentation.
NOTE 2 - GOING CONCERN
The Company’s condensed financial statements are prepared using accounting principles generally accepted in the United States of America applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. However, the Company has a history of operating losses since its inception in 1997, and has an accumulated deficit of $43,355,947 and a total stockholders’ deficit of $831,262 at September 30, 2010. The Company currently has no sources of operating revenues. The Company will require additional capital to fund its operations and to pursue other mineral property development opportu nities with its existing properties and other prospects. The Company will seek funding primarily from equity financing, and anticipates it will also receive proceeds from the secured promissory note received in the sale of the Ashdown LLC. There can be no assurance that the Company will be successful in its efforts to continue to raise capital at favorable rates or at all or that funds will be received from the promissory note. If the Company is unable to obtain profitable operations and positive operating cash flows and raise sufficient capital to pay its obligations, it may be forced to scale back its development plans or to significantly reduce or terminate operations and file for reorganization or liquidation under the bankruptcy laws. These factors together raise doubt about the Company’s ability to continue as a going concern. The accompanying condensed financial statements do not include any adjustments that might result from the outcome of this uncertainty.
7
Historically, the Company has obtained working capital from debt and equity financing, the exercise of options and warrants, and from a production payment purchase agreement to fund the Company’s activities. The deterioration of capital markets has made it difficult for the Company to obtain debt and equity financing.
The operations of the Ashdown LLC historically funded a portion of the Company’s operating costs and expenses. On May 13, 2009, the Company completed an agreement to sell 100% of its ownership interest in the Ashdown LLC to Win-Eldrich Gold, Inc. (“WEG”). The $5.3 million purchase price due the Company in the form of a secured promissory note was initially payable over a 72 month term, and WEG assumed substantially all of the liabilities of the Ashdown LLC. The terms of the promissory note were subsequently modified in connection with certain debt reduction agreements entered into in April 2010 (see Note 7) and the principal balance of promissory note due the Company is now $4,231,925. There can be no guarantee or assurance that WEG will be successful in its ability to raise sufficient capital to fund the operations of the Ashdown LLC, attain a sustained profitable level of operations, or pay the Company the amounts due in accordance with the terms of the promissory note.
On March 10, 2010, the Company closed the Exploration, Development and Mining Joint Venture Members’ Agreement (the “Members’ Agreement”) entered into on December 31, 2009 with Scorpio Gold Corporation (“Scorpio Gold”) and its US subsidiary, Scorpio Gold (US) Corporation (“Scorpio US”). At the closing of the Members’ Agreement, the Company sold Scorpio US an undivided 70% interest in the Mineral Ridge Mine for a purchase price of $3,750,000 cash (less those amounts previously advanced to the Company by Scorpio Gold) and 7,824,750 common shares of stock of Scorpio Gold at a market value of $5,501,582. Immediately following the sale, the Company and Scorpio US each contributed their respective interests in the Mineral Ridge Mine to a joint ventur e formed to own and operate the Mineral Ridge Mine called Mineral Ridge Gold, LLC, a Nevada limited liability company (the “Mineral Ridge LLC”). The Company currently owns a 30% membership interest in the Mineral Ridge LLC. Scorpio US owns a 70% membership interest in and is the Manager of the Mineral Ridge LLC, and has agreed to carry all finance costs necessary to bring the Mineral Ridge Mine into production. There can be no assurance that Scorpio US will be successful in its ability to raise sufficient capital to fund the development of the Mineral Ridge Mine and attain a successful level of operations.
On August 4, 2010, the Company sold in a market transaction all 7,824,750 shares of its investment in Scorpio Gold common stock (including 782,475 shares that had been set aside in a separate account to pay an obligation to Thomas Klein, Chief Executive Officer of the Company, for fees earned on the formation of the Mineral Ridge LLC) for net proceeds of approximately $3.8 million, realizing a loss of approximately $1.7 million. After payment of Mr. Klein’s obligation, the Company’s share of the net proceeds was approximately $3.4 million. Additionally, on August 11, 2010, the Company repaid the remaining obligation pursuant under that certain Debt Restructuring Secured Promissory Note with Crestview Capital Master, LLC (“Crestview”) in the principal amount of $1 million, p lus interest accrued thereon.
8
In addition to its 30% interest in the Mineral Ridge LLC, the Company owns the Adams Mine and Duff Claim Block near Denio, Nevada and the Northern Champion molybdenum property in Ontario Canada. Recently, the Company entered into agreements to acquire an 80% interest in the Vanderbilt Silver and Gold Project and the Coyote Fault Gold and Silver Project, both located adjacent to the Mineral Ridge gold and silver property near Silver Peak, Nevada. The Company also entered into a binding Memorandum of Understanding by which the Company may acquire an 80% interest in five gold and molybdenum properties in Peru, and a definitive Acquisition Agreement whereby the Company may acquire a 100% interest in four gold and base metal properties in the Shining Tree Mining District in Ontario, Canada. The Company will be required to raise significant capital, primarily through the issuance of its common stock, to complete the acquisition of the interests in and further the development of each of these mineral properties. There can be no assurance that the Company will be successful in raising the required capital or that any of these mineral properties will attain a successful level of operations.
NOTE 3 - DISCONTINUED OPERATIONS AND NOTE RECEIVABLE
Ashdown Project LLC
On February 25, 2009, the Company entered into a Binding Memorandum of Understanding as well as two related binding side letter agreements (collectively, the “MOU”) with Win-Eldrich Gold, Inc. (“WEG”), whereby the Company agreed to sell 100% of its ownership interest in the Ashdown LLC to WEG (the “Ashdown Sale”). WEG was a co-owner of the Ashdown LLC with the Company since the inception of the Ashdown LLC in September 2006, with the Company owning a 60% membership interest and WEG owning a 40% membership interest. The Ashdown LLC placed the Ashdown property into commercial operation in December 2006, and had sales of molybdenite concentrates of $10,398,361 for the year ended December 31, 2007 and sales of $10,537,370 during 2008 prior to suspension of operation s in November 2008 due to significant declines in the market price of molybdenum.
On May 13, 2009, pursuant to the material terms of the MOU, as further revised, negotiated and mutually agreed to by the Parties, the Company entered into definitive agreements that superseded the MOU, including a Purchase and Sale of LLC Membership Interest Agreement with WEG, to effectuate the Ashdown Sale (the “Purchase Agreement”). As consideration for the Ashdown Sale and the Parties’ mutual release of certain claims against the other pursuant to the terms of a Settlement and Release Agreement (the “Release”), WEG is to pay $5.3 million (the “Purchase Price”) to the Company, which has been satisfied by the issuance of a Limited Recourse Secured Promissory Note (the “Note”), for the full amount of the Purchase Price.
In particular, WEG is to pay the Company $5.3 million and assume the majority of all obligations and liabilities held by the LLC, all as detailed and more fully set forth in the Purchase Agreement. Pursuant to the terms and conditions of the Purchase Agreement and the Note, the Company, WEG and the LLC have also entered into a Security Agreement, a Short Form Deed of Trust and Assignment of Rents Agreement (the “Deed of Trust”), and certain other releases and side letter agreements (together with the Purchase Agreement and the Note, collectively, the “Transaction Documents”).
The initial terms and conditions of the Note, including term, interest rate and description of security interest were as follows: the terms of the Note include the payment of the Purchase Price together with simple interest on the unpaid principal amount of the Note at rate equal to the Wall Street Journal Prime rate plus 2.0%, computed on a quarterly basis beginning April 1, 2009, for a term of 72 months, with the first payment due one year from the date of Closing. As security for the Note, the Purchase Price shall be secured by the assets and property of the LLC as well as 100% of WEG’s ownership interest in the LLC (the “Collateral”). The sole recourse of the Company under the Note for the collection of amounts owed and in the event of default shall be foreclosure as to the C ollateral, as further detailed in the Security Agreement and Deed of Trust by and between the Parties.
9
As further discussed in Note 7, the Company entered into certain debt reduction agreements in April 2010 whereby it extinguished debt and royalty obligations totaling $1,068,075 through the assignment of portions of the Note, resulting in the principal amount of the Note payable to the Company reduced to $4,231,925.
Because of the current uncertainty of collecting the Note or realizing any value from the assets and property of the LLC upon foreclosure, the Note has been reduced 100% by an allowance account and recorded at no value in the accompanying balance sheets as of September 30, 2010 and December 31, 2009, and no gain on disposition of the Company’s interest in the Ashdown LLC attributed to the $5.3 million Note was recorded in the Company’s statements of operations for the year ended December 31, 2009. The Company did, however, record a loss on sale of interest in joint venture of $235,303 for year ended December 31, 2009 resulting from the assumption by the Company of certain liabilities in the transaction and the elimination of all investment and loan accounts related to the Ashdown LLC. Further gain, if any, on disposition of the interest in the Ashdown LLC will be recorded as cash payments are received on the Note or, if required, upon disposition of any assets or property of the Ashdown LLC due to foreclosure on the Note.
Pursuant to the Release, the Parties agreed to terminate any and all litigation and ongoing disputes existing between the Parties effective at Closing.
Finally, pursuant to the Purchase Agreement, Perry Muller, President of WEG, or his assignee, agreed to pay up to $100,000 of all payments made in settlement of the amounts owed by the Ashdown LLC to Retrievers LLC, and the Company secured a release from Retrievers LLC of any claim or title in or to the Ashdown Mill property, with Mr. Muller becoming the sole owner of the Ashdown Mill property (the “Retriever’s Settlement”). Upon completion of the Retriever’s Settlement, Mr. Muller agreed to lease the Ashdown Mill property to the Ashdown LLC and convey the Ashdown Mill to the Ashdown LLC upon repayment to Mr. Muller by the Ashdown LLC of $100,000, plus a loan fee amount of $10,000, all as pursuant to that certain Ashdown Mill Binding Side Letter Agreement, dated May 13, 2009.
Mineral Ridge Mine
The Company entered into a letter agreement dated May 19, 2009, as subsequently amended on July 17, 2009, with Scorpio Gold Corporation (as previously defined, “Scorpio Gold”) for the purpose of completing due diligence prior to entering into a possible joint venture to place the Company’s Mineral Ridge Mine into production. Upon execution of the letter agreement, Scorpio Gold paid the Company $50,000 and commenced a 15 day due diligence period. On June 18, 2009, Scorpio Gold notified the Company that it had completed preliminary due diligence and intended to proceed with the acquisition of the Mineral Ridge Mine and the formation of a joint venture.
Through December 31, 2009, Scorpio Gold paid the Company an additional $850,000 plus certain expenses, as part of ongoing monthly payments to be credited toward the ultimate purchase price while the parties finalized negotiations and definitive agreements. These payments to the Company were non-refundable, and the total payments through December 31, 2009 of $900,000 were recorded as a deposit, a current liability in the accompanying condensed balance sheet as of December 31, 2009.
On March 10, 2010, the Company closed the Members’ Agreement entered into on December 31, 2009 with Scorpio Gold and Scorpio US. At the closing of the Members’ Agreement, the Company sold Scorpio US an undivided 70% interest in the Mineral Ridge Mine for a purchase price of US $3,750,000 cash (less those amounts previously advanced to the Company by Scorpio Gold) and 7,824,750 common shares of stock of Scorpio Gold at a market value of $5,501,582. Immediately following the sale, the Company and Scorpio US each contributed their respective interests in the Mineral Ridge Mine to a joint venture formed to own and operate the Mineral Ridge Mine called Mineral Ridge Gold, LLC, a Nevada limited liability company (as previously defined, the “Mineral Ridge LLC”). The Company also contributed to the Mineral Ridge LLC its interest in the reclamation bonds related to the Mineral Ridge Mine and Scorpio US contributed a net smelter royalty encumbering the Mineral Ridge Mine, which Scorpio US had acquired simultaneously with the closing of the Members’ Agreement. The Company recorded the common shares of Scorpio Gold at their market value on March 10, 2010 of $5,501,582 and recognized a gain on sale of the 70% interest in the net assets of the Mineral Ridge Mine of $8,982,772 during the nine months ended September 30, 2010, comprised of the following:
10
| Cash received, including amounts previously advanced | $ | 3,750,000 | ||
| Marketable securities received, shares of Scorpio Gold recorded at their market value | 5,501,582 | |||
| Total proceeds | 9,251,582 | |||
| Reclamation liability and accounts payable transferred | 2,134,098 | |||
| Book value of assets sold | (1,784,652 | ) | ||
| Fees to related party | (618,256 | ) | ||
| Gain on sale | $ | 8,982,772 |
The fees on the transaction were paid to Thomas Klein, Chief Executive Officer of the Company.
The contribution of the Company’s 30% interest in the net assets of Mineral Ridge, which was comprised of a net liability of $149,763, was recorded as a transfer to a related party and recorded as an increase to additional paid-in capital as follows:
| Reclamation liability and accounts payable transferred | $ | 914,614 | ||
| Book value of assets transferred | (764,851 | ) | ||
| Increase in additional paid-in capital | $ | 149,763 |
The Company currently owns a 30% membership interest in the Mineral Ridge LLC. Scorpio US owns a 70% membership interest in and is the Manager of the Mineral Ridge LLC, and has agreed to carry all finance costs necessary to bring the Mineral Ridge Mine into production and, provided it does so within 30 months of the closing of the Members’ Agreement, will then have the right to increase its interest in the Mineral Ridge LLC by 10% to a total of 80%. In the event Scorpio US qualifies to increase its ownership interest to 80%, it will also have the option to purchase the Company’s then remaining 20% interest for a period of 24 months following the commencement of commercial production. There can be no assurance that Scorpio US will be successful in its ability to raise suffici ent capital to fund the development of the Mineral Ridge Mine and attain a successful level of operations.
Scorpio Gold and the Company have arranged with regulatory authorities, insurance carriers and others to complete the transfer to the Mineral Ridge LLC of the reclamation obligation and related bonds, permits and deposits that are established to fund the obligation. As of March 10, 2010, the date of the transfer, the reclamation obligation was estimated at $3,041,927. Both Scorpio Gold and the Company have agreed to jointly and severally indemnify the bond and insurance provider from and against any and all liability for any loss suffered in connection with the bond issued on behalf of the Mineral Ridge LLC. However, the Company believes the reclamation bonds and deposits transferred are currently sufficient to fund the reclamation obligation.
The Company has reported the operations of the Ashdown LLC and the Mineral Ridge Mine as discontinued operations in the accompanying condensed financial statements for all periods presented.
11
The accompanying condensed statements of operations for the three months and nine months ended September 30, 2010 and 2009 include the following:
Three Months Ended September 30, | 2010 | 2009 | ||||||||||||||||||||||
Ashdown LLC | Mineral Ridge | Total | Ashdown LLC | Mineral Ridge | Total | |||||||||||||||||||
| Revenues | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||
| Loss before income taxes | - | - | - | - | (94,479 | ) | (94,479 | ) | ||||||||||||||||
| Provision for income taxes | - | - | - | - | - | - | ||||||||||||||||||
| Loss from discontinued operations | - | - | - | - | (94,479 | ) | (94,479 | ) | ||||||||||||||||
| Gain (loss) on sale of Mineral Ridge assets | - | (8,256 | ) | (8,256 | ) | - | - | - | ||||||||||||||||
| Loss on sale of interest in joint venture | - | - | - | - | - | - | ||||||||||||||||||
| Loss from discontinued operations | - | (8,256 | ) | (8,256 | ) | - | (94,479 | ) | (94,479 | ) | ||||||||||||||
| Loss from discontinued operations attributable to noncontrolling interest | - | - | - | - | - | - | ||||||||||||||||||
| Loss from discontinued operations attributable to the Company | $ | - | $ | (8,256 | ) | $ | (8,256 | ) | $ | - | $ | (94,479 | ) | $ | (94,479 | ) | ||||||||
Nine Months Ended September 30, | 2010 | 2009 | ||||||||||||||||||||||
Ashdown LLC | Mineral Ridge | Total | Ashdown LLC | Mineral Ridge | Total | |||||||||||||||||||
| Revenues | $ | - | $ | - | $ | - | $ | 321,115 | $ | - | $ | 321,115 | ||||||||||||
| Loss before income taxes | - | (81,219 | ) | (81,219 | ) | (668,186 | ) | (482,080 | ) | (1,150,266 | ) | |||||||||||||
| Provision for income taxes | - | - | - | - | - | - | ||||||||||||||||||
| Loss from discontinued operations | - | (81,219 | ) | (81,219 | ) | (668,186 | ) | (482,080 | ) | (1,150,266 | ) | |||||||||||||
| Gain on sale of Mineral Ridge assets | - | 8,982,772 | 8,982,772 | - | - | - | ||||||||||||||||||
| Loss on sale of interest in joint venture | - | - | - | (235,303 | ) | - | (235,303 | ) | ||||||||||||||||
| Income (loss) from discontinued operations | - | 8,901,553 | 8,901,553 | (903,489 | ) | (482,080 | ) | (1,385,569 | ) | |||||||||||||||
| Loss from discontinued operations attributable to noncontrolling interest | - | - | - | 267,274 | - | 267,274 | ||||||||||||||||||
| Income (loss) from discontinued operations attributable to the Company | $ | - | $ | 8,901,553 | $ | 8,901,553 | $ | (636,215 | ) | $ | (482,080 | ) | $ | (1,118,295 | ) | |||||||||
12
No accounts or amounts for the Ashdown LLC are included in the condensed financial statements of the Company subsequent to May 13, 2009, the date the Company’s sale of its interest in the Ashdown LLC was completed. Similarly, no accounts or amounts for the Mineral Ridge Mine are included in the condensed financial statements of the Company subsequent to March 10, 2010, the date of the sale of the Company’s interest in the Mineral Ridge Mine. The assets and liabilities of the Mineral Ridge Mine were aggregated and disclosed as long-term assets and liabilities of discontinued operations in the condensed balance sheet as of December 31, 2009 as follows:
| Prepaid expenses and other current assets | $ | 48,041 | ||
| Inventories | 19,324 | |||
| Property and equipment, net | 432,986 | |||
| Restricted funds – reclamation obligations | 1,861,146 | |||
| Prepaid bond insurance premiums | 190,853 | |||
| Deposits | 50 | |||
| Assets of discontinued operations | $ | 2,552,400 |
| Accounts payable | $ | 17,332 | ||
| Reclamation obligation | 3,019,098 | |||
| Liabilities of discontinued operations | $ | 3,036,430 |
NOTE 4 – MARKETABLE SECURITIES
The 7,824,750 shares of Scorpio Gold common stock received in the sale of the net assets of the Mineral Ridge Mine were originally recorded on March 10, 2010 at their market value of $5,501,582 and subsequently stated at market value, with market value based on market quotes. The Company classified these marketable securities as securities held-for-sale in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification™ (ASC) Topic 320, Investments – Debt and Equity Securities. Unrealized gains and losses resulting from changes in market value were recorded as other comprehensive income, a component of stockholders’ equity in the Company’s balance sheet.
On August 4, 2010, the Company sold in a market transaction all 7,824,750 shares of its investment in Scorpio Gold common stock (including 782,475 shares that had been set aside in a separate account to pay an obligation to Thomas Klein, Chief Executive Officer of the Company, for fees earned on the formation of the Mineral Ridge LLC) for net proceeds, after commissions and fees, of $3,832,626. After payment of Mr. Klein’s obligation, the Company’s share of the net proceeds was approximately $3.4 million. The Company reported a loss on sale of marketable securities of $1,681,571 in its condensed statements of operations for the three months and nine months ended September 30, 2010.
In accordance with ASC Topic 830, Foreign Currency Matters, the increase or decrease in the recorded value of the marketable securities resulting from changes in foreign exchange rates between the Company’s functional currency, the US dollar, and the currency in which the marketable securities were denominated, the Canadian dollar, was recorded as a foreign currency transaction gain or loss in the Company’s condensed statements of operations. The foreign currency gain was $168,018 and $12,615 for the three months and nine months ended September 30, 2010, respectively.
NOTE 5 – INVESTMENT IN MINERAL RIDGE LLC
The Company’s 30% membership interest in the Mineral Ridge LLC is accounted for using the equity method of accounting in accordance with ASC Topic 323 – Investments – Equity Method and Joint Ventures. The investment is recorded at cost, with the carrying value subsequently increased for the investor’s share of the investee’s net income or additional contributions to capital, and decreased for the investor’s share of the investee’s net loss or equity distributions.
13
Because the Company’s book value of its initial investment in the Mineral Ridge LLC, which was comprised of liabilities in excess of assets, was recorded as a transfer to a related party and recorded as an increase to additional paid-in capital, and because the Company has no obligation to contribute capital to fund the operations of the Mineral Ridge LLC, the carrying value of the investment is recorded at zero. In accordance with ASC Topic 323, the Company has not recorded its share of the Mineral Ridge LLC net loss for the period ended September 30, 2010 because its investment has been reduced to zero and the Company has neither guaranteed obligations of or otherwise committed to provide further financial support for the Mineral Ridge LLC.
The following presents unaudited summary financial information for the Mineral Ridge LLC as of September 30, 2010:
| Current assets | $ | 142,108 | ||
| Property and equipment | 3,529,829 | |||
| Restricted funds – reclamation obligations | 2,335,755 | |||
| Total assets | 6,007,692 | |||
| Current liabilities | (722,197 | ) | ||
| Reclamation obligation | (2,302,921 | ) | ||
| Members’ Equity | $ | 2,982,574 |
Subsequent to September 30, 2010, Scorpio Gold, the Company’s partner in the Mineral Ridge LLC, closed a debt financing transaction for up to $12 million, with the use of proceeds designated to finance the operations of the Mineral Ridge LLC. See Note 23.
NOTE 6 – MHAKARI PROPERTIES
On April 19, 2010, the Company entered into a letter of intent with Mhakari Gold (Nevada) Inc. (“Mhakari”) dated April 16, 2010 (the “First LOI”), concerning that certain property known as the “Mhakari Nevada Properties excluding Vanderbilt Mine,” located in the State of Nevada (the “Property”).
Pursuant to the terms of the First LOI, the parties agreed to immediately proceed to negotiate a definitive option agreement (the “Definitive Option Agreement”) whereby the Company will be granted an option to acquire an undivided 80% interest in the Property.
Simultaneous with the First LOI, on April 19, 2010, the Company entered into a further letter of intent with Mhakari, dated April 16, 2010 (the “Second LOI”) concerning that certain property, known as the “Mhakari Vanderbilt Properties,” located in the State of Nevada (the “Vanderbilt Property”).
Pursuant to the terms of the Second LOI, the parties agreed to immediately proceed to negotiate a definitive purchase agreement (the “Definitive Purchase Agreement”) whereby the Company will purchase an undivided 80% interest in the Vanderbilt Property.
The Company made two payments of $25,000 each to Mhakari related to the letters of intent.
On July 6, 2010, the Company, entered into a definitive Option Agreement (the “Option Agreement”) as well as a definitive Asset Purchase Agreement (“Purchase Agreement”) with Mhakari, as contemplated by the two LOI’s discussed above.
14
Pursuant to the terms of the Option Agreement, the Company was granted an exclusive option to acquire an undivided 80% interest in the Property. To exercise its option, the Company must fulfill certain conditions and make certain payments to Mhakari as follows: (i) upon signing of the Option Agreement, $75,000 cash payment in three monthly installments of $25,000 as well as the issuance of 5,000,000 shares of the Company’s common stock and warrants to purchase a further 5,000,000 shares of Company common stock at a strike price of $0.05 per share exercisable for a period of five years; (ii) within six months of the signing of the Option Agreement, an additional $50,000 cash payment to Mhakari; (iii) within 12 months of signing the Option Agreement, an additional $50,000 cash payment to Mhakari; (iv) wi thin 12 months of signing the Option Agreement, the Company shall be required to expend no less than $150,000 in exploration and development expenditures on the Property; and (v) within 48 months of signing the Option Agreement, the Company shall be required to expend no less than an additional $1,000,000 in exploration and development expenditures on the Property (collectively, items (i) – (v) above referred to as the “Option Purchase Price”).
Further, the Option Agreement provides that upon the satisfaction of terms (i)-(iv) of the Option Purchase Price set forth above, the parties shall enter in to a joint venture agreement with respect to the Property in which the Company will receive a 51% interest. Under the terms of such joint venture agreement, the Company will assume day-to-day operational control of the Property. Upon satisfying term (v) of the Option Purchase Price above, the Company’s interest in the Property shall automatically be increased from 51% to 80%, with Mhakari retaining a 20% participating interest and both parties subject to dilution for failure to contribute its respective share of required capital to the joint venture.
In the event the Company fails to satisfy all of the components of the Option Purchase Price within the specified timeframes (except as specifically set forth above with respect to the Company’s ability to earn a 51% joint venture interest), the Option Agreement shall be deemed to have been terminated with all payments and securities issuances forfeited to Mhakari and no interest in the Property transferring to the Company. Further, the Company affirmatively covenanted to Mhakari that it will obtain an “area of interest waiver” from Scorpio Gold Corporation (“Scorpio”) related to the Company’s current joint venture with Scorpio with respect to the Mineral Ridge property, and to maintain the joint venture with Scorpio in good standing. The parties each made certa in customary representations and warranties to the other with respect to a transaction of this nature.
Simultaneous with the Option Agreement, on July 6, 2010, the Company also entered into a definitive Asset Purchase Agreement with Mhakari (the “Purchase Agreement”) concerning the Vanderbilt Properties. Pursuant to the terms of the Purchase Agreement, the Company has contracted to purchase an undivided 80% interest in the Vanderbilt Property.
In particular, the terms of the Purchase Agreement provide for a purchase price payable by the Company to Mhakari as follows: (i) no later than June 15, 2010, the Company was to make a payment of $25,000 as directed to that certain optionor of the Vanderbilt Property to satisfy the payment required under Mhakari’s current exclusive option agreement with said optionor (such payment having already been satisfied); (ii) upon the signing of the Purchase Agreement, the issuance of 2,000,000 shares of the Company’s common stock as well as warrants to purchase a further 2,000,000 shares of the Company’s common stock with a strike price of $0.05 per share exercisable for a period of five years; (iii) on or before July 15, 2010, make a further payment of $26,000 to that certain optionor as required to satisfy Mhakari’s payment obligation under that certain option agreement for the Vanderbilt Property; (iv) within 48 months of signing the Purchase Agreement, the Company shall be required to expend no less than $350,000 in exploration and development expenditures on the Vanderbilt Property; and (v) complete each of items (i) – (iv) above, provided that, should the Company elect not to increase its interest in the Mhakari Claims Excluding Vanderbilt Properties (referred to above as the “Property”) under the Option Agreement from 51% to 80%, any balance owing in respect of exploration and development expenditures shall be applied to the Vanderbilt Property such that the Company has incurred a minimum of $1,500,000 in exploration and development expenditures in total between the Vanderbilt Property and the Property within 48 months of signing the Purchase Agreement (collectively, items (i) – (v) above referred to as the “Purchase Price”).
15
Further, the Purchase Agreement provides that in the event the Company fails to make the necessary payments comprising items (i) (which has been satisfied) and (iii) of the Purchase Price, Mhakari will be entitled to a penalty payment of $5,000 for every week such payment is not received. Upon satisfaction of the Purchase Price, the parties shall enter into a joint venture agreement with respect to the Vanderbilt Property in which the Company will receive an undivided 80% ownership interest in, and will assume day-to-day operational control of, the Vanderbilt Property, with Mhakari retaining a 20% participating interest and both parties subject to dilution for failure to contribute its respective share of required capital to the joint venture. In the event the Company fails to satisfy all of the c omponents of the Purchase Price within the specified timeframes, the Purchase Agreement shall be deemed to have been terminated with all payments and securities issuances forfeited to Mhakari and no interest in the Vanderbilt Property transferring to the Company. The parties each made certain customary representations and warranties to the other with respect to a transaction of this nature.
Pursuant to the terms of the Option Agreement and Purchase Agreement, on July 9, 2010, the Company issued Mhakari an aggregate of 7,000,000 shares of the Company’s common stock, valued at $280,000 based on the market value of the shares. Further, the Company issued Mhakari two separate warrants (the “Warrants”) to purchase a further 5,000,000 and 2,000,000 shares, respectively, of the Company’s common stock, at a strike price of $0.05 per share. The Company estimated the value of the Warrants at $236,390 using the Black-Scholes option pricing model. The value of the shares and warrants issued was expensed and included in exploration, development and mineral property lease expenses in the accompanying condensed statement of operations for the three months and nine months ended September 30, 2010. The Warrants are exercisable for a 5-year term, and in the event that the 200-day volume weighted average price per share of the Company’s common stock equals or exceeds $0.15, the Company may, upon prior written notice to Mhakari (the “Forced Conversion Notice”), but shall not have the obligation to, force Mhakari to exercise the Warrants in full within ninety days of receipt of the Forced Conversion Notice (the “Forced Conversion Period”). If Mhakari fails to exercise the Warrants prior to the end of the Forced Conversion Period, the Warrants shall expire. If the Company elects not to exercise its forced conversion rights, the Warrants shall expire according to their respective terms.
The Company paid $26,000 and $25,000 to Mhakari in July and August 2010, respectively, as required by the Purchase Agreement.
NOTE 7 – DEBT REDUCTION AGREEMENTS
On April 15, 2010, in furtherance of its debt reduction efforts, the Company entered into a series of agreements with Kenneth Ripley (“Ripley”) and David Pearl (“Pearl”), members of the Ashdown Milling Company, LLC (“Ashdown Milling”), Win-Eldrich Gold, Inc., (“WEG”), the Ashdown Project, LLC (“Ashdown Project”) and Earl Harrison (“Harrison”), whereby WEG agreed to modify that certain Limited Recourse Secured Promissory Note in the principal amount of $5,300,000 made in favor of the Company, dated May 13, 2009 (the “Initial Note”), and reissue and replace the Initial Note with one Series A Note, two Series B Notes and one Series C Note, with the Company maintaining the Series A Note and WEG consenting to the Company’s assignment o f the Series B Notes to Ripley and Pearl and the Series C Note to Harrison, in settlement of outstanding sums owed by the Company to each party, all as further described below (the overall transaction referred to herein as the “Debt Reduction”):
As an initial matter, in furtherance of the Debt Reduction, the Company and WEG entered into a Promissory Note Modification Agreement, dated April 15, 2010, whereby the parties agreed to replace the Initial Note issued under that certain Purchase and Sale of Membership Interest Agreement, dated May 11, 2009 (the “Ashdown Project Purchase Agreement”) with four separate notes as follows: (a) one Series A Limited Recourse Secured Promissory Note in the principal amount of $4,231,925 (the “Series A Note”), (b) two Series B Limited Recourse Secured Promissory Notes, each in the principal amount of $489,002 (the “Series B Notes”), and (c) one Series C Limited Recourse Secured Promissory Note in the principal amoun t of $90,070 (the “Series C Note”) (the Series A Note, the Series B Notes and the Series C Note, collectively, the “Replacement Notes”). As discussed below, payments to the Company on the Series A Note will commence on April 1, 2011 rather than on May 13, 2010 as initially contemplated, in order to permit the commencement of payments on the Series B Notes and Series C Note, in furtherance of the Debt Reduction.
16
The Series A Note bears interest at a rate of 5.25% per annum, with interest accruing from April 1, 2011, and monthly payments to commence as of even date therewith and continue in equal monthly installments for 49 months until the Series A Note’s maturity date of April 1, 2015, unless sooner accelerated upon an event of default. The Series B Notes are non-interest bearing and shall each be repaid in equal monthly installments over a twenty-four (24) month period, with the first monthly installment to commence on May 1, 2010. The Series C Note bears interest at a rate of 5.25% per annum and shall be repaid in equal monthly installments over a 24 month period, with the first monthly installment to commence on May 1, 2010. Accordingly, the Series B Notes and Series C Note are schedu led to commence payments one (1) year prior to the commencement of payments under the Series A Note. However, an event of default under any of the Series B Notes or Series C Note, constitutes an event of default under the Series A Note, thereby triggering the acceleration of all Replacement Notes.
Further, the Replacement Notes are collectively secured by certain Ashdown Project and WEG collateral as set forth in that certain Security Agreement and Mortgage and Deed of Trust (“Security Agreement”) entered into by and between the Company, WEG and the Ashdown Project simultaneous with and pursuant to the Ashdown Project Purchase Agreement, such Security Agreement amended as of April 15, 2010 by that certain First Amendment to Security Agreement (the “Amendment”), to facilitate the issuance of the Replacement Notes and to affirm that the Security Agreement, as amended, remains in full force and effect, securing WEG’s obligations under the Replacement Notes.
Also in connection with the Debt Reduction, on April 15, 2010, the Company entered into a Membership Interest Purchase Agreement (the “Ashdown Milling Purchase Agreement”) with Ripley and Pearl (collectively, the “Sellers”), whereby the Company agreed to purchase the Sellers’ collective 40% membership interest in Ashdown Milling (the “Membership Interests”) for an aggregate purchase price of $978,005 (the “Purchase Price”), payable in the form of an assignment of the Company’s rights to those certain Series B Notes made by WEG, as described above. The Company entered into the Ashdown Milling Purchase Agreement to acquire the Membership Interests, in furtherance of its obligation under the Ashdown Project Purchase Agreement to use its best efforts to reduce or eliminate the net smelter royalty obligations owed to Ashdown Milling. In consideration of the Purchase Price, the Sellers agreed to assign the Company all of their respective right, title and interest in and to the Membership Interests and to provide the Company with a general release of any and all claims, obligations, debts, liabilities, agreements, warranties, representations, damages, losses, costs and expenses, among other things, that Sellers may have had against the Company. The Company provided Sellers with a similar general release of liabilities.
To facilitate the Company’s payment of the Purchase Price as described in the Ashdown Milling Purchase Agreement, the Company and each of Ripley and Pearl entered into an Assignment of Loan Documents dated April 15, 2010 (the “Assignments”), whereby the Company assigned its right to the Series B Notes to each of Ripley and Pearl, which Assignments were duly consented to by WEG. Pursuant to the Assignments, Ripley and Pearl each agreed to release the Company from any liability with respect to, and agreed to indemnify and hold the Company harmless from and against, any claims arising out of or relating to, the Series B Notes.
17
Robert P. Martin, an officer and director of the Company, and Mr. Ripley, a former Chief Executive Officer of the Company, are co-managers and members of Ashdown Milling. Because of the related party nature of the transfer of the Series B Notes and the resulting extinguishment of the royalty obligation, the transaction has been recorded at the book value of the financial assets transferred of zero, with no gain or loss recognized.
Finally, in connection with the Debt Reduction, on April 21, 2010, the Company entered into a Settlement Agreement with Earl Harrison (“Harrison”) dated April 9, 2010 (the “Harrison Settlement Agreement”), whereby the Company agreed to pay Harrison the aggregate sum of $180,140 (the “Harrison Settlement Amount”). The parties agreed that of the Harrison Settlement Amount, $90,070 was to be paid in cash simultaneous with the Company’s execution of the Harrison Settlement Agreement, and the remaining $90,070 was to be paid in the form of an assignment of the Company’s right to that certain Series C Note made by WEG, as described above. In consideration of the Company's payment of the Harrison Settlement Amount, Harrison agreed to a full release of any a nd all debts, claims, obligations, losses, costs and expenses he may have had against the Company related to that certain default judgment dated February 2, 2009 from the Second District Court of the State of Nevada in Washoe County entered in favor of Harrison and the Execution Order dated May 1, 2009 issued in connection therewith.
To facilitate the assignment of the Series C Note, the Company and Harrison entered into an Assignment of Loan Documents dated April 15, 2010 (the “Harrison Assignment”), which Harrison Assignment was duly consented to by WEG. Pursuant to the Harrison Assignment, Harrison agreed to release the Company from any liability with respect to, and agreed to indemnify and hold the Company harmless from and against, any claims arising out of or relating to, the Series C Note.
Mr. Harrison is a former manager of the Ashdown Mine. Because of the related party nature of the transaction, the transfer of the Series C Notes has been recorded at the book value of the financial assets transferred of zero, and the resulting gain on extinguishment of the loan obligation to Mr. Harrison of $90,070 has been recorded as an increase to additional paid-in capital.
NOTE 8 – MARTIN DEBT SETTLEMENT AGREEMENT
On April 16, 2010, the Company entered into a Debt Settlement and Release Agreement with Robert P. Martin, the Company’s current President, Secretary and Chairman of the Company’s Board of Directors (the “Debt Settlement Agreement”), as part of the Company’s ongoing efforts to consolidate and eliminate certain outstanding debt obligations.
Pursuant to the terms of the Debt Settlement Agreement, Mr. Martin agreed to accept the total sum of $716,689 (the “Martin Settlement Amount”) in exchange for the settlement of all outstanding amounts owed by the Company to Mr. Martin, such amounts totaling $985,259 (the “Outstanding Debt”), as well as a release of all claims against the Company by Mr. Martin relating to, or arising out of, the Outstanding Debt. By agreeing to accept the Martin Settlement Amount, Mr. Martin is forgiving $268,570 owed to him by the Company.
The Outstanding Debt consists of: (i) loan obligations of the Company in the form of three promissory notes issued to Mr. Martin totaling $215,940 (such amount includes accrued interest on the three notes in the amount of $55,415) (“Loan Obligations”); (ii) unpaid salary totaling $268,570 (“Unpaid Salary Obligation”) and accrued unpaid expenses totaling $11,747 (“Accrued Expense Obligation”) owed by the Company to Mr. Martin under the Employment Agreement between the Company and Mr. Martin dated March 8, 2006, as supplemented by that certain Addendum to Employment Agreement dated January 31, 2007; and (iii) financial obligations totaling $489,002 owed by the Company to Mr. Martin in connection with the Compa ny’s investment in the mill owned by the Ashdown Milling Company, LLC, in Mr. Martin’s capacity as a member thereof (the “Ashdown Milling Obligations”).
18
Under the terms of the Debt Settlement Agreement, the Company agreed to pay Mr. Martin the Accrued Expense Obligation in cash as soon as reasonably practicable, with the remainder of the Martin Settlement Amount to be issued in the form of a secured promissory note (the “Secured Promissory Note”). Of the principal amount owed on the Secured Promissory Note, (1) $215,940 accrues interest at a rate of 6.5% per annum, with a maturity date of December 12, 2010; and (2) $489,002 payable by the Company to Mr. Martin after the Company has satisfied its current financial obligations to Ripley and Pearl, the remaining members of the Ashdown Milling Company, LLC (as previously defined, “Ashdown Milling”), or by March 12, 2011, whichever comes first, said payment to be structured, at Mr. Martin& #8217;s election, as a sale of Mr. Martin’s membership interest in Ashdown Milling to the Company pursuant to, and in accordance with, the terms and conditions of the Ashdown Milling Operating Agreement.
The Company has recorded royalties expense $489,002 in the condensed statement of operations for the nine months ended September 30, 2010 for the non-interest bearing note payable to Mr. Martin of $489,002. The total gain on extinguishment of amounts due Mr. Martin of $270,581 has been recorded as an increase to additional paid-in capital due to the related party nature of the transaction.
The Secured Promissory Note was intended to be secured by a pledge of 1,020,000 share of Scorpio Gold common stock, valued at CN $0.50 per share (“Scorpio Gold Shares”). Prior to perfecting the security interest in the Scorpio Gold Shares as contemplated by the Debt Settlement Agreement, the Company’s Board of Directors, with Mr. Martin abstaining from the vote, approved the sale of all 7,824,750 shares of its investment in Scorpio Gold common stock, including the Scorpio Gold Shares that were intended to secure the Secured Promissory Note, with an undertaking to pay off the Secured Promissory Note in full from the proceeds of the sale of Scorpio Gold common stock. The sale occurred in a market transaction on August 4, 2010 and the Company paid off the Secured Promissory Note in September 2010.
NOTE 9 – STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation in accordance with ASC Topic 718, Compensation – Stock Compensation. Under the fair value recognition provisions of this standard, stock-based compensation cost is measured at the grant date based on the value of the award granted, using the Black-Scholes option pricing model, and recognized over the period in which the award vests. The stock-based compensation expense included in general and administrative expenses for the three months ended September 30, 2010 and 2009 was $4,018 and $18,725, respectively, and $21,439 and $51,672 for the nine months ended September 30, 2010 and 2009, respectively. There was no stock compensation expense capitalized during the three months or nine months ended September 30, 2010 and 2009.
During the nine months ended September 30, 2010, options to purchase a total of 200,000 shares of the Company’s common stock were issued to directors with exercise prices ranging from $0.04 to $0.045 per share. The Company estimated the weighted average grant-date fair value of these options at $0.04 per share using the Black-Scholes option pricing model with the following assumptions:
| Expected dividend yield | 0.00% |
| Expected stock price volatility | 138.35% |
| Risk-free interest rate | 1.91% |
| Expected life of options | 5 years |
19
The following table summarizes the stock option activity during the nine months ended September 30, 2010:
Options | Weighted Average Exercise Price | Weighted Average Remaining Contract Term | Aggregate Intrinsic Value | |||||||
| Outstanding at December 31, 2009 | 6,137,273 | $ | 0.21 | |||||||
| Granted | 200,000 | $ | 0.04 | |||||||
| Exercised | - | $ | - | |||||||
| Expired or cancelled | (1,922,273 | ) | $ | 0.15 | ||||||
| Outstanding at September 30, 2010 | 4,415,000 | $ | 0.22 | |||||||
| Options vested and exercisable at September 30, 2010 | 4,415,000 | $ | 0.22 | 1.72 | $ 7,410 | |||||
The aggregate intrinsic value in the preceding table represents the total pretax intrinsic value, based on the Company’s closing stock price of $0.06 as of September 30, 2010 which would have been received by the holders of in-the-money options had the option holders exercised their options as of that date.
As of September 30, 2010, there was no future compensation cost related to non-vested stock-based awards not yet recognized in the condensed statements of operations.
NOTE 10 - STOCK WARRANTS AND PURCHASE RIGHTS
A summary of the status of the Company’s stock warrants and purchase rights as of September 30, 2010 and changes during the nine months then ended is presented below:
| Weighted | ||||||||
| Average | ||||||||
| Shares | Exercise Price | |||||||
| Outstanding, December 31, 2009 | 26,248,926 | $ | 0.04 | |||||
| Granted | 10,333,333 | $ | 0.05 | |||||
| Canceled / Expired | (1,748,926 | ) | $ | 0.25 | ||||
| Exercised | - | $ | - | |||||
| Outstanding, September 30, 2010 | 34,833,333 | $ | 0.04 | |||||
The following summarizes the exercise price per share and expiration date of the Company's outstanding warrants and rights to purchase common stock at September 30, 2010:
| Expiration Date | Price | Number |
| 2011 | $ 0.03 | 23,000,000 |
| 2011 | $ 0.01 | 1,500,000 |
| 2011 | $ 0.06 | 3,333,333 |
| 2015 | $ 0.05 | 7,000,000 |
| 34,833,333 |
20
In connection with the purchase of shares of the Company’s common stock in February 2010, the Company issued warrants to an investor to purchase 3,333,333 common shares of the Company at an exercise price of $0.06 per share. The warrants are exercisable through February 24, 2011.
On September 24, 2010, the Company entered into a letter agreement (“Agreement”) with Crestview Capital Master, LLC (“Crestview”) whereby the Company has an option to repurchase 20,000,000 warrants of the 23,000,000 warrants currently held by Crestview with an exercise price of $0.03 per share (the “Warrants”), issued as of February 6, 2009 in connection with that certain Bridge Loan and Debt Restructuring Agreement, dated January 30, 2009 (the “Restructuring Agreement”). See Note 15.
Pursuant to the Agreement, the Company has the option (“Option”) to purchase 20,000,000 of the Warrants for a period of 45 days from the date of the Agreement (the “Option Period”) for a purchase price of no less than $0.0285 per share. In consideration for the Option, the Company made a payment to Crestview of $10,000. Further, if during the Option Period the closing price of the Company’s common stock reaches or exceeds $0.06 per share, as quoted by the OTC Bulletin Board, the Company will provide Crestview with a non-refundable deposit in the amount of $50,000, which sum will be applied to the ultimate exercise of the Option and repurchase of certain of the Warrants, but will be retained by Crestview despite any election by Golden Phoenix not to exercise the Option . Because the closing price of the Company’s common stock exceeded $0.06 per share, such $50,000 deposit was paid to Crestview. The Option Period has been extended until December 15, 2010 by mutual agreement of the parties. Except as may be modified to reflect the terms of any sale or transfer of the Warrants as contemplated by the Option, the Warrants remain in full force and effect according to their terms.
See Note 6 for a discussion of warrants to purchase a total of 7,000,000 common shares issued in July 2010 for exploration mineral properties.
NOTE 11 – EARNINGS (LOSS) PER SHARE
The computation of basic earnings per common share is based on the weighted average number of shares outstanding during the period. The computation of diluted earnings per common share is based on the weighted average number of shares outstanding during the period plus the weighted average common stock equivalents which would arise from the exercise of stock options, warrants and rights outstanding using the treasury stock method and the average market price per share during the period.
A reconciliation of the number of shares used in the computation of the Company’s basic and diluted earnings per common share is as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
Weighted average number of common shares outstanding | 241,092,349 | 211,948,713 | 233,732,479 | 210,328,353 | ||||||||||||
| Dilutive effect of: | ||||||||||||||||
| Stock options | - | - | 71,739 | - | ||||||||||||
| Warrants and stock purchase rights | - | - | 8,633,696 | - | ||||||||||||
Weighted average number of common shares outstanding, assuming dilution | 241,092,349 | 211,948,713 | 242,437,914 | 210,328,353 | ||||||||||||
No stock options and warrants are included in the computation of weighted average number of shares for the three months ended September 30, 2010 and 2009 and for the nine months ended September 30, 2009 because the effect would be anti-dilutive. At September 30, 2010, the Company had outstanding options and warrants to purchase a total of 39,248,333 common shares of the Company that could have a future dilutive effect on the calculation of earnings per share.
21
NOTE 12 – PROPERTY AND EQUIPMENT
Property and equipment consist of the following at September 30, 2010:
| Computer equipment | $ | 72,038 | ||
| Drilling equipment | 346,205 | |||
| Support equipment | 39,932 | |||
| Office furniture and equipment | 17,872 | |||
| 476,047 | ||||
| Less accumulated depreciation and amortization | (258,918 | ) | ||
| $ | 217,129 |
NOTE 13 – SEVERANCE OBLIGATIONS
At a meeting of the Board of Directors on February 18, 2005, the directors unanimously approved a separation agreement for Michael Fitzsimonds, a former Chief Executive Officer of the Company. The terms of separation were that Mr. Fitzsimonds would be paid his full salary for one year, including medical benefits, followed by 180 hours of vacation. The Company then would pay him $394,000 in 59 equal monthly payments. He would be allowed to use a company vehicle for one year at which time he exercised his option to purchase it. The current portion of the severance obligation to Mr. Fitzsimonds of $165,201 as of December 31, 2009 is included in current liabilities in the accompanying condensed balance sheet as of December 31, 2009.
On December 23, 2009, the Company entered into a Settlement Agreement and Mutual Release Agreement with Mr. Fitzsimonds (the “Fitzsimonds Settlement Agreement”), pursuant to which the Company and Mr. Fitzsimonds agreed to settle the severance obligations and $100,000 promissory note due Mr. Fitzsimonds and cancel all outstanding stock options held by Mr. Fitzsimonds. The Company paid Mr. Fitzsimonds $25,000 upon execution of the Fitzsimonds Settlement Agreement and agreed to pay Mr. Fitzsimonds $65,201 within two business days of the closing of the Mineral Ridge LLC, which payments were made in March 2010. In addition, the Company issued Mr. Fitzsimonds 1,000,000 shares of its common stock on December 30, 2009 in payment of the $100,000 promissory note and 1,428,571 shares of its commo n stock on March 18, 2010 in payment of other obligations. Upon final payment of all amounts due, Mr. Fitzsimonds agreed to release and discharge the Company from all current or future claims.
NOTE 14 – ASHDOWN MILLING PRODUCTION PAYMENT PURCHASE AGREEMENT
On September 26, 2005, the Company entered into a Production Payment Purchase Agreement with Ashdown Milling Co LLC (“Ashdown Milling”). Under the terms of the agreement, Ashdown Milling agreed to purchase a production payment to be paid from the Company’s share of production from the Ashdown mine for a minimum of $800,000. In addition, Ashdown Milling received one share of the Company’s common stock and one warrant to purchase one share of the Company’s common stock at $0.20 per share for each dollar paid to the Company. In addition, the Production Payment Purchase Agreement provided that, upon the request of the Company for additional funds, Ashdown Milling had the right, but not the obligation, to increase its investment in the production payment up to a n additional $700,000 for a maximum purchase price of $1,500,000. The amount of the production payment to be paid to Ashdown Milling is equal to a 12% net smelter returns royalty on the minerals produced from the mine until an amount equal to 240% of the total purchase price has been paid. Robert P. Martin, and officer and director of the Company, and Kenneth S. Ripley, a former Chief Executive Officer of the Company, are co-managers and two of the five members of Ashdown Milling. The Company’s Board approved the transaction.
22
On February 6, 2008 the Company bought out the membership interests of two members of Ashdown Milling, Charles D. Murphy and Acco Investment Inc., in exchange for 1,866,667 shares of the Company’s common stock and $139,092 cash paid to each of them. As a result, their membership interests in Ashdown Milling were extinguished, and the Company’s remaining production payment to be paid to Ashdown Milling was reduced from a 12% net smelter returns royalty on the minerals produced to 7.2%.
As a consequence to the sale of its interest in the Ashdown LLC, the members of Ashdown Milling no longer had a net smelter returns royalty on Ashdown LLC production. The Company intended to pay the remaining royalty obligation as sales proceeds are received from WEG.
As discussed in Note 7, in April 2010, the Company bought out the membership interests of two additional members of Ashdown Milling, Kenneth Ripley and David Pearl, in exchange for an assignment of an aggregate $978,005 of the $5.3 million promissory note due the Company from the sale of its membership interest in the Ashdown LLC.
As further discussed in Note 8, a debt settlement agreement was reached with Robert P. Martin, pursuant to which $489,002 was paid to Mr. Martin.
As a result of these April 2010 transactions with Messrs. Ripley, Pearl and Martin, the Company will no longer have any obligations to Ashdown Milling pursuant to the Production Payment Purchase Agreement.
NOTE 15 – DEBT
The Company’s debt consists of the following at September 30, 2010:
| Note payable to GE Capital, payable at $1,080 per month through January 2012, including interest at 5.40%, secured by equipment | $ | 17,642 | ||
| Note payable to Daimler Chrysler, payable at $806 per month through February 2012, including interest at 13.75%, secured by vehicle | 12,381 | |||
| Note payable to Komatsu Equipment Company, with principal payments of $58,486 on June 30, 2008, $58,486 on June 30, 2009, and $58,485 on June 30, 2010, with interest at 8%, unsecured | 175,457 | |||
| Capital lease payable to Heartland Wisconsin Corp., payable at $1,148 per month through May 2013, secured by equipment | 32,008 | |||
| Note payable to West Coast Environmental & Engineering, unsecured, non-interest bearing, payable in monthly installments of $4,612 through March 2011 | 27,676 | |||
| Other | 9,010 | |||
| Accrued interest payable | 45,619 | |||
| Total | 319,793 | |||
| Less current portion | 289,554 | |||
| Long-term portion | $ | 30,239 |
23
On January 30, 2009, the Company entered into a Bridge Loan and Debt Restructuring Agreement (the “Agreement”) with Crestview Capital Master, LLC (the “Lender”), whereby the Company and the Lender entered into a bridge loan and a restructuring of the original debt in the amount of $1,974,456 owed by the Company to the Lender pursuant to the Production Payment Purchase Agreement and Assignment, dated June 12, 2007 (the “Original Debt”).
Pursuant to the Agreement, the Company borrowed from the Lender the principal amount of $1,000,000 (the “Principal Amount”) in exchange for the Company issuing the Lender a Bridge Loan Secured Promissory Note (the “Bridge Note”) for the Principal Amount plus interest to accrue on a quarterly basis at a rate of the Wall Street Journal Prime Rate plus 2%. On October 26, 2009, the Company and the Lender agreed to restructure the Bridge Note to extend the maturity date from November 6, 2009 to February 6, 2010. Pursuant to a side letter agreement between the Company and the Lender dated January 13, 2010, the Lender agreed to extend the Maturity Date for successive one week periods for an extension fee of $10,000 per weekly period, prorated for any portion thereof, but in no eve nt beyond April 6, 2010. On March 10, 2010, the Bridge Note was repaid in full.
Additionally, pursuant to the Agreement, the Company and Lender restructured the Original Debt, which was previously recorded as a production payment obligation, a current liability in the Company’s balance sheet. In consideration of the reduction of the Original Debt from $1,974,456 to $1,000,000, the Company executed a Secured Promissory Note in the principal amount of $1,000,000 (the “Debt Restructuring Note”) together with interest at a rate equal to the Wall Street Journal Prime Rate plus 2%, with a maturity date of August 31, 2010, as well as issue certain warrants to purchase Company common stock as further described below. As a result, the Company recorded a gain on extinguishment of debt of $974,456 in its statement of operations for the year ended December 31, 2009. 0; Upon formation of the joint venture in relation to the Mineral Ridge Mine, the Company issued an irrevocable assignment to the Lender of 50% of all distributions to be made to it by the joint venture as prepayment for the amount outstanding on the Debt Restructuring Note.
On July 16, 2010, the Company and Crestview entered into an agreement to extend the maturity date of the $1 million Debt Restructuring Note from August 6, 2010 to August 31, 2010 in exchange for an extension fee of $10,000, which extension fee was waived by Crestview upon payoff.
The Company paid the Lender $50,000 as part of the consideration for amending each of the Bridge Loan and debt restructuring agreements set forth above.
As of the Closing, and as additional consideration for the restructuring of the Original Debt, the Company issued to the Lender warrants to purchase 23,000,000 shares of the Company’s common stock, at an exercise price of $0.03 per share, for a purchase period of 24 months (the “Debt Restructuring Warrants”). The Debt Restructuring Warrants and the Bridge Warrants (collectively referred to herein as the “Warrants”) are subject to certain registration rights, which the Lender, at present, has agreed to waive in lieu of utilizing Rule 144, as necessary, to remove any restrictive legends on its securities. The provisions of the Debt Restructuring Warrants were modified pursuant to an Amended and Restated Restructuring Warrant dated October 29, 2009 to provide that in the event ther e is an issuance of shares or common stock, convertible debt or equity, or warrants or options, at a price per share or convertible or exercisable at a price per share below the Warrant Price (as defined), then the Warrant Price shall be reduced to the price per share of the common stock so issued or issuable, and the number of Warrant Shares (as defined) shall be adjusted to the extent required to enable the Holder to acquire additional shares of common stock representing the same percentage of the shares issued and/or issuable as a result of the transaction as the number of Warrant Shares exercisable immediately prior to the transactions represents of the number of shares of common stock issued and outstanding immediately prior to the transaction.
24
On August 11, 2010, the Company repaid the $1 million Debt Restructuring Note together with the related accrued interest payable and Crestview cancelled the Restructuring Note and released its security interest in the Company’s membership interest in Mineral Ridge LLC. Further, the Company’s assignment to Crestview of 50% of its right to any proceeds from distributions made by the Mineral Ridge LLC, to be applied as a mandatory prepayment on the Restructuring Note, is no longer in effect. The Company continues to retain its current 30% membership interest in the LLC.
NOTE 16 – AMOUNTS DUE TO RELATED PARTIES AND EMPLOYEE SEPARATION AGREEMENT
At September 30, 2010, amounts due to related parties included in current liabilities consisted of a note payable of $215,940 and related accrued interest payable of $6,501 to Robert P. Martin, President of the Company, resulting from the Debt Settlement Agreement discussed in Note 8. The note bears interest at 6.5% and is due December 12, 2010.
On January 25, 2010, the Company entered into an Employment Separation and Severance Agreement dated as of January 19, 2010 (the “Caldwell Separation Agreement”) with David A. Caldwell, the Company’s then Chief Executive Officer (“CEO”), interim Chief Financial Officer (“CFO”) and a member of the Company’s board of directors (“Board”). Pursuant to the terms of the Caldwell Separation Agreement, Mr. Caldwell resigned from his positions as CEO, CFO and as a member of the Board effective as of February 1, 2010 (the “Termination Date”). The Caldwell Separation Agreement terminated that certain Employment Agreement between the Company and Mr. Caldwell dated February 27, 2006, as amended by that certain Addendum to Employment Agreem ent dated January 31, 2007, pursuant to which the Company employed Mr. Caldwell as its CEO since January 31, 2007 (collectively, the “Caldwell Employment Agreement”).
Under the terms of the Caldwell Separation Agreement, in settlement of all outstanding amounts owed to Mr. Caldwell, including, but not limited to, those amounts due in accrued and unpaid salary, expenses, director’s fees and repayment of certain loans made to the Company, as well as all amounts owed as severance pursuant to the terms of the Caldwell Employment Agreement, the Company shall: (i) make cash payments of an aggregate of $25,000, half of which was paid upon the agreement of the principal terms of the Caldwell Separation Agreement and the other half paid upon the signing of the Caldwell Separation Agreement; (ii) a subsequent cash payment of $20,379 upon the earlier to occur of the Company’s closing of a transaction involving the Company’s Mineral Ridge mining property or a financing by a th ird party involving an infusion of working capital to the Company of at least $250,000 (the “Subsequent Payment”); and (iii) issue to Mr. Caldwell an unsecured promissory note (the “Note”), in the principal amount of $366,623, such Note to accrue interest at a rate of 2.0% per annum, with a maturity date twenty-four (24) months from the date of the Separation Agreement. The long-term liability, amounts due related parties, with a balance of $371,757 at September 30, 2010 is comprised of the Note principal balance of $366,623 plus accrued interest payable of $5,134. Further, pursuant to certain events and conditions as set forth in the Caldwell Separation Agreement, Mr. Caldwell can be issued shares of Company common stock in lieu of cash payments for the Note and the Subsequent Payment.
The Caldwell Separation Agreement further provides that Mr. Caldwell will form a new company, Phoenix Development Group, LLC, a Nevada limited liability company (“PDG”), to operate as a mine exploration and evaluation enterprise. It is contemplated that Mr. Caldwell will serve as CEO and Exploration Geologist of PDG and that the Company will own a 25% ownership in PDG in exchange for ongoing monthly cash payments of $7,500 (“PDG Payments”), such payments to commence 30 days after the formation of PDG and continue on a monthly basis for a period of 24 months, to be further detailed in a contribution agreement by and between PDG and the Company at a later time. Further, pursuant to the Caldwell Separation Agreement, the Company will have a right of first refusal to negotiate with PDG fo r the purchase of any mining, mineral or exploration property rights identified and acquired by PDG. In addition, as set forth in the Caldwell Separation Agreement, PDG can be issued shares of Company common stock in lieu of the PDG Payments.
25
NOTE 17 – COMMON STOCK
During the nine months ended September 30, 2010, the Company issued a total of 18,898,552 shares of its common stock, including: 6,333,333 shares for cash of $250,000; 3,276,757 shares for accounts payable of $51,346; 1,538,462 shares for severance obligation of $100,000; 750,000 shares for services of $29,500; and 7,000,000 shares issued for exploration properties of $280,000 (included in exploration, development and mineral property lease expenses). The prices per share recorded in non-cash equity transactions approximated the quoted market price of the Company’s common stock on the date the shares were issued. In those instances where the market price of the Company’s common stock on the date the shares are issued to repay debt or other obligations differs from the market price orig inally used to determine the number of shares to be issued, a gain or loss on extinguishment of debt is recorded. Depending on the delay in issuing these shares, the gain or loss may be material. For the three months and nine months ended June 30, 2010, no gain or loss on extinguishment of debt repaid through the issuance of the Company’s common stock was recorded.
In connection with the issuance of common stock for cash in February 2010, the Company issued a warrant for the purchase of 3,333,333 shares of common stock at an exercise price of $0.06 per share, exercisable for a period of one year.
As further discussed in Note 6, the Company issued warrants to purchase a total of 7,000,000 shares of the Company’s common stock, at an exercise price of $0.05 per share, exercisable for a period of five years. The Company estimated the value of the Warrants at $236,390 using the Black-Scholes option pricing model. The value of the shares and warrants issued was expensed and included in exploration, development and mineral property lease expenses in the accompanying condensed statement of operations for the three months and nine months ended September 30, 2010.
On September 28, 2010, the Company announced that its Board of Directors approved a Stock Repurchase Program, permitting the Company to repurchase up to an aggregate of 20% of its outstanding common stock over the next 12 months. The repurchases will be made from time to time in the open market at prevailing market prices or in negotiated transactions off the market. The Stock Repurchase Program may be extended beyond 12 months or shortened by the Board of Directors.
NOTE 18 – CONSULTING AGREEMENTS
J. Roland Vetter Consulting Agreement
On July 1, 2010, the Company entered into a Consulting Agreement (the “Consulting Agreement”) with J. Roland Vetter, whereby Mr. Vetter is to provide services to the Company in his role as Chief Financial Officer (“CFO”) of the Company. Mr. Vetter was appointed as the Company’s CFO effective as of February 1, 2010.
As compensation for providing such consulting services in his capacity as CFO, the Company has agreed to pay Mr. Vetter $2,500 per month as well as provide a $10,000 bonus upon signing the Consulting Agreement, such compensation to be reviewed annually by the Company’s Compensation Committee. The Consulting Agreement has a 2-year term with automatic 1-year renewal periods unless earlier terminated upon notice or for cause as provided in the Consulting Agreement, and allows for Mr. Vetter to participate in certain Company incentive and benefit plans.
26
Uptick Capital, LLC Consulting Agreement
On July, 1, 2010, the Company entered into a Consulting Agreement (the “Uptick Consulting Agreement”) with Uptick Capital, LLC (“Uptick”), whereby Uptick is to provide consulting services to the Company with regards to the capital structure of the Company, financing options, types of financial instruments to be offered and the identification of possible investors.
The term of the Uptick Agreement commenced on July 1, 2010 for an initial three month period, and will automatically renew for unlimited consecutive additional six month periods unless either party provides written notice of non-renewal to the other party at least 45 days prior to the expiration of the initial three month term or any renewal period thereafter.
As compensation for providing such consulting services, the Company has agreed to issue Uptick 250,000 shares of the Company’s common stock per month during the term of the Uptick Agreement. The Company issued Uptick 250,000 shares of its common stock on July 13, 2010 and August 5, 2010.
NOTE 19 – LEGAL MATTERS
Tetra Financial Group, LLC – On January 29, 2009, Tetra Financial Group, LLC (“Tetra”) filed a complaint in the Third District Court of Utah in Salt Lake County against the Ashdown Project, LLC, the Company, Win-Eldrich Mines Limited and certain principals of each company, claiming the breach of a lease agreement for the lease of two (2) ten-ton hauler trucks. In February 2010, a settlement agreement was reached with Tetra requiring payments to be made by the Ashdown Project, LLC and resulting in no material financial impact to the Company. The Company remains contingently liable, however, for amounts due Tetra under the settlement agreement in the event such amounts are not paid by the Ashdown Project, L LC.
Ed Staub & Sons Petroleum, Inc. - No material changes have occurred during the quarter ended September 30, 2010. Further description of this legal dispute is provided in the Company’s Form 10-K for the year ended December 31, 2009.
NOTE 20 – DEBT SETTLEMENT AND RELEASE AGREEMENT
On August 19, 2010, the Company entered into a Debt Settlement and Release Agreement (the “Aveson Agreement”) with Kent Aveson, a member of the Company’s Board of Directors. Pursuant to the terms of the Aveson Agreement, Mr. Aveson has agreed to release the Company from any and all obligations, claims and liabilities related to that certain debt owed to him pursuant to his employment agreement with the Ashdown LLC, which debt the Company agreed to assume upon the completion of the sale of its interest in the Ashdown LLC., in consideration for the payment by the Company of the total sum of $35,088. The Company agreed to pay Mr. Aveson the obligation as follows: (i) a cash payment of $11,696 upon entering into the Aveson Agreement; and (ii) monthly payments in the amount of $1,949 commencing on September 1, 2010 and ending on August 1, 2011.
NOTE 21 – SUPPLEMENTAL STATEMENT OF CASH FLOWS INFORMATION
During the nine months ended September 30, 2010 and 2009, the Company made no cash payments for income taxes.
27
During the nine months ended September 30, 2010 and 2009, the Company made cash payments for interest of $240,013 and $21,249, respectively.
During the nine months ended September 30, 2010, the Company had the following non-cash financing and investing activities:
| · | Increased receivables and decreased property and equipment by $18,880. |
| · | Decreased marketable securities and increased other comprehensive loss by $1,528,269. |
| · | Decreased accounts payable by $51,346, increased common stock by $3,277 and increased additional paid-in capital by $48,069. |
| · | Decreased severance obligations by $100,000, increased common stock by $1,539 and increased additional paid-in capital by $98,461. |
| · | Increased amounts due related parties and decreased accrued liabilities by $366,623. |
| · | Decreased accounts payable and increased debt by $55,351. |
| · | Increased additional paid-in capital and decreased amounts due related parties by $92,081. |
| · | Increased additional paid-in capital and decreased accrued liabilities by $268,570. |
During the nine months ended September 30, 2009, the Company had the following non-cash financing and investing activities:
| · | Decreased production payment obligation and increased long-term debt by $1,000,000. |
| · | Decreased accounts payable and increased property and equipment by $147. |
| · | Decreased current portion of long-term debt and increased amounts due to related parties by $4,300. |
| · | Decreased accounts payable and increased debt by $22,050. |
| · | Decreased accounts payable by $40,319, increased common stock by $4,069, increased additional paid-in capital by $35,063 and decreased common stock subscribed by $1,187. |
NOTE 22 – RECENT ACCOUNTING PRONOUNCEMENTS
There were no new accounting pronouncements issued during the nine months ended September 30, 2010 and through the date of the filing of this report that the Company believes are applicable to or would have a material impact on the financial statements of the Company.
28
NOTE 23 – SUBSEQUENT EVENTS
Ra Resources Definitive Agreement
On October 6, 2010, the Company entered into a definitive Acquisition Agreement (“Acquisition Agreement”) between the Company, Ra Resources Ltd., a corporation incorporated under the laws of the Province of Ontario (“Ra”) and 2259299 Ontario Inc., a corporation incorporated under the laws of the Province of Ontario and a wholly-owned subsidiary of the Company formed for the purpose of effecting the transactions contemplated by the Acquisition Agreement (“Newco”). Pursuant to the terms of the Acquisition Agreement, the Company will acquire 100% of the outstanding securities of Ra (the “Acquisition”) by way of a “three-cornered amalgamation” in accordance with the Ontario Business Corporations Act (“OBCA”), in consideration for the issuanc e to the shareholders of Ra of such number of shares of Company common stock (the “GPXM Shares”) as determined by an exchange ratio of 3.5 GPXM Shares for every 1 share of Ra common stock outstanding. As of the date of the Acquisition Agreement, there were 5,925,000 shares of Ra common stock issued and outstanding. In no event will the number of GPXM Shares issued in consideration for the Acquisition exceed 45,722,880. Currently, Ra owns a 100% interest in four principal gold and base metal properties within the Shining Tree mining district of northeastern Ontario.
Upon the Closing (as defined below) of the Acquisition Agreement, the Acquisition shall occur via the amalgamation, or merger, of Ra and Newco, which shall form one new corporation under the provisions of the OBCA, referred to as “Amalco.” All of the properties, assets, rights, privileges and franchises of each of Ra and Newco will continue to be the properties, assets, rights, privileges and franchises of Amalco, and Amalco will similarly succeed to any liabilities thereof. Amalco will then be a wholly-owned subsidiary of the Company. Among other conditions, the closing of the Acquisition will be conditioned upon the receipt of approval of the shareholders of Ra in accordance with the OCBA, as well as any necessary corporate approvals of both parties, certification of the a ccuracy of representations and warranties of the parties, any necessary regulatory approvals and certain other customary closing conditions (the “Closing”). The Closing is to occur no later than November 30, 2010 (the “Outside Date”). The Acquisition Agreement may be terminated prior to the Closing upon the mutual written consent of the parties, based on a misrepresentation, breach or non-performance by the breaching party of any representation, warranty or covenant that could reasonably be expected to have a material adverse effect on the terminating party, by either party for the other’s failure to satisfy the necessary conditions to Closing, or if the Closing has not occurred by the Outside Date. Although the parties anticipate Closing within the specified timeframe, there can be no assurance that the Closing will occur.
Upon closing of the Acquisition agreement, the Company will own a 100% interest in four gold and base metal properties in the Shining Tree Mining District in Ontario, Canada.
Salwell International Binding MOU; Peru Properties
On October 4, 2010, the Company entered into a binding Memorandum of Understanding (“MOU”) with Salwell International (“Salwell”), whereby the parties agreed to enter into definitive agreements within the next 5 business days for the purpose of forming a strategic alliance (“Alliance”) in order to develop certain defined properties as well as to identify, acquire and develop additional mining opportunities in the future within Central and South America. In particular, the parties agreed upon certain terms and conditions by which the Company may potentially acquire an 80% profits interest in 5 mining properties in Peru, including the Porvenir molybdenum stockpile, the Porvenir molybdenum exploration property (collectively, the "Porvenir Properties”), the Alicia gold e xploration area near and abutting Porvenir and two large gold exploration plays in the Pataz District, Group of the Eight and the Tornitos (collectively, the “Gold Properties”) (the Porvenir Properties and Gold Properties are collectively referred to herein as the “Peru Properties”). The Peru Properties total approximately 6,200 hectares of prospective exploration ground, or approximately 25 square miles.
29
As of the date of this report, the Company has expended $400,000, agreed by the parties to be allocated as follows: (a) $100,000 as a non-refundable purchase of a 45-day option related to the Porvenir Properties; and (b) $300,000 as a non-refundable deposit to be applied to the acquisition cost of the Gold Properties. Definitive agreements are expected to include, among other terms, that in exchange for an 80% profits interest in the Porvenir Properties, the Company will make payments to Salwell (in addition to the $100,000 previously expended), of $50,000 per month for 12 months commencing on the first of the month following the signing of the definitive agreement, and $25,000 a month for an additional six months, plus the issuance to Salwell of such number of shares of Company common stock equal to $500,000 priced at the 10-day trailing average volume weighted average price beginning from the closing price on the date of the MOU. It is contemplated that upon completion of the Company’s payment obligations in consideration for its 80% profits interest, Salwell shall retain a 20% profits interest in the Porvenir Property. The parties agreed to enter into definitive agreements with respect to the Porvenir Property within 30 days of the date of the MOU. The Company is in discussions to extend the date to enter into the definitive agreement.
Further, with respect to the Gold Properties, in addition to the $300,000 previously expended to be applied to the acquisition of an 80% profits interest in the Gold Properties, the definitive agreement is intended to require an additional investment by the Company of $500,000 in exploration and development expenditures related to such properties within a 12 to 18 month period.
The parties contemplate that in furtherance of the Alliance, the Company will be responsible for financing, management, distribution of profits, formation and maintenance of operating reserves, and accounting on all such properties acquired, while Salwell will be responsible for identifying and delivering viable opportunities within Central and South America to the Company, facilitating operations as reasonably requested and handling any necessary permitting or documentation related to potential property acquisitions. It is also anticipated that the Company will govern the operations of projects under the Alliance and will have the right to encumber any properties in order to finance their development, along with the right to withdraw from a particular project, with such right then reverting to Salwell. The parties contemplate that definitive agreements will provide for the ability of the Company to purchase Salwell’s retained 20% interest in a property obtained pursuant to the Alliance for cash and/or shares of the Company’s common stock, for Salwell’s pro-rata share of a net profits value as determined by a qualified feasibility study. Although the parties anticipate entering into definitive agreements in the near future, there can be no assurance that the Alliance will succeed or that the proposed property acquisitions will be consummated.
On October 28, 2010, the Company announced that the Alliance had secured a milling facility in southern Peru to process the molybdenite currently stockpiled at the Porvenir property. The contract for the milling facility allows for operational control over the facility for the next two years and can be extended as additional development warrants.
Amendments to Compensation Arrangements
On October 4, 2010, as approved by the Company’s Board of Directors, the Company and Robert Martin, the Company’s current President and Chairman of the Board of Directors, agreed to an amendment of Mr. Martin’s current compensation arrangement currently in effect, as set forth in that certain Employment Agreement between Mr. Martin and the Company dated March 8, 2006, as amended and supplemented by that certain Supplemental Compensation Agreement dated May 18, 2009 and that certain Debt Settlement Agreement dated April 2, 2010 (collectively, the “Martin Compensation Arrangement”). In consideration of $47,177 in deferred salary owed to Mr. Martin pursuant to the Martin Compensation Arrangement, the Company issued 786,290 shares of the Company’s common stock to Mr. Martin at a price equal to $0.06 per share - the closing price of a share of the Company’s common stock on October 1, 2010, as quoted on the OTCBB.
30
Further, on October 4, 2010, as approved by the Company’s Board of Directors, the Company and Thomas Klein, the Company’s current Chief Executive Officer, agreed to an amendment of Mr. Klein’s current compensation arrangement currently in effect, as set forth in that certain Consulting Agreement between the Company and Mr. Klein dated January 16, 2009, as amended (the “Klein Compensation Agreement”). In consideration of $53,227 in deferred salary owed to Mr. Klein pursuant to the Klein Compensation Agreement, the Company issued 887,118 shares of the Company’s common stock to Mr. Klein at a price equal to $0.06 per share - the closing price of a share of the Company’s common stock on October 1, 2010, as quoted by the OTCBB.
Consulting Agreement
On October 4, 2010, the Company entered into a Consulting Agreement (the “Klein Consulting Agreement”) with Thomas Klein, whereby Mr. Klein is to provide services to the Company in his role as Chief Executive Officer (“CEO”) of the Company. Mr. Klein was appointed as the Company’s CEO effective as of February 1, 2010.
As compensation for providing such consulting services in his capacity as CEO, the Company has agreed to pay Mr. Klein $165,000 per year as well as provide a $96,250 bonus upon signing the Consulting Agreement. Mr. Klein’s compensation will be reviewed annually by the Company’s Compensation Committee, or by the full Board of Directors serving in such capacity. The Consulting Agreement has a 2-year term with automatic 1-year renewal periods unless earlier terminated upon notice or for cause as provided in the Consulting Agreement, and allows for Mr. Klein to participate in certain Company incentive and benefit plans.
Mineral Ridge LLC Debt Financing
On October 21, 2010, Scorpio Gold, the Company’s joint venture partner in the Mineral Ridge LLC, closed a debt financing transaction for up to an aggregate principal amount of $12 million (the "Scorpio Financing"), with the use of proceeds from the Scorpio Financing being designated to finance the Mineral Ridge project. The lender in the Scorpio Financing, Waterton Global Value, L.P. ("Lender"), required, among other things, certain agreements evidencing, guaranteeing and securing the Scorpio Financing, including a pledge of all of the assets and properties held by the Mineral Ridge LLC.
Accordingly, under the terms of the Mineral Ridge LLC’s operating agreement, the Company’s consent was required in order to permit such an encumbrance in the Lender’s favor. In consideration for the Company’s consent to the encumbrance and to mitigate the Company’s risk of forfeiture upon a default by Scorpio Gold, the Lender, Scorpio Gold and the Mineral Ridge LLC agreed that the Mineral Ridge LLC would grant the Company a perpetual 20% net profits royalty interest in and to the production of minerals from the Mineral Ridge properties. Such royalty interest was recorded in the land records in Esmeralda County prior to the recording of a deed of trust in favor of the Lender securing its interest in the Mineral Ridge properties. Under the terms of the royalt y deed in favor of the Company, no royalties will begin to accrue unless and until such time as title to any of the Mineral Ridge properties is transferred to the Lender pursuant to a foreclosure based on an uncured default by Scorpio Gold.
Further, the Company, Scorpio Gold, the Mineral Ridge LLC and the Lender entered into a Right of First Refusal Agreement, whereby the Lender agreed that upon a default by Scorpio Gold, it will provide the Company notice of its intent to initiate an enforcement action to realize on its security interest prior to commencing any such action. The Lender will then grant the Company a right of first refusal with respect to the purchase of the Mineral Ridge property, whereby the Company will have the option of acquiring the property for a purchase price equal to the greater of: (a) $8 million; and (b) the aggregate amounts payable by Scorpio Gold to the Lender under the Scorpio Financing and any other indebtedness owed by Scorpio Gold to t he Lender. The Company must notify the Lender of its intent to accept the Lender’s offer within 10 business days of receipt of the offer ("Acceptance Period") and must consummate the purchase within 45 days of title to the Mineral Ridge properties transferring to the Lender (the "Closing Deadline").
31
In the event the Company chooses not to accept the Lender’s offer or if the Company is unable to consummate a purchase before the Closing Deadline, the Company agreed that the Lender will have the right to acquire the Company’s 20% net profits royalty interest for a purchase price of $5 million, such purchase to be consummated within 45 days of the earlier expiration of the Acceptance Period or the Closing Deadline. If the Lender chooses not to purchase the Company’s net profits royalty interest, it will have the right to otherwise sell, transfer or dispose of the Mineral Ridge properties, subject to the Company’s royalty interest, to any third party.
Warrant Exercise
In November 2010, an investor exercised warrants for a total of 3,333,333 shares of the Company’s common stock, with proceeds to the Company of $200,000.
32
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
FORWARD LOOKING STATEMENTS
Except for historical information, the following Management’s Discussion and Analysis contains forward-looking statements based upon current expectations that involve certain risks and uncertainties. Such forward-looking statements include statements regarding, among other things, (a) our estimates of mineral reserves and mineralized material, (b) our projected sales and profitability, (c) our growth strategies, (d) anticipated trends in our industry, (e) our future financing plans, (f) our anticipated needs for working capital, (g) our lack of operational experience and (h) the benefits related to ownership of our common stock. Forward-looking statements, which involve assumptions and describe our future plans, strategies, and expectations, are generally identifiab le by use of the words “may,” “will,” “should,” “expect,” “anticipate,” “estimate,” “believe,” “intend,” or “project” or the negative of these words or other variations on these words or comparable terminology. This information may involve known and unknown risks, uncertainties, and other factors that may cause our actual results, performance, or achievements to be materially different from the future results, performance, or achievements expressed or implied by any forward-looking statements. These statements may be found under “Management’s Discussion and Analysis of Financial Condition” as well as in this Report generally. Actual events or results may differ materially from those discussed in forward-looking statements as a result of various factors, including, without limitation, the risks outlined under “Risk Factors” described in our Annual Report on Form 10-K for the year ended December 31, 2009 filed with the Securities and Exchange Commission (the “SEC”) and matters described in this Report generally. In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained in this Report will in fact occur as projected.
OVERVIEW
Golden Phoenix Minerals, Inc. (the “Company,” “Golden Phoenix,” “we,” “us” or “our”) is a mineral exploration, development and production company formed in Minnesota on June 2, 1997. On May 30, 2008, we reincorporated in Nevada. Our business includes acquiring and consolidating mineral properties with potential production and future growth through exploration discoveries. Acquisition emphasis is focused on properties containing gold, silver, molybdenum and other strategic minerals that present low political and financial risk and exceptional upside potential.
On May 13, 2009, we completed an agreement to sell 100% of our ownership interest in the Ashdown Project LLC (the “Ashdown LLC”) to Win-Eldrich Gold, Inc. (“WEG”) and, on March 10, 2010, we closed an agreement dated December 31, 2009 for the purpose of contributing our Mineral Ridge Mine into Mineral Ridge Gold, LLC, a Nevada limited liability company, (the “Mineral Ridge LLC”) in which we retain a 30% interest, to place the Mineral Ridge Mine into production. As a result, the Ashdown LLC and the Mineral Ridge Mine are classified as discontinued operations for all periods presented in our condensed financial statements.
As consideration for the sale of our ownership interest in the Ashdown LLC, we received consideration from WEG in the form of a note receivable of $5.3 million. In addition, the assets of the Ashdown LLC have been pledged as collateral for the note receivable. However, generally accepted accounting principles preclude us from presenting an asset in our condensed balance sheets and recognizing any gain on sale of our interest in the Ashdown LLC attributed to the note due to the uncertainty of collecting the note or realizing any value from the assets and property of the Ashdown LLC upon foreclosure. Therefore, we have recorded a 100% valuation allowance against the $5.3 million note receivable as of March 31, 2010 and December 31, 2009. Payments received from WEG in the future , if any, will be recorded as either interest income or gain on sale of our interest in the Ashdown LLC. As further discussed under Liquidity and Capital Resources, we entered into certain debt reduction agreements in April 2010 whereby we extinguished debt and royalty obligations totaling $1,068,075 through the assignment of portions of the $5.3 million note, resulting in the principal amount of the note payable to the Company reduced to $4,231,925.
33
In February 2007, we completed a purchase agreement with four individuals for the Northern Champion molybdenum property located in Ontario, Canada, and we plan to take bulk samples for metallurgical and market testing, and to actively explore and delineate molybdenum mineralization on the property as funding is available. With available funding, we also plan to commence a surface mapping and sampling program covering sections of the 4,400 acres of claims within the Duff claims block, which is located adjacent to the Ashdown Mine in northwestern Nevada and which was acquired in 2007.
We recently announced on our web site a new “Royalty Mining” growth strategy pursuant to which we plan to expand the base of our operations through the development of our mineral properties into Royalty Mining projects.
We intend to embark upon an initial 24-month acquisition plan targeting advanced stage mineral projects with near-term production throughout North and South America. During this period, we anticipate analyzing up to 50 prospective properties, with a view towards optioning up to 10 of those properties on terms and conditions acceptable to us. From these optioned properties, we hope to identify up to 5 projects that can be advanced toward commercial production.
As further discussed in the notes to our condensed financial statements, we recently entered into agreements to acquire an 80% interest in the Vanderbilt Silver and Gold Project and the Coyote Fault Gold and Silver Project, both located adjacent to the Mineral Ridge gold and silver property near Silver Peak, Nevada. We also entered into a binding Memorandum of Understanding by which we may acquire an 80% interest in five gold and molybdenum properties in Peru, and a definitive Acquisition Agreement whereby we may acquire a 100% interest in four gold and base metal properties in the Shining Tree Mining District in Ontario, Canada. It is our intent to move forward with the various agreements to further develop these properties.
We expect to retain up to a 30% interest in each project, and we anticipate our cash flow will be leveraged to the price of gold or the underlying strategic metal. Ultimately, we intend to convert some of our interests into royalty agreements.
GOING CONCERN UNCERTAINTY
Our condensed financial statements are prepared using accounting principles generally accepted in the United States of America applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. However, we have a history of operating losses since our inception in 1997, and have an accumulated deficit of $43,355,947 and a total stockholders’ deficit of $831,262 at September 30, 2010. We currently have no sources of operating revenues. We will require additional capital to fund our operations and to pursue other mineral property development opportunities with our existing properties and other prospects. We will seek funding primarily from equity financ ing, and anticipate we will also receive proceeds from the secured promissory note received in the sale of the Ashdown LLC. There can be no assurance that we will be successful in our efforts to continue to raise capital at favorable rates or at all or that funds will be received from the promissory note. If we are unable to obtain profitable operations and positive operating cash flows and raise sufficient capital to pay our obligations, we may be forced to scale back our development plans or to significantly reduce or terminate operations and file for reorganization or liquidation under the bankruptcy laws. These factors together raise doubt about our ability to continue as a going concern. The accompanying condensed financial statements do not include any adjustments that might result from the outcome of this uncertainty.
34
Historically, we have obtained working capital from debt and equity financing, the exercise of options and warrants, and from a production payment purchase agreement to fund our activities. The deterioration of capital markets has made it difficult for us to obtain debt and equity financing.
The operations of the Ashdown LLC historically funded a portion of our operating costs and expenses. On May 13, 2009, we completed an agreement to sell 100% of our ownership interest in the Ashdown LLC to Win-Eldrich Gold, Inc. (“WEG”). The $5.3 million purchase price due us in the form of a secured promissory note was initially payable over a 72 month term, and WEG assumed substantially all of the liabilities of the Ashdown LLC. The terms of the promissory note were subsequently modified in connection with certain debt reduction agreements entered into in April 2010 and the principal balance of the promissory note due us is now $4,231,925. There can be no guarantee or assurance that WEG will be successful in its abi lity to raise sufficient capital to fund the operations of the Ashdown LLC, attain a sustained profitable level of operations, or pay us the amounts due in accordance with the terms of the promissory note.
On March 10, 2010, we closed the Exploration, Development and Mining Joint Venture Members’ Agreement (the “Members’ Agreement”) entered into on December 31, 2009 with Scorpio Gold Corporation (“Scorpio Gold”) and its US subsidiary, Scorpio Gold (US) Corporation (“Scorpio US”). At the closing of the Members’ Agreement, we sold Scorpio US an undivided 70% interest in the Mineral Ridge Mine for a purchase price of $3,750,000 cash (less those amounts previously advanced to us by Scorpio Gold) and 7,824,750 common shares of stock of Scorpio Gold at a market value of $5,501,582. Immediately following the sale, the Company and Scorpio US each contributed their respective interests in the Mineral Ridge Mine to a joint venture formed to own and operate the Mineral Ridge Mine called Mineral Ridge Gold, LLC, a Nevada limited liability company (the “Mineral Ridge LLC”). We currently own a 30% membership interest in the Mineral Ridge LLC. Scorpio US owns a 70% membership interest in and is the Manager of the Mineral Ridge LLC, and has agreed to carry all finance costs necessary to bring the Mineral Ridge Mine into production. There can be no assurance that Scorpio US will be successful in its ability to raise sufficient capital to fund the development of the Mineral Ridge Mine and attain a successful level of operations.
On August 4, 2010, we sold in a market transaction all 7,824,750 shares of our investment in Scorpio Gold common stock (including 782,475 shares that had been set aside in a separate account to pay an obligation to Thomas Klein, Chief Executive Officer of the Company, for fees earned on the formation of the Mineral Ridge LLC) for net proceeds of approximately $3.8 million, realizing a loss of approximately $1.7 million. After payment of Mr. Klein’s obligation, our share of the net proceeds was approximately $3.4 million. Additionally, on August 11, 2010, we repaid the remaining obligation pursuant to that certain Debt Restructuring Secured Promissory Note with Crestview Capital Master, LLC (“Crestview”) in the principal amount of $1 million, plus interest accrued thereon.
35
In addition to our 30% interest in the Mineral Ridge LLC, we own the Adams Mine and Duff Claim Block near Denio, Nevada and the Northern Champion molybdenum property in Ontario Canada. Recently, we entered into agreements to acquire an 80% interest in the Vanderbilt Silver and Gold Project and the Coyote Fault Gold and Silver Project, both located adjacent to the Mineral Ridge gold and silver property near Silver Peak, Nevada. We also entered into a binding Memorandum of Understanding by which we may acquire an 80% interest in five gold and molybdenum properties in Peru, and a definitive Acquisition Agreement whereby we may acquire a 100% interest in four gold and base metal properties in the Shining Tree Mining District in Ontario, Canada. We will be required to raise significant capit al, primarily through the issuance of our common stock, to complete the acquisition of the interests in and further the development of each of these mineral properties. There can be no assurance that we will be successful in raising the required capital or that any of these mineral properties will attain a successful level of operations.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make a wide variety of estimates and assumptions that affect: (1) the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements, and (2) the reported amounts of revenues and expenses during the reporting periods covered by the financial statements. Our management routinely makes judgments and estimates about the effect of matters that are inherently uncertain. As the number of variables and assumptions affecting the future resolution of the uncertainties increases, these judgments become even more subjective and complex. We have identified certain accounting policies that are most importa nt to the portrayal of our current financial condition and results of operations. Our significant accounting policies are disclosed in Note 1 of the Notes to the Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2009 filed with the SEC, and several of those critical accounting policies are as follows:
Marketable Securities. We had no marketable securities at September 30, 2010 and December 31, 2009. We classified the marketable securities consisting of the shares of Scorpio Gold common stock received in the sale of the net assets of the Mineral Ridge Mine as securities held-for-sale in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification™ (ASC) Topic 320, Investments – Debt and Equity Securities. The marketable securities were stated at fair value based on market quotes. Unrealized gains and losses resulting from changes in market value were recorded as other comprehensive income, a component of stockholders&# 8217; equity in the Company’s balance sheet. We sold the Scorpio Gold common stock in August 2010.
In accordance with ASC Topic 830, Foreign Currency Matters, the increase or decrease in the recorded value of the marketable securities resulting from changes in foreign exchange rates between the Company’s functional currency, the US dollar, and the currency in which the marketable securities are denominated, the Canadian dollar, was recorded as a foreign currency transaction gain or loss in the Company’s statements of operations.
Investment in Mineral Ridge LLC. At September 30, 2010, our 30% membership interest in the Mineral Ridge LLC is accounted for using the equity method of accounting in accordance with ASC Topic 323 – Investments – Equity Method and Joint Ventures. The investment is recorded at cost, with the carrying value subsequently increased for our share of the Mineral Ridge LLC net income or additional contributions made by us to capital, and decreased for our share of the Mineral Ridge LLC net loss or equity distributions received by us.
36
Because our book value of our initial investment in the Mineral Ridge LLC, which was comprised of liabilities in excess of assets, was recorded as a transfer to a related party and recorded as an increase to additional paid-in capital, and because we have no obligation to contribute capital to fund the operations of the Mineral Ridge LLC, the carrying value of the investment is recorded at zero. In accordance with ASC Topic 323, we have not recorded our share of the Mineral Ridge LLC net loss for the periods ended September 30, 2010 because our investment has been reduced to zero and we have neither guaranteed obligations of or otherwise committed to provide further financial support for the Mineral Ridge LLC.
Property and Equipment. Property and equipment are stated at cost. Depreciation and amortization are calculated using the straight-line method over estimated useful lives of the assets, ranging from 5 to 40 years.
Mine development costs are capitalized after proven and probable reserves have been identified. Amortization of mine development costs will be calculated using the units-of-production method over the expected life of the operation based on the estimated proven and probable reserves. With the sale of our interest in the Ashdown LLC and the formation of the Mineral Ridge LLC, as of September 30, 2010, we had no proven or probable reserves.
Property Acquisition and Deferred Mineral Property Development Costs. Mineral property acquisition and deferred mineral property development costs are recorded at cost and will be capitalized once determination has been made that a mineral property has proven or probable reserves that can be produced profitably. On the commencement of profitable commercial production, depletion of each mineral property acquisition and associated deferred property development costs will be computed on the units of production basis using estimated proven and probable reserves.
Exploration Properties. Mineral exploration expenditures are expensed as incurred. Property acquisition costs relating to exploration properties are also expensed until the economic viability of the project is determined and proven and probable reserves quantified. Costs associated with economically viable projects are depreciated and amortized in accordance with the policies described above.
Proven and Probable Ore Reserves. On a periodic basis, management reviews the reserves that reflect estimates of the quantities and grades of metals at our mineral properties which management believes can be recovered and sold at prices in excess of the total cost associated with mining and processing the mineralized material. Management’s calculations of proven and probable ore reserves are based on, along with independent consultant evaluations, in-house engineering and geological estimates using current operating costs, metals prices and demand for our products. Periodically, management obtains external determinations of reserves.
Reserve estimates will change as existing reserves are depleted through production, as well as changes in estimates caused by changing production costs and/or metals prices. Reserves may also be revised based on actual production experience once production commences. Declines in the market price of metals, as well as increased production or capital costs or reduced recovery rates, may render ore reserves uneconomic to exploit. Should that occur, restatements or reductions in reserves and asset write-downs in the applicable accounting periods may be required. Reserves should not be interpreted as assurances of mine life or of the profitability of current or future operations. No assurance can be given that the estimate of the amount of metal or the indicated level of recov ery of these metals will be realized.
We currently have no proven or probable ore reserves.
37
Closure, Reclamation and Remediation Costs. Current laws and regulations require certain closure, reclamation and remediation work to be done on mineral properties as a result of exploration, development and operating activities. We periodically review the activities performed on our mineral properties and makes estimates of closure, reclamation and remediation work that will need to be performed as required by those laws and regulations and makes estimates of amounts that are expected to be incurred when the closure, reclamation and remediation work is expected to be performed. Future closure, reclamation and environmental related expenditures are difficult to estimate in many circumstances due to the early stages of investigation, uncertain ties associated with defining the nature and extent of environmental contamination, the uncertainties relating to specific reclamation and remediation methods and costs, application and changing of environmental laws, regulations and interpretation by regulatory authorities and the possible participation of other potentially responsible parties.
We have estimated costs associated with closure, reclamation and environmental reclamation of the Mineral Ridge property which, prior to the formation of the Mineral Ridge LLC, were included in our financial statements in liabilities of discontinued operations in accordance with generally accepted accounting principles, in accordance with ASC Topic 410, Asset Retirement and Environmental Obligations.
Property Evaluations and Impairment of Long-Lived Assets. We review and evaluate the carrying amounts of our mining properties and related buildings and equipment, and other long-lived assets when events or changes in circumstances indicate that the carrying amount may not be recoverable. Estimated future net cash flows, on an undiscounted basis, from a property or asset are calculated using estimated recoverable minerals (considering current proven and probable reserves and mineralization expected to be classified as reserves where applicable); estimated future mineral price realization (considering historical and current prices, price trends and related factors); and operating, capital and reclamation costs. Reduction in the carrying value of property , plant and equipment, or other long-lived assets, with a corresponding charge to earnings, are recorded to the extent that the estimated future net cash flows are less than the carrying value.
Estimates of future cash flows are subject to risks and uncertainties. It is reasonably possible that changes in circumstances could occur which may affect the recoverability of our properties and long-lived assets.
Note Receivable. As of September 30, 2010 and December 31, 2009, the note receivable received from WEG in the sale of our interest in the Ashdown LLC had a balance of $4,231,925 and $5,300,000, respectively, and has been reduced by a 100% valuation allowance due to the uncertainty of collecting the note or realizing any value from the assets and property of the Ashdown LLC upon foreclosure. Payments received from WEG in the future, if any, will be recorded as either interest income or gain on sale of our interest in the Ashdown LLC. We entered into certain debt reduction agreements in April 2010 extinguishing debt and royalty obligations totaling $1,068,075 through the assignment of p ortions of the note receivable, with the principal amount of the note receivable reduced to $4,231,925.
Income Taxes. We recognize a liability or asset for deferred tax consequences of all temporary differences between the tax bases of assets and liabilities and their reported amounts in the financial statements that will result in taxable or deductible amounts in future years when the reported amounts of the assets and liabilities are recovered or settled. Deferred tax items mainly relate to net operating loss carry forwards and accrued expenses. These deferred tax assets or liabilities are measured using the enacted tax rates that will be in effect when the differences are expected to reverse. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes th e enactment date. Deferred tax assets are reviewed periodically for recoverability, and valuation allowances are provided when it is more likely than not that some or all of the deferred tax assets may not be realized. As of September 30, 2010 and December 31, 2009, we have fully reduced our deferred tax assets by recording a valuation allowance.
38
Stock-Based Compensation and Equity Transactions. We account for stock-based compensation in accordance with ASC Topic 718, Compensation – Stock Compensation, which requires us to measure the compensation cost of stock options and other stock-based awards to employees and directors at fair value at the grant date and recognize compensation expense over the requisite service period for awards expected to vest.
Except for transactions with employees and directors that are within the scope of ASC Topic 718, all transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. Additionally, in accordance ASC Topic 505-50, Equity-Based Payments to Non-Employees, we have determined that the dates used to value the transaction are either: (1) the date at which a commitment for performance by the counter party to earn the equity instruments is established; or (2) the date at which the counter party’s performance is complete.
RECENT ACCOUNTING PRONOUNCEMENTS
There were no new accounting pronouncements issued during the nine months ended September 30, 2010 and through the date of the filing of this report that are applicable to or would have a material impact on our financial statements.
RESULTS OF OPERATIONS
Sales
With the sale of our interest in the Ashdown LLC in May 2009 and the presentation of its operations as discontinued operations in our condensed financial statements, we reported no sales of minerals for the three months and nine months ended September 30, 2010 and 2009.
We currently have limited operations in our drilling services division, pending additional funding and project opportunities. During the three months and nine months ended September 30, 2010 and 2009, however, we did have rental income from our drilling equipment of $43,000 and $63,056, respectively.
Operating Costs and Expenses
Operating costs and expenses reported in the accompanying condensed statements of operations exclude the operating costs and expenses of the Ashdown LLC and the Mineral Ridge Mine due to the classification of these operations as discontinued operations.
Exploration, development and mineral property lease expenses were $924,772 and $1,224,758 for the three months and nine months ended September 30, 2010, respectively, and are comprised of the acquisition costs of exploration mineral properties, exploration and development of mineral properties, and the equipment rental, depreciation expense, and incidental costs of supplies and maintenance of our idled drilling department. The acquisition costs of exploration mineral properties totaled $825,800 for the three months ended September 30, 2010, including $567,390 for the Mhakari properties, $200,000 for the Salwell properties, and $58,410 for the Ra Resources properties. The acquisition costs of exploration mineral properties totaled $1,020,274 for the nine months ended September 30, 2010, including $ 616,864 for the Mhakari properties, $345,000 for the Salwell properties, and $58,410 for the Ra Resources properties. There were no similar costs in the three months and nine months ended September 30, 2009. As discussed above, we have had limited operations in our drilling services division, pending additional funding and project opportunities. We will, however, continue to incur equipment rental and other costs of keeping the drilling services division on a standby basis.
39
General and administrative expenses were $528,423 and $379,764 for the three months ended September 30, 2010 and 2009, respectively, and $1,306,417 and $1,308,089 for the nine months ended September 30, 2010 and 2009, respectively. General and administrative expenses include investor relations, salaries and wages of officers and office and accounting personnel, travel, legal and professional fees, and stock-based compensation expense. On a year-to-date basis, our general and administrative expenses are comparable to the levels incurred in the prior year. For the three months ended September 30, 2010, our general and administrative expenses increased over the levels for the three months ended September 30, 2009 primarily due to increases in travel expenses and the costs of employee and c onsultant compensation.
Depreciation and amortization expense was $18,924 and $20,560 for the three months ended September 30, 2010 and 2009, respectively, and $55,303 and $60,520 for the nine months ended September 30, 2010 and 2009, respectively. Depreciation and amortization expense in the current year is less than in the prior year due to the retirement of certain mining and milling equipment.
We recorded royalties expense of $489,002 for the nine months ended September 30, 2010 for the non-interest bearing note payable issued to an officer and director to extinguish a portion of the royalty obligation due to the Ashdown Milling Company LLC. Similarly, royalties expense of $70,090 for the nine months ended September 30, 2009 resulted from the increase in amounts due this officer and director to extinguish a portion of the same royalty obligation.
Other Income (Expense)
Interest and other income was $36,678 and $4,289 for the three months ended September 30, 2010 and 2009, respectively, and $47,799 and $4,541 for the nine months ended September 30, 2010 and 2009, respectively. The increase in interest and other income in the current year is due to increased levels of interest bearing deposits resulting from the sale of the Scorpio Gold stock and a refund of corporate income taxes.
Interest expense was $36,601 and $66,912 for the three months ended September 30, 2010 and 2009, respectively, and $149,933 and $637,881 for the nine months ended September 30, 2010 and 2009, respectively. The decrease in interest expense in the current year is due primarily to the interest expense recorded upon the issuance of warrants associated with fund raising activities in the three months ended March 31, 2009 and to the overall reduction in our debt.
During the nine months ended September 30, 2010 and 2009, we reported a gain on extinguishment of debt of $36,901 and $982,579, respectively. We had no gain on extinguishment of debt in the three months ended September 30, 2010, but reported a gain on extinguishment of debt of $8,123 for the three months ended September 30, 2009. We continue our efforts to reduce our liabilities, reaching settlements where possible for a reduction in amounts owed. The gain on extinguishment of debt in the nine months ended September 30, 2009 included a gain from the restructuring of a production payment obligation of $1,974,456 to a long-term debt obligation of $1,000,000.
Foreign currency gain was $104,559 for the three months ended September 30, 2010 and foreign currency loss was $50,845 for the nine months ended September 30, 2010, which resulted from a change in the foreign exchange rates used to translate the value of our marketable securities and certain transactions denominated in Canadian dollars to our functional currency, the U.S. dollar. We had no foreign currency gains or losses in the three months and nine months ended September 30, 2009.
40
For the three months and nine months ended September 30, 2010, we reported a loss on sale of marketable securities of $1,681,571, resulting from the sale in a market transaction of all 7,824,750 shares of our investment in Scorpio Gold common stock. We had no sales of marketable securities for the three months and nine months ended September 30, 2009.
We also reported an immaterial loss on disposal of property and equipment of $6,322 in the nine months ended September 30, 2010 and an immaterial gain on disposal of property and equipment of $127 in the nine months ended September 30, 2009.
Discontinued Operations
We have reported the results of operations of the Ashdown LLC and the Mineral Ridge Mine in our condensed financial statements as discontinued operations for the three months and nine months ended September 30, 2010 and 2009, including the following:
Three Months Ended September 30, | 2010 | 2009 | ||||||||||||||||||||||
| Ashdown LLC | Mineral Ridge | Total | Ashdown LLC | Mineral Ridge | Total | |||||||||||||||||||
| Revenues | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||
| Loss before income taxes | - | - | - | - | (94,479 | ) | (94,479 | ) | ||||||||||||||||
| Provision for income taxes | - | - | - | - | - | - | ||||||||||||||||||
| Loss from discontinued operations | - | - | - | - | (94,479 | ) | (94,479 | ) | ||||||||||||||||
| Gain (loss) on sale of Mineral Ridge assets | - | (8,256 | ) | (8,256 | ) | - | - | - | ||||||||||||||||
| Loss on sale of interest in joint venture | - | - | - | - | - | - | ||||||||||||||||||
| Loss from discontinued operations | - | (8,256 | ) | (8,256 | ) | - | (94,479 | ) | (94,479 | ) | ||||||||||||||
| Loss from discontinued operations attributable to noncontrolling interest | - | - | - | - | - | - | ||||||||||||||||||
| Loss from discontinued operations attributable to the Company | $ | - | $ | (8,256 | ) | $ | (8,256 | ) | $ | - | $ | (94,479 | ) | $ | (94,479 | ) | ||||||||
41
Nine Months Ended September 30, | 2010 | 2009 | ||||||||||||||||||||||
| Ashdown LLC | Mineral Ridge | Total | Ashdown LLC | Mineral Ridge | Total | |||||||||||||||||||
| Revenues | $ | - | $ | - | $ | - | $ | 321,115 | $ | - | $ | 321,115 | ||||||||||||
| Loss before income taxes | - | (81,219 | ) | (81,219 | ) | (668,186 | ) | (482,080 | ) | (1,150,266 | ) | |||||||||||||
| Provision for income taxes | - | - | - | - | - | - | ||||||||||||||||||
| Loss from discontinued operations | - | (81,219 | ) | (81,219 | ) | (668,186 | ) | (482,080 | ) | (1,150,266 | ) | |||||||||||||
| Gain on sale of Mineral Ridge assets | - | 8,982,772 | 8,982,772 | - | - | - | ||||||||||||||||||
| Loss on sale of interest in joint venture | - | - | - | (235,303 | ) | - | (235,303 | ) | ||||||||||||||||
| Income (loss) from discontinued operations | - | 8,901,553 | 8,901,553 | (903,489 | ) | (482,080 | ) | (1,385,569 | ) | |||||||||||||||
| Loss from discontinued operations attributable to noncontrolling interest | - | - | - | 267,274 | - | 267,274 | ||||||||||||||||||
| Income (loss) from discontinued operations attributable to theCompany | $ | - | $ | 8,901,553 | $ | 8,901,553 | $ | (636,215 | ) | $ | (482,080 | ) | $ | (1,118,295 | ) | |||||||||
We suspended the mining operations of the Ashdown LLC in November 2008 in response to a substantial decline of molybdenum oxide market prices, with only incidental revenues during the period from January 1, 2009 through May 13, 2009, the date we sold our interest in the Ashdown LLC. The Ashdown LLC reported a loss of $668,186 for the nine months ended September 30, 2009, respectively.
The sale of our interest in the Ashdown LLC was completed on May 13, 2009, and no amounts for the Ashdown LLC are included in our condensed statements of operations for the three months ended September 30, 2010 and 2009 and the nine months ended September 30, 2010.
On March 10, 2010, we completed the sale of an undivided 70% interest in the Mineral Ridge Mine and contributed our remaining 30% undivided interest in the Mineral Ridge Mine to the Mineral Ridge LLC. Therefore, no amounts for the Mineral Ridge Mine are included in our condensed statements of operations for the three months ended September 30, 2010. The loss from discontinued operations for the Mineral Ridge Mine for the three months ended September 30, 2009 and the nine months ended September 30, 2010 and 2009 include costs and expenses to maintain the property on standby status and exploration and development activities. These expenses decreased in the current year due to lack of funding and the suspension of activities pending formation of the Mineral Ridge LLC.
42
We recognized a gain on sale of our 70% interest in the net assets of the Mineral Ridge Mine of $8,982,772 in the nine months ended September 30, 2010, comprised of the following:
| Cash received, including amounts previously advanced | $ | 3,750,000 | ||
| Marketable securities received, shares of Scorpio Gold recorded at their market value | 5,501,582 | |||
| Total proceeds | 9,251,582 | |||
| Reclamation liability and accounts payable transferred | 2,134,098 | |||
| Book value of assets sold | (1,784,652 | ) | ||
| Fees to related party | (618,256 | ) | ||
| Gain on sale | $ | 8,982,772 |
The fees on the transaction were paid to Thomas Klein, our Chief Executive Officer.
Scorpio Gold and the Company have arranged with regulatory authorities, insurance carriers and others to complete the transfer to the Mineral Ridge LLC of the reclamation obligation and related bonds, permits and deposits that are established to fund the obligation. As of March 10, 2010, the date of the transfer, the reclamation obligation was estimated at $3,041,927. Both Scorpio Gold and the Company have agreed to jointly and severally indemnify the bond and insurance provider from and against any and all liability for any loss suffered in connection with the bond issued on behalf of the Mineral Ridge LLC. However, we believe the reclamation bonds and deposits transferred are currently sufficient to fund the reclamation obligation.
LIQUIDITY AND CAPITAL RESOURCES
We have a history of operating losses since our inception in 1997, and had an accumulated deficit of $43,355,947 at September 30, 2010. At September 30, 2010, we had current assets of $992,394 and current liabilities of $1,720,039, resulting in a working capital deficit of $727,645. Included in current assets at September 30, 2010 were cash and cash equivalents totaling $934,300.
We have significantly reduced our current liabilities by making payments out of the proceeds from the sale of our interest in the Mineral Ridge Mine to Scorpio Gold, including proceeds from the sale of our investment in the Scorpio Gold common stock. At September 30, 2010, our total current liabilities were $1,720,039 compared to total current liabilities of $6,312,136 at December 31, 2009.
In connection with the formation of the Mineral Ridge LLC, we repaid the $1,000,000 Bridge Loan and Crestview released the security interest in the Mineral Ridge Mine. We also repaid other obligations out of the Scorpio Gold proceeds.
On August 4, 2010, we sold in a market transaction all 7,824,750 shares of our investment in Scorpio Gold common stock (including 782,475 shares that had been set aside in a separate account to pay an obligation to Thomas Klein, Chief Executive Officer of the Company, for fees earned on the formation of the Mineral Ridge LLC) for net proceeds, after commissions and fees, of $3,832,626. After payment of Mr. Klein’s obligation, the Company’s share of the net proceeds was approximately $3.4 million. On August 11, 2010, we repaid the remaining obligation pursuant to that certain Debt Restructuring Secured Promissory Note with Crestview in the principal amount of $1 million, plus interest accrued thereon. 0;We also repaid other obligations out of the proceeds from the sale of the Scorpio Gold common stock.
43
We currently have no significant operating revenues. As further discussed above, and in the notes to our condensed financial statements, we have recently entered agreements resulting in substantial obligations to acquire exploration properties and fund mineral property exploration and development activities related to the Vanderbilt Silver and Gold Project, the Coyote Fault Gold and Silver Project, gold and molybdenum projects in Peru, and four gold and base metal properties in Ontario, Canada. We continue to experience difficulties raising debt and equity capital. We have, however, significantly reduced our operating costs, including a reduction in force. In order to increase the level of our operations, evaluate and participate in other mining ventures, commence again the a ctivities of our drilling department and explore or develop our existing mineral properties, we will require additional capital.
The $4,231,925 balance of the purchase price due us from WEG from the sale of our membership interest in the Ashdown LLC is in the form of a secured promissory note, bearing interest at 5.25% from April 1, 2011, and payable in monthly payments beginning April 1, 2011 for 49 months until the Maturity date of April 1, 2015. WEG assumed substantially all of the liabilities of the Ashdown LLC. There can be no guarantee or assurance that WEG will be successful in its ability to raise sufficient capital to fund the operations of the Ashdown LLC, attain a sustained profitable level of operations, or pay us the amounts due in accordance with the terms of the promissory note.
During the nine months ended September 30, 2010, we used net cash of $2,672,841 in operating activities, compared to $708,104 net cash used in operating activities during the nine months ended September 30, 2009. After eliminating non-cash income and expense items, the increase in net cash used in operating activities in the nine months ended September 30, 2010 compared to the nine months ended September 30, 2009 is primarily due to a reduction of accounts payable of $508,591 and accrued and other liabilities of $79,440 in the nine months ended September 30, 2010 compared to an increase in accounts payable of $235,489 and accrued and other liabilities of $523,009 in the nine months ended September 30, 2009.
During the nine months ended September 30, 2010, we had net cash provided by investing activities of $3,819,997, comprised of proceeds from the sale of marketable securities of $3,832,626, partially offset by the purchase of property and equipment of $12,629. During the nine months ended September 30, 2009, we had net cash used in investing activities of $1,147, consisting of the purchase of property and equipment of $1,500, partially offset by proceeds from the sale of property and equipment of $353.
During the nine months ended September 30, 2010, net cash used in financing activities was $2,856,602, comprised of the purchase of an option to buy back warrants of $10,000, payments of severance obligations of $65,201, payments of notes payable and long-term debt of $2,415,196 and payments of amounts due related parties of $606,205, partially offset by proceeds from the sale of common stock of $240,000.
During the nine months ended September 30, 2009, net cash provided by financing activities was $1,065,715, comprised of proceeds from the issuance of debt of $1,000,000, proceeds from the issuance of common stock of $139,674, and proceeds from amounts due related parties of $6,000, partially offset by payments of severance obligations of $9,179, payments of notes payable and long-term debt of $30,710 and payments of amounts due related parties of $40,070.
44
During the nine months ended September 30, 2010, net cash provided by discontinued operations was $2,548,961, compared to net cash used in discontinued operations for the nine months ended September 30, 2009 of $350,542. The net cash provided by operations in the nine months ended September 30, 2010 resulted primarily as a result of the cash proceeds from the sale of net assets to Scorpio Gold.
Debt Restructuring Note
On October 26, 2009, the Company and Crestview agreed to restructure the terms of the $1 million Debt Restructuring Note to change the maturity date from February 6, 2011 to August 6, 2010. We executed an Amended and Restated Debt Restructuring Promissory Note dated October 29, 2009 to reflect the same. The terms of the Amended and Restated Debt Restructuring Note were also modified to require us to prepay the Amended and Restated Debt Restructuring Note to the extent of 50% of any debt or equity financing received by us. The Debt Restructuring Note was repaid in full in August 2010 out of the proceeds from the sale of our investment in Scorpio Gold common stock.
We had previously issued Crestview warrants to purchase 23,000,000 shares of our common stock, at an exercise price of $0.03 per share, for a purchase period of 24 months (the “Debt Restructuring Warrants”). The Debt Restructuring Warrants are subject to certain registration rights, which Crestview, at present, has agreed to waive in lieu of utilizing Rule 144, as necessary, to remove any restrictive legends on its securities. The provisions of the Debt Restructuring Warrants were modified pursuant to an Amended and Restated Restructuring Warrant dated October 29, 2009 to provide that in the event there is an issuance of shares or common stock, convertible debt or equity, or warrants or options, at a price per share or convertible or exercisable at a price per share below the Warrant P rice (as defined), then the Warrant Price shall be reduced to the price per share of the common stock so issued or issuable, and the number of Warrant Shares (as defined) shall be adjusted to the extent required to enable the Holder to acquire additional shares of common stock representing the same percentage of the shares issued and/or issuable as a result of the transaction as the number of Warrant Shares exercisable immediately prior to the transactions represents of the number of shares of common stock issued and outstanding immediately prior to the transaction.
On September 24, 2010, we entered into a letter agreement (“Agreement”) with Crestview whereby we have an option to repurchase 20,000,000 warrants of the 23,000,000 warrants held by Crestview. Pursuant to the Agreement, we have the option (“Option”) to purchase 20,000,000 of the Warrants for a period of 45 days from the date of the Agreement (the “Option Period”) for a purchase price of no less than $0.0285 per share. In consideration for the Option, we made a payment to Crestview of $10,000. Further, if during the Option Period the closing price of our common stock reaches or exceeds $0.06 per share, as quoted by the OTC Bulletin Board, we will provide Crestview with a non-refundable deposit in the amount of $50,000, which sum will be applied to the ultimate exercise of the Option and repurchase of certain of the Warrants, but will be retained by Crestview despite any election by us not to exercise the Option. Because the closing price of the Company’s common stock exceeded $0.06 per share, such $50,000 deposit was paid to Crestview. The Option Period has been extended until December 15, 2010 by mutual agreement of the parties. Except as may be modified to reflect the terms of any sale or transfer of the Warrants as contemplated by the Option, the Warrants remain in full force and effect according to their terms.
Debt Reduction Efforts
Leading up to and following the successful formation of the Mineral Ridge LLC, we have continued our efforts to eliminate our indebtedness through negotiated debt reductions, and structured cash and stock payments.
45
Caldwell Separation Agreement
On January 25, 2010, we entered into an Employment Separation and Severance Agreement dated as of January 19, 2010 (the “Caldwell Separation Agreement”) with David A. Caldwell, the Company’s then Chief Executive Officer (“CEO”), interim Chief Financial Officer (“CFO”) and a member of the Company’s board of directors (“Board”). Pursuant to the terms of the Caldwell Separation Agreement, Mr. Caldwell resigned from his positions as CEO, CFO and as a member of the Board effective as of February 1, 2010 (the “Termination Date”). The Caldwell Separation Agreement terminated that certain Employment Agreement between the Company and Mr. Caldwell dated February 27, 2006, as amended by that certain Addendum to Employment Agreement dated January 31, 2007, pursuant to which we have employed Mr. Caldwell as its CEO since January 31, 2007 (collectively, the “Caldwell Employment Agreement”).
Under the terms of the Caldwell Separation Agreement, in settlement of all outstanding amounts owed to Mr. Caldwell, including, but not limited to, those amounts due in accrued and unpaid salary, expenses, director’s fees and repayment of certain loans made to the Company, as well as all amounts owed as severance pursuant to the terms of the Caldwell Employment Agreement, we agreed to: (i) make cash payments of an aggregate of $25,000, half of which was paid upon the agreement of the principal terms of the Caldwell Separation Agreement and the other half paid upon the signing of the Caldwell Separation Agreement; (ii) a subsequent cash payment of $20,379 upon the earlier to occur of the Company’s closing of a transaction involving our Mineral Ridge mining property or a financing by a third party involving a n infusion of working capital to the Company of at least $250,000 (the “Subsequent Payment”); and (iii) issue to Mr. Caldwell an unsecured promissory note (the “Note”), in the principal amount of $366,623, such Note to accrue interest at a rate of 2.0% per annum, with a maturity date twenty-four (24) months from the date of the Separation Agreement. The long-term liability, amounts due related parties, with a balance of $371,757 at September 30, 2010 is comprised of the Note principal balance of $366,623 plus accrued interest payable of $5,134. Further, pursuant to certain events and conditions as set forth in the Caldwell Separation Agreement, Mr. Caldwell can be issued shares of our common stock in lieu of cash payments for the Note and the Subsequent Payment.
The Caldwell Separation Agreement further provides that Mr. Caldwell will form a new company, Phoenix Development Group, LLC, a Nevada limited liability company (“PDG”), to operate as a mine exploration and evaluation enterprise. It is contemplated that Mr. Caldwell will serve as CEO and Exploration Geologist of PDG and that we will own a 25% ownership in PDG in exchange for ongoing monthly cash payments of $7,500 (“PDG Payments”), such payments to commence 30 days after the formation of PDG and continue on a monthly basis for a period of 24 months, to be further detailed in a contribution agreement by and between PDG and the Company at a later time. Further, pursuant to the Caldwell Separation Agreement, we will have a right of first refusal to negotiate with PDG for the purchase of any mining, mineral or exploration property rights identified and acquired by PDG. In addition, as set forth in the Caldwell Separation Agreement, PDG can be issued shares of our common stock in lieu of the PDG Payments.
April 2010 Debt Reduction Agreements
On April 15, 2010, in furtherance of our debt reduction efforts, we entered into a series of agreements with Kenneth Ripley (“Ripley”) and David Pearl (“Pearl”), members of the Ashdown Milling Company, LLC (“Ashdown Milling”), Win-Eldrich Gold, Inc., (“WEG”), the Ashdown Project, LLC (“Ashdown Project”) and Earl Harrison (“Harrison”), whereby WEG agreed to modify that certain Limited Recourse Secured Promissory Note in the principal amount of $5,300,000 made in favor of us, dated May 13, 2009 (the “Initial Note”), and reissue and replace the Initial Note with one Series A Note, two Series B Notes and one Series C Note, with the Company maintaining the Series A Note and WEG consenting to our assignment of the Series B Notes to Ripley and Pearl and the Series C Note to Harrison, in settlement of outstanding sums owed by us to each party, all as further described below (the overall transaction referred to herein as the “Debt Reduction”):
46
As an initial matter, in furtherance of the Debt Reduction, we entered into a Promissory Note Modification Agreement with WEG, dated April 15, 2010, whereby the parties agreed to replace the Initial Note issued under that certain Purchase and Sale of Membership Interest Agreement, dated May 11, 2009 (the “Ashdown Project Purchase Agreement”) with four separate notes as follows: (a) one Series A Limited Recourse Secured Promissory Note in the principal amount of $4,231,925 (the “Series A Note”), (b) two Series B Limited Recourse Secured Promissory Notes, each in the principal amount of $489,002 (the “Series B Notes”), and (c) one Series C Limited Recourse Secured Promissory Note in the principal amount of $90,070 (the “Series C Note”) (the Series A Note, the Series B Notes and the Series C Note, collectively, the “Replacement Notes”). We will begin receiving payments on the Series A Note on April 1, 2011 rather than in May 2010 as initially contemplated, in order to permit the commencement of payments on the Series B Notes and Series C Note, in furtherance of the Debt Reduction.
The Series A Note bears interest at a rate of 5.25% per annum, with interest accruing from April 1, 2011, and monthly payments to commence as of even date therewith and continue in equal monthly installments for 49 months until the Series A Note’s maturity date of April 1, 2015, unless sooner accelerated upon an event of default. The Series B Notes are non-interest bearing and shall each be repaid in equal monthly installments over a 24 month period, with the first monthly installment to commence on May 1, 2010. The Series C Note bears interest at a rate of 5.25% per annum and shall be repaid in equal monthly installments over a 24 month period, with the first monthly installment to commence on May 1, 2010. Accordingly, the Series B Notes and Series C Note are scheduled to commenc e payments one (1) year prior to the commencement of payments under the Series A Note. However, an event of default under any of the Series B Notes or Series C Note, constitutes an event of default under the Series A Note, thereby triggering the acceleration of all Replacement Notes.
Further, the Replacement Notes are collectively secured by certain Ashdown Project and WEG collateral as set forth in that certain Security Agreement and Mortgage and Deed of Trust (“Security Agreement”) entered into by and between the Company, WEG and the Ashdown Project simultaneous with and pursuant to the Ashdown Project Purchase Agreement, such Security Agreement amended as of April 15, 2010 by that certain First Amendment to Security Agreement (the “Amendment”), to facilitate the issuance of the Replacement Notes and to affirm that the Security Agreement, as amended, remains in full force and effect, securing WEG’s obligations under the Replacement Notes.
Also in connection with the Debt Reduction, on April 15, 2010, we entered into a Membership Interest Purchase Agreement (the “Ashdown Milling Purchase Agreement”) with Ripley and Pearl (collectively, the “Sellers”), whereby we agreed to purchase the Sellers’ collective 40% membership interest in Ashdown Milling (the “Membership Interests”) for an aggregate purchase price of $978,005 (the “Purchase Price”), payable in the form of an assignment of our rights to those certain Series B Notes made by WEG, as described above. We entered into the Ashdown Milling Purchase Agreement to acquire the Membership Interests, in furtherance of our obligation under the Ashdown Project Purchase Agreement to use its best efforts to reduce or eliminate the net smelter royalt y obligations owed to Ashdown Milling. In consideration of the Purchase Price, the Sellers agreed to assign us all of their respective right, title and interest in and to the Membership Interests and to provide us with a general release of any and all claims, obligations, debts, liabilities, agreements, warranties, representations, damages, losses, costs and expenses, among other things, that Sellers may have had against us. We provided Sellers with a similar general release of liabilities.
47
To facilitate our payment of the Purchase Price as described in the Ashdown Milling Purchase Agreement, we entered into an Assignment of Loan Documents with each of Ripley and Pearl dated April 15, 2010 (the “Assignments”), whereby we assigned our right to the Series B Notes to each of Ripley and Pearl, which Assignments were duly consented to by WEG. Pursuant to the Assignments, Ripley and Pearl each agreed to release us from any liability with respect to, and agreed to indemnify and hold us harmless from and against, any claims arising out of or relating to, the Series B Notes.
Finally, in connection with the Debt Reduction, on April 21, 2010, we entered into a Settlement Agreement with Earl Harrison (“Harrison”) dated April 9, 2010 (the “Harrison Settlement Agreement”), whereby we agreed to pay Harrison the aggregate sum of $180,140 (the “Harrison Settlement Amount”). The parties agreed that of the Harrison Settlement Amount, $90,070 was to be paid in cash simultaneous with our execution of the Harrison Settlement Agreement, and the remaining $90,070 was to be paid in the form of an assignment of our right to that certain Series C Note made by WEG, as described above. In consideration of our payment of the Harrison Settlement Amount, Harrison agreed to a full release of any and all debts, claims, obligations, losses, costs and expense s he may have had against us related to that certain default judgment dated February 2, 2009 from the Second District Court of the State of Nevada in Washoe County entered in favor of Harrison and the Execution Order dated May 1, 2009 issued in connection therewith.
To facilitate the assignment of the Series C Note, we entered into an Assignment of Loan Documents with Harrison, dated April 15, 2010 (the “Harrison Assignment”), which Harrison Assignment was duly consented to by WEG. Pursuant to the Harrison Assignment, Harrison agreed to release us from any liability with respect to, and agreed to indemnify and hold us harmless from and against, any claims arising out of or relating to, the Series C Note.
Martin Debt Settlement Agreement
On April 16, 2010, we entered into a Debt Settlement and Release Agreement with Robert P. Martin, our current President, Secretary and Chairman of our Board of Directors (the “Debt Settlement Agreement”), as part of our ongoing efforts to consolidate and eliminate certain outstanding debt obligations.
Pursuant to the terms of the Debt Settlement Agreement, Mr. Martin agreed to accept the total sum of $716,689 (the “Martin Settlement Amount”) in exchange for the settlement of all outstanding amounts owed by us to Mr. Martin, such amounts totaling $985,259 (the “Outstanding Debt”), as well as a release of all claims against us by Mr. Martin relating to, or arising out of, the Outstanding Debt. By agreeing to accept the Martin Settlement Amount, Mr. Martin is forgiving $268,570 owed to him by us.
The Outstanding Debt consists of: (i) loan obligations of the Company in the form of three promissory notes issued to Mr. Martin totaling $215,940 (such amount includes accrued interest on the three notes in the amount of $55,415) (“Loan Obligations”); (ii) unpaid salary totaling $268,570 (“Unpaid Salary Obligation”) and accrued unpaid expenses totaling $11,747 (“Accrued Expense Obligation”) owed by the Company to Mr. Martin under the Employment Agreement between the Company and Mr. Martin dated March 8, 2006, as supplemented by that certain Addendum to Employment Agreement dated January 31, 2007; and (iii) financial obligations totaling $489,002 owed by the Company to Mr. Martin in connection with the Company’s investment in the mill owned by the Ashdown Milling Company, LLC, in Mr. Martin’s capacity as a member thereof (the “Ashdown Milling Obligations”).
Under the terms of the Debt Settlement Agreement, we agreed to pay Mr. Martin the Accrued Expense Obligation in cash as soon as reasonably practicable, with the remainder of the Martin Settlement Amount to be issued in the form of a secured promissory note (the “Secured Promissory Note”). Of the principal amount owed on the Secured Promissory Note, (1) $215,940 will accrue interest at a rate of 6.5% per annum, with a maturity date of December 12, 2010; and (2) $489,002 will be paid to Mr. Martin after we have satisfied our current financial obligations to Ripley and Pearl, the remaining members of the Ashdown Milling Company, LLC (as previously defined, “Ashdown Milling”), or by March 12, 2011, whichever come s first, said payment to be structured, at Mr. Martin’s election, as a sale to us of Mr. Martin’s membership interest in Ashdown Milling pursuant to, and in accordance with, the terms and conditions of the Ashdown Milling Operating Agreement.
48
The Secured Promissory Note was intended to be secured by a pledge of 1,020,000 share of Scorpio Gold common stock, valued at CN $0.50 per share (“Scorpio Gold Shares”). Prior to perfecting the security interest in the Scorpio Gold Shares as contemplated by the Debt Settlement Agreement, the Company’s Board of Directors, with Mr. Martin abstaining from the vote, approved the sale of all 7,824,750 shares of its investment in Scorpio Gold common stock, including the Scorpio Gold Shares that were intended to secure the Secured Promissory Note, with an undertaking to pay off the Secured Promissory Note in full from the proceeds of the sale of Scorpio Gold common stock. The sale occurred in a market transaction on August 4, 2010, and we paid off the Secured Promissory Note in Septembe r 2010.
Aveson Debt Settlement Agreement
On August 19, 2010, the Company entered into a Debt Settlement and Release Agreement (the “Aveson Agreement”) with Kent Aveson, a former member of the Company’s Board of Directors. Pursuant to the terms of the Aveson Agreement, Mr. Aveson agreed to release the Company from any and all obligations, claims, and liabilities of that certain debt owed to him pursuant to his employment agreement with the Ashdown LLC, which debt the Company agreed to assume upon the completion of the sale of its interest in the Ashdown LLC to WEG, in consideration for the payment by the Company of the total sum of $35,088 (“Aveson Payment”). The Aveson Payment was made as follows: (i) a cash payment of $11,696 upon entering into the Aveson Agre ement, and (ii) monthly payments in the amount of $1,949 commencing on September 1, 2010 and ending on August 1, 2011, which in aggregate will satisfy the remaining balance of the debt owed to Mr. Aveson.
Amendments to Compensation Arrangements
On October 4, 2010, as approved by the Company’s Board of Directors, the Company and Robert Martin, the Company’s current President and Chairman of the Board of Directors, agreed to an amendment of Mr. Martin’s current compensation arrangement currently in effect, as set forth in that certain Employment Agreement between Mr. Martin and the Company dated March 8, 2006, as amended and supplemented by that certain Supplemental Compensation Agreement dated May 18, 2009 and that certain Debt Settlement Agreement dated April 2, 2010 (collectively, the “Martin Compensation Arrangement”). In consideration of $47,177 in deferred salary owed to Mr. Martin pursuant to the Martin Compensation Arrangement, the Company issued 786,290 shares of the Company’s common stock to Mr. Martin at a price equal to $0.06 per share - the closing price of a share of the Company’s common stock on October 1, 2010, as quoted on the OTCBB.
Further, on October 4, 2010, as approved by the Company’s Board of Directors, the Company and Thomas Klein, the Company’s current Chief Executive Officer, agreed to an amendment of Mr. Klein’s current compensation arrangement currently in effect, as set forth in that certain Consulting Agreement between the Company and Mr. Klein dated January 16, 2009, as amended (the “Klein Compensation Agreement”). In consideration of $53,227 in deferred salary owed to Mr. Klein pursuant to the Klein Compensation Agreement, the Company issued 887,118 shares of the Company’s common stock to Mr. Klein at a price equal to $0.06 per share - the closing price of a share of the Company’s common stock on October 1, 2010, as quoted by the OTCBB.
49
Ashdown Milling Obligation
On September 26, 2005, we entered into a Production Payment Purchase Agreement with Ashdown Milling Co LLC (“Ashdown Milling”). Under the terms of the agreement, Ashdown Milling agreed to purchase a production payment to be paid from our share of production from the Ashdown mine for a minimum of $800,000. In addition, Ashdown Milling received one share of our common stock and one warrant to purchase one share of our common stock at $0.20 per share for each dollar paid us. In addition, the Production Payment Purchase Agreement provided that, upon our request for additional funds, Ashdown Milling had the right, but not the obligation, to increase its investment in the production payment up to an additional $700,000 for a maximum purchase price of $1,500,000. A total of $1,500,000 was paid to us pursuant to the agreement. The amount of the production payment to be paid to Ashdown Milling was equal to a 12% net smelter returns royalty on the minerals produced from the mine until an amount equal to 240% of the total purchase price had been paid. Robert P. Martin, one of our officers and directors, and Kenneth S. Ripley, one of our former Chief Executive Officers, are co-managers and two of the five original members of Ashdown Milling. Our Board approved the transaction.
On February 6, 2008 we bought out the membership interests of two members of Ashdown Milling, Charles D. Murphy and Acco Investment Inc., in exchange for 1,866,667 shares of our common stock and $139,092 cash paid to each of them. As a result, their membership interests in Ashdown Milling were extinguished, and our remaining production payment to be paid to Ashdown Milling was reduced from a 12% net smelter returns royalty on the minerals produced to 7.2%.
As a consequence to the sale of our interest in the Ashdown LLC, the members of Ashdown Milling no longer had a net smelter returns royalty on Ashdown LLC production. We intended to pay the remaining royalty obligation as sales proceeds were received from WEG. As part of our debt reduction efforts, however, we have entered into agreements to extinguish the remaining obligation to the members of Ashdown Milling.
As discussed above, in April 2010, we bought out the membership interests of two members of Ashdown Milling, Kenneth Ripley and David Pearl, in exchange for an assignment of an aggregate $978,005 of the $5.3 million promissory note due us from the sale of our membership interest in the Ashdown LLC.
As further discussed above, a debt settlement agreement was reached with Robert P. Martin in April 2010 to include $489,002, which at Mr. Martin’s election, will be structured as a purchase of Mr. Martins membership interest in Ashdown Milling.
As a result of these April 2010 transactions with Messrs. Ripley, Pearl and Martin, we will no longer have any obligations to Ashdown Milling pursuant to the Production Payment Purchase Agreement.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not Applicable.
50
Item 4T. Controls and Procedures
Disclosure Controls and Procedures
Our management, under the supervision and with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of September 30, 2010. Based on that evaluation, our chief executive officer and chief financial officer concluded that the disclosure controls and procedures employed at the Company were effective to ensure that the information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms.
Change in Internal Control Over Financial Reporting
No change in our internal control over financial reporting occurred during the fiscal quarter ended September 30, 2010 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Tetra Financial Group, LLC – On January 29, 2009, Tetra Financial Group, LLC (“Tetra”) filed a complaint in the Third District Court of Utah in Salt Lake County against the Ashdown Project, LLC, the Company, Win-Eldrich Mines Limited and certain principals of each company, claiming the breach of a lease agreement for the lease of two (2) ten-ton hauler trucks. In February 2010, a settlement agreement was reached with Tetra requiring payments to be made by the Ashdown Project, LLC and resulting in no material financial impact to the Company. The Company remains contingently liable, however, for amounts due Tetra under the settlement agreement in the event such amounts are not paid by the Ashdown Project, L LC.
Ed Staub & Sons Petroleum, Inc. - No material changes have occurred during the quarter ended September 30, 2010. Further description of this legal dispute is provided in the Company’s Form 10-K for the year ended December 31, 2009.
Item 1A. Risk Factors
Not Applicable.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
In consideration for consulting services provided pursuant to the terms of that certain Consulting Agreement between the Company and Uptick Capital, LLC (“Uptick”), the Company issued Uptick 250,000 shares of its common stock on each of July 13, 2010, August 5, 2010 and September 28, 2010.
Pursuant to the terms of that certain Asset Purchase Agreement between the Company and Mhakari Gold (Nevada) (“Mhakari”), the Company issued Mhakari a total of 7,000,000 shares of its common stock on July 8, 2010 for exploration properties valued at $280,000. Further, as additional consideration, the Company issued Mhakari warrants to purchase a total of 7,000,000 shares of its common stock with an exercise price of $0.05 per share exercisable for a period of five years.
51
The issuances of common stock to Uptick and Mhakari were conducted in reliance upon the exemption from registration requirements provided by Section 4(2) of the Securities Act of 1933, as amended, and from various similar state exemptions.
Item 3. Defaults Upon Senior Securities
None.
Item 4. (Removed and Reserved.)
Item 5. Other Information
None
Item 6. Exhibits
| Exhibit No. | Description | |
| 3.1 | Articles of Incorporation of Golden Phoenix Minerals, Inc.(1) | |
| 3.2 | Bylaws of Golden Phoenix Minerals, Inc.(1) | |
| 3.3 | Amended and Restated Articles of Incorporation of Golden Phoenix, Minerals, Inc.(2) | |
| 3.4 | Amended and Restated Articles of Incorporation of Golden Phoenix Minerals, Inc.(3) | |
| 3.5 | Amended and Restated Bylaws of Golden Phoenix Minerals, Inc.(3) | |
| 4.1 | Specimen Common Stock Certificate of Golden Phoenix Minerals, Inc.(3) | |
| 4.2 | Form of Warrant of Golden Phoenix Minerals, Inc.(4) | |
| 10.1 | Option Agreement between the Company and Mhakari Gold (Nevada) Inc., dated July 6, 2010.(5) | |
| 10.2 | Asset Purchase Agreement between the Company and Mhakari Gold (Nevada) Inc., dated July 6, 2010.(5) | |
| 10.3 | Consulting Agreement between the Company and J. Roland Vetter, dated July 1, 2010.(5) | |
| 10.4 | Debt Settlement and Release Agreement between the Company and Kent Aveson, dated August 19, 2010.(6) | |
| 10.5 | Letter Agreement between the Company and Crestview, dated September 24, 2010.(7) | |
| 10.6 | Acquisition Agreement between the Company, Ra Resources Ltd. and 2259299 Ontario Inc., dated October 6, 2010.* | |
| 10.7 | Memorandum of Understanding between the Company and Salwell International, dated October 4, 2010.* | |
| 10.8 | Consulting Agreement between the Company and Thomas Klein, dated October 4, 2010.* | |
| 31.1 | Certification of Chief Executive Officer Pursuant to Section 302.* | |
| 31.2 | Certification of Chief Financial Officer Pursuant to Section 302.* | |
| 32.1 | Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350.* |
*Filed herewith.
| (1) | Incorporated by reference from Form 10SB12G filed with the SEC on July 30, 1997. |
| (2) | Incorporated by reference from Form SB-2/A filed with the SEC on June 29, 2007. |
| (3) | Incorporated by reference from Form 8-K filed with the SEC on June 5, 2008. |
| (4) | Incorporated by reference from Exhibit A to Exhibit 10.1 of Form 8-K filed with the SEC on April 25, 2007. |
| (5) | Incorporated by reference from Form 8-K filed with the SEC on July 8, 2010. |
| (6) | Incorporated by reference from Form 8-K filed with the SEC on September 17, 2010. |
| (7) | Incorporated by reference from Form 8-K filed with the SEC on September 24, 2010. |
52
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934 the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| GOLDEN PHOENIX MINERALS, INC. | ||
| Date: November 15, 2010 | By: | /s/ Thomas Klein |
| Name: Thomas Klein | ||
| Title: Chief Executive Officer | ||
| Date: November 15, 2010 | By: | /s/ J. Roland Vetter |
| Name: J. Roland Vetter | ||
| Title: Chief Financial Officer | ||
53