UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30th, 2006
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT
For the transition period from to
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Commission file number 000-50399
BATTLE MOUNTAIN GOLD EXPLORATION CORP.
----------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
NEVADA 86-1066675
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
One East Liberty Street, 6th Floor, Suite 9 Reno, Nevada 89504
--------------------------------------------------------------
(Address of principal executive offices)
(775) 686-6081
--------------
(Registrant's telephone number)
N/A
---
(Former name and address)
Check whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 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 [ ]
As of July 31st, 2006, the issuer had 63,346,449 shares of common stock
issued and outstanding.
PART I FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS (Unaudited)
BATTLE MOUNTAIN GOLD EXPLORATION CORPORATION
BALANCE SHEET
(UNAUDITED)
ASSETS
------
JUNE 30, 2006
---------------
CURRENT ASSETS
- --------------
Cash - unrestricted $ 22,318
Cash - restricted 387,009
Accounts receivable 566,690
---------------
Total current assets 976,017
PROPERTY AND EQUIPMENT
(NET OF ACCUMULATED DEPRECIATION OF $1,093) 5,015
OTHER ASSETS
- ------------
Royalty interests in mineral properties, (net
of accumulated amortization of $910,000) 19,620,000
Deposits 295
---------------
Total other assets 19,620,295
---------------
Total assets $ 20,601,327
===============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
- -------------------
Accounts payable $ 123,747
Accrued interest 176,202
Bridge loan payable 4,000,000
Income tax payable 40,484
Note payable - current maturity 1,319,307
Related party payables 14,902
---------------
Total current liabilities 5,674,642
---------------
LONG-TERM LIABILITIES
- ---------------------
Convertible debentures 2,000,000
Note payable 5,326,478
---------------
Total long-term liabilities 7,326,478
---------------
Total liabilities 13,001,120
---------------
COMMITMENTS AND CONTINGENCIES -
- ----------------------------- ---------------
STOCKHOLDERS' EQUITY
- --------------------
Preferred stock: 10,000,000 shares authorized ($0.001 par value)
none issued -
Common stock, $.001 par value, 200,000,000 shares authorized
63,346,449 shares issued and outstanding 63,346
Additional paid-in-capital 16,906,922
Prepaid stock-based compensation (14,272)
Accumulated other comprehensive deficit (272,811)
Accumulated deficit (9,082,978)
---------------
Total stockholders' equity 7,600,207
---------------
Total liabilities and stockholders' equity $ 20,601,327
===============
The Accompanying Notes are an Integral Part of the Financial Statements.
2
BATTLE MOUNTAIN GOLD EXPLORATION CORPORATION
STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE SIX MONTHS ENDED FOR THE THREE MONTHS ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2006 2005 2006 2005
------------ ------------ ------------ ------------
REVENUE $ 1,549,274 $ - $ 1,549,274 $ -
- -------
EXPENSES
- --------
Depreciation and amortization (910,709) (94) (910,657) (47)
Professional and consulting (2,291,254) (247,969) (2,144,067) (135,110)
Travel and entertainment (20,943) (13,581) (8,466) (5,431)
Rent and office (16,567) (8,448) (9,314) (5,803)
General and administrative (999,516) (61,964) (985,278) (23,769)
------------ ------------ ------------ ------------
Total operating expenses (4,238,989) (332,056) (4,057,782) (170,160)
------------ ------------ ------------ ------------
Loss from operations (2,689,715) (332,056) (2,508,508) (170,160)
OTHER INCOME (EXPENSE)
- ----------------------
Interest expense (222,345) - (222,345) -
Financing fees (3,953,488) (3,953,488)
Foreign exchange loss (622) (622)
Unrealized loss - - 10,600
Loss on sale investments (10,082) - (10,082)
Loss on gold payment (63,199) - (63,199) -
------------ ------------ ------------ ------------
Total other expense (4,239,654) (10,082) (4,239,654) 518
Loss before income taxes (6,929,369) (342,138) (6,748,162) (169,642)
Provision for income taxes (40,484) - (40,484) -
------------ ------------ ------------ ------------
Net loss $(6,969,853) $ (342,138) $(6,788,646) $ (169,642)
============ ============ ============ ============
Loss per share - basic and diluted $ (0.13) $ (0.01) $ (0.11) $ (0.01)
============ ============ ============ ============
Weighted average shares outstanding-
basic and diluted 52,068,816 41,030,000 61,607,633 41,030,000
============ ============ ============ ============
COMPREHENSIVE LOSS
- ------------------
Net loss per statement of operations $(6,969,853) $ (342,138) $(6,788,646) $ (169,642)
Foreign currency translation adjustments (3,048) - (3,048) -
Unrelized loss on gold holdings and commitments (269,763) - (269,763) -
------------ ------------ ------------ ------------
Comprehensive loss $(7,242,664) $ (342,138) $(7,061,457) $ (169,642)
============ ============ ============ ============
The Accompanying Notes are an Integral Part of the Financial Statements.
3
BATTLE MOUNTAIN GOLD EXPLORATION CORPORATION
STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30
2006 2005
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CASH FLOWS FROM OPERATING ACTIVITIES
- ------------------------------------
Net loss $ (6,969,853) $(342,138)
Adjustments to reconcile net loss to cash used
in operating activities:
Depreciation and amortization 910,709 94
Non-cash compensation 1,937,042
Shares issued for services 599,850
Issuance of stock warrants 3,953,488
Foreign exchange loss 622 -
Loss on sale of investments 10,082
Decrease in prepaid expense 1,188
Increase in accounts receivable (566,690)
Increase in accounts payable 94,544
Increase in accrued interest 176,202
Increase in income tax payable 40,484
Increase in related party payable 125,787 7,745
------------- ----------
Net cash used in operating activities 303,373 (324,217)
CASH FLOWS FROM INVESTING ACTIVITIES
- ------------------------------------
Purchase of property and equipment (3,319) -
Purchase of royalty rights (13,850,000) -
Proceeds from sale of short term investments - 25,718
Investment in mining properties (98,825) (630,794)
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Net cash used in investing activities (13,952,144) (605,076)
CASH FLOWS FROM FINANCING ACTIVITIES
- ------------------------------------
Proceeds from issuance of related party notes payable 6,907,825 -
Principal payments on related party notes payable (529,999) (148,196)
Proceeds from short term notes 4,000,000 -
Proceeds from issuance of common stock 3,439,119 460,000
------------- ----------
Net cash provided by financing activities 13,816,945 311,804
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Net increase (decrease) in cash and cash equivalents 168,174 (617,489)
Effect of exchange rates on cash and cash equivalents (5,461) -
Cash and cash equivalents at beginning of period 246,614 703,123
------------- ----------
Cash and cash equivalents at end of period $ 409,327 $ 85,634
============= ==========
SUPPLEMENTAL INFORMATION AND NON CASH TRANSACTIONS
- --------------------------------------------------
During the six months ended June 30, 2006 the Company paid cash interest of $46,143. The Company paid
no interest for the six months ended June 30, 2005.
The Company paid no income taxes during the six months ended June 30, 2006, and 2005.
During the quarter ended June 30, 2006 the Company issued 12,000,000 shares of common stock to IAMGold
for the purchase of royalty rights.
During the quarter ended June 30, 2006 the Company issued $2,000,000 of unsecured convertible
debentures for the purchase of royalty rights.
The Company issued the Chairman and CEO 750,000 shares of unregistered, restricted common stock for
the forgiveness of previously accrued operating payables and prepaid salaries.
The Accompanying Notes are an Integral Part of the Financial Statements.
4
BATTLE MOUNTAIN GOLD EXPLORATION CORPORATION
NOTES TO THE INTERIM FINANCIAL STATEMENTS
-----------------------------------------
June 30, 2006
(unaudited)
1. ORGANIZATION AND CHANGES IN SIGNIFICANT ACCOUNTING POLICIES
-----------------------------------------------------------
The accompanying unaudited interim financial statements of Battle Mountain Gold
Exploration Corporation (the "Company") have been prepared by the Company in
accordance with generally accepted accounting principles in the United States of
America, pursuant to the Securities and Exchange Commission rules and
regulations. In management's opinion, all adjustments necessary for a fair
presentation of the results for the interim periods have been reflected in the
interim financial statements. The results of operations for any interim period
are not necessarily indicative of the results for a full year. All adjustments
to the financial statements are of a normal recurring nature.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. Such disclosures are those that would
substantially duplicate information contained in the most recent audited
financial statements of the Company, such as unchanged significant accounting
policies.
Management presumes that users of the interim statements have read or have
access to the audited financial statements and notes thereto included in the
Company's most recent annual report on Form 10-KSB.
BUSINESS
- --------
Prior to the completion of the Company's acquisition of certain royalty
interests in mineral properties in April 2006, the Company's primary business
was mineral, specifically gold, exploration in the State of Nevada. Based on the
Company's previous focus on mineral exploration, since its inception in January
2004, it previously reported its financial information in accordance with
Statements of Financial Accounting Standards (SFAS) No. 7 Accounting and
Reporting by Development Stage Enterprises.
Upon completion of its acquisition of certain royalty interests in mineral
properties, along with the divesture of its joint venture, Pediment Gold LLC,
the Company's primary focus has changed to acquiring and managing precious metal
royalties. The acquisition of the royalty interests resulted in the Company no
longer being considered exploration stage under SFAS No. 7.
The Company's current and potential future royalty interests, defined as
non-operating net revenue rights in mining projects, expect to provide all
future revenues. The Company currently does not conduct exploration or mining
activities.
USE OF ESTIMATES
- ----------------
The preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires the use of management's estimates. These estimates are subjective in
nature and involve judgments that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at fiscal year
5
end, and the reported amounts of revenues and expenses during the fiscal year.
Actual results may differ from these estimates.
CASH AND CASH EQUIVALENTS
- -------------------------
For the purpose of the statements of cash flows, all highly liquid investments
with maturities of three months or less are considered to be cash equivalents.
There were no cash equivalents as of June 30, 2006. From time to time the
Company maintains amounts on deposit with financial institutions which exceed
federally insured limits. The Company has not experienced any significant losses
in such accounts, nor does management believe it is exposed to any significant
credit risk.
RESTRICTED CASH - The Company maintains the majority of its cash resources with
Macquarie Bank Limited, its senior lender. Restricted cash is denominated in US
dollars, Canadian dollars, and gold bullion. In accordance with the Company's
loan agreements with Macquarie Bank Limited, restricted cash is periodically
released to meet the Company's working capital obligations based on a previously
agreed upon annual budget. Additional funds are available on an as needed basis.
ROYALTY INTERESTS IN MINERAL PROPERTIES:
- ----------------------------------------
Acquired royalty interests in mineral properties include certain properties in
the production, development, and exploration stage. In accordance with Financial
Accounting Standards Boards (FASB) Emerging Issues Task Force Issue (EITF) No.,
04-02, Working Group Report No.1, Whether Mineral Rights are Tangible or
Intangible Assets and Related Issues, we evaluate our royalty interests to
determine if they are tangible assets based on several factors including:
1. If our royalty interests in mineral properties are considered real property
interests;
2. If our royalty interests in mineral properties do not meet the definition
of financial assets under FASB Statement No. 140; and
3. If our royalty interests in mineral properties do not meet the definition
of derivative instruments under FASB Statement No. 133.
The fair value of acquired royalty interests in mineral properties are
capitalized as tangible assets when they meet the definition as noted above.
Acquisition costs of production stage royalty interests are depleted using the
units of production method over the life of the mineral property, which is
estimated using proven and probable reserves. Development and exploration stage
royalties will be amortized in the same manner once they become production stage
assets. The carrying values of all royalty mineral interests are periodically
evaluated for impairment. The recoverability of the carrying value of royalty
interests in production and development stage mineral properties is evaluated
based upon estimated future undiscounted net cash flows from each royalty
interest property using estimates of proven and probable reserves. We evaluate
the recoverability of the carrying value of royalty interests in exploration
stage mineral properties in the event of significant decreases in the price of
gold, and whenever new information regarding the mineral properties is obtained
from the operator that could affect the future recoverability of our royalty
interests. Impairments in the carrying value of each property are measured and
recorded to the extent that the carrying value in each property exceeds its
estimated fair value, which is generally calculated using estimated future
discounted cash flows.
Our estimate of gold prices, operator's estimates of proven and probable
reserves to our royalty properties, and operator's estimates of operating,
capital and reclamation costs are subject to certain risks and uncertainties
which may affect the recoverability of our investment in these royalty interests
in mineral properties. Although we have made our best assessment of these
6
factors based on current conditions, it is possible that changes could occur,
which could adversely affect the net cash flows expected to be generated from
these royalty interests. The Company believes that no impairment of its
long-lived assets occurred during the second quarter of 2006 or existed as of
June 30 2006.
BASIS OF CONSOLIDATION
- ----------------------
The consolidated financial statements include the accounts of Battle Mountain
Gold Exploration Inc., and its recently incorporated and wholly - owned
subsidiaries, Battle Mountain Gold (Barbados) Inc. and Battle Mountain Gold
(Canada) Inc. The Company's wholly owned subsidiaries hold all the currently
existing gold royalty assets. Intercompany transactions and account balances
have been eliminated in consolidation.
LONG-LIVED ASSETS
- -----------------
The Company reviews the carrying amount of its long-lived assets whenever events
or changes in circumstances indicate that the carrying amount of the assets may
not be recoverable in accordance with SFAS No. 144 Accounting for the Impairment
or Disposal of Long-Lived Assets.
REVENUE RECOGNITION
- -------------------
The Company's revenue is generated from its royalty interests in mineral
properties. Royalty revenue is recognized in accordance with the terms of the
underlying royalty agreements subject to (i) the pervasive evidence of the
existence of the arrangements; (ii) the risks and rewards having been
transferred; (iii) the royalty being fixed or determinable; and (iv) the
collectibility of the royalty being reasonably assured. For royalty payments
received in gold, royalty revenue is recorded at the average spot price of gold
for the period in which the royalty was earned.
ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
- -------------------------------------------------------
The carrying value of the Company's receivables, net of the allowance for
doubtful accounts, represents their estimated net realizable value.
The Company evaluates the collectibility of accounts receivable on a historical
basis. The Company records a reserve for bad debts against amounts due to reduce
the net recognized receivable to an amount the Company believes will be
reasonably collected. The reserve is a discretionary amount determined from the
analysis of the aging of the accounts receivables and historical experience.
Based on our analysis of payment experience, no reserve has been recorded for
the period.
FOREIGN CURRENCY TRANSLATION
- ----------------------------
The functional currency of the Company and its subsidiaries is the applicable
local currency in accordance with SFAS No. 52, Foreign Currency Translation.
Monetary assets and liabilities of the Company and its subsidiaries with
functional currencies other than the U.S. dollar are translated into U.S.
dollars using current rates of exchange at the balance sheet date. Non-monetary
assets and liabilities are translated at historical exchange rates. Revenues and
expenses are translated at the weighted average exchange rates in effect for the
period in which the items occur. Translation gains or losses are recorded as a
separate component of stockholders' equity and transaction gains and losses are
included in other income and expenses, net.
COMPREHENSIVE INCOME
- --------------------
The Company reports comprehensive income and loss and its components in
accordance with SFAS No. 130, Reporting Comprehensive Income. The Company's
7
comprehensive income is comprised of net income, foreign currency translation
adjustments, and gold price fluctuations.
CONCENTRATION OF CREDIT RISK
- -------------------------------
The Company's current revenue is solely generated from the production stage
royalty interests in the El Limon Mine, Williams Mine, Joe Mann Mine, and Don
Mario Mine.
RECLASSIFICATIONS
- -----------------
Certain prior year amounts have been reclassified to conform to the current year
presentation. These reclassifications did not have an impact on previously
reported financial position, cash flows, or results of operations.
2. DIVESTITURE OF JOINT VENTURE
----------------------------
In accordance with the Company's current focus of acquiring and managing its
portfolio of royalty interests in mining properties, the Company exchanged its
previously obtained interest in Pediment Gold LLC with its joint venture
partner, Nevada Gold Exploration Solutions LLC (NGXS) for the rescission of
7,800,000 previously granted and restricted shares of Company common stock and a
1.25% net smelter royalty on any future production, if any, of the Hot Pots and
Fletcher Junction Exploration Projects. As of the date of the transaction
neither the Hot Pots nor the Fletcher Junction Project had any proven or
probable reserves.
3. RELATED PARTY TRANSACTIONS
--------------------------
On April 26, 2006 the CEO received a total of 750,000 shares of Company common
stock at $0.39 per share, the fair market value of the Company's common stock on
the date of issuance, for total consideration of $292,500. The transaction
resulted in the cancellation of $278,214 of accrued salary and operating
payables and $14,272 in prepaid stock based compensation. The prepaid
compensation amount arose as a result of the difference in the share price at
the time the agreement was made and the time the transaction closed. This
difference created excess value based on the number of shares and warrants
issued. As of August 15th, 2006, the entire amount was earned by the CEO. The
Company anticipates that transactions of this type will not occur in the future.
On April 26, 2006 the CEO received 1,762,096 shares of common stock at $0.39 per
share for total consideration of $687,217 in accordance with the employment
agreement.
The aggregate of 2,512,096 shares of Company common stock issued to the CEO
during the quarter include additional exercisable warrants of 2,512,096, each
for one additional share of common stock at $0.31 per share expiring on April
12, 2011. The Company recognized $879,726 of non-cash compensation expense
related to issuance of the warrants.
The Company's CFO, previously engaged as a consultant, received 500,000 shares
of common stock at $0.39 per share for total consideration of $195,000 as
compensation for advisory work related to the acquisition of the royalty assets.
The shares include additional exercisable warrants of 500,000, each for one
additional share of common stock at $0.31 per share expiring on April 12, 2011.
The Company recognized $175,098 of non-cash compensation expense related to
issuance of the warrants.
The Company has an employment agreement with its CFO effective May 1, 2006. The
initial term of the agreement is three years with a base compensation of
$125,000 per year. In addition, the CFO was granted 750,000 restricted shares of
the Company's common stock, which vest equally over the term of the agreement,
beginning in May 2007.
8
4. ROYALTY INTERESTS IN MINERAL PROPERTIES
---------------------------------------
The Following Table Summarizes the net book value of each of our royalty
interests in mineral properties as of June 30th, 2006.
ROYALTY INTEREST IN MINERAL PROPERTIES
as of June 30th, 2006
($ in 000's)
ACCUMULATED
DEPLETION &
GROSS AMORTIZATION NET
----------------------- -------------- -------
PRODUCTION STAGE ROYALTY INTERESTS
Williams mine $ 3,709 (365) $ 3,344
Don Mario mine 3,460 (346) 3,114
El Limon mine 2,132 (154) 1,979
Joe Mann mine 413 (45) 368
----------------------- -------------- -------
$ 9,714 (910) $ 8,804
DEVELOPMENT STAGE ROYALTIES
Dolores resource $ 3,597 - $ 3,597
Relief Canyon mine 2,843 - 2,843
Lluvia Del Oro property 788 - 788
----------------------- -------------- -------
$ 7,229 $ 7,229
EXPLORARATION STAGE
Seguenega 3,587 $ 3,587
Night Hawk Lake Property -
Marmato -
Hot Pot -
Fletcher Junction -
Total royalty interests in mineral properties $ 20,530 $ (910) $19,620
======================= ============== =======
The Company incurred amortization expense of $910,000 during the quarter ended
June 30, 2006.
Discussed below is the status of each of our royalty interests in mineral
properties.
Williams Mine - We own a 0.72% NSR on the Williams Mine which is located 350
- --------------
kilometres east of Thunder Bay, Ontario, Canada. The NSR covers the underground
operations and a portion of the open pit operations. The mine is jointly owned
and operated by Teck Cominco Ltd. (50%) and Barrick Gold Corporation Ltd.(50%).
The mine is currently operating.
Don Mario Mine - We own a 3.0% NSR on the Don Mario Mine. The mine is owned by
- ----------------
Orvana Minerals Corp., and is currently operating. The Don Mario Mine is located
within the San Juan Canton, of the province of Chiquitos, in eastern Bolivia.
El Limon/La India - We own a 3.0% NSR on the El Limon mine and La India
- -----------------
resource. The mine is owned by Glencairn Gold Corporation. The El Limon Mine is
currently operating. The La India resource is currently being explored. The El
Limon Mine is located in Northwester Nicaragua, approximately 140 kilometers
form the capital Managua.
Joe Mann Mine - We own a 1% NSR on the Joe Mann mine. The mine is owned by
- ---------------
9
Campbell Resources Inc. The mine is currently operating and is located
approximately 550 km north of Montr al, Quebec.
Dolores Reserve - We own a 1.25% NSR on gold production from the Dolores
- ----------------
Resource. The resource is owned by Minefinders Corporation Ltd. Construction of
the mine is in process, with a start-up date expected in the third quarter of
2007. Dolores is located in Mexico, in the state of Chihuahua.
Relief Canyon Mine - We own a 4.0% NSR on the Relief Canyon Mine - The mine is
- --------------------
owned by Newgold Inc. The mine is scheduled to re start by mid 2007 according to
the mine operator, Newgold Inc. The mine is located approximately 110 miles
northeast of Reno, Nevada.
Lluvia Del Oro - We own a 3.0% NSR on the Lluvio del Oro Mine. The property is
- ----------------
owned by a private Mexican company. We carry our interest on the mine as a
development stage asset, since the mine was previously in production, is
currently on care and maintenance, and we anticipate a restart of the mine
within the next 12-18 months.
Seguenega Property - We own a 3.0% NSR on the Sega property. The property is
- -------------------
owned by Orezone Resources Inc. Orezone has spent in excess of $5.0 million in
exploration over the past 3 years. Orezone has the option to purchase (buy back)
up to two thirds of our royalty interest (i.e. from 3% to 1%) for $2.0 million,
prior to starting production. The property is located in Burkina Faso.
Night Hawk Lake Property, Marmato, Hot Pot and Fletcher Junction are all early
- ------------------------------------------------------------------
stage exploration properties. We will update as needed based on further
exploration work by the property owners.
5. NOTES PAYABLE
-------------
GOLD LOAN FACILITY
On April 10, 2006 the Company received an 11,750 ounce gold loan facility from
Macquarie Bank Limited. The Company sold the gold on the open market at $587.90
per ounce on April 10, 2006 for total proceeds of $6,907,825. The gold loan
facility calls for the Company to repay Macquarie Bank in sixteen quarterly
installments of 907 ounces beginning May 15, 2006 with a final installment of
488 ounces due on May 15, 2010 for total consideration of 15,000 ounces. The
loan is collateralized by the acquired royalty interests in mining properties.
BRIDGE LOAN
On April 26th, 2006, the Company entered into a bridge loan agreement with
Macquarie Bank Limited for $4,000,000. The bridge loan carries a 12% annual
interest rate, interest is accrued until maturity, and the loan is due December
31, 2006. The loan carries a one-time extension option through March 31, 2007.
The loan is collateralized by the acquired royalty interests in mining
properties.
SUBORDINATED EXCHANGEABLE DEBENTURE
The Company entered into a subordinated exchangeable debenture with IAMGOLD
(seller of acquired royalty interests in mining properties) for a total of
$2,000,000. The debenture carries an interest rate of 6% per annum and is due on
April 25, 2008. Principal and interest payments are due semi-annually and may be
paid in cash or in shares of common stock of the Company. Additionally, IAMGOLD
may, at any time within the period, convert the outstanding principal and
accrued interest into shares of common stock of the Company at $0.50 per share.
10
The following table illustrates the Company's future obligations as of June 30,
2006:
YEAR PRINCIPAL INTEREST TOTAL
- ------------- --------- ---------- --------
2007 5,319,307 1,172,145 6,491,452
2008 3,546,660 708,388 4,255,048
2009 1,759,095 373,805 2,132,900
2010 1,752,764 133,806 1,886,570
----------- --------- ----------
Total 12,377,826 2,388,144 14,765,970
=========== ========= ==========
Note: The above table includes principal and interest on the gold loan facility
based on a gold price of $587.90 per ounce.
As of June 30, 2006 the Company recognized an unrealized loss on the carrying
amount of its gold loan facility of $267,959.
6. CAPITAL STOCK
-------------
On April 26, 2006 the Company issued 11,669,353 shares of common stock at $0.31
per share to accredited investors in a private placement offering. Total
proceeds received in the private placement were $3,439,119 net of fees of
$178,380. Each share has an attached warrant exercisable into one share of
common stock at $0.31 per share expiring on April 12, 2011.
On April 26, 2006 the Company issued 2,512,096 shares of common stock at $0.39
per share to the CEO for total consideration of $979,717 related to previously
accrued salary, operating payables, and bonuses related to the acquisition of
the royalty interests in mineral properties. Each share has an attached warrant
exercisable into one share of common stock at $0.31 per share expiring on April
12, 2011.
On April 26, 2006 the Company issued 500,000 shares of common stock at $0.39 per
share to its CFO (previously in a consulting role) for total consideration of
$195,000 in accordance with the terms of a consulting agreement. Each share has
an attached warrant exercisable into one share of common stock at $0.31 per
share expiring on April 12, 2011.
On April 26, 2006 the Company issued 1,935,000 shares of common stock at $0.31
per share to Macquarie Bank Limited for total consideration of $599,850 related
to the payment of loan origination fees incurred during the quarter ended June
30, 2006.
On April 26, 2006 the Company issued 12,000,000 shares of common stock at $0.39
for total consideration of $4,680,000 related to the purchase of royalty
interests in mineral properties from IAMGOLD.
On June 30, 2006 the Company received and cancelled 7,800,000 shares of
previously issued restricted common stock related to the divesture of its
interest in Pediment Gold LLC.
7. WARRANTS
--------
During the quarter ended June 30, 2006 the Company issued 14,681,449 in
conjunction with the issuance of common stock. The Company estimates the fair
value of the warrants using a lattice pricing model assuming a life equal to the
maximum contractual life. The warrants expire on April 26th, 2011.
The estimated fair value of warrants, using a lattice pricing model is based on
the following assumptions.
11
2006 2005
------ ----
Expected Dividend yield $ -0- n/a
Expected stock price volatility 90% n/a
Risk free interest rate 4.90% n/a
Expected life of warrants (years) 5.00 n/a
For the quarter ended June 30, 2006 the fair value of these warrants was
estimated to be $5,008,312, net of commission expense of $133,075, of which
$1,054,824 is considered compensation expense and $3,953,488 of financing costs,
a component of other expense.
The following table illustrates the warrant activity as of June 30, 2006:
AS OF 6/30/2006 2005
------------------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
WARRANTS PRICE WARRANTS PRICE
------------------------------------------
Outstanding, beginning of
the year 1,500,000 $ 0.25 - $ -
Issued 14,681,449 $ 0.31 1,500,000 $0.25
Exercised - - - -
Expired - - - -
------------------------------------------
Outstanding, end of the period 16,181,449 $0.3045 1,500,000 $ 0.25
==========================================
Currently exercisable 16,181,449 $0.3045 1,500,000 $ 0.25
==========================================
Stock warrants outstanding and exercisable as of June 30th, 2006 are as follows:
Average
Weighted Remaining Number of Weighted
Range of Number of Average Contractual Warrants Average
Exercise Warrants Exercise Life Vested Exercise
Price Outstanding Price (Years) (Exercisable) Price
- --------- ----------- --------- ------------ ------------- ---------
0.25 1,500,000 0.25 1.75 1,500,000 0.25
0.31 14,681,449 $ 0.31 5.00 14,681,449 $ 0.31
8. INCOME TAXES
------------
The Company has adopted FASB 109 to account for income taxes. The Company
currently has no issues that create timing differences that would mandate
deferred tax expense. Net operating losses would create possible tax assets in
future years. Due to the uncertainty as to the utilization of net operating loss
carry-forwards a valuation allowance has been made to the extent of any tax
benefit that net operating losses may generate.
The Company has incurred a taxable net loss of $2,278,672 as of June 30, 2006
that can be carried forward to offset future earnings if conditions of the
Internal Revenue Code are met. This net operating loss carry-forward will begin
to expire in the year 2024. As of June 30, 2006 the entire future tax benefit
has been offset by a valuation allowance.
12
9. PRO FORMA FINANCIAL INFORMATION
----------------------------------
On April 26, 2006 the Company acquired certain royalty interests in mineral
properties. The following is pro-forma condensed operating data which portrays
the results of operations as if the transaction had occurred at the beginning of
each period presented:
SIX MONTHS ENDED JUNE 30
2006 2005
------------ ------------
Net revenue $ 1,549,274 $ 1,132,000
- ------------------------- ------------ ------------
Depreciation and
amortization (910,709) (664,999)
- ------------------------- ------------ ------------
Operating income /
(loss) (2,689,715) 134,589
- ------------------------- ------------ ------------
Other expenses (4,239,654) (10,082)
- ------------------------- ------------ ------------
Pro-forma net income /
(loss) (6,969,853) 124,507
- ------------------------- ------------ ------------
Pro-forma net income /
(loss) per share - basic $ (0.13) $ 0.01
- ------------------------- ------------ ------------
Pro-forma net income /
(loss) per share -
diluted $ (0.13) $ nil
- ------------------------- ------------ ------------
Weighted average shares
outstanding - basic 52,068,816 41,030,000
- ------------------------- ------------ ------------
Weighted average shares
outstanding - diluted 52,068,816 44,030,000
- ------------------------- ------------ ------------
10. LOSS PER SHARE
----------------
The Company's loss per share of common stock is based on the weighted average
number of common shares outstanding at the financial statement date consisting
of the following:
JUNE 30,
2006
------------
BASIC LOSS PER SHARE:
- ------------------------------
Net loss (numerator) $(6,969,853)
- ------------------------------ ------------
Shares outstanding
(denominator) 52,068,816
- ------------------------------ ------------
Loss per basic share $ (0.13)
- ------------------------------ ============
FULLY DILUTED LOSS PER SHARE:
- ------------------------------
Net loss (numerator) $(6,969,853)
- ------------------------------ ------------
Shares outstanding
(denominator) 52,068,816
- ------------------------------ ------------
Loss per basic share $ (0.13)
- ------------------------------ ============
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THIS REPORT CONTAINS FORWARD LOOKING STATEMENTS WITHIN THE MEANING OF SECTION
27A OF THE SECURITIES ACT OF 1933, AS AMENDED AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED. THE COMPANY'S ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THOSE SET FORTH ON THE FORWARD LOOKING STATEMENTS AS A RESULT OF
THE RISKS SET FORTH IN THE COMPANY'S FILINGS WITH THE SECURITIES AND EXCHANGE
COMMISSION, GENERAL ECONOMIC CONDITIONS, AND CHANGES IN THE ASSUMPTIONS USED IN
MAKING SUCH FORWARD LOOKING STATEMENTS.
With the exception of historical matters, the matters discussed in this report
are forward-looking statements that involve risks and uncertainties that could
cause actual results to differ materially from projections or estimates
contained herein. Such forward-looking statements include statements regarding
projected production estimates from the operators of our royalty properties, the
adequacy of financial resources and funds to cover anticipated expenditures for
general and administrative expenses as well as capital expenditures and costs
associated with business development, the potential need for additional funding
for acquisitions, our future capital commitments and our expectation that
substantially all our revenues will be derived from royalty interests. Factors
that could cause actual results to differ materially from these forward-looking
statements include, among others:
- - changes in gold and other metals prices;
- - the performance of our producing royalties;
- - decisions and activities of the operators of our royalty properties;
- - unanticipated grade, geological, metallurgical, processing or other
problems at these properties;
- - changes in project parameters as plans of the operators are amended or
refined;
- - changes in estimates of reserves and mineralization by the operators of
our royalty properties;
- - future financial needs;
- - Economic and market conditions;
- - the availability and size of acquisitions; and
other factors described elsewhere in our Annual Report on Form 10-K and other
reports filed with the Securities and Exchange Commission (the "SEC"). Most of
these factors are beyond our ability to predict or control. We disclaim any
obligation to update any forward-looking statement(s) made herein. Readers are
cautioned not to put undue reliance on forward-looking statements in making any
analysis or decision(s), whether financial, investment, or otherwise.
GENERAL
Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") is intended to provide information to assist you in better
understanding and evaluating our financial condition and results of operations.
We recommend that you read this MD&A in conjunction with our consolidated
financial statements included in Item 1 of this Quarterly Report on Form 10-Q,
as well as our 2005 Annual Report on Form 10-K.
We refer to "NSR" or Net Smelter Royalty throughout this MD&A. A Net Smelter
Royalty ("NSR") is a royalty payment made by a producer of metals, to the
royalty holder, based on a fixed percentage of gross mineral production from the
property, less a deduction of certain smelter and refining costs, if any.
14
OVERVIEW
Battle Mountain Gold Exploration Corp. ("Battle Mountain", the "Company", "we",
"us", or "our"), together with its subsidiaries, is engaged in the business of
acquiring and managing precious metals royalties. Royalties are passive
(non-operating) interests in mining projects that provide the right to revenue
from the project after deducting specified costs, if any.
We seek to acquire existing royalties or to assist in the financing of projects
that are in production or near production in exchange for royalty interests. We
expect that substantially all of our revenues are and will be derived from
royalty interests. We do not conduct mining operations at this time.
During the quarter ended June 30, 2006, we focused on the integration and
management of the royalty assets which we acquired on April 26, 2006, as well as
the divesture of our interest in the Pediment LLC exploration business.
The acquisition of IAMGOLD Corporations' gold royalty assets was completed on
April 26, 2006. The acquisition consisted of eleven Net Smelter Royalty ("NSR")
interests in four producing stage mines (Williams mine, Don Mario mine, El Limon
mine and Joe Mann mine), three development stage resources, (Dolores resource ,
Relief Canyon mine and Lluvia del Oro property) and three exploration stage
properties (Seguenaga, Marmato, and Night Hawk Lake) and one mine in reclamation
(Vueltas del Rio). The purchase price was $21,850,000, which was funded from the
following sources:
SOURCES
- -------
Gold Loan $ 6,907,825
Bridge Loan $ 4,000,000
Seller note (subordinated exchangeable debenture) $ 2,000,000
Common shares issued to seller $ 6,000,000
Common shares issued for cash $ 3,499,142
-----------
TOTAL SOURCES OF FUNDS $22,406,967
USES
- ----
Purchase of Royalty Assets $21,850,000
Fees and expenses $ 292,254
Working Capital $ 264,713
-----------
TOTAL USES OF FUNDS $22,406,967
We also announced the agreement to divest our interest in our Pediment LLC
exploration partnership to our joint venture partner on June 21, 2006. The
transaction closed on July 14, 2006. Consideration for the sale consisted of (a)
the cancellation of 7,800,000 previously issued shares of the Company's Common
Stock and (2) the granting to the Company by Pediment of a 1.25% Net Smelter
Royalty on the Hot Pot and a 1.25% Net Smelter Royalty on the Fletcher Junction
exploration projects in Nevada.
This transaction ends our involvement in the mineral exploration business.
OUR ROYALTY INTERESTS IN MINERAL PROPERTIES ARE SET FORTH BELOW.
- ----------------------------------------------------------------
NOTE: THE INFORMATION AND FIGURES CONCERNING THE PROPERTIES, AS SET FORTH BELOW,
HAVE BEEN PROVIDED BY THE OWNERS/OPERATORS OF THE RESPECTIVE MINING PROPERTIES
AND WE HAVE NOT INDEPENDENTLY VERIFIED SUCH INFORMATION OR FIGURES. THE
OPERATIONS ON AND PRODUCTION FROM THE RESPECTIVE PROPERTIES ARE SUBJECT TO ALL
THE SUBSTANTIAL RISKS AND UNCERTAINTIES INHERENT IN AND ATTENDANT TO MINING
ACTIVITIES AND THE MINING INDUSTRY.
15
Williams Mine- We own a 0.72% Net Smelter Royalty ("NSR") on the Williams Mine
- --------------
(located 350 kilometres east of Thunder bay, Ontario, Canada) which covers the
underground operations and a portion of the open pit operations. The mine is
jointly owned and operated by Teck Cominco Ltd. (50%) and Barrick Gold
Corporation Ltd. (50%) and is currently operating. Royalty revenues are received
in Canadian dollars from the Williams mine. The mine has been operating since
the fall of 1985, and is considered part of the Hemlo operations, which also
include the David Bell mine. The mill, located at the Williams Mine, processes
ore for both the Williams and David Bell mines. The Williams mine is primarily
an underground operation, with some open pit mining. The property comprising the
Williams mine includes 11 patented mining claims and 6 leased claims. The mine
covers a surface area of approximately 270 hectares, and the mine is currently
one of the largest gold mines in Canada. Over the past 5 years, the average
annual gold production from the Hemlo operations was 528,000 ounces, with
460,000 of gold produced in 2005. The mill started production in 1985 at a rate
of 3,000 tonnes per day, and currently operates at a rate of 10,000 tonnes per
day. The current mine plan calls for mining operations to continue until 2011.
Don Mario Mine - We own a 3.0% NSR on the Don Mario mine. The mine is owned by
- ----------------
Orvana Minerals Corp., and is currently operating. Royalty payments are received
in US dollars from the Don Mario mine. The Don Mario Mine is located within the
San Juan Canton, of the province of Chiquitos, in eastern Bolivia. Access to the
property is by air from the city of Santa Cruz de la Sierra, or by road (460
road km). On January 11, 2002, Compania Minera del Sur (Comsur), one of the
largest privately held mining Companies in Bolivia, completed the purchase of a
majority interest in Orvana, and has since been managing and supervising the
exploration, development and mining activities carried on at the Don Mario
property. The Don Mario property consists of two zones, the Lower Mineralized
Zone (LMZ) and the Upper Mineralized Zone (UMZ). The LMZ is currently being
mined, while the UMZ is the subject of a pre-feasibility study currently being
completed. The Don Mario Mine has been in operation since 2003. The mine
produced 48,228 ounces of gold in 2004, and 68,769 ounces of gold in 2005. The
mine life estimate, based on the resources in the LMZ, is approximately five
years, at an assumed production rate of 75,000 ounces per year. The mine life
estimates may change pending the results of the pre-feasibility study on the
UMZ, which could become an additional resource on the property.
El Limon Mine/La India Resource - We own a 3.0% NSR on the El Limon mine and La
- -------------------------------
India resource. The mine is owned by Glencairn Gold Corporation and is currently
operating. The La India resource is currently being explored. Royalty payments
are received in gold bullion from the El Limon mine. The mine is located in
Northwestern Nicaragua, approximately 140 kilometers form the capital Managua.
The property consists of 14 mining concessions, all of which are covered by the
royalty. Since 2002, the mine has produced an average of 46,593 ounces of gold
per year. Based on publicly available information from the mine owner, current
estimates on mine life (which do not include the La India resource or any
additional resources from the property which is still being explored) is
approximately 5 years.
Joe Mann Mine - We own a 1% NSR on the Joe Mann mine. The mine is owned by
- ---------------
Campbell Resources Inc and is located approximately 550 km north of Montr al,
Quebec. The mine is currently operating. Royalty payments are received in gold
bullion from the Joe Mann Mine. Based on publicly available information from the
operator, current reserves are 26,371 ounces and measured and indicated
resources are 113,130 ounces. The mine produced approximately 29,640 ounces of
gold in 2005.
Dolores Resource - We own a 1.25% NSR on gold production from the Dolores
- -----------------
Resource. The resource is owned by Minefinders Corporation Ltd. Construction of
the mine is in process, with a start-up date, (according to Minefinders),
expected early in the third quarter of 2007. The Dolores resource is located in
Mexico, in the state of Chihuahua. Based on recent publicly available data from
Minefinders, the estimated annual gold production from the Dolores mine, will be
approximately 120,000 ounces per year over an estimated mine life of over 12
years.
Relief Canyon Mine - We own a 4.0% NSR on the Relief Canyon Mine - The mine is
- --------------------
owned by Newgold Inc. The Relief Canyon mine is an open-pit, heap leaching
operation located approximately 110 miles northeast of Reno, Nevada. Based on
past exploration by Newgold, Inc. and others, Newgold believes the Relief Canyon
16
Mine presents the potential for gold bearing ore deposits which will hopefully
be validated through further exploration of additional mining claims. As of
January 31, 2006 the Relief Canyon properties include 78 unpatented mining
claims contained in about 1,000 acres. Newgold's operating plan is to place the
most promising mining targets into production during the 2007 fiscal year, and
use the net proceeds from these operations to fund expanded exploration and
development of its entire property holdings. Once Newgold has achieved
environmental compliance, they can proceed with the permits to commence full
scale exploration and mining activities. The estimated time for completing the
permitting process is between 9 months to 18 months. The mine is scheduled to
re-start by mid 2007 according to Newgold.
Seguenega Property ("Sega") - We own a 3.0% NSR on the Sega property. The
- ----------------------------
property is owned by Orezone Resources Inc. and is located in Burkina Faso. This
is an advanced stage exploration property, with an indicated resource of over
310,000 ounces. Orezone has spent in excess of $5.0 million in exploration over
the past three years. Orezone has the option to purchase from us up to two
thirds of our royalty interest (i.e. from 3% to 1%) for $2.0 million, prior to
putting the resource into commercial production.
Lluvia del Oro Property - We own a 3.0% NSR on the Lluvio del Oro property
- --------------------------
("Lluvia"). The property is owned by a private Mexican company. This former
open-pit gold and silver mine is currently on care and maintenance. In April
2006, Columbia Metals signed a letter of intent purchase the Lluvia mine with
the intent of placing the mine back into production. Preliminary historic
resource estimates show 4,600,000 tonnes of 0.82g/t and 4,500,000 tonnes of
0.95g/t. The property currently includes an open-pit, two leach pads, and a
recovery plant.
Night Hawk Lake Property, Marmato, Hot Pot and Fletcher Junction are all early
stage exploration properties.
RECENT PRODUCTION STATISTICS FOR THE OPERATING MINES IN WHICH WE HOLD ROYALTY
- -----------------------------------------------------------------------------
INTERESTS.
- ----------
NOTE: THE INFORMATION AND FIGURES CONCERNING THE PROPERTIES, AS SET FORTH BELOW,
HAVE BEEN PROVIDED BY THE OWNERS/OPERATORS OF THE RESPECTIVE MINING PROPERTIES
AND WE HAVE NOT INDEPENDENTLY VERIFIED SUCH INFORMATION OR FIGURES. THE
OPERATIONS ON AND PRODUCTION FROM THE RESPECTIVE PROPERTIES ARE SUBJECT TO ALL
THE SUBSTANTIAL RISKS AND UNCERTAINTIES INHERENT IN AND ATTENDANT TO MINING
ACTIVITIES AND THE MINING INDUSTRY.
Williams Mine
- -------------
Gold production from the Hemlo operations (which include both the Williams Mine
and David Bell Mine), was reduced versus the same period last year as a result
of poor ground control conditions, excess ground water in the Williams pit due
to heavy rains, and equipment availability. Gold production for the three months
ended June 30, 2006 was 102,700 ounces vs 116,300 ounces for the same period a
year ago. For the six months ended June 30, 2006, gold production was 209,600
ounces versus 241,000 ounces for the same period a year ago. Cash operating
costs increased, in part due to increased mining costs, the effect of lower
production and a weaker US dollar. (note, production data is for the combined
Williams/David Bell operations as the operators do not currently provide
separate production data for each mine.)
Don Mario Mine
- --------------
The Don Mario Mine produced 18,814 ounces of gold and sold 21,918 ounces of gold
during the first quarter of 2006 vs. 17,345 ounces produced and 15,712 ounces
sold in the first quarter of 2005.
El Limon Mine
- -------------
Gold production at the El Limon mine during the first quarter of 2006 was 7,846
ounces, which was 4,390 ounces below the corresponding period of 2005, the
result of intermittent road blockades and a lower than projected mine grade.
Gold production during the second quarter of 2006 was 9,949 ounces, vs. 9,669
ounces for the same period in 2005.
17
Joe Mann Mine
- -------------
During the first quarter of 2006, the Joe Mann Mine produced 3,464 ounces of
gold. This is below the previous quarter's production of 5,577 and 7,410 ounces
for the same period of last year. During the quarter, difficult ground
conditions were encountered which result in the mining of lower grade ore.
During the second quarter of 2006, the mine produced 4,265 ounces of gold.
Update on the Dolores Resource and mine construction:
- -----------------------------------------------------
The owner of the Dolores resource, Minefinders, Inc, recently reported that
based on recent exploration results, that the open-pit, fully-diluted reserve
base at its 100% owned Dolores gold and silver deposit in Chihuahua, Mexico has
increased to 2.45 million ounces of gold and 127.9 million ounces of silver, for
an overall increase of 24.9% in contained gold reserves and an increase of 23.5%
in contained silver reserves. The Company is proceeding rapidly with development
and construction of the planned, 18,000 tonnes per day Dolores open-pit, heap
leach mine. The mine is expected to produce an average of 6,480,000 tonnes of
ore per annum, over a projected mine life of 15.5 years.
RESULTS OF OPERATIONS
Quarter Ended June 30, 2006, Compared to Quarter June 30, 2005
- --------------------------------------------------------------
As part of the acquisition of the gold royalty assets, which was announced on
November 28, 2005, (and was subsequently closed on April 26, 2006) it was agreed
between the seller and the Company, that the Company would receive all accrued
royalties from the operating mines from January 15, 2006 to close, except for
the Joe Mann mine, where we received accrued royalties from November 2005.
Generally, the receipt of royalty payments earned during a quarter, from the
mine operators, can occur anywhere from 15 to 48 days following the quarter end
or are received on a continuous basis (depending on how the particular royalty
agreement is structured). The royalties which accrued to us from January 2006,
until the transaction close were from the Williams mine, the Don Mario mine, the
El Limon mine and the Joe Mann mine. The seller transferred to us all of the
royalties the seller had received from January 15, 2006 to April 26, 2006,
following the close of the transaction. The remaining royalties earned during
Q1, were paid to us in Q2 directly, by the mine operator. Since the close of the
transaction came after the end of the first quarter, we have included this
revenue as part of the revenue for the second quarter ending June 30, 2006. The
table below shows the breakdown of the royalties earned and received by us from
the period of January 15, 2006 to March 31, 2006. (except for revenue from the
Joe Mann mine which includes royalties from November and December 2005).
Total gross royalty income by mine for the period of January 15, 2006 to March
31, 2006 is as follows:
Williams mine $267,859
El Limon mine $131,442
Don Mario mine $359,457
Joe Mann mine $ 38,752
--------
Total royalties for the period ending March 31, 2006 $797,510
Our financial results are closely tied to the price of gold and production from
the mining properties in which we hold royalty interests. For the quarter ended
June 30, 2006, the price of gold averaged $628 per ounce. Revenues earned during
the second quarter are comprised of revenue from the El Limon mine, which
totaled $149,543, the Don Mario mine, $332,825, the Williams mine, with revenues
of $250,000, and the Joe Mann mine, with revenues of $19,396. Total revenues
earned during the quarter were $751,764.
18
For the quarter ended June 30, 2006 we recorded a net loss of $6,788,646 or
$0.11 per basic share as compared to net a net loss of $169,642, or $0.01 per
basic share, for the quarter ended June 30, 2005.
Total operating expenses increased to $4,057,782 for the quarter ended June 30,
2006, compared to $170,160 for the quarter ended June 30, 2005. The increase was
primarily from several significant non- cash, non-recurring expenditures related
to the acquisition of the gold royalty assets which occurred during the quarter,
in addition to non-cash amortization expense related to the newly-acquired
royalty assets.
Professional and consulting expenses, which include salaries, fees to external
legal and accounting professionals as well as consultants, increased to
$2,144,067 for the three months ended June 30, 2006 from $135,110 for the three
months ended June 30, 2005, primarily as a result of non cash compensation
expenses of $1,937,042. This expense consists of the value of the shares and
warrants issued to our CEO for accrued salary and payables owed to him, as well
as a transaction bonus due to him, under his employment agreement. In addition,
the non cash compensation expense includes the value of the shares and warrants
issued to a consultant, for advisory services provided to the Company with
respect to the royalty acquisition. Legal and accounting expenses of $117,036
during the quarter, which relate primarily to the royalty acquisition and the
Pediment sale transactions, also contributed to the increase. We expect that
legal and accounting expenses will continue to accrue at higher than normal
levels for the third quarter, as the company transitions from an exploration
company with limited operations, to a royalty company with more complex
operations and greater legal and accounting requirements. The remaining increase
in expenses include the increased salary expense for our CEO under a new
employment agreement (December 2005), as well as the new salary expenses for our
recently hired CFO (as of May 1, 2006).
General and administrative expenses increased to $985,278 for the quarter ended
June 30, 2006, compared to $23,769 for the quarter ended June 30, 2005. The
increase was primarily due to one-time cash and non- cash bank charges relating
to the financing of the royalty acquisition. Total bank charges were $832,864,
of which $599,850 were non-cash charges, related to the value of the shares
issued to the bank, for fees related to the bridge loan facility. Other expenses
include foreign withholding taxes of $141,348 related to royalties received from
the Don Mario and El Limon mines.
Depreciation and amortization expense for the quarter ended June 30, 2006 was
$910,657 vs. $47 for the quarter ended June 30, 2005. The increase is due
primarily to the amortization of the purchase price of the acquired royalty
assets. The amortization expense is calculated using a units of production
method.
Interest expense for the quarter ended June 30, 2006 was $222,345, vs. zero
during the period ending June 30, 2005. Interest expense was comprised of cash
expense of $46,143, and accrued interest expense of $176,202. The cash portion
of the interest expense relates to the May 15, 2006 payment on our gold loan
facility, and represents the interest from April 26, 2006 to May 15, 2006 on the
facility. The accrued interest expense of $176,202 is comprised of accrued
interest related to the Gold loan (from May 15 to June 30, 2006), as well as
accrued interest on the bridge loan facility and the subordinated exchangeable
debenture for the quarter.
The financing fee of $3,953,488 is a non-cash, non-recurring expense that
relates entirely to the cost associated with the warrants issued to investors,
as part of the equity placement, which was used for the funding of the royalty
asset purchase.
The loss on gold loan payment of $63,199 is a non-cash item that arises as a
result of the difference in the gold price on the date of drawdown on the gold
loan (April 10, 2006) and the date of the payment of the first quarterly
repayment, (May 30, 2006). The amount is based on the difference in the gold
price multiplied by the number of ounces paid.
For the quarter ended June 30, 2006, we recorded a provision for income taxes of
$40,484 compared with zero during the three months ended June 30, 2005. This
amount relates to an estimate on taxes payable on net earnings generated by a
foreign subsidiary.
19
Other comprehensive income/(loss) of ($272,811) reflects non cash changes from
unrealized loss on gold holdings and commitments and foreign currency
translation adjustments.
Six Months Ended June 30, 2006, Compared to Six Months Ended June 30, 2005
- ---------------------------------------------------------------------------
For the six months ended June 30, 2006, we recorded a net loss of $6,969,853, or
$0.13 per basic share, as compared to a net loss of $342,138, or $0.01 per basic
share, for the six month ended June 30, 2005.
For the six months ended June 30 2006, total royalty revenues were $1,549,274
consisting of $517,859 from our royalty on the Williams mine, $692,282 from our
royalty on the Don Mario mine, $280,985 from our royalty on the EL Limon mine,
and $58,148 from our royalty on the Joe Mann mine. We did not have any royalty
income for the period ending June 30, 2005.
Total operating expenses increased to $4,238,989 for the six months ended June
30, 2006, compared to $332,056 for the six months ended June 30, 2005. The
increase was primarily due to several non-cash, non-recurring expenditures
related to the acquisition of the IAMGOLD gold royalty assets which occurred
during the quarter, in addition to the non-cash amortization expense related to
the newly acquired royalty assets.
Professional and consulting expenses, which include salaries, fees to external
legal and accounting professionals as well as consultants, increased to
$2,291,254 for the six months ended June 30, 2006 from $247,969 for the six
months ended June 30, 2005, primarily as a result of non-cash compensation
expense of $1,937,042. This expense consists of the value of shares and warrants
issued to our CEO for accrued salary and payables owed to him, as well as a
transaction bonus due to him, under his employment agreement. In addition, the
non-cash compensation expense includes the value of the shares and warrants
issued to a consultant, for advisory services provided to the company with
respect to the royalty acquisition. Legal and accounting expenses of $172,924
during the period, which relate primarily to the royalty acquisition and
Pediment sale transactions, also contributed to the increase. We expect that
legal and accounting expenses will continue to accrue at higher than normal
levels for the third quarter, as the company transitions from an exploration
company with limited operations, to a royalty company with more complex
operations and greater legal and accounting requirements. The remaining increase
in expenses includes the increased salary expense for our CEO under a new
employment agreement, as well as salary expenses for our recently hired CFO.
General and administrative expenses increased to $999,516 for the period ended
June 30, 2006, compared to $61,964 for the period ended June 30, 2005. The
increase was primarily due to one time cash and non cash bank charges relating
to the financing of the royalty acquisition. Total bank charges were $832,864 of
which $599,850 were non cash charges, related to the value of the shares issued
for fees for the bridge loan facility. Other expenses include foreign
withholding taxes of $141,348 related to royalties received from the Don Mario
and El Limon mines. Withholding taxes are taken at the source by the country
where the operations are based.
Depreciation and amortization expense for the six months ended June 30, 2006 was
$910,709 vs. $94 for the six months ended June 30, 2005. The increase is due
primarily to the amortization of the purchase price of the acquired royalty
assets. The amortization expense is calculated using a units of production
method.
Interest expense for the period ended June 30, 2006 was $222,345, vs zero during
the period ending June 30, 2005. Interest expense was comprised of cash expense
of $46,143, and accrued interest expense of $176,202. The cash portion of the
interest expense relates to the May 15, 2006 payment of our gold loan facility,
and represents the interest accrued from April 26, 2006 to May 15, 2006 on the
facility. The accrued interest expense of $176,202 is comprised of accrued
interest related to the gold loan, as well as accrued interest on the bridge
loan facility and the subordinated exchangeable debenture for the quarter.
20
The financing fee of $3,953,488 is a non-cash, non-recurring expense that
relates entirely to the cost associated with the warrants issued to investors,
as part of the equity placement, which was used for the funding of the royalty
asset purchase.
The loss on gold loan payment of $63,199 is a non cash item that arises as a
result of the difference in the gold price on the date of drawdown on the Gold
loan (April 10, 2006) and the date of the payment of the first quarterly
repayment, May 30, 2006. The amount is based on the difference in the gold price
multiplied by the number of ounces paid.
For the period ended June 30, 2006, we recorded a provision for income taxes of
$40,484 compared with zero during the period ended June 30, 2005. This amount
relates to an estimate on taxes payable on net earnings generated by a foreign
subsidiary.
Other comprehensive income/(loss) of ($272,811) reflects non cash changes from
unrealized loss on gold holdings and commitments and foreign currency
translation adjustments.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2006, we had current assets of $976,017 compared to current
liabilities of $5,674,642. $4,000,000 of current liabilities is from the bridge
loan facility, which comes due on December 31, 2006. The Company has an option
to extend the facility to March 31, 2007. Cash on hand of $409,327 consisted of
approximately $387,000 held in restricted accounts with our senior lender, with
the remaining cash held directly by the Company. Cash held with our senior
lender is in US dollars, Canadian dollars and gold bullion. Cash held by the
Company is held in both US and Canadian dollars. Under the terms of our Gold
Loan Agreement, cash is released from the accounts to cover previously agreed
upon corporate expenses, which is part of our annual budget. Accounts receivable
consist entirely of royalties earned but not yet received as of the quarter end.
Cash generated from operations was $303,373 for the six months ended June 30,
2006.
During the quarter ended June 30, 2006, liquidity needs were met from royalty
revenues, excess proceeds from the financing of the royalty asset acquisition,
and our available cash resources.
We believe that our current financial resources and funds generated from
operations will be adequate to cover anticipated expenditures for operating
expenses, and capital expenditures for the foreseeable future. Additional
capital will be required to repay our obligations under the bridge loan
facility. We will be seeking additional financing in the near future.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our earnings and cash flow are significantly impacted by changes in the market
price of gold. Gold prices can fluctuate widely and are affected by numerous
factors, such as demand, production levels, economic policies of central banks,
producer hedging, world political and economic events, and the strength of the
U.S. dollar relative to other currencies. We are also subject to risks arising
from the performance of the owners/operators of the mines and properties in
which we have royalty interests.
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RISK FACTORS
OUR AUDITORS PREVIOUSLY ISSUED GOING CONCERN OPINIONS ON OUR FINANCIAL
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STATEMENTS.
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In its reports dated March 11, 2006 and April 18, 2005, Chisholm, Bierwolf &
Nilson, LLC, expressed an opinion that there is substantial doubt about our
ability to continue as a going concern based on our history of operating losses
since inception, our lack of operating revenues and our dependence on
third-party financing. Our financial statements do not include any adjustments
that might result from the outcome of that uncertainty. The accompanying
financial statements have been prepared assuming that the Company will continue
as a going concern. In spite of our recent financing activities, and
availability of certain cash resources, our continuation as a going concern will
continue to be dependent upon future events, including third party debt and
equity financing and revenues generated from our acquired royalty assets. If we
are unable to continue as a going concern, investors may lose their entire
investment.
WE HEAVILY DEPEND ON MARK KUCHER.
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The success of the Company depends upon the personal efforts and abilities of
Mark Kucher. Mark Kucher serves as the sole director and the Company's Chief
Executive Officer, pursuant to an employment agreement. Mr. Kucher and the
Company may voluntarily terminate the employment agreement at any time. The loss
of Mr. Kucher could have a material adverse effect on our business, results of
operations or financial condition. In addition, the absence of Mr. Kucher will
force us to seek a replacement who may have less experience or who may not
understand our business as well, or we may not be able to find a suitable
replacement.
WE ARE INVOLVED IN AN INDUSTRY THAT IS INHERENTLY SPECULATIVE AND RISKY.
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Historically, we have been involved in mineral exploration which is subject to
risks related to a substantial or extended decline in prices of mineral
commodities, property acquisition complexities, and restrictive and/or changing
political, social and/or environmental laws and regulations. However, since we
have discontinued all mineral exploration activities, in the future, we expect
to derive a majority of our revenues from royalty interests we hold in the
mining industry. Because of the inherently speculative and risky nature of the
mining industry, our Company could be negatively impacted by many factors in the
mining industry, and specifically the mining companies, mining properties and
ventures upon which we rely to derive our royalty payments. Such factors may
include: political risk in the countries in which the properties are located
from which we derive royalty payments, labor disputes at the mine sites at such
properties, a decline in the price of gold, significant environmental or
regulatory restrictions, insufficient reserves, and natural disasters such as
floods or earthquakes, among other factors, and as a result investors could lose
their entire investment.
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Risks Relating to Our Common Stock
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THE MARKET PRICE OF OUR COMMON STOCK HISTORICALLY HAS BEEN VOLATILE.
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The market price of our common stock historically has fluctuated significantly
based on, but not limited to, such factors as: general stock market trends,
announcements of developments related to our business, actual or anticipated
variations in our operating results, our inability to generate revenues, and
conditions and trends in the mining industry, including the mineral exploration,
development and production segments of such industry.
Our common stock is traded on the over-the-counter Bulletin Board. In recent
years the stock market in general has experienced extreme price fluctuations
that have often been unrelated to the operating performance of the affected
companies. Similarly, the market price of our common stock may fluctuate
significantly based upon factors unrelated or disproportionate to our operating
performance. These market fluctuations, as well as general economic, political
and market conditions, such as recessions or interest rates may adversely affect
the market price of our common stock.
OUR COMMON STOCK IS SUBJECT TO THE "PENNY STOCK" RULES OF THE SECURITIES AND
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EXCHANGE COMMISSION WHICH LIMITS THE TRADING MARKET IN OUR COMMON STOCK, MAKES
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TRANSACTIONS IN OUR COMMON STOCK CUMBERSOME AND MAY REDUCE THE VALUE OF AN
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INVESTMENT IN OUR COMMON STOCK.
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Our common stock is considered a "penny stock" as defined in Rule 3a51-1
promulgated by the Securities and Exchange Commission (the "Commission" or the
"SEC") under the Exchange Act. In general, a security which is not quoted on
NASDAQ or has a market price of less than $5 per share where the issuer does not
have in excess of $2,000,000 in net tangible assets is considered a penny stock.
The Commission's Rule 15g-9 regarding penny stocks impose additional sales
practice requirements on broker-dealers who sell such securities to persons
other than established customers and accredited investors (generally persons
with net worth in excess of $1,000,000 or an annual income exceeding $200,000 or
$300,000 jointly with their spouse). For transactions covered by the rules, the
broker-dealer must make a special suitability determination for the purchaser
and receive the purchaser's written agreement to the transaction prior to the
sale. Thus, the rules affect the ability of broker-dealers to sell our common
stock should they wish to do so because of the adverse effect that the rules
have upon liquidity of penny stocks. Unless the transaction is exempt under the
rules, under the Securities Enforcement Remedies and Penny Stock Reform Act of
1990, broker-dealers effecting customer transactions in penny stocks are
required to provide their customers with (i) a risk disclosure document; (ii)
disclosure of current bid and ask quotations if any; (iii) disclosure of the
compensation of the broker-dealer and its sales personnel in the transaction;
and (iv) monthly account statements showing the market value of each penny stock
held in the customer's account. As a result of the penny stock rules the market
liquidity for our common stock may be adversely affected by limiting the ability
of broker-dealers to sell our common stock and the ability of purchasers to
resell our common stock.
In addition, various state securities laws impose restrictions on transferring
"penny stocks" and as a result, investors in our common stock may have their
ability to sell their shares of the common stock impaired.
23
THE COMPANY HAS NOT PAID ANY CASH DIVIDENDS.
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The Company has paid no cash dividends on its common stock to date and it is not
anticipated that any cash dividends will be paid to holders of the Company's
common stock in the foreseeable future. While the Company's dividend policy will
be based on the operating results and capital needs of the business, it is
anticipated that any earnings will be retained to finance the future expansion
of the Company.
CRITICAL ACCOUNTING ESTIMATES
Our discussion and analysis of our financial condition and results of operations
is based upon our financial statements, which have been prepared in accordance
with accounting principals generally accepted in the United States. The
preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues (if
any) and expenses, and related disclosure of any contingent assets and
liabilities. On an on-going basis, we evaluate our estimates. We base our
estimates on various assumptions that we believe to be reasonable under the
circumstances, the results of which form the basis for making judgments about
carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions.
We estimated the financing fees related to the issuance of warrants and options
to purchase our common stock using a lattice pricing model using various
volatility assumptions.
ITEM 3. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. Our Chief Executive
Officer and Chief Financial Officer, after evaluating the effectiveness of the
Company's "disclosure controls and procedures" (as defined in the Securities
Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) as of the end of the period
covered by this quarterly report (the "Evaluation Date"), have concluded that,
as of the Evaluation Date, our disclosure controls and procedures are adequately
designed to ensure that material information required to be disclosed by the
Company in the reports that it files or submits under the Exchange Act of 1934
is recorded, processed, summarized and reported, within the time periods
specified in the Commission's rules and forms.
(b) There were no changes in our internal control over financial reporting
during our most recent fiscal quarter that materially affected, or were
reasonably likely to materially affect, our internal control over financial
reporting.
24
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not a party to, and its property is not the subject of, any
pending legal proceeding.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following issuances of stock, warrants, debentures and other equity
securities were made without any public solicitation to a limited number of
investors or related individuals or entities in separately negotiated
transactions. Each investor represented to us that the securities were being
acquired for investment purposes only and not with an intention to resell or
distribute such securities. Each of the individuals or entities had access to
information about our business and financial condition and was deemed capable of
protecting their own interests. The stock, warrants and other securities were
issued pursuant to the private placement exemption provided by Section 4(2) or
Section 4(6) of the Securities Act. These are deemed to be "restricted
securities" as defined in Rule 144 under the Securities Act and the debenture,
warrant or stock certificates bear a legend limiting the resale thereof.
During the current quarter ended June 30, 2006 we issued the following
securities pursuant to exemptions from registration under the Securities Act:
On April 26, 2006 the Company issued 11,669,353 shares of common stock at $0.31
per share to accredited investors in a private placement offering. Total
proceeds received in the private placement were $3,439,119 net of fees of
$178,380. Each share has an attached warrant exercisable into one share of
common stock at $0.31 per share expiring on April 12, 2011.
On April 26, 2006 the Company issued 2,512,096 shares of common stock at $0.39
per share to the CEO for total consideration of $979,717 related to previously
accrued salary, operating payables, and bonuses related to the acquisition of
the royalty interests in mineral properties. Each share has an attached warrant
exercisable into one share of common stock at $0.31 per share expiring on April
12, 2011.
On April 26, 2006 the Company issued 500,000 shares of common stock at $0.39 per
share to its CFO (previously in a consulting role) for total consideration of
$195,000 in accordance with the terms of a consulting agreement. Each share has
an attached warrant exercisable into one share of common stock at $0.31 per
share expiring on April 12, 2011.
On April 26, 2006 the Company issued 1,935,000 shares of common stock at $0.31
per share to Macquarie Bank Limited for total consideration of $599,850 related
to the payment of loan origination fees incurred during the quarter ended June
30, 2006.
On April 26, 2006 the Company issued 12,000,000 shares of common stock at $0.39
for total consideration of $4,680,000 related to the purchase of royalty
interests in mineral properties from IAMGOLD.
The net proceeds to the Company from the April 26, 2006 transactions were
$3,439,119. The Company did not use any underwriter in connection with these
transactions, and there were no underwriting discounts or commissions. Legal
fees and expenses related to the transactions totaled $178,380. The net proceeds
were used for purchase of royalty assets and working capital, in furtherance of
our business and operations.
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ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
Exhibit No. Description
31.1* Certificate of the Chief Executive Officer pursuant
Section 302 of the Sarbanes-Oxley Act of 2002
31.2* Certificate of the Chief Financial Officer pursuant
Section 302 of the Sarbanes-Oxley Act of 2002
32.1* Certificate of the Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
32.2* Certificate of the Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
* Filed Herein.
b) Reports on Form 8-K
During the quarter for which this report is filed, the Company a filed
report on Form 8-K on April 12 and April 27, 2006.
Subsequent to the close of the quarter for which this report is filed,
the Company filed an additional report on Form 8-K on July 21, 2006.
26
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934,
the Registrant has caused this report to be signed on its behalf by the
undersigned officers, thereunto duly authorized.
DATED: August 14, 2006 BATTLE MOUNTAIN GOLD EXPLORATION CORP.
By: /s/ Mark Kucher
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Mark Kucher,
Chief Executive Officer
By: /s/ David Atkinson
----------------------
David Atkinson
Chief Financial Officer
27