UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
AMENDMENT 1
TO
FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
OF SMALL BUSINESS ISSUERS
UNDER SECTION 12(B) OR (G) OF THE SECURITIES EXCHANGE ACT OF 1934
Spirit Exploration, Inc.
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(Name of Small Business Issuer in its charter)
Nevada 20-8002426
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(State or other jurisdiction of (I. R. S. Employer Identification No.)
incorporation or organization)
7305 Calle Sagrada, Bakersfield, California 93309
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number (250) 384-2077
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Securities to be registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which
to be so registered each class is to be registered
None N/A
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Securities to be registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 par value
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(Title of Class)
1
TABLE OF CONTENTS
PART I
Item 1. Description of Business. ..............................................3
Item 1A. Risk Factors. .......................................................32
Item 2. Financial Information. ................................................9
Item 3. Description of Property. .............................................46
Item 4. Security Ownership of Certain Beneficial Owners and Management. ......47
Item 5. Directors and Executive Officers, Promoters and Control Persons. .....49
Item 6. Executive Compensation. ..............................................51
Item 7. Certain Relationships and Related Transactions and
Director Independence. ...............................................60
Item 8. Legal Proceedings. ...................................................61
Item 9. Market Price of and Dividends on the Registrant's
Common Equity and Related Stockholder Matters. .......................62
Item 10. Recent Sales of Unregistered Securities. ............................64
Item 11. Description of Securities. ..........................................67
Item 12. Indemnification of Directors and Officers. ..........................69
Item 13. Financial Statements. ..............................................70
Item 14. Changes in and Disagreements with Accountants. ......................71
Item 15. Financial Statements and Exhibits. ..................................72
2
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
A. BUSINESS DEVELOPMENT.
Spirit Exploration, Inc. (an exploration stage company) (the "Company"), through
its 99% owned subsidiary ECUADORGOLDCORP, S.A. ("Ecuadorgold"), is a natural
resource exploration company with an objective of acquiring, exploring and if
warranted and feasible, developing natural resource properties. Activities
during the exploration stage include developing the business plan, raising
capital, and acquiring properties in Ecuador which have mining concessions
granted by the Ecuadorean government.
Spirit Exploration, Inc. was incorporated on March 10, 1970 in the state of
Utah, and reincorporated in the state of Nevada on March 24, 1998. In 2006 the
name was changed to Spirit Exploration, Inc. The Company currently trades on
the "pink sheets" under the symbol "SPXP.PK".
History of the Company
The Company was originally incorporated on March 10, 1970 for the purpose of
raising capital to develop and possibly put into production certain oil and
mineral deposits. The Company was unable to raise development money and the
Company's operations ceased and the mineral deposits were abandoned. On June 4,
1997 the Company acquired Krystar International Ltd. (Krystar) in exchange for
6,000,000 shares of common stock. Krystar had proprietary ownership of a
technology that transported minerals using Boundary Air/Laminar Flow Technology.
On September 24, 1997, the Board of Directors of the Company discontinued the
operations of Krystar and the 6,000,000 shares of common stock were cancelled.
On June 23, 1997, the Company acquired all of the outstanding shares of Chow's
Consulting Corporation for 90,000 common shares of its common stock. The only
asset of Chow's was a mining claim that has since been deemed worthless and
Chow's was dissolved.
On October 14, 1997 the Company changed its name from Dynasty Oil and Minerals
Corporation to Global Telephone Communication, Inc. The Company's focus at that
time was to seek and develop opportunities in the IT (Information Technology),
telecommunications, and Internet industries. On March 24, 1998, the Company
reincorporated in Nevada by merging into Global Telephone Communication, Inc., a
newly formed Nevada corporation.
Prior to approximately January 1, 2003, the Company as Global Telephone
Communication, Inc. was an operating company with its common shares listed for
trading on the OTCBB market. The company failed to remain current on its SEC
filing requirements and as a result was demoted to the Pink Sheets. The Company
has not filed any periodic reports since the report filed for the quarter ended
September 30, 2002. Subsequently, the Company ceased all business operations
and has been
3
dormant since approximately January 1, 2003. During the same period, all the
Company's officers and directors ceased acting on behalf of the Company and
abandoned their obligations to the Company and its shareholders. As a result,
the Company was considered to be dormant from approximately January 1, 2003 to
December 31, 2005.
In early 2006, after discussions with the Company, current management took
control and restructured the Company to make it viable for undertaking the
current mineral exploration business of the Company. The two company officers
invested approximately $66,667 for 16,000,000 shares of the Company's common
stock in a private transaction, made other loans to the Company (as more fully
reflected below), and began the Company's current business plan.
Since January 1, 2006, the Company is in the exploration stage and has commenced
its current business plan. The Company formed and is the 99% owner of
ECUADORGOLDCORP, S.A., an Ecuadorean corporation which is the operating
subsidiary of the Corporation. ECUADORGOLDCORP, S.A. is the entity undertaking
the Company's operations in Ecuador. The Company's common shares are currently
listed for trading on the Pink Sheets under the symbol SPXP.PK.
B. FINANCIAL INFORMATION ABOUT SEGMENTS
As defined by generally accepted accounting principles ("GAAP"), Spirit does not
have any segments separate and apart from its business as a whole. Accordingly,
there are no measures of revenue from external customers, profit and loss, or
total assets aside from what is reported in the Financial Statements attached to
this Form 10.
C. BUSINESS OF THE COMPANY
SUMMARY
Spirit Exploration, Inc., a Nevada Corporation, is an early production mineral
exploration company. Through our subsidiary ECUADORGOLDCORP, of which we own
99%, we are in the business of acquiring, exploring and developing mineral
(gold, silver, copper) concessions in Ecuador. We conduct our operations
through our relationship with Minera Pacifico Noroeste, S.A. ("Pacifico"), as
more fully described below.
Although we currently do not have proven reserves, we are currently in the
process of bringing several of our mineral properties into production. We have
acquired, and we have options to acquire, a diverse range of mineral and
exploration properties in Ecuador.
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SPIRIT'S BUSINESS STRATEGY
Our primary business strategies are as follows:
- - To acquire existing mining concessions and processing facilities that can
be upgraded inexpensively and produce significant cash flow quickly;
- - To establish strong in country ties and partnerships to get an inside track
on new acquisitions;
- - To structure acquisitions to minimize upfront cash payments thereby
maximizing exploration funds; we have negotiated favorable acquisition
terms that allow us to preserve cash and fully test our optioned
properties;
- - To establish a large strategic land position in the major gold camps of
Southern Ecuador: near Aurelian's Del Norte Discovery, Nambija and
Portovelo. To cost effectively conduct mineral exploration by joint
venturing which allows us to advance these properties with little of our
own capital while still participating in the upside; and
- - To build strong local relations and take advantage of local knowledge and
cost effective local mining and administrative talent.
OUR OPERATOR
Effective April 21, 2007 the Company entered into an Assignment and Operating
Agreement (the "Operating Agreement") with Minera Pacifico Noroeste, S.A.
("Pacifico"), pursuant to which the Company acquired certain assets relating to
mining concessions and interests and related obligations including the Muluncay
Project, the Maria Olivia Project and the Kylee concession, all subject to
certain mortgages and obligations. Under the terms of the Agreement with
Pacifico, the Company through its subsidiary ECUADORGOLDCORP., S.A. acquired a
100 % interest in certain actual operating mines and related mineral exploration
assets as more fully described below. The purchase consideration for the
interest consisted of 15,000,000 restricted common shares.
Under the Operating Agreement, Pacifico undertakes the actual exploration,
exploitation, mining and all other operations of the mineral properties and
eventually operating mines on our behalf. Pacifico will remain the operator on
all properties of the Company in Ecuador in consideration for (i) reimbursement
of all expenses incurred on the projects at cost plus 10%, (ii) fee of the lower
of 10% of the net revenues or $10,000 per month, (iii) $10,000 per month for the
first twelve months, which is deferred until the earlier of April 11, 2008 or
funding of the Company through a substantial outside equity or debt investment
sufficient to provide adequate working capital and (iv) a 3% Net Smelter Return
Royalty for 30 years or the life of the property. In the event of any material
default on the Operating Agreement, we may immediately terminate the
5
Agreement. Upon any such termination, the fees and expenses, including without
limitation the Net Smelter Return Royalty, are immediately terminated and
neither party would have any further rights or obligations with respect to the
other.
As part of the Operating Agreement, the Company also agreed to obtain
capitalization and funding required for the operation of the properties,
including without limitation development, exploration and mining operations for
the properties. Such funding is pursuant to mutually agreed upon budgets
between the Company and Pacifico. The amounts which we believe are required
for such funding to properly undertake full production on the properties are
more specifically described below with respect to each of the properties.
MINERAL RESOURCES
Spirit has finalized the acquisition of three mineral properties which were
already in production and a flotation processing plant in Southern Ecuador - the
"Muluncay Project." The initial acquisitions included three properties from
which Spirit began producing gold immediately. We were in production for about
a month with these three properties when we determined that the facility had to
be upgraded to increase production and make it more efficient. The Company is
almost finished the upgrade and will start producing gold again from these
properties in March 2008. Initial revenue from the production of these mines
will be reflected in our financial statements for the quarter ended December 31,
2007.
This area has historically yielded in excess of 4.5 million oz. of gold from
epithermal gold/silver vein systems. Spirit's total holding encompasses
approximately 2,100 hectares. Spirit has also acquired another concession - the
"Maria Olivia Project" - in the same region. Both the Muluncay Project and the
Maria Olivia Project are open to depth and we believe could yield substantial
reserves.
We plan on building our reserve base with an extensive underground drilling
program. Spirit Exploration has acquired and has options to acquire other
mineral production and exploration properties as referenced more fully below in
Ecuador totaling in excess of 80,000 hectares. These optioned properties
include Fierro Urco I, Fierro Urco II and Campo de Oro.
The Muluncay Project
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The Muluncay Project is the Company's principle concession where most of our
resources will initially be allocated.
There is an old adage in the mining business: look for new deposits near old
deposits. This is why the Company has entered into the mineral exploration and
eventually mining business in Ecuador and more particularly in the Portovelo
area. Within El Oro Province the Portovelo-Zaruma-Muluncay mining camp has
conservatively produced in excess of 4.5 million ounces of gold since 1905.
6
We have finalized the acquisition of three mineral properties and a flotation
processing plant in Southern Ecuador - the Muluncay Project. These acquisitions
provided us with three properties from which have already produced gold
(although these mines are currently being upgraded and will recommence
production in February or March 2008). While we have already produced
concentrate, it became apparent that an upgrade to our processing capacity was
necessary to take advantage of the tremendous opportunity presented at Muluncay.
These operating mines and processing plant are presently being upgraded.
We have begun the modernization of our mining methods (formerly pick and shovel)
and have slashed the mine out to an eight by eight tunnel to install water,
electricity and air to be able to employ pneumatic equipment for efficiency and
higher production.
Traditional mining techniques, like the historic operations at Muluncay,
accessed gold veins by developing small narrow drifts into the hill side where
small scale low volume mining would yield a few tons of ore a day. This type of
traditional mining was essentially done by local miners using a shovel and pick
to extract the ore and a man carrying an burlap bag or small rubber tired ore
car to move the ore to the surface. The basic mining technique used by Pacifico
and ECUADORGOLD is to make the tunnels larger so more ore can be accessed and
extracted. We do this by slashing the main access tunnel to a size of 3 meters
by 3 meters. This gives enough space to lay rail for 2 ton ore cars and the use
of electric underground locomotives. We also add electrical and air lines to
provide power for lighting and pneumatic drilling equipment. These additions
can increase ore production from below 10 tons a day to well over 50 tons a day.
Traditional processing of ore by the local miners is with an old technique using
a "Chilean" mill crushing units that crushes the ore by rolling steel wheels
inside a cylinder. This technique takes considerable time to crush a small
amount: normally less than 12 tons of ore in 24 hours. The typical chemical
process to extract the minerals from the ore is also inefficient and can be are
very hazardous to the people handling it and the environment.
The modernization techniques consist of modern crushing equipment that uses
primary and secondary crushing systems to maximize processing size and time.
One high output crusher can process over 100 tons per day. We will use a
flotation tank system to process the ore into concentrate that can be sold.
This technique provides for a controlled system that limits the use of hazardous
chemicals while maximizing productivity of mineral removal and environmental
protection. Daily tonnage is a function of ore removed from the mine and
equipment added to process the daily production load.
7
Description and Location
The Muluncay concession in Ecuador, as well as the other concessions of the
Company, are reflected in the map set forth immediately below:
[Ecuador Area Map is omitted here, but included in the pdf version]
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The Muluncay Project is situated about 109 miles southeast and 37 miles east of
the major Pacific port cities of Guayaquil and Machala, respectively. It lies
on the western slope of the Andes Mountains, part of the Western Cordillera
which runs the length of the west coast of North and South America.
A more detailed map of the location of the Company's properties in the Muluncay
Project is set forth immediately below. The Muluncay concession lies in the
centre of the Portovelo-Zaruma mining camp, which is found in the cantons of
Ayapamba and Paccha, Province of El Oro, southern Ecuador. It is centered at
Latitude 03 36' 30" South and Longitude 79 40' West. It covers an area of 374
hectares. This map also shows the Company's Maria Olivia concession referenced
below
[Detailed Muluncay Map is omitted here, but included in the pdf version]
9
The Muluncay Concession was originally granted by the Republic of Ecuador in May
2001 to the Asociacion de Mineras Muluncay, which under Ecuadorean mining law is
essentially a mining "condominium" project, which was then subdivided into
numerous individual claims held by individual owners. All mining concessions in
Ecuador are undertaken through thirty year national ("federal") grants through
the Ecuadorean Energy and Mining Office and upon grant include the rights to
prospect, explore, develop, mine, reduce, smelt, refine and sell the different
mineral ores found and mined in the area.. See "Ecuadorean Mining Law published
May 31st 1991 and modified on August 18, 2000." Under Ecuadorean law, these
rights are transferred with the underlying mining concession and remain
perfected so long as certain reports and fees are properly paid.
Pacifico initially acquired the workings contained by the Aguacate mining
concession from Sr. Manuel Lopez of Muluncay. Pacifico also acquired the
workings contained in the Buena Esperanza mining concession, the Naranjitos
mining concession, the de la Divina Justricia mining concession, the La Chonta
mining concession and the Los Quindes mining concession from Sr. Angel Avila
Cordova. Pacifico acquired the workings contained in the Las Canas mining
concession from Sr. Maximo Asanza. All of these acquisitions were pursuant to
concession assignments from these owners to Pacifico which were then registered
with the mining office in Zaruma, Oro Province in Ecuador. As part of the
Operating Agreement with Pacifico, Pacifico agreed to assign these concessions
to ECUADORGOLDCORP. This was accomplished by an Assignment and Assumption
Agreement between Pacifico and ECUADORGOLDCORP effective December 19, 2007.
These mining concessions are located within the centre of the Muluncay
concession. Certain of these locations are set forth in the map beginning on
the next page. The total area of the Company's Muluncay property block is
approximately 374 hectares. The mine which is in actual operation at this time
is the Buena Esperanza mine.
In order to maintain operation of these properties under Ecuadorean law, we are
required to provide certain reports to the Ecuadorean Energy and Mining Office
and also complete certain environmental reports and meet certain environmental
obligations. All concession owners are required to pay concession patent fees
to the Ecuadorean Federal Office of Energy and Mining on or before March 31 of
each calendar year. These reports and fees are all current for all of the
mineral properties undertaken by the Company as of the date hereof.
We are also required to finalize and pay the original mortgages with the
original landowners at the time we receive sufficient corporate financing. We
intend to pay all of these mortgages from the debt and equity financing which
closed on January 25, 2008.
10
[Mina El Aguacate Map omitted here, but included in the pdf version]
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Boundary co-ordinates for the Muluncay Project are found in Table immediately
below. These are based on a metric UTM grid system referenced to PSAD-56 datum
and geographic zone 17.
Muluncay Boundary Coordinates
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EASTING - M NORTHING - M
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652000 9599400
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653100 9599400
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653100 9596800
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651600 9596800
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651600 9599000
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652000 9599000
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652000 9599400
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Accessibility, Climate, Physiography, Local Resources and Infrastructure
Access to the district from the cities of Quayaquil and Quito in the north to
the city of Machala, traveling south on the Pan American highway, is a paved two
lane road in good condition. Quito and Quayaquil are accessed by international
airports. It is approximately a two hour drive from the coastal city of Machala
to the town of Portovelo, at the confluence of the Rio Amarillo and Rio Calera.
From within the district access to most of the properties, including the
Muluncay concession, is by secondary one to two lane paved roads which often
continue to specific sites by tertiary single lane gravel roads, usually though
not always in good enough condition for two wheel drive vehicles. Access to
these sites from Portovelo takes approximately 30 minutes
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The climate is subtropical and humid with temperatures ranging from 64 to 86 F.
Yearly rainfall averages 52 inches, with heaviest rainfalls occurring in the
months from January to June.
[Photograph of the area omitted here, but included in the pdf version]
Within the district, hill slopes are moderately steep to very steep with
elevations ranging from the 3100 to 5400 feet above sea level. The
Portovelo-Zaruma-Ayapamba district is traditionally an underground mining camp.
Those areas not disturbed by mining activity are used for farmlands, grazing and
local minor secondary forestry. Any early stages of surface exploration work
carried out by the Company will involve minimal disruption to current surface
activities. Underground exploration, including additional drifting, sampling,
mapping and possible drilling should have even less of an effect than the
surface work.
Typical Topography and Vegetation, area of Muluncay Concession
The population within the project area is approximately 50,000. Zaruma, with a
population of 29,000, and Portovelo, with a population of 14,000 make up the
majority, but there are numerous small villages of a few hundred people each
(e.g. Ayapamba, Muluncay). The population has extensive experience in the
recognition and mining of narrow vein high-grade gold deposits, making them a
valuable asset for future exploration, development and production throughout the
entire region. Hotels, food and material supplies, communication resources,
public security and government institution representatives are all available
locally, and in Pin s, approximately a 12 mile distance to the west.
High-tension power lines providing electricity are connected to both Zaruma and
Portovelo. Cell phone use in this area allows communication with major centers
in the country. The Rio Amarillo and Rio Calera rivers are able to supply
adequate water for large scale mining operations throughout the year.
History
The hills of Portovelo, Zaruma and Ayapamba have been mined for gold and silver
for centuries. The Incas were already extracting gold and silver in the area
with hydraulic mining of the oxidized parts of veins when Mercadillo, one of
Pizzarro s force, followed the Rio Amarillo upstream, encountered the Inca mine
and founded the town of Zaruma in 1549 (Holly and Maynard, 2006).
Exploitation of the Zaruma and Portovelo districts continued during the time of
Spanish colonization until 1870 when an Ecuadorean-Chilean mining company was
established. Operational rights were immediately acquired by Southern American
Development Company (SADCO), a subsidiary of a major American mining company.
SADCO operated the mines from 1897 to 1950 by gaining control of the district's
main gold
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deposits in 1897. The most extensively mined of these workings was the Grand
Shaft on the Casa Negra concession, on the eastern edge of the town of
Portovelo. Exploration programs of SADCO commenced in 1896 and brought the
Grand Mine into production at 108 tons a day in 1905. The mine was subsequently
deepened to 13 levels, 2,600 feet below the uppermost workings.
In the 53 years that followed, SADCO recovered some 3.5 million ounces of gold
and 12 million ounces of silver from 7.6 million tons of ore at a cut-off grade
of 14.6 g/T Au and 48.9 g/T Ag. The lower levels of the Grand Mine were flooded
in 1944, and facing increasing costs, taxes and a complicated political
situation, SADCO withdrew from Ecuador in 1950. A state-owned company, CIMA,
took over the mining operations in the area until 1980, and it is estimated to
have produced a further 375,000 ounces of gold by 1965.
In 1984, thousands of poverty-stricken miners invaded the old SADCO pits and
small-scale and artisanal mining has been going on in the area ever since. An
additional 35,000 to 50,000 ounces of gold has been produced each year since
then by informal miners, small-scale operating mining societies and family-owned
operations. Statistical information from the 1990 s reported that mining from
the Zaruma and Portovelo areas totaled 3 million tons.
In the mid-1990s several overseas companies attempted to consolidate the area
and carried out systematic exploration programs. From 1995 to 1996 TVX
Corporation, a Canadian exploration company, conducted underground and surface
mapping. After TVX Corp. withdrew from Ecuador in 1998 all information was
acquired by IAMGOLD. IAMGOLD continued with more extensive exploration programs
including surface trenching, surface and underground sampling, surveying,
diamond drilling and geological modelling.
Geological Setting of the Region
Regional geology of the southern part of Ecuador consists of basement rocks of
the Triassic age Tahuin Series. These include San Roque Formation medium- to
high-grade gneisses, schists and amphibolites overlain by a thick sequence of
Capiro Formation low-grade mica schists, phyllites and quartzites, with a minor
component of interfingering volcanic rocks.
This metamorphic basement is unconformably overlain by a thick sequence of Lower
Cretaceous age Celica Formation, massive homogeneous volcanic lavas and tuffs.
These are of andesite composition and are intercalated with minor sedimentary
layers. The Celica Formation is intruded by small plutons of diorite to
granodiorite composition, also Lower Cretaceous in age. This entire mass has
been interpreted as a continental volcanic arc. All of these units are capped
unconformably by Tertiary (Oligocene age) Saraguro Formation felsic volcanic
lavas and pyroclastics, and by later Miocene age Chincillo Formation (currently
referenced as Pisayambo Formation) rhyolite flows and pyroclastic.
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There are two major regional faults. These are the Pin s Fault and the Puente
Busa -Palestina Fault. These faults have produced three tectonic blocks which
have exposed bedrock to different depths. Between these two faults exposure
consists of Celica Formation mafic to intermediate volcanics. Within the Celica
Formation is a thick series of andesitic lavas termed the Portovelo Series which
occurs along a central N-S trending axis. These lavas act as host rocks to most
of the vein systems in the Portovelo-Zaruma-Ayapamba region.
Recent mapping has shown that the Celica Formation is unconformably overlain by
two hydrothermally altered volcanic series, and is crosscut by their subvolcanic
feeder systems. These volcanics are composed of intermediate pyroclastics and
breccias, crosscut by younger small rhyolite stocks, dykes and sills. These
rhyolitic rocks are concentrated along two NW trends in the central mountain
ranges (Zaruma-Urca and Santa Barbara) and are due to resistant weathering
caused by regional silicification. Most of the district vein-cavity fillings,
including base- and precious metals mineralization, are closely associated with
this volcanic activity.
Significant structures in the district include NW, NE and N-S trending high- and
low-angle faults and circular structures. The N-S trending veins, dipping
generally 70 to 90 NE, are the dominant, though not the only, structures for
hosting gold, silver, lead, zinc and copper mineralization in the district.
They are bound to the SW by the NW-trending Pinas Fault. The Puente Busa
- -Palestina Fault lies directly NE of the centre of the district and does not
interfere with the continuity of either faults, veins or mineralization beyond
it to the NE.
Concentric district-size zones of propylitic, argillic, silicic and sericitic
alteration cover the region and represent the collapse of a Miocene age volcano
and the formation of a caldera. Supergene enrichment of gold mineralization is
recognized in certain areas by the presence of strong patches of argillic
alteration. Silicification represents the core of this alteration "aureole".
Silicification formed in two stages. One type, associated with most of the
gold-silver-base metals mineralization, is related to the Portovelo-Zaruma axis.
The second type is found in the Santa Barbara Mountain and is associated with
rhyolite dykes and plugs, and with intense argillic alteration. A third type of
silicification is found as wallrock alteration haloes of
quartz-chlorite-sericite-adularia-calcite-(pyrite).
Geological Setting of the Muluncay Concession
Bedrock underlying the Muluncay concession consists of Lower Cretaceous age
Celica Formation massive volcanic lavas of andesitic composition. Within these
host rocks is a series of sub-parallel structures. These local area structures
encompass both those veins found within the Muluncay concession, such as Jen and
Cristina. This system of veins is the northern continuation of the large system
of veins (e.g. Abundancia, Portovelo) which have been so vigorously mined in the
area for the last 400 years.
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Deposit Types
Gold mineralization within the district is considered to be a low- to
intermediate sulphidation stage epithermal to upper mesothermal
gold-silver-lead-zinc-copper system. Typically this type of mineralizing system
includes pyrite-pyrrhotite-arsenopyrite and high-Fe sphalerite. Gangue minerals
vary from vein through stockwork to disseminated forms. Gold is typically
associated with quartz-adularia calcite sericite. This contrasts with
high-sulphidation types which typically contain
gold-pyrite-enargite-luzonite-covellite hosted by a leached residual core, with
quartz-alunite, kaolin, pyrophyllite or diaspore.
A subset of the low-sulphidation stage assemblage contains pyrite-tetrahedrite/
tennantite-chalcopyrite and low-Fe sphalerite. This subset is also silver and
base metal rich compared to low-sulphidation end members. Base metals within
the Muluncay veins, as well as within much of the district, mineralization may
be an indicator for this intermediate assemblage. It could also indicate
(especially the presence of significant galena -(lead)) that the system has
reached upper mesothermal depths.
Mineralization in the Region
The gold bearing north-south trending sub-parallel systems of quartz veins
occurring within the Portovelo-Zaruma district are found exclusively within the
Cretaceous altered andesitic rocks (Portovelo Series). Spatially the
mineralization is arranged in three zones. In Zone 1 pyritization with little
gold is seen in stockwork, shattering and brecciation around the Santa Barbara
and Zaruma Mountains. Zone 2 contains gold-bearing quartz and quartz-adularia
veins with abundant sulphides and is found in the Portovelo-Zaruma axis and NE
of the Santa Barbara Mountains.
A large aureole of gold-bearing quartz-calcite and quartz-chlorite, with
abundant sulphosalts and minor sulphides, representing Zone 3, surrounds the
core of sulphide mineralization. Muluncay lies within the NNW continuation of
this Zone 2 type of mineralization. Based on the presence of adularia-sericite,
the vein textures, the abundance of sulphides and calcite, the mineralization is
considered to be part of an adularia-sericite low- to intermediate sulphidation
epithermal gold system.
The quartz veins are predominately fault and fracture filling structures
exhibiting pinch and swell, branching, composite banding, braided and loop
features.
Regionally these mineralized veins extend horizontally for at least nine miles
(the Portovelo-Zaruma-Ayapamba region), and have known depths of at least 4,900
feet (from local height of land to known depth of the Casa Negra Concession
SADCO Grand Mine). Past-producing veins in the district range from 23 inches to
26 feet, with an average width of approximately four feet. "Stringers" and
narrow veins, as well as silicified wallrock, are virtually untested for their
gold potential. As is typical in a standard epithermal gold system, there are
some zones of "bonanza-type" high-grade gold mineralization (locally termed
"clavos") in the 30 to 200 g/ton range. Clavos of this
16
grade were reported by the owner on the Muluncay concession on one of the major
veins (Cristina or Jen).
Most of the known gold is free-milling. Other mineralization includes silver (as
electrum, sulphosalts and with galena) and copper-lead-zinc sulphides
(chalcopyrite-galena-sphalerite). The dominant north-south strike of the gold
bearing quartz veins shows local variations in the proximity of cross faults. To
the south of Rio Amarillo, the veins swing in a south-east direction,
sub-parallel to the Pinas-Portovelo fault.
Three main types of gold bearing veins are present in the district. These are:
1) Quartz veins with disseminated pyrite, minor chlorite as streaks, bands and
patches, and 2) Quartz veins with abundant pyrite and subordinate chalcopyrite,
galena and sphalerite occurring as bands, patches and coarse disseminations, and
3) Carbonate veins with coarse calcite and calcite-quartz gangue occasionally
with coarse galena, sphalerite and chlorite beside ubiquitous pyrite. Visible
gold is not a common occurrence within the Portovelo-Zaruma-Ayapamba district.
As a general rule, gold occurs as fine particles, often less than 100 mesh in
size. According to microscopic studies carried out in the past, gold locally
replaces sphalerite. Locally, gold mineralization is present in the wall rock
following north-east trending faults and fractures.
Post mineralization faulting along north-west striking cross faults has locally
caused displacements of up to 130 feet in several gold bearing structures.
Local detailed mapping and drilling is required to trace the continuity of this
mineralization.
Mineralization in the Muluncay Concession
Veins within the Muluncay concession include Jen and Cristina. Other veins
exist parallel to these two main structures but are not presently developed.
The mineralization in the concession area ranges from a gold:silver ratio of
1:10 near surface to 1:15 at depth. Veins range up to 4,900 feet in strike
length, and mines in the immediate area range from 5,400 feet above surface
level to 3,100 feet above surface level, giving a known depth of mineralization
of at least 2,300 feet. Vein widths range from 1.3 feet to 4.5 feet and are
steeply dipping (70 to 90 ) to the northeast.
The Jen and Cristina veins consisted of milky quartz, being hard but brittle,
and containing chalcopyrite (copper), sphalerite (zinc) and galena (lead)
sulphide minerals. This mineralization is similar to that found in the
Portovelo-Zaruma area, where it is quite common. The principal mineral
accompanying the gold is pyrite (FeS2), but other minerals include safflorite
(CoAs2), proustite (Ag3AsS3), tetrahedrite (Cu3SbS3-4), freibergite
((CuAg2ZnFe)3Sb2S6) and minor Au-Pb telluride minerals. These are indicative of
a low-temperature near-surface environment.
17
Exploration - Historical
Systematic exploration activity closely related to mining advance was carried
out by SADCO from 1897 to 1950. However, only limited information is available
from that period.
Modern exploration activity within the Zaruma - Portovelo Mining District begun
in 1995 when a one-year property area consolidation and district-scale
exploration was made by TVX Gold Corporation, a Canadian-based company. During
this period, over 25 miles of underground workings were surveyed and mapped on a
1:500 scale. Total amount of underground samples collected by TVX is estimated
to be over 4,000. IAMGOLD reported 733 samples although many of these were from
older maps and reports. Following TVX s withdrawal from Ecuador in 1998, all
information was acquired by IAMGOLD who continued exploration. This work
included surface trenching, surface and underground sampling, surveying and
diamond drilling and geological modeling. IAMGOLD databases contained the
following:
- - 680 surface rocks channel and chip samples
- - 2,126 underground channel samples
- - 5,415 soil samples
- - 37 diamond drill hole results including sample assay results
- - 1,114 DDH core samples
- - 2,591 topographical control points survey
- - 39 stream sediments samples
- - 369 channel samples form surface trenching
The Aguacate Mine has been mapped by previous owners. Unfortunately, this map
is presently unavailable.
Exploration - Current
Current exploration initially involved a site visit by a consulting geologist on
behalf of the Company to the Muluncay concession. The geologist visited three
separate mineral properties within the concession. These included Fatima, Nueva
Esperanza 1 and Aguacate. Numerous other workings are present within the
concession but have not yet been investigated. Several samples of vein material
were taken by the geologist from the various workings. Assay results are shown
in the Table on the next page:
18
Assays from Independent Sampling, Mina Aguacate, September 2006
---------------------------------------------------------------
Au Ag Cu Pb Zn
Sample g/T g/T % % %
------ ----- ---- ------ ------ -----
483051 0.013 0.70 0.053 0.001 0.02
------ ----- ---- ------ ------ -----
483052 0.015 7.0 0.089 0.02 0.02
------ ----- ---- ------ ------ -----
483053 0.361 16.5 0.26 0.009 0.06
------ ----- ---- ------ ------ -----
483054 2.76 37.1 0.85 0.03 0.19
------ ----- ---- ------ ------ -----
483055 6.64 36.4 0.82 0.06 0.15
------ ----- ---- ------ ------ -----
483056 3.25 23.8 0.69 0.03 0.21
------ ----- ---- ------ ------ -----
483057 10.40 27.4 0.30 0.07 0.09
------ ----- ---- ------ ------ -----
C
urrent exploration is conducted daily by underground shift geologist working
with the shift miners for production removal. Samples are taken and tested
through an atomic absorption (AA machine) in laboratory on site and reported to
the mining engineer responsible for production.
Rock samples are collected following blasting and cleanup from each new rock
face. Sampling is by chip sampling across the face of the mineralized zone being
worked. Measurements of width, dip direction and description of the mineralized
zone and host rock are recorded. These samples are taken to an on-site lab. At
that lab the gold and silver content are determined by Fire Assay-Atomic
Absorption method from 30 g pulps. Up to this time no blanks or samples with
known values were added to the total samples delivered to the lab. To this date
no check samples have been submitted to other labs for confirmation of values.
Records of all analyses are stored on site. Pulps and rejects are stored at the
lab for any future analysis.
Commencing in 2007 we have commenced the start of extensive underground
development work. This has included slashing the tunnels to a size of three
meters by three meters, laying down of rail for the rapid movement of two ton
ore cars using electric underground locomotives, and installing a generator and
compressor to provide lighting, and compressed air. These improvements will
increase the rate of extraction of ore from the property.
Our current Muluncay concession operates a series of reconditioned Chilean mills
(crushing facilities) which are used to liberate free-milling gold from the
quartz and sulphide gangue. We recently added Denver flotation cells to prevent
loss of mineral through the sands while waiting for delivery from manufacturers
of equipment not
19
available locally. We have laid foundations and footers and prepared for
installation. The underground tunnel structures are over 4,000 meters, with
newly installed rail, electricity, water, air, two ton ore cars and related
equipment for mining. We put in place a government required kitchen to feed the
workers and a supply warehouse with mining engineer/geologist office. We have
also added an off-site explosive building for security and safety for the daily
needs for the mining captains.
Electricity is supplied by the local grid with diesel generator back up. Water
is supplied by ample ground water.
Due to the low mining production provided by local miners up to this time we
have not calculated a gold ore resource or reserves. Our current underground
surveying, mapping and sampling by Company geologists and engineers is
exploratory in nature and is beginning to develop such reserves.
Near-term exploration will consist of the following. We will map and prospect
the concession surface in detail. We will carry out stream sediment sampling
and lithogeochemical sampling. These surface samples will be analyzed for gold
by Fire Assay, with A.A. or gravimetric finish. Other elements will be tested
for a 35-element suite by Induced Coupled Plasma (ICP-MS) to check for sulphide
content, halo effects, alteration patterns and pathfinder elements such as
mercury and antimony. We will also examine airphoto or similar satellite
imagery to outline structural elements within the area, and to assist in tracing
continuity of known mineralized structures.
Concurrent with this work all current or past underground workings will be
mapped, surveyed and sampled to develop an idea of size and grade of ore blocks.
Sampling will include not only vein material but wallrock to at least a meter on
either side of each vein sample. We intend to take samples approximately every
three meters along the vein. Analysis of these samples will be for gold by Fire
Assay and other elements by ICP-MS.
Using the underground sampling data an underground diamond drill program will be
conducted to show continuity of known mineralized veins and to discover new
mineralized veins, stringer zones and disseminations. Underground drilling is
considered more economical for short term information and will most likely
produce a more detailed estimate of grade and tonnage for the current mine
workings and for the concession. Further work is dependent on the results of
this program.
Developing a larger reserve estimate for longer term production would include
surface diamond drilling, which we anticipate undertaken subsequent to the other
exploration activities described above.
Mineral Processing and Metallurgical Testing
The current artisanal miners of the various mining operations within the
Muluncay concession operate a series of Chilean mills (crushing facilities)
which are used to
20
liberate free-milling gold from the quartz and sulphide gangue. A lead-
zinc-copper concentrate is also produced which is stockpiled for possible future
processing. Production from these mills is low, averaging perhaps 30 tons per
day with a head grade (ore grade) of 3-4 g/T. This grade is due to hundreds of
years of hand mining of only high grade (> 20 g/T to hundreds of g/T) gold. Up
to this point a lack of funding has prevented those locals from conducting any
extensive underground development.
Mineral Resources and Mine Planning
The Company plans to undertake production of the Muluncay property in three
phases:
1. Initially through continuation of preparation and modernization with
equipment for proper excavation for the tonnage required for the production
plant(s). The Company intends to acquire 100 hectares for the new Central
Processing Plant for growth and tailing ponds to fulfill the required
Environmental Impact Studies for this future site. The Company will acquire
new equipment to bring the current plant to 150 tons per day at the
Company's Buena Esperanza location, and acquire equipment for the new
flotation plant that will begin construction during Phase 2.
2. In Phase 2, the Company intends to construct a new central flotation plant,
with clearing of land, preparation of utilities and pouring footers to
begin immediately. During concrete curing, the Company will begin tailing
pond preparation and equipment transportation to the site. The Company will
then begin on site assembly of tanks and crushing line assembly for
installation. The Company intends to apply equipment in order of placement
and continue through a test run of the plant at 250 tons per day operation.
3. In Phase 3, the Company will continue the development and slashing process
to continue to create proper ore feed. The Company will develop holding
deposits for extracting ore for proper blending for the plant. After the
plant runs at approximately 250 tons per day for 90 consecutive days, the
Company will begin the process of adding additional equipment to raise
production to 500 tons per day. Ore volume per day will dictate the growth
stages (50 ton tanks can be added quickly) based on the mining progress for
vein quality.
The Maria Olivia Project
- ---------------------------
Maria Olivia has similar geology, structures and mineralization as Muluncay.
Consequently, this section will not repeat information with respect to geology,
history and mineralization which can be reviewed under Muluncay above.
21
Description and Location
The Maria Olivia Project lies in the northwest corner of the Portovelo-Zaruma
mining camp, which is found in the cantons of Ayapamba and Paccha, Province of
El Oro, southern Ecuador. See the map on page 9. It is centered at Latitude 03
36' 30" South and Longitude 79 40' West. It covers an area of 1,067.2
hectares. Boundary co-ordinates for the Project are found in the table
immediately below. These are based on a metric UTM grid system referenced to
PSAD-56 datum and geographic zone 17.
Maria Olivia Boundary Coordinates
---------------------------------
EASTING - M NORTHING - M
----------- ------------
643558 9606000
----------- ------------
645720 9607000
----------- ------------
647000 9607000
----------- ------------
647000 9604000
----------- ------------
646000 9604000
----------- ------------
646000 9599800
----------- ------------
645000 9599800
----------- ------------
645000 9606000
----------- ------------
The project is situated about 108 miles southeast and 37 miles east of the major
Pacific port cities of Guayaquil and Machala, respectively. It lies on the
western slope of the Andes Mountains, part of the Western Cordillera which runs
the length of the west coast of North and South America.
Geological Setting of the Maria Olivia Concession
Bedrock underlying the Maria Olivia concession consists of Lower Cretaceous age
Celica Formation massive volcanic lavas of andesitic composition. No detailed
mapping has been carried out on these host rocks. Within these host rocks, and
on the western margin of an andesitic sub-volcanic intrusion of the Portovelo
Series, a series of parallel structures is grouped under the name Cerro de Oro.
To the west are a series of basalt flows of Mesozoic age.
22
These local area structures encompass both those veins found within the Maria
Olivia concession, such as Tres Diablos, Bolivar and San Antonio, as well as
those immediately outside the concession boundaries but considered to be part of
the same Ayapamba area mineralizing system (e.g. La Sucre Vein). This system of
veins is the northwest continuation of the large system of veins (e.g.
Abundancia) which have been so vigorously mined in the Zaruma-Portovelo area for
the last 400 years.
Mineralization of the Maria Olivia Concession
Veins within the Maria Olivia concession include Tres Diablos, Bolivar and San
Antonio. The Sucre Vein, a major gold-bearing structure, lies directly to the
northwest of the concession. Structures are oriented NNE. The mineralization
in the concession area ranges from a gold : silver ratio of 1:10 near surface to
1:15 at depth. Veins range from to 1 miles kilometers in strike length
(Sucre Vein), and mines in the immediate area range from 4,450 feet above
surface level to 2,600 feet above surface level, giving a known depth of
mineralization of at least 1,600 feet. Vein widths range from 1.3 feet to 4.5
feet and are steeply dipping (70 to 90 ) to the NE.
No detailed work has been done on the mineralization within the veins of the
Maria Olivia concession. However, the Sucre Vein was investigated by Marikovsky
(1958). The Sucre Vein was reported as an epithermal gold system, with milky
quartz being hard but brittle. It contains chalcopyrite (copper), sphalerite
(zinc) and galena (lead) sulphide minerals. This mineralization is similar to
that found in the Portovelo-Zaruma area, where it is quite common. The
principal mineral accompanying the gold is pyrite (FeS2), but other minerals
include safflorite (CoAs2), proustite (Ag3AsS3), tetrahedrite (Cu3SbS3-4),
freibergite ((CuAg2ZnFe)3Sb2S6) and minor Au-Pb telluride minerals. These are
indicative of a low-temperature near-surface environment. It is assumed, though
not confirmed, that the veins of the Maria Olivia concession contain similar
mineralization.
Exploration - Historical
Systematic exploration activity closely related to mining advances was carried
out by SADCO from 1897 to 1950. However, only limited information is available
from that period. Detailed underground maps and 103,657 assay result records
have been recovered from local miners and from local archives by TVX Gold Corp.
and IAMGOLD. These are now held by Dynasty Metals and Mining Inc. Much of the
SADCO data can be acquired from certain parties in Machala.
Modern exploration activity within the Zaruma - Portovelo Mining District begun
in 1995 when a one-year property area consolidation and district-scale
exploration was made by TVX Gold Corporation, a Canadian-based company. During
this period, over 25 miles of underground workings were surveyed and mapped on a
1:500 scale. Total amount of underground samples collected by TVX is estimated
to be over 4,000. IAMGOLD reported 733 samples although many of these were from
older maps and reports. Following TVX s withdrawal from Ecuador in 1998, all
information was acquired by
23
IAMGOLD who continued exploration. This work including surface trenching,
surface and underground sampling, surveying and diamond drilling and geological
modelling. IAMGOLD databases contained the following:
- - 680 surface rocks channel and chip samples
- - 2,126 underground channel samples
- - 5,415 soil samples
- - 37 diamond drill hole results including sample assay results
- - 1,114 DDH core samples
- - 2,591 topographical control points survey
- - 39 stream sediments samples
- - 369 channel samples form surface trenching
In August 2003, all the IAMGOLD properties and project databases were
transferred to Dynasty Metals and Mining Inc. which continued with exploration
programs up to the present. The Company re-sampled selected IAMGOLD and TVX
sites with the purpose of data verification and repeatability of the original
assay results. New exploration in the zones of the Sucre Mine resulted in the
discovery of additional resources of high-grade mineralization (Dynasty news
release, July 7, 2004).
Exploration - Current
Current exploration on behalf of the Company has thus far involved a site visit
by a consulting geologist to the general area of the Maria Olivia concession.
The geologist also made a visit underground at the Tres Diablos Mine (Tres
Diablos Vein) on June 30, 2006. A single sample of vein material was taken by
the author from that vein. Assay results included 3.23 g/T Au, 53.3 g/T Ag and
2360 ppm As. No significant Pb-Zn-Cu values were noted from that one sample.
Production Planned
The Company plans to undertake production of the Maria Olivia concession
production in four phases:
1. Initially in Phase 1, through startup exploration, completion of an
environmental impact study, undertaking soil and water studies to begin
with laboratory results and engaging engineers to begin surface evaluations
for possible entry points of the main tunnel.
2. In Phase 2, the Company will put its drill program into place. This will
including (i) hiring a drill team with an approved North American Geologist
to prepare cores for booking and lab preparation; (ii) building a security
shelter for cores and equipment; (iii) moving equipment on site and
beginning drilling; (iv) preparing a model from drilling results of the ore
body after the first 16,000 feet have been drilled and sampled; (v)
beginning calculation of provable resources based upon
24
early lab reports; (vi) starting a second round of drilling (16,000 feet);
(vii) using these results to assure mining tonnage and grade for valuations
and (viii) repeating the above based upon distance, depth and width of
findings.
3 In Phase 3, the Company will begin underground extraction (mining).
The Company will need to complete an environmental impact study for
extraction. The Company's mining engineers will begin construction for the
entry of the main tunnel and its mechanical engineers will approve final
drawings of the flotation processing plant. Key paperwork will be completed
to include approval of budgets, flow charts and objectives from financing
to construction, and setting production objectives.
4. In the final Phase 4, the Company will begin construction of a 200 ton
plant and mining extraction. Included in this phase will be (i) setting
footers for 400 ton per day Processing flotation plant; (ii) purchasing
equipment to set 200 ton per day in this Phase; (iii) developing a tailings
pond for five year production at 200 ton per day for a key impact study;
(iv) providing rail, water, air and electricity mine for extraction of a
200 ton per day operation; (v) building a laboratory on site and (vi)
setting a security perimeter around the active plant and mine area
The Kylee Concession
- ----------------------
We have also acquired the Kylee Concession subject to a mortgage. This project
contains at least one major vein of 1 meter width, and is suggested to be 2.3
kilometers long, trending from northeast to southwest, width of vein suggests
strength, continuity and depth. Our current workings are on a vein exposed
along Quebrada Zuro of Rio San Francisco, which lies northeast of the major
river, Rio Jubones. There are possible parallel veins in Quebrada Cuchicorral,
which appears to be a gully trending northwest where another vein may exist.
The area has not been explored for parallel structures which may host similar
mineralization. Our proposed exploration program would consist of stream
sediment sampling of all creeks in the concession, where accessible, at
approximately 100 meter separation along each creek. The purchase cost of
acquiring this asset is $400,000.
The Fierro Urco I and II Projects
- ---------------------------------------
We have an option to acquire the Fierro Urco I and II Projects (both subject to
existing mortgages). The Company's strategic land package, Fierro Urco II, is
comprised of 11 concessions totaling 13,503 hectares (approximately 28,000
acres) inside the Regional Mining District of Loja. Our purchase price for this
concession is $1,500,000. In addition to the Fierro Urco II project, we have a
purchase agreement to acquire the Fierro Urco I project. This is a very
strategic package and is on the same geological trend as the Fierro Urco II
project. We have already spent $100,000 on this project to date and need
$1,100,000 to complete the acquisition.
25
There have been numerous exploration programs carried out on this property under
the auspices of the British Geological Commission, the United Nations and Geolog
a del Ecuador. Our geological team in Ecuador has conducted an extensive
document search and review of previous work in this very strategic area in
Southern Ecuador. The 11 mining concessions we have obtained options for in
this package presented 134 areas of interest to our experts. This project will
be fully evaluated with a preliminary exploration program already initiated with
soil sampling. The program will include detailed mapping, prospecting, stream
sediment sampling, and chip and channel sampling to confirm the previous
exploration data. We intend to very aggressively define each phase of our
exploration results based on these lab tests and intend to move quickly into a
drill program.
The Campo De Oro Project
- ----------------------------
Campo De Oro is an exploration land package in the south-east sector of the Oro
Province of Ecuador, just south of the gold camp area of Portovelo. The
Company has an option to acquire this project (subject to a mortgage) and has
already paid a deposit of $100,000 to secure this land package of approximately
50,000+ hectares. During early exploration, our geological team discovered a
six meter wide exposed quartz vein on the surface. Sampling has been done and
forwarded to third party lab in Peru for analysis. Campo de Oro consists of 13
separate mining concessions : ALFA, EPSILON, GRUS, OMEGA, CRUX, GANIMIDES, VELA,
CENTAURO, FOMAX, HIDRUS, PEGASUS, MUSCA, TUCANA. We have also paid $50,000
patent fees in connection with this project on September 30, 2007.
BENEFITS OF MINING IN ECUADOR
Southern Ecuador has rapidly become an attractive choice for mineral exploration
and development companies. Permissive geology in unexplored or under-explored
areas, a stable mining code, an opportunistic labor pool, no restrictions on
capital flows, and relatively good infrastructure has led to the recent interest
in the country.
Ecuador is mineral-rich with the same geological framework and mineral potential
as its neighbors, Peru, Chile, and Colombia, although it remains under-explored
compared to those countries. While gold has been mined in Ecuador for
centuries, most of this country has been unexplored by modern techniques, and is
dominated by inefficient, small-scale artisanal miners. Management accordingly
believes that the use of modern exploration and mining methods and equipment can
be applied to great benefit.
In addition, Ecuador's low costs of labor and fuel make mining in Ecuador
relatively cost-effective in comparison to other regions. With high overall ore
grades with cut-off grades often exceeding 10 grams of gold per ton, the low
costs make high margin mining an accessible goal.
26
Finally, changes in the mining laws during the last decade have provided an
opportunity to confidently stake claims, and recent discoveries indicate that
the opportunities available to mineral claimholders can be tremendous.
HISTORY AND PAST PRODUCTION NEAR PORTOVELO
The opportunity at Muluncay must be put into historical perspective. Gold
mining in the Portovelo - Zaruma district dates from the time of the Inca
empire. The Spaniards re-discovered gold in the area and founded the town of
Zaruma in the year 1549.
In 1896, the South American Development Company (SADCO), a subsidiary of Asarco,
gained control of the main gold zones in the district. Through the
establishment of the Grand Mine of SADCO on the Casa Negra concession, SADCO
built the sole portal (The Grand Shaft at Portovelo) to an underground tunnel
system that reaches more than 18 dominant gold veins discovered inside the
Portovelo-Zaruma Oro Region.
The Portovelo-Zaruma mining camp has produced in excess of 4.5 million ounces of
gold since 1905 with the majority of this coming from the Portovelo Mine (The
Grand Mine) operated until 1950 by the South American Development Corp. SADCO's
reported cut-off grade during this period was 14.5 g gold per ton.
The bulk of gold, silver and base metals were produced mainly from the Grand
Mine at the southern end of the Portovelo-Zaruma-Muluncay-Ayapamba district.
The Grand Shaft at Portovelo (The Grand Mine) reached a depth of 660 m below the
surface. With the advent of flotation technology in 1939, and as a result of
building a new flotation plant, silver, copper, lead and zinc were recovered
from pyritic ores contained within the gold mineralizing system in the district.
Through pressure on SADCO from local and federal governments and the failure to
complete agreements with the people of Ecuador, SADCO left Ecuador in 1950.
Underground mining ceased and the Grand Mine was allowed to flood to
approximately the 5th level. The Ecuadorean Government purchased the South
American Development Company's equipment and sponsored the organization of CIMA
(Compania Industrial Minera Asociada, S.A.) in January, 1952. Within 3 years
the mine flooded to the 3rd level and has remained so until recent de-watering
by MINESADCO, S.A.
Within the Muluncay Concession, Pacifico has acquired four levels of mine
workings (La Fatima, Nueva Esperanza 1 and 2, and other acquired Muluncay Mines)
that provide access to the Jena and Cristina veins over a strike length of a
kilometer. These two major veins are currently being worked by local artisanal
miners, at a low production rate of 20 to 40 tons per day. Local mining over
the last century has been sporadic due to the fluctuation in the price of gold
and the cost of exploration and development to establish additional high-grade
reserves.
Pre-1950s SADCO development work and more recent mining have found at least six
additional veins that remain virtually untested. This activity is presently
confined to the southern half of the concession. There are several mine
workings in the northwest part
27
of the concession that are continuations of the Jen, Cristina and other parallel
mineralized veins seen in the southern workings. These northern mine workings
remain unexplored and underdeveloped.
Very little work has been done to test continuity of the mineralization at
depth, and yet work by SADCO on the Grand Shaft at Portovelo has shown a depth
of 660 m, and a topographic difference between the Grand Shaft and Muluncay of
an additional 1200 m, so that from local highest elevation at Muluncay to the
deepest mine workings in the district there is a potential depth of
gold-silver-base metals mineralized system of almost 1860 m.
At Muluncay, much of the local mining is currently working high-grade vein
structures, generally at an average grade of 6 to 8 gT AU in the ore, coming
upon recorded clavos of concentrated high mineralization reaching as high as 200
gT Au. However, SADCO's work shows that high grade mineralization continues at
depth to 660m below the entrance of their mining shaft. Lack of funding has
thus far prevented miners on the Muluncay Concession from doing similar
development, but it is anticipated that grades on Muluncay, at depths below
current workings, will be similar to those at the Grand Mine.
GEOLOGY AND MINERALIZATION
Regional geology of the southern part of Ecuador consists of basement rocks of
the Tahuin Series. This metamorphic basement is un-conformably overlain by a
thick sequence of Celica Formation massive, homogeneous volcanic lavas and tuffs
of andesitic composition, intercalated with minor sedimentary layers. There are
two major regional faults. These are the Pin s Fault and the Puente Busa
- -Palestina Fault. Spatially the mineralization is arranged in three zones. In
Zone 1 pyritization with little gold is seen in stock-work, shattering and
brecciation around the Santa Barbara and Zaruma Mountains. Zone 2 contains
gold-bearing quartz and quartz-adularia veins with abundant sulphides and is
found in the Portovelo-Zaruma axis and NE of the Santa Barbara Mountains. A
large aureole of gold-bearing quartzcalcite and quartz-chlorite, with abundant
sulphosalts and minor sulphides, representing Zone 3, surrounds the core of
sulphide mineralization. Muluncay lies within the Zone 2 type of mineralization
NE of the Santa Barbara Mountains.
Stringers" and narrow veins, as well as silicified wall rock, are virtually
untested for their gold potential. As is typical in a standard epithermal gold
system, there are some zones of "bonanza-type" high-grade gold mineralization
(locally termed "clavos") in the 30 to 200 g / tonne range. Clavos of this
grade have been worked by the local mining community on the Muluncay Concession.
28
GOVERNMENTAL REGULATION
Effect of Regulation on the Company
- ----------------------------------------
As the Company operates in Ecuador, there is unlikely to be any significant
United States-based governmental regulation on its operations, other than
compliance with Federal Securities laws and regulations with respect to
reporting and other matters.
The operations of the Company in Ecuador, including exploration and development
activities and commencement of production on its properties, require permits
from various federal, provincial and local governmental authorities and such
operations are and will be governed by laws and regulations governing
prospecting, development, mining, production, exports, taxes, labor standards,
occupational health, waste disposal, toxic substances, land use, environmental
protection, mine safety and other matters. Companies such as Spirit which are
engaged in the exploration, potential development and operation of mineral
properties and related facilities generally experience increased costs and
delays as a result of the need to comply with applicable laws, regulations and
permits.
Failure to comply with applicable laws, regulations, and permitting requirements
may result in enforcement actions thereunder, including orders issued by
regulatory or judicial authorities causing operations to cease or be curtailed,
and may include corrective measures requiring capital expenditures, installation
of additional equipment, or remedial actions. Parties engaged in mining
operations may be required to compensate those suffering loss or damage by
reason of the mining activities and may have civil or criminal fines or
penalties imposed for violations of applicable laws or regulations and, in
particular, environmental laws.
In addition, the Company could be subject to possible political or economic
instability in Ecuador, which may result in the impairment or loss of mineral
concessions or other mineral rights, and mineral exploration and mining
activities, may be affected in varying degrees by political instability and
government regulations relating to the mining industry. Exploration may be
affected in varying degrees by government regulations with respect to
restrictions on future exploitation and production, price controls, export
controls, foreign exchange controls, income taxes, expropriation of property,
environmental legislation, and mine and/or site safety.
The Need for Government Approval
- ------------------------------------
The operations of the Company in Ecuador including exploration and development
activities and commencement of production on its properties, require permits
from various federal, provincial and local governmental authorities and such
operations are and will be governed by laws and regulations governing
prospecting, development, mining, production, exports, taxes, labor standards,
occupational health, waste disposal, toxic substances, land use, environmental
protection, mine safety and other matters.
29
The Company through its affiliates has either received or applied for any such
permits as might be required for its operations.
Compliance with Environmental Laws
- -------------------------------------
The Company's activities will be subject to environmental regulations
promulgated by Ecuadorean government agencies from time to time. Environmental
legislation generally provides for restrictions and prohibitions on spills,
releases or emissions of various substances produced in association with certain
mining industry operations, such as seepage from tailings disposal areas, which
could result in environmental pollution. A breach of such legislation may
result in imposition of fines and penalties. In addition, certain types of
mineral operations require the submission and approval of environmental impact
assessments. Environmental legislation in Ecuador is evolving in a manner which
means stricter standards and enforcement, fines and penalties for non-compliance
are more stringent. Environmental assessments of proposed projects carry a
heightened degree of responsibility for companies and directors, officers and
employees. The cost of compliance with changes in governmental regulations has a
potential to reduce the profitability of operations.
The Company is not presently aware of any environmental liabilities present on
any of its properties. The Company has submitted and received approval for its
environmental reports with respect to all of its current operating mineral
properties.
RESEARCH AND DEVELOPMENT
In the two fiscal years ending December 31, 2005 and December 31, 2006, the
Company has not spent any funds on research and development. The Company
anticipates that much of its research and development in determining appropriate
mining concessions will be borne by operators and vendors.
30
EMPLOYEES
As of February 29, 2008, the Company itself employed three management level
employees, one of which is a full-time employee and two of which devote
approximately 80% of their time to operations of the Company. ECUADORGOLDCORP,
our operating subsidiary in Ecuador, currently has five full time employees.
Depending on the stage of production and mining, ECUADORGOLDCORP has
historically employed as many as 80 employees and we anticipate that
ECUADORGOLDCORP will employ between 80 to 100 persons when we are in full
production at the Muluncay project. Our other operations are conducted through
affiliate relationships, including through our primary operator Minera Pacifico
Noroeste S.A., who presently employees approximately 600 persons in Ecuador with
at least 80 involved on the Company's projects. We believe that our relations
with our employees are good.
DISTRIBUTION METHODS
The Company has not yet established methods of distribution.
COMPETITION
Significant and increasing competition exists for the limited number of mineral
acquisition opportunities available in Ecuador. As a result of this
competition, some of which is with large established mining companies with
substantial capabilities and substantially greater financial and technical
resources than the Company, we may be unable to acquire additional attractive
mineral properties on terms we consider acceptable. Accordingly, there can be
no assurance that our exploration and acquisition programs will yield any
reserves or result in any commercial mining operation.
One major competitor in the area is Aurelian Resources, Inc., a public company
with 200 employees and which raised $95 million in gross proceeds in 2006
through drilling projects in Ecuador.
INTELLECTUAL PROPERTY
The Company currently owns no traditional "intellectual property" in the form of
patents, trademarks, licenses, or franchises. The Company holds several mining
concessions in Ecuador. See "Mineral Resources" above. The Company has thus
far not directly entered into any royalty agreements or labor contracts, except
that it has entered into an operating agreement with Pacifico which provides for
a 3% Net Smelter Royalty on the production of the properties in Ecuador.
31
ITEM 1A. RISK FACTORS.
The Company faces a number of risks and uncertainties which in some cases also
represent opportunities for its business.
SPECULATIVE NATURE OF MINERAL EXPLORATION AND DEVELOPMENT ACTIVITIES MAKES IT
DIFFICULT TO PREDICT THE COMPANY'S FUTURE SUCCESS.
The Company is engaged in mineral exploration and development activities.
Resource exploration and development is a speculative business, characterized by
a number of significant risks including, among other things, unprofitable
efforts resulting not only from the failure to discover mineral deposits but
from finding mineral deposits which, though present, are insufficient in
quantity and quality to return a profit from production. The marketability of
minerals acquired or discovered by the Company may be affected by numerous
factors which are beyond the control of management and which cannot be
accurately predicted, such as market fluctuations, the proximity and capacity of
milling facilities, mineral markets and processing equipment, and such other
factors as government regulations, including regulations relating to royalties,
allowable production, importing and exporting of minerals, and environmental
protection, the combination of which factors may result in the Company not
receiving an adequate return of investment capital.
S
ubstantial expenditures are required to establish ore reserves through
drilling, to develop metallurgical processes to extract the metal from the ore
and, in the case of new properties to develop the mining and processing
facilities and infrastructure at any site chosen for mining. We do not know
whether or not minerals will be discovered in sufficient quantities and grades
to justify commercial operations or that the funds required for development can
be obtained on a timely basis. Estimates of reserves, mineral deposits and
production costs can also be affected by such factors as environmental
permitting regulations and requirements, weather, environmental factors,
unforeseen technical difficulties, unusual or unexpected geological formations
and work interruptions. In addition, the grade of ore ultimately mined may
differ from that indicated by drilling results. Short term factors relating to
reserves, such as the need for orderly development of ore bodies or the
processing of new or different grades, may also have an adverse effect on mining
operations and on the results of operations. Material changes in ore reserves,
grades, stripping ratios or recovery rates may affect the economic viability of
any project.
The Company's mineral properties either currently are or will be in the
exploration stage, or at a very early production stage, and are without a
substantial known body of commercial ore. Development of any of the Company's
mineral properties will only follow upon obtaining satisfactory exploration
results. Few properties which are explored are ultimately developed into
producing mines. Major expenses may be required to establish ore reserves,
develop metallurgical processes and construct mining and processing facilities
at a particular site. The Company's mineral exploration activities may not
result in any discoveries of commercial bodies of ore. The Company's
32
properties may also be subject to prior unregistered agreements or interests or
undetected claims which could be materially adverse to Spirit Exploration.
THE NATURE OF THE COMPANY'S BUSINESS CREATES ELEVATED OPERATING HAZARDS AND
ON-SITE RISKS THAT MAKE IT DIFFICULT TO PREDICT THE COMPANY'S COSTS.
Mineral exploration involves many risks, which even a combination of experience,
knowledge and careful evaluation may not be able to overcome. The Company's
operations will be subject to all the hazards and risks normally incidental to
exploration, development and production of metals, such as unusual or unexpected
formations, cave-ins or pollution, all of which could result in work stoppages,
damage to property, and possible environmental damage. The Company does not
presently have general liability insurance covering its operations and does not
presently intend to obtain liability insurance as to such hazards and
liabilities. Payment of any liabilities as a result could have a materially
adverse effect upon the Company's financial condition.
MINING RISKS MAY MAKE IT MORE DIFFICULT TO OBTAIN INSURANCE, WHICH MAY AFFECT
THE COMPANY'S ABILITY TO CONTROL THE COSTS IN THE EVENT OF A CATASTROPHIC LOSS.
The business of mining for gold and other metals is generally subject to a
number of risks and hazards including environmental hazards, industrial
accidents, labor disputes, unusual or unexpected geological conditions,
pressures, cave-ins, changes in the regulatory environment and natural phenomena
such as inclement weather conditions, floods, blizzards and earthquakes. We do
not know that insurance will continue to be available or that it will be
available at economically feasible premiums. Mining operations will be subject
to risks normally encountered in the mining business.
THE UNCLEAR SYSTEM OF TITLE TO MINING PROPERTIES IN ECUADOR MAY MAKE IT MORE
DIFFICULT FOR INVESTORS TO RELY ON THE COMPANY'S CURRENT ASSETS.
In Ecuador there is only one type of concession, a mining concession. Article
27.1 paragraph 2 of the Ecuadorean Mining Law (published April 6th, 2001)
states:
The mining concession confers to its holder the universal and
exclusive right to prospect, explore, exploit, beneficiate, smelt, refine,
and trade all mineral substances which exist and can be obtained within the
area, with no more limits than those stated in this law.
There is consequently no guarantee that title to any of the Company's properties
will not be challenged or impugned. Third parties may have valid claims
underlying portions of the Company's interest.
33
SINCE NONE OF THE COMPANY'S RESERVES HAVE BEEN PROVEN, INVESTORS MAY BE LESS
ABLE TO PREDICT FUTURE PERFORMANCE BASED ON THE COMPANY'S CURRENT ASSETS.
The properties in which the Company holds an interest are primarly considered to
be in the exploration stage only and do not contain a known body of commercial
ore. The Company's estimates for properties that have not yet commenced
production may require revision based on actual production experience. Market
price fluctuations of metals, as well as increased production costs or reduced
recovery rates may render relatively lower grades of mineralization uneconomic.
Moreover, short-term operating factors, such as the need for orderly development
of the mining properties, and the processing of new or different ore grades may
cause a mining operation to be unprofitable in any particular accounting period.
OUR FOREIGN LOCATION MAY MAKE IT MORE DIFFICULT TO PREDICT THE RESULTS OF OUR
OPERATIONS IN COMPARISON TO DOMESTIC CORPORATIONS.
The Company's exploration and development projects will be located in Ecuador.
Like most countries, Ecuador has specific laws and regulations relating to
foreign investments, mining operations and local region and environmental
impact. These laws are dissimilar from those in the United States and
consequently make prediction of their impact more difficult. Our projects could
be adversely affected by exchange controls, currency fluctuations, taxation and
laws or policies of Ecuador affecting mining, foreign trade, investment or
taxation.
Changes in mining or investment policies or shifts in political attitude in
Ecuador may adversely affect the Company's business. Operations may be affected
by governmental regulations with respect to restrictions on production, price
controls, export controls, income taxes, expropriation of property, maintenance
of claims, environmental legislation, land use, land claims of local people,
water use and mine safety. The effect of these factors cannot be accurately
predicted.
OUR NEED TO COMPLY WITH UNPREDICTABLE ENVIRONMENTAL AND OTHER REGULATORY
REQUIREMENTS MAY MAKE IT DIFFICULT FOR INVESTORS TO PREDICT OPERATING COSTS.
The Company's activities will be subject to environmental regulations
promulgated by government agencies from time to time. Environmental legislation
generally provides for restrictions and prohibitions on spills, releases or
emissions of various substances produced in association with certain mining
industry operations, such as seepage from tailings disposal areas, which would
result in environmental pollution. A breach of such legislation may result in
imposition of fines and penalties. In addition, certain types of operations
require the submission and approval of environmental impact assessments.
Environmental legislation is evolving in a manner which means stricter standards
and enforcement, fines and penalties for non-compliance are more stringent.
Environmental assessments of proposed projects carry a heightened degree of
responsibility for companies and directors, officers and employees. The cost of
compliance with changes in governmental regulations has a potential to reduce
the profitability of operations.
34
The operations of the Company including exploration and development activities
and commencement of production on its properties, require permits from various
federal, provincial and local governmental authorities and such operations are
and will be governed by laws and regulations governing prospecting, development,
mining, production, exports, taxes, labor standards, occupational health, waste
disposal, toxic substances, land use, environmental protection, mine safety and
other matters. Companies engaged in the development and operation of mines and
related facilities generally experience increased costs and delays in production
and other schedules as a result of the need to comply with applicable laws,
regulations and permits.
Failure to comply with applicable laws, regulations, and permitting requirements
may result in enforcement actions thereunder, including orders issued by
regulatory or judicial authorities causing operations to cease or be curtailed,
and may include corrective measures requiring capital expenditures, installation
of additional equipment, or remedial actions. Parties engaged in mining
operations may be required to compensate those suffering loss or damage by
reason of the mining activities and may have civil or criminal fines or
penalties imposed for violations of applicable laws or regulations and, in
particular, environmental laws.
WE REQUIRE ADDITIONAL FUNDING, WHICH MAY MAKE IT DIFFICULT FOR INVESTORS TO
PREDICT OUR ABILITY TO CONTINUE AS A GOING CONCERN.
The Company's mineral properties are primarily in the exploration stage and, as
a result, the Company will have initially only a nominal source of operating
cash flow from operations. The Company intends to raise additional funds to
complete its projects. We do not know whether the Company will be able to raise
additional funds on reasonable terms or at all. The development of any ore
deposits found on the Company's exploration properties depends on the Company's
ability to obtain financing through debt financing, equity financing or other
means. If the Company's exploration programs are successful, additional funds
will be required to develop the properties and, if successful, to place them
into commercial production. The only sources of future funds presently
available to the Company are the sale of equity capital of the Company, the
imposition of debt on the properties, or the sale by the Company of an interest
in any of its properties in whole or in part. We do not know if the Company
will be successful in raising additional funds or that additional funds can be
obtained on acceptable terms. If additional financing is raised by the
issuance of shares from the treasury of the Company, control of the Company may
change and shareholders may suffer additional dilution. If adequate funds are
not available, the Company may be required to delay, reduce the scope of, or
eliminate one or more exploration activities or relinquish rights to certain of
its interests. Failure to obtain additional financing on a timely basis could
cause the Company to forfeit its interests in some or all of its properties and
reduce or terminate its operations.
35
OUR COMPETITION MAKES IT DIFFICULT FOR INVESTORS TO PREDICT OUR ABILITY TO
CAPTURE A PORTION OF THE MARKET.
Significant and increasing competition exists for the limited number of mineral
acquisition opportunities available. As a result of this competition, some of
which is with large established mining companies with substantial capabilities
and greater financial and technical resources than the Company, the Company may
be unable to acquire additional attractive mineral properties on terms it
considers acceptable. Accordingly, the Company's exploration and acquisition
programs may be unable to yield any reserves or result in any commercial mining
operation.
OUR CURRENT STAGE OF DEVELOPMENT MAKES IT DIFFICULT FOR INVESTORS TO PREDICT
FUTURE PERFORMANCE BASED ON HISTORICAL RESULTS.
The Company is in the business of exploring for, with the ultimate goal of
producing, precious and base metals from its mineral exploration properties.
Only a limited number of the Company's properties have commenced commercial
production and the Company has only a nominal history of earnings or cash flow
from its operations. As a result of the foregoing, the Company may not be able
to develop any of its properties profitably or assure that its activities will
generate positive cash flow. The Company will not have paid any dividends and
it is unlikely to enjoy earnings or pay dividends in the immediate or
foreseeable future. The Company will not have sufficiently diversified such that
it can mitigate the risks associated with its planned activities. The Company
will have limited cash and other assets. A prospective investor in the Company
must be prepared to rely solely upon the ability, expertise, judgment,
discretion, integrity and good faith of the Company's management in all aspects
of the development and implementation of the Company's business activities.
Prior to the commencement of operations of the Company's current line of
business, prior management of the Company engaged in several other lines of
business which were not successful.
THERE MAY NOT BE A MARKET FOR OUR SECURITIES, WHICH MAY AFFECT THE ABILITY OF
INVESTORS TO REALIZE A RETURN ON THEIR INVESTMENT.
The Company's common stock presented is quoted for trading on the "pink sheets"
market under the symbol "SPXP." An active trading market in the Company's
securities may not be fully established and, if established, sustained. The
market price for the Company's securities could be subject to wide fluctuations.
Factors such as precious and base metal commodity prices, government regulation,
interest rates, share price movements of the Company's peer companies and
competitors, as well as overall market movements, may have a significant impact
on the market price of the Company's securities. The stock market has from time
to time experienced extreme price and volume fluctuations, particularly in the
mining sector, which have often been unrelated to the operating performance of
particular companies.
36
THERE MAY BE CONFLICTS OF INTEREST WITHIN THE COMPANY, WHICH MAY ADVERSELY
AFFECT THE CONFIDENCE INVESTORS HAVE IN DECISIONS OF THE BOARD.
Circumstances may arise where members of the board of directors, employees,
operators of the mines and others who work with the Company are directors or
officers of corporations which are in competition to the interests of the
Company. These opportunities identified by such persons may not be provided to
the Company.
OUR INDUSTRY IS SUBJECT TO FLUCTUATIONS IN COMMODITY PRICES, WHICH MAKES IT
DIFFICULT TO PREDICT REVENUES DERIVED FROM OUR OPERATIONS.
The profitability, if any, in any mining operation in which the Company will
have an interest will be significantly affected by changes in the market price
of precious and base metals which fluctuate on a daily basis and are affected by
numerous factors beyond the Company's control.
THE USE OF FOREIGN CURRENCY IN OUR OPERATIONS MAY AFFECT OUR ABILITY TO
REPATRIATE REVENUE FROM ECUADOR TO THE UNITED STATES.
A substantial portion of the Company's proposed activities are expected to be
carried on outside of the United States. Accordingly, such proposed activities
are subject to risks associated with fluctuations of the rate of exchange of the
U.S. dollar and foreign currencies. The Company does not intend to hedge its
currency exposure.
THE BOARD DOES NOT EXPECT TO DECLARE DIVIDENDS, WHICH MAY MAKE IT MORE DIFFICULT
FOR INVESTORS TO REALIZE A RETURN ON THEIR INVESTMENT.
The Company has never paid dividends to its shareholders. For the foreseeable
future, the Company expects to follow a policy of retaining earnings, if any, in
order to finance further exploration and development or expansion. The payment
of dividends is within the discretion of the board of directors of the Company
and will depend on the earnings, if any, financial requirements and the
operating and financial condition of the Company, among other factors.
CERTAIN OF OUR OFFICERS, DIRECTORS AND OPERATORS ARE NOT RESIDENTS OF THE UNITED
STATES
Mr. Peter Laipnieks, a current director and officer of the Corporation, resides
outside of the United States. In addition, our operations in Ecuador are
conducted by Pacifico, which is an Ecuadorean corporation. In the event
investors seek to obtain judgments against these persons or entities, it may be
difficult to obtain service of process or enforce a judgment against persons not
resident in the United States.
37
OUR OFFICERS DO NOT HAVE SUBSTANTIAL EXPERIENCE IN MINERAL EXPLORATION OR MINING
None of the Company's current officers has significant technical training and/or
experience in minerals exploration or mining. None of these officers has
technical training and experience with exploring for, starting, and/or operating
a mine. The Company relies on our operator Pacifico and on outside contractors
for this experience. As a consequence, their decisions and choices may not take
into account standard engineering or managerial approaches mineral exploration
companies commonly use, and our operations, earnings and ultimate financial
success could suffer due to management's lack of experience in this industry.
OUR STOCK MIGHT BE CONSIDERED A PENNY STOCK WHICH RESTRICTS CERTAIN TRANSACTIONS
At any time that the market price for our common stock is less than $5.00 per
share, our stock might be considered to be a "penny stock" as defined by SEC
rules. Under those rules, certain stock brokerage firms may prohibit purchase
or sale of shares of our common stock within their clients' accounts.
All securities brokerage firms effecting purchase orders for clients in the
Company's common stock at a time when the common stock has a market bid price of
less than $5.00 per share are required by federal law to send a standardized
notice to such clients regarding the risks of investing in "penny stocks", to
provide additional bid, ask and broker compensation and other information to the
patients and to make a written determination that the Company's common stock is
a suitable investment for the client and receive the client's written agreement
to the transaction, unless the client is an established client of the firm,
prior to effecting a transaction for the client. These business practices may
inhibit the development of a public trading market for the Company's common
stock during periods that the price of the common stock in the public market is
less than $5.00 by both limiting the number of brokerage firms which may
participate in the market and increasing the difficulty in selling the Company's
common stock.
38
ITEM 2. FINANCIAL INFORMATION
This Management's Discussion and Analysis or Plan of Operation should be read in
conjunction with the audited financial statements for the year ended December
31, 2006, and for the nine month period from January 1, 2007 through September
30, 2007. The discussion also includes subsequent activities up to February 29,
2008. The financial statements have been prepared in accordance with generally
accepted accounting policies in the United States ("GAAP"). Except as otherwise
disclosed, all dollar figures included therein and in the following management
discussion and analysis ("MD&A") are quoted in United States dollars.
Forward Looking Statements:
Statements about our future expectations are "forward-looking statements" within
the meaning of applicable Federal Securities Laws, and are not guarantees of
future performance. When used herein, the words "may," "will," "should,"
"anticipate," "believe," "appear," "intend," "plan," "expect," "estimate,"
"approximate," and similar expressions are intended to identify such
forward-looking statements. These statements involve risks and uncertainties
inherent in our business, including those set forth under the caption "Risk
Factors," in this Disclosure Statement, and are subject to change at any time.
Our actual results could differ materially from these forward-looking
statements. We undertake no obligation to update publicly any forward-looking
statement.
A. PLAN OF OPERATION
Spirit Exploration, Inc., a Nevada Corporation, is an early production mineral
exploration company. Through our subsidiary ECUADORGOLDCORP, S.A., of which we
own 99%, we are in the business of acquiring, exploring and developing mineral
(gold, silver, copper) concessions in Ecuador.
We are in the process of bringing several mines into actual production. We have
acquired, and we have options to acquire, a diverse range of mineral production
and exploration properties in Ecuador.
Our plan of operation for the next 24 months involves primarily the production
and development of the Muluncay Project and the Maria Olivia Project. We also
intend to continue to acquire other mineral properties and seek to develop the
mineral rights obtained.
We intend to undertake production of the Muluncay production in three phases:
1. Initially through continuation of preparation and modernization with
equipment for proper excavation for the tonnage required for the production
plant(s). The
39
Company intends to acquire 100 hectares for the new Central Processing
Plant for growth and tailing ponds to fulfill the required Environmental
Impact Studies for this future site. The Company will acquire new equipment
to bring the current plant to 150 tons per day at the Company's Buena
Esperanza location and acquire equipment for the new flotation plant that
will begin under construction during Phase 2. Our anticipated cost for this
phase of production is $2,525,000, which includes completion of purchase of
the Lopez, Esperanza and Asanza mines in the Muluncay project and the
mining operation upgrades referenced above.
2. In Phase 2, the Company intends to construct a new central flotation plant,
with clearing of land, preparation of utilities and pouring footers to
begin immediately. During concrete curing, the Company will begin tailing
pond preparation and equipment transportation to the site. The Company will
then begin on site assembly of tanks and crushing line assembly for
installation. The Company intends to apply equipment in order of placement
and continue through a test run of plant at 250 tons per day operation. Our
anticipated cost for this phase of production is $4,680,000, which reflects
approximately $3,650,000 for development of the flotation plant and
$1,210,000 for upgrades at our three principal mineral properties.
3. In Phase 3, the Company will continue the development and slashing process
to continue to create proper ore feed. The Company will develop holding
deposits for extracting ore for proper blending for the plant. After plant
runs at approximately 250 tons per day for 90 consecutive days, the Company
will begin the process to add additional equipment to raise production to
500 tons per day. Ore volume per day will dictate the growth stages (50 ton
tanks can be added quickly) based on the mining progress for vein quality.
Our anticipated cost for this phase of production is $2,960,000. This
includes $1,750,000 for completion of the plants and $1,210,000 for further
upgrades at our three principal mining properties.
We intend to undertake production of the Maria Olivia concession production in
four phases:
1. Initially in Phase 1 through startup exploration, completion of an
environmental impact study, undertaking soil and water studies to begin
with laboratory results and engaging engineers to begin surface evaluations
for possible entry points of the main tunnel. We anticipate the cost of
this to be approximately $1,000,000.
40
2. In Phase 2, the Company will put its drill program into place. This will
including (i) hiring a drill team with an approved North American Geologist
to prepare cores for booking and lab preparation; (ii) building a security
shelter for cores and equipment; (iii) moving equipment on site and
beginning drilling; (iv) preparing a model from drilling results of the ore
body after the first 16,000 feet have been drilled and sampled; (v)
beginning calculation of provable resources based upon early lab reports;
(vi) starting a second round of drilling (16,000 feet); (vii) using these
results to assure mining tonnage and grade for valuations and (viii)
repeating the above based upon distance, depth and width of findings. The
Company will require funding of approximately $1,300,000 to complete this
phase.
3. In Phase 3, the Company will begin underground extraction (mining). The
Company will need to complete an environmental impact study for extraction.
The Company's engineers will begin construction for the entry of the main
tunnel and its mechanical engineers will approve final drawings of the
flotation processing plant. Key paperwork will be completed include
approval of budgets, flow charts and objectives from financing to
construction, and setting production objectives. Our anticipated budget for
this phase is approximately $500,000.
4. In the final Phase 4, the Company will begin construction of a 200 ton
plant and mining extraction. Included in this phase will be (i) setting
footers for 400 ton per day Processing flotation plant; (ii) purchasing
equipment to set 200 ton per day in this Phase; (iii) developing a tailings
pond for five year production at 200 ton per day for a key impact study;
(iv) providing rail, water, air and electricity mine for extraction of a
200 ton per day operation; (v) building a laboratory on site and (vi)
setting a security perimeter around the active plant and mine area. This
phase is the most costly of the Maria Olivia project with $2,000,000 in
anticipated costs.
BUSINESS STRATEGY
Our primary business strategies are as follows:
- - To acquire existing mineral properties and processing facilities that can
be upgraded inexpensively and produce significant cash flow quickly;
- - To establish strong in country ties and partnerships to get an inside track
on new acquisitions;
- - To structure acquisitions to minimize upfront cash payments thereby
maximizing exploration funds; we have negotiated favorable acquisition
terms that allow us to preserve cash and fully test our optioned
properties;
41
- - To establish a large strategic land position in the major gold camps of
Southern Ecuador: near Aurelian's Del Norte Discovery, Nambija and
Portovelo. To cost effectively conduct mineral exploration by joint
venturing which allows us to advance these properties with little of our
own capital while still participating in the upside; and
- - To build strong local relations and take advantage of local knowledge and
cost effective local mining and administrative talent.
FINANCIAL CONDITION AND LIQUIDITY
Our liquidity requirements arise principally from our working capital needs,
including funds needed to explore and develop our mining properties. To date,
we have funded our liquidity requirements with a combination of loans from our
principles, loans from third parties and cash obtained through the sale of
restricted stock. We have also deferred all management compensation and certain
legal fees pending appropriate financing of the Company.
In November 2007, we received a firm commitment for the placement of $20,000,000
in asset-backed notes (the "Notes") and $10,000,000 in equity financing (the
"Equity Transaction"). The Note Transaction was oversubscribed by $10,000,000
for a total of $30,000,000 and the Equity Transaction was subsequently increased
to $15,000,000 in financing.
Subsequent to receipt of such commitment, we have been working on providing
various due diligence requirements from the underwriting syndicate including
delivery of substantial background and backup on the Company's operations in
Ecuador, cash flow projections, appropriate Use of Proceeds (as essentially
reflected elsewhere herein for what is required for operation and development of
our Muluncay and Maria Olivia projects), and other materials requested by the
underwriters. We have also completed the documents and formed the entities
required for assignment of the underlying Muluncay assets for security. We have
also negotiated terms and conditions of the financing.
We are advised by the underwriters that they anticipate closing the initial
$20,000,000 in Notes, and the oversubscribed additional $10,000,000 in Notes, as
well as the $15,000,000 in Equity imminently, with the funding to be issued into
trust on behalf of the Company. The Notes will bear interest at 15% per annum
and will be paid semi-annually. The Equity Transaction, which in the terms
sheet was initially based upon a 17.5% discount from the 30 day weighted average
trading price of the Company's common stock, will result in 7,500,000 shares of
common stock issued at a closing price of $2.00 per share. The shares of common
stock in the Equity Transaction will be issued in accordance with Regulation S.
The Notes will be secured by the seven different mines which are essentially the
concessions which constitute our Muluncay Property. These properties, which were
42
initially assigned by Pacifico to Ecuadorgold (our subsidiary), were assigned to
Cutler Ecuador S.A., a wholly owned subsidiary of Cutler Law Group, which is our
Trustee for these financing transactions. All funds issued in the Note and
Equity transaction will be issued and held by the Trustee and disbursed only in
accordance with a specific Use of Proceeds approved by the underwriters for the
Notes and Equity. Essentially, the Company has committed to utilize the proceeds
from the sale of the Notes and the Equity Transaction for exploration and
development of the Muluncay Property, the Maria Olivia Property and other
projects in Ecuador, certain potential acquisitions, and general corporate
working capital.
We continue to review other financing options for our business, which may in the
future include more equity financing. We have entered into or are seeking to
enter into various joint venture arrangements which would provide financing for
development of our mineral properties.
We believe that the combination of (i) the sale of the Notes, (ii) the sale of
stock in the Equity Transaction, (iii) other potential joint venture
arrangements currently in preliminary discussions, and (iv) other proposed and
negotiated financings, cash on hand, expected revenues and any new revenues from
our mining properties that our cash flow will be sufficient to meet our current
and anticipated operating cash requirements at least through fiscal 2008.
Cash and cash equivalents consist of demand deposits and interest earning
investments with maturities of three months or less, including overnight bank
deposits and money market funds. We carry cash equivalents at cost.
Effective April 3, 2007, we issued 4,000,000 shares of our common stock in
consideration for cancellation of a note payable totaling $1,200,000, payable
without interest. The balance remaining unpaid on that Note at September 30,
2007 was $385,057 and is listed as a Note Receivable on the Company's balance
sheet.
Between April 5, 2007 and June 22, 2007, we sold a total of 336,000 of our
shares to six accredited investors for proceeds of $168,000.
At September, 2007, cash and cash equivalents were $70,495 compared to $0.00 at
December 31, 2006.
B. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FULL FISCAL YEARS
Fiscal Year Ended December 31, 2006
- ----------------------------------------
The Company had essentially no operations during the fiscal year ended December
31, 2006. We incurred only $3,778 in various expenses as we began the startup
operation
43
of the Company. The only item of any substance on our books was a convertible
note held at $84,375 which was converted to common stock during 2007.
During the fiscal year ended December 31, 2006 our shareholders completed the
acquisition of Global Telephone Communication, Inc., changed its name to Spirit
Exploration, Inc. and completed a 1 for 660 reverse stock split. This permitted
us to properly structure the Company for our operations which effectively
commenced in fiscal year 2007.
INTERIM PERIODS
Nine Month Period from January 1, 2007 to September 30, 2007
- ----------------------------------------------------------------------
We essentially commenced operations and began operation of our business plan
during the early part of 2007.
During the period ended September 30, 2007, we reported no revenues and a net
loss of $46,193,186 or $.97 per share. This did not reflect actual operations
at the Company's mineral exploration sites, some of which had begun actual
production. Subsequent to September 30, 2007 we have had actual production of
mining concentrate and sales which will be reported in subsequent periods.
Our net loss reflects an impairment on mineral rights of $45,293,617. This
expense is an accounting entry resulting from the Company's acquisition of
substantial mineral rights and does not reflect actual cash paid by the Company.
On September 21, 2007 but effective for operations beginning on April 21, 2007,
the Company entered into an Assignment and Operating Agreement (the "Operating
Agreement") with Minera Pacifico Noroeste, S.A. ("Pacifico"), pursuant to which
the Company acquired certain assets relating to mining concessions and interests
and related obligations including the Muluncay Project, the Maria Olivia Project
and the Kylee concession, all subject to certain mortgages and obligations.
Under the terms of the Agreement with Pacifico, the Company through its
subsidiary ECUADORGOLDCORP., S.A. acquired a 100 % interest in the operating
mines and related assets. The purchase consideration for the interest consisted
of 15,000,000 restricted common shares which the Company valued at market on the
date of issue (September 21, 2007) or a total of $43,500,000.
Under accounting guidelines promulgated by the US Securities and Exchange
Commission ("SEC") in Industry Guide 7, as well as the Financial Accounting
Standards Board ("FASB"), the Company is not permitted to capitalize the value
of the mining rights until such point as they are "proven" or at least
"probable" reserves. Current accounting and disclosure rules prohibit the
Company from including those as assets on its balance sheet. The recoverability
of capitalized costs would likely be insupportable under Financial Accounting
Standard 144 ("FASB 144"), prior to the determination of a commercially minable
deposit, particularly as contemplated by the SEC's Industry Guide
44
for a mining company in the exploration stage. As a consequence, the SEC Staff
has advised that those costs should be expensed as incurred during the
exploration stage under generally accepted accounting rules.
The three primary properties in the Muluncay Project (the "Lopez" mine, the
"Esperanza" mine and the "Asanza" mine) acquired by the Company included
mortgages payable on the properties which at the time of acquisition from
Pacifico as part of the Operating Agreement totaled $1,560,000. At September
30, 2007, the balance remaining owed on these mortgages was approximately
$1,155,000. Pacifico has entered into an Assignment and Assumption Agreement
with ECUADORGOLDCORP, S.A., the Company's 99% subsidiary, which assigned these
properties to Ecuadorgold on behalf of the Company, and pursuant to which the
Company agreed to pay the balance of these mortgages from the first proceeds of
financing received by the Company. As the properties are part of the expense
recorded on the Company's Consolidated Income Statement, and they are payable
contingent upon the receipt of financing by the Cmopany, the mortgages are
included within that expense and are not set out as a separate liability of the
Company.
As part of the Operating Agreement, the Company also agreed to obtain
capitalization and funding required for the operation of the properties,
including without limitation exploration, future development, and future mining
operations for the properties. Such funding shall be pursuant to mutually
agreed upon budgets between the Company and Pacifico. Pacifico will remain the
operator on all properties of the Company in Ecuador in consideration for (i)
reimbursement of all expenses incurred on the projects at cost plus 10%, (ii)
fee of the lower of 10% of the net revenues or $10,000 per month, (iii) $10,000
per month for the first twelve months, which is deferred until the earlier of
April 11, 2008 or funding of the Company (fees payable after that shall be
negotiated between Pacifico and the Company) and (iv) a 3% Net Smelter Return
Royalty for 30 years or the life of the property. In the event of any material
default on the Operating Agreement, the offended party may immediately terminate
the Agreement. Upon any such termination, the fees and expenses, including
without limitation the Net Smelter Return Royalty, are immediately terminated
and neither party would have any further rights or obligations with respect to
the other.
Our net operating expenses were $762,310, which reflected $180,000 of expenses
which were accrued but unpaid for management salaries and consulting fees. Our
expenses also included $223,413 in wages and contract labor paid in connection
with the operations of our properties in Ecuador. Our expenses also included
$418,897 in selling, general and administrative expenses, of which $87,513 was
professional fees primarily relating to legal and accounting, $63,049 was fees
and expenses of consultants, $60,000 was management fees, $65,641 was office
rent and officer related expenses, $29,056 was travel related expenses and the
balance was numerous other general and administrative expenses.
We have also recorded a loss on derivative liability of $137,259 which is also
reflected as an accrued derivative liability on our balance sheet. This entry
reflects the issuance
45
of warrants to purchase 2,512,500 shares of our common stock at an exercise
price of $1.00 per share for five years, and is computed in accordance with the
Black-Scholes stock option valuation method.
Off-Balance Sheet Arrangements
- --------------------------------
The company has no off-balance sheet arrangements.
ITEM 3. DESCRIPTION OF PROPERTY.
The Company's head and principal office is located at 7305 Calle Sagrada,
Bakersfield, California 93309.
The Company also maintains a 200 square foot office in Victoria at 118 Howe St.
where the corporate records are kept. Accounting is done at a separate location
in Victoria, under contract. The Company also maintains a presence in
Vancouver, BC at Suite 1600, 705 West Pender St. This 2,000 square foot office
is shared with three other mining companies and is used under an accommodation
arranged by our Chief Executive Officer, who was the former President and still
Director of one of the companies, Yankee Hat Minerals.
The Company also maintains an office through it's subsidiary, Mineras
ECUADORGOLDCORP S.A. in Machala, Ecuador at Circunvalacion Norte #511, Y12 AVA,
Machala, Ecuador
The Machala office consists of a two story building of approximately 4,000 sq.
ft. It is surrounded by a security gate with a full time security guard. It is
located on a main road across from the only Five Star Hotel in Machala, the Oro
Verde. We do not have a long term lease arrangement and pay a monthly rental of
approximately $1,200 a month including utilities. We share this facility with
our operator, Mineras Pacifico Noroeste, S.A
46
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table shows the beneficial ownership of each class of the
Company's stock as of February 29, 2008. The table shows the amount of shares
owned by:
(1) each person known to us who owns beneficially more than five
percent of the outstanding shares of any class of the Company's stock,
based on the number of shares outstanding as of February 29, 2008;
(2) each of the Company's Directors and Executive Officers; and
(3) all of its Directors and Executive Officers as a group.
The percentage of shares owned is based on 48,025,800 shares of the Company's
common stock being outstanding as of February 29, 2008. Where the beneficially
owned shares of any individual or group in the following table includes any
options, warrants, or other rights to purchase shares in the Company's stock,
the percentage of shares owned includes such shares as if the right to purchase
had been duly exercised.
AMOUNT PERCENT
NAME, TITLE, AND ADDRESS, OF SHARES OF CLASS
CLASS OF BENEFICIAL OWNER OWNED OWNED
- ------ ----------------------------------- ------------ ---------
Peter Laipnieks,
Director and Interim
Chief Financial Officer
118 Howe Street
Victoria, British Columbia V8V 4K4
Common Canada 8,800,000(1) 18.0%
- ------ ----------------------------------- ------------ ---------
Terry Fields,
Director, CEO and Secretary
3510 Sunset Lane
Common Oxnard, CA 93035 8,800,000(2) 18.0%
- ------ ----------------------------------- ------------ ---------
Thomas Cunningham
President
7305 Calle Sagrada
Common Bakersfield, California 93309 200,000(3) 0.4%
- ------ ----------------------------------- ------------ ---------
Roger McClay
235 Morningside Drive
Delta, British Columbia V4L 2M3
Common Canada 6,000,000 12.5%
- ------ ----------------------------------- ------------ ---------
All Officers and Directors
Common as a group (three persons) 17,800,000 35.9%
- ------ ----------------------------------- ------------ ---------
(1) Includes 8,000,000 shares of common stock, and presently exercisable
warrants to purchase 800,000 shares of common stock, granted pursuant to
the employment agreement between the Company and Mr. Laipnieks.
47
(2) Includes 8,000,000 shares of common stock, and presently exercisable
warrants to purchase 800,000 shares of common stock, granted pursuant to
the employment agreement between the Company and Mr. Fields.
(3) Reflects presently exercisable options to purchase 200,000 shares of common
at a price of $1.90 per share, granted pursuant to the employment agreement
between the Company and Mr. Cunningham. Mr. Cunningham has other options
available under the contract which are not exercisable within 60 days and
are consequently not included in this table. See the discussion with
respect to his employment contract below.
BENEFICIAL OWNERSHIP OF SECURITIES: Pursuant to Rule 13d-3 under the Securities
Exchange Act of 1934, involving the determination of beneficial owners of
securities, a beneficial owner of securities is person who directly or
indirectly, through any contract, arrangement, understanding, relationship or
otherwise has, or shares, voting power and/or investment power with respect to
the securities, and any person who has the right to acquire beneficial ownership
of the security within sixty days through means including the exercise of any
option, warrant or conversion of a security.
48
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS.
The following table sets forth the names and ages of our current directors and
executive officers, their principal offices and positions and the date each such
person became a director or executive officer. The Board of Directors elects
our executive officers annually. Our directors serve one-year terms or until
their successors are elected, qualified and accept their positions. The
executive officers serve terms of one year or until their death, resignation or
removal by the Board of Directors. There are no family relationships or
understandings between any of the directors and executive officers. In
addition, there was no arrangement or understanding between any executive
officer and any other person pursuant to which any person was selected as an
executive officer. Mr. Cunningham devotes 100% of his business time to the
operations of the Company and Mr. Fields and Mr. Laipnieks currently devote
approximately 80% of their business time to the operations of the Company.
NAME OF DIRECTOR OR OFFICER AGE POSITION
----------------------------- ---
Terry Fields
3510 Sunset Lane
Oxnard, CA 93035 Chief Executive Officer,
65 Secretary and Director
Thomas Cunningham
7305 Calle Sagrada
Bakersfield, California 93309
65 President
Peter Laipnieks
118 Howe Street
Victoria, British Columbia Interim Chief Financial Officer,
V8V 4K4 President of EcuadorGoldCorp,
Canada 50 S.A. and Director
EXECUTIVE OFFICERS AND DIRECTORS
TERRY FIELDS: Chief Executive Officer, Secretary and Director
Mr. Fields graduated from UCLA (BS, 1965) and obtained his Doctorate of Law
degree from Loyola University School of Law (1969). He has over 30 years
experience as a practicing attorney in California. He is presently an inactive
member in good standing of the California State Bar since 2000. Mr. Fields has
extensive knowledge of corporate business and finance matters, both
international and domestic, having lived in Europe from 1995 to 1999. He has
been involved in the resource area since 1987 when he became President of High
Desert Mineral Resources (HDMR, BB) until it was sold to Royal Gold Corp in
2001. From January 2001 to December 2005, Mr. Fields was a Director of Sunburst
Acquisitions IV, Inc. (now Mexoro Minerals, Ltd.), and was President and
Secretary of Sunburst Acquisitions IV, Inc. from May 2001 to December
49
2005. He was also President of Apogee Minerals (APE, TSX) from 1993 to 2004 and
Yankee Hat Minerals (KHT, TSX) from August 2006 until August 2007. Presently,
Mr. Fields is President of First Pursuit Ventures (FPV, TSX) since January 2002
and Meadow Bay Capital Corp (MAY.P, TSX) since April 2005. From August 2006 to
August 2007 Mr. Fields was President and a Director of Yankee Hat Minerals (KHT,
TSX) and remains a Director of Yankee Hat Minerals to date, and is a Director of
Advanced I.D. Corp (AIDO, BB) since July 2005.
THOMAS CUNNINGHAM. President
Mr. Cunningham joined us as President on January 15, 2008. Prior to joining the
Company, Mr. Cunningham was appointed as treasurer and CFO of Tri-Valley
Corporation, a publicly traded oil, gas, and mineral exploration and production
company, in February 1997 and Corporate Secretary of Tri-Valley in December
1998. He has over 25 years experience in corporate finance, public company
reporting, shareholder relations, and employee benefits. In his career, Mr.
Cunningham served as Plant Property and Equipment Supervisor, corporate wide,
for Tesoro Petroleum, as Controller and Assistant Secretary for Tucker Drilling
Company, and as Executive Vice President and Chief Financial Officer for Star
Resources. Immediately prior to joining Tri-Valley, Mr. Cunningham was a
Management Consultant in finance, marketing, and human resource matters
including employee benefit plans. Mr. Cunningham received his education in
accounting and business administration from Angelo State University, San Angelo,
Texas.
PETER LAIPNIEKS: Interim Chief Financial Officer, President of EcuadorGoldCorp
S.A. and Director
Mr. Laipnieks graduated from Wilfred Laurier in 1979 (Hon. BA) and received an
MA degree from University of Alberta in 1985. He has over 25 years professional
experience as a consultant, senior manager and as President of a public company.
From April, 2003 until October, 2005, Mr. Laipnieks was President, Acting Chief
Financial Officer and Director of NetMeasure Technologies, Inc. (NMTH, BB).
NetMeasure merged with Sorell Inc. (SLLI, PINK), a Korean company in the
business of manufacturing, research and development and sales of consumer
electronics. He was President of Alliance Corporate Services from 1998 to 2004.
He also provided corporate development services to public and private companies,
including strategic advice in the areas of financing and public offerings. Mr.
Laipnieks was previously Director of Investor Relations for JCI Technologies, a
public Canadian high technology company. Mr. Laipnieks spent ten years as a
senior manager in the public service, where he was an Executive Director with
120 employees.
50
ITEM 6. EXECUTIVE COMPENSATION.
COMPENSATION DISCUSSION AND ANALYSIS
We do not have a standing compensation committee. Our President and Chief
Executive Officer make recommendations to our board of directors as to employee
benefit programs and officer and employee compensation.
Objectives and Philosophy of Our Executive Compensation Program
The primary objectives of our executive compensation programs are to:
- attract, retain and motivate skilled and knowledgeable individuals;
- ensure that executive compensation is aligned with our corporate
strategies and business objectives;
- promote the achievement of key strategic and financial
performance measures by linking short-term and long-term cash and
equity incentives to the achievement of measurable corporate and
individual performance goals; and
- align executives' incentives with the creation of stockholder value.
To achieve these objectives, our board of directors evaluate our executive
compensation program with the objective of setting compensation at levels they
believe will allow us to attract and retain qualified executives. In addition, a
portion of each executive's overall compensation is tied to key strategic,
financial and operational goals set by our board of directors. We also generally
provide a portion of our executive compensation in the form of options that vest
over time, which we believe helps us retain our executives and align their
interests with those of our stockholders by allowing the executives to
participate in our longer term success as reflected in asset growth and stock
price appreciation.
Components of our Executive Compensation Program
At this time, the primary elements of our executive compensation program
are:
- base salaries;
- cash bonuses;
- option grant incentive awards; and
- benefits and other compensation.
We do not have any formal or informal policy or target for allocating
compensation between short-term and long-term compensation, between cash and
non-cash compensation or among the different forms of non-cash compensation.
Instead, we have determined subjectively on a case-by-case basis the appropriate
level and mix of the various compensation components. Similarly, we do not rely
on benchmarking against our competitors in making compensation related
decisions.
51
Named Executive Officers
The following table identifies our principal executive officer, our
principal financial officer and our most highly paid executive officers, who,
for purposes of this Compensation Disclosure and Analysis only, are referred to
herein as the "named executive officers."
Name Corporate Office
- ----------------- ------------------------------------------
Terry Fields Chief Executive Officer
Thomas Cunningham President
Peter Laipnieks Interim Chief Financial Officer, Secretary
Employment Agreements
We maintain employment agreements with each of the named executive
officers. As discussed in more detail below, in addition to base salary, these
employment agreements cover a range of other components of the executive's
compensation package.
Base salaries
Base salaries are used to recognize the experience, skills, knowledge and
responsibilities required of all our named executive officers. Under the terms
of employment agreements base salary, and other components of compensation, may
be evaluated by our board of directors for adjustment based on an assessment of
the individual's performance and compensation trends in our industry. With the
exception of our President, our named executive officers have agreed to defer
base salaries until the Company has achieved a funding level sufficient to
maintain its operations and pay salaries without jeopardizing our business
operations in Ecuador.
Cash bonuses
Our board of directors has the discretion to award cash bonuses based on
our financial performance and individual objectives. The corporate financial
performance measures, which have typically been developed by our board of
directors, will be given the greatest weight in this bonus analysis. In our
initial development and exploration phases, we have not yet granted any cash
bonuses to any named executive officer.
Stock Option awards
Our stock option award program is the primary vehicle for offering
long-term incentives to our executives. Our equity awards to executives have
typically been made in the form of stock options. We believe that equity grants
in the form of Stock Options provide our executives with a direct link to our
long-term performance, create an
52
ownership culture and align the interests of our executives and our
stockholders. The employment agreements of Terry Fields and Peter Laipnieks
each included a grant of 800,000 stock options exercisable immediately for five
years into shares of the Company's common stock at $1.00 per share. The
employment agreement of Thomas Cunningham included a grant of a total of
1,000,000 stock options, which vest over a period of two years, at an exercise
price of $1.90 per share (the closing price of the shares of common stock on
January 15, 2008). The options become exercisable as they vest and are
exercisable for a period of five years following vesting of the full grant
amount. We believe the vesting feature furthers our objective of executive
retention because this feature provides an incentive to our executives to remain
in our employ during the vesting period.
We may also make discretionary equity awards to the named officers. In
determining the size of equity grants to our executives, our board of directors
will consider company-level performance, the applicable individual's
performance, the amount of equity previously awarded to the individual, the
vesting of such awards and the recommendations of management. Any grants of
discretionary equity awards, including those to executives, would be approved by
our board of directors and generally are granted based on the fair market value
of our common stock.
# of
Shares Exercise
Underlying Price
Name Options per Share Expiration Date
- ----------------- ---------- ---------- ----------------
Terry Fields 800,000 $ 1.00 April 21, 2012
Peter Laipnieks 800,000 $ 1.00 April 21, 2012
Thomas Cunningham 1,000,000 $ 1.90 January 15, 2013
The options granted to Mr. Cunningham will vest (i) 200,000 on January 1,
2008,(ii) 100,000 on April 1, 2008, (iii) 100,000 on July 1, 2008, (iv) 100,000
on October 1, 2008, (v) 200,000 on January 1, 2009, (vi) 100,000 on April 1,
2009, (vii) 100,000 on July 1, 2009, and (viii) 100,000 on October 1, 2009.
Benefits and other compensation.
Under the terms of their employment contracts, our named executive officers
are permitted to participate in such health care, disability insurance, bonus
and other employee benefits plans as may be in effect with the Company from time
to time to the extent the executive is eligible under the terms of those plans.
As of the date of this Registration Statement, we have not implemented any such
employee benefit plans.
53
SUMMARY COMPENSATION TABLE
The following table sets forth the total compensation paid to, or accrued by,
the Company's highest paid executive officers during the fiscal year ended
December 31, 2006. No restricted stock awards, long-term incentive plan payout
or other types of compensation, other than the compensation identified in the
chart below and its accompanying notes, were paid to these executive officers
during that fiscal years.
ANNUAL ANNUAL OTHER COMPEN- LONG
COMPEN- COMPEN- ANNUAL SATION TERM
SATION SATION COMPEN- RESTR- COMPEN- LTIP ALL
NAME AND SALARY BONUS SATION ICTED SATION PAY- OTHER
POSITION YEAR ($) ($) STOCK OPTIONS OUTS
- ---------------- ---- ------- ------- ------- ------- ------- ---- -----
Peter Laipnieks,
President and
Treasurer
2006 0 0 0 0 0 0 0
- ---------------- ---- ------- ------- ------- ------- ------- ---- -----
Terry Fields,
CEO and
Secretary
2006 0 0 0 0 0 0 0
- ---------------- ---- ------- ------- ------- ------- ------- ---- -----
(This table does not include Mr. Cunningham because he began his employment on
January 15, 2008)
Annual Base Salary
The following table discloses the annual salary set forth in the employment
agreement of each of the individual named executive officers
Name Annual Salary
----------------- --------------
Terry Fields $ 120,000
Peter Laipnieks $ 120,000
Thomas Cunningham $ 192,000
As discussed above, our employment agreements provide for an annual salary.
Base salary may be increased from time to time with the approval of the board of
directors. Base salary may not be decreased without the written consent of the
named executive officer.
Employment Agreements
TERRY FIELDS: Chief Executive Officer, Secretary and Director - Mr. Fields has
not been paid any salary for his services through the date hereof. Effective
April 11, 2007, Mr. Fields entered into an employment agreement for a period of
five years with the Company which provides for base compensation in the gross
amount of $10,000 per month for the first twelve months, which payment is
deferred until April 11, 2008 or until
54
sufficient funding of the Company to permit continued operations in Ecuador
while adequately providing for salary compensation, whichever is earlier.
Commencing on April 11, 2008, the Company will pay Mr. Field's base compensation
in the gross amount of $20,000 per month. Thereafter base compensation shall
increase by 5% annually. Mr. Fields also received a grant of 800,000 stock
warrants exercisable for five years into shares of the Company's common stock at
$1.00 per share. Mr. Fields is also entitled to other benefits granted to
executive officers and to a bonus of up to 50% of base compensation based on the
Company's performance.
PETER LAIPNIEKS, Interim Chief Financial Officer and Director - Mr. Laipnieks
has not been paid any salary for his services through the date hereof.
Effective April 11, 2007, Mr. Laipnieks, entered into an employment agreement
for a period of five years with the Company which provides for base compensation
in the gross amount of $10,000 per month for the first twelve months, which
payment is deferred until April 11, 2008 or until sufficient funding of the
Company to permit continued operations in Ecuador while adequately providing for
salary compensation, whichever is earlier. Commencing on April 11, 2008, the
Company will pay Mr. Laipnieks base compensation in the gross amount of $20,000
per month. Thereafter base compensation shall increase by 5% annually. Mr.
Laipnieks also received a grant of 800,000 stock warrants exercisable for five
years into shares of the Company's common stock at $1.00 per share. Mr.
Laipnieks is also entitled to other benefits granted to executive officers and
to a bonus of up to 50% of base compensation based on the Company's performance.
THOMAS CUNNINGHAM, President - Mr. Cunningham began his employment with the
Company on January 15, 2008 pursuant to an employment contract which terminates
December 31, 2009. Mr. Cunningham's initial base salary is $192,000, which will
increase to $240,000 automatically on July 1, 2008. Mr. Cunningham also received
1,000,000 options to purchase common stock of the Company at $1.90 per share
(the closing price of the stock on January 15, 2008), which vest as follows: (i)
200,000 on January 1, 2008,(ii) 100,000 on April 1, 2008, (iii) 100,000 on July
1, 2008, (iv) 100,000 on October 1, 2008, (v) 200,000 on January 1, 2009, (vi)
100,000 on April 1, 2009, (vii) 100,000 on July 1, 2009, and (viii) 100,000 on
October 1, 2009. Mr. Cunningham is entitled to participate in the Company's
general health, dental and 401(k) plans to the extent they are adopted.
Termination of Employment Agreements
Terry Fields and Peter Laipnieks
--------------------------------
The employment agreements of Mr. Laipnieks and Mr. Fields officers may be
terminated: ( i) upon resignation, (ii) upon resignation "for good reason",
(iii) by the Company for cause;( iv) by the Company without cause; (v) upon a
change in control or (vi) upon a death or disability.
If Mr. Fields or Mr. Laipnieks resigns employment during the other than for
"Good Reason," the Company shall have no liability to Executive except to pay
Base Salary
55
and any accrued benefits through his last day worked. The executives would
not be entitled to receive severance or other benefits.
If Mr. Fields or Mr. Laipnieks resigns employment for "Good Reason," he
shall be entitled to receive (i) all accrued but unpaid salary and benefits
through the date of termination, and (ii) the Severance Benefit referenced
below. "Good Reason" shall mean a resignation within sixty days after any of the
following events which occur without Executive's consent: (1) A diminution in
Executive's position, duties or responsibilities; (2) A relocation of the
Company's headquarters more than 50 miles from its present location; (3) A
reduction in Executive's then Base Compensation; or (4) The Company's material
breach of the employment agreement
If the Company terminates Mr. Fields or Mr. Laipnieks for "Cause," the
Company shall have no liability to Executive except to pay Base salary and any
accrued benefits through his last day worked. Executive shall not be entitled to
receive severance or other benefits. "Cause" includes: (1) Theft or
embezzlement, or attempted theft or embezzlement, of money exceeding $20,000 or
material tangible or intangible assets or property of the Company, its
Subsidiaries or its employees or business relations; (2) An intentional
violation of any law or any act or acts of moral turpitude which negatively and
directly affects the property, business or operations of the Company or its
Subsidiaries; (3) Other than as a result of a disability, a material and
substantial failure to carry out effectively Executive's duties and obligations
to the Company, or failure to devote to the Company's business the time
required, upon not less than ten (10) days' advance written notice of the
asserted problem and a reasonable opportunity to cure; (4) Gross negligence or
willful misconduct in the performance of Executive's duties resulting in
material negative impact on the property, business or operations of the Company;
or (5) Executive's material breach of the4 employment agreement which, after
written notice by the Company of such breach, is not cured within ten (10) days
of such notice.
If the Company terminates Mr. Fields or Mr. Laipnieks without Cause (and
for reasons other than Death, Disability or Change in Control), Executive shall
be entitled to receive (i) all accrued but unpaid salary and benefits through
the date of termination and (ii) the Severance Benefit.
If the Company terminates Mr. Fields or Mr. Laipnieks without Cause (and
for reasons other than Death or Disability) in conjunction with a "Change in
Control," he shall be entitled to receive (i) all accrued but unpaid salary and
benefits through the date of termination and (ii) the Change in Control Benefit
The "Severance Benefit" includes: (i) continuation of base salary in effect
immediately prior to such termination or resignation, but in any event such
compensation shall be for no less than sixty months ("Severance Benefit
Period"); and (ii) continuation of employment benefits for the Severance Benefit
Period. The "Change in Control Benefit" includes : (i) continuation of base
salary in effect immediately prior to such termination or resignation for a
period equal to twice the amount of the Severance Benefit Period or the
remainder of the then current employment term ("Change in
56
Control Benefit Period"), whichever is longer; and (ii) continuation of
employment benefits for the Change in Control Benefit Period.
Thomas Cunningham
- -----------------
Mr. Cunningham's employment may be terminated as follows: (i) simply upon
the expiration of the term of his employment agreement (currently December 31,
2009) or any subsequent extension of the term; (ii) upon mutual written
agreement; (iii) automatically and without further action on the part of either
party as of the date of death; (iv) automatically and without further action
upon the dissolution of the Company; (v) upon the giving of twenty-four hours'
written notice, for cause upon the occurrence certain events, as determined by
the Company. "Cause" includes (1) Continued failure to follow the directives of
the Company or unjustifiably neglecting duties under the employment agreement;
(2) Acts involving moral turpitude; (3) Failure or refusal to adhere to the
bylaws, rules, regulations, policies, code of conduct or other standards of the
Company, after being provided with written notice of such failure and being
provided a reasonable opportunity to cure such failure; (4) Personal or
professional conduct of such a nature as to bring disrepute upon the Company or
to render continued association a serious threat to the orderly conduct of the
Company's affairs; (5) Material breach of the employment agreement; (6) A
fraudulent act or act of dishonesty, including, but not limited to,
misappropriation of the Company's funds or assets; (7) intentional or negligent
misuse of the Company's facilities or equipment; (8) Appointment by a court of
competent jurisdiction of a guardian or conservator for Mr. Cunningham; (9)
Evidence of drug or alcohol abuse, as determined pursuant to the Company's
substance abuse policies; (10) Refusal to provide the Company with any
information reasonably requested to evaluate whether Mr. Cunningham is in
violation of the employment agreement or has committed any other act or omission
which might constitute just cause for termination of the employment agreement;
(11) Disclosure of Company confidential information or trade secrets or misuse
of data, information or documents acquired in connection with employment.
Upon termination of the employment Agreement, Mr. Cunningham would be
entitled to compensation for all services performed prior to date of
termination. In the event the employment agreement is terminated for any reason
other than termination of the term, death or cause, Mr. Cunningham would also
receive a severance payment of $240,000.00 and all stock purchase options not
yet vested would vest immediately.
57
GRANTS OF PLAN-BASED AWARDS TABLE FOR FISCAL YEAR 2006
ALL OTHER
OPTION EXERCISE
AWARDS: OR BASE GRANT DATE
CONST- NUMBER OF PRICE OF FAIR VALUE
RUCTIVE ACTUAL SECURITIES OPTION OF STOCK
GRANT GRANT UNDERLYING AWARDS AND OPTION
NAME DATE(1) DATE(1) OPTIONS (#) ($/SH)(2) AWARDS
- ----------------- -------- ------- ----------- --------- ----------
Terry Fields None None n/a n/a n/a
Peter Laipnieks None None n/a n/a n/a
Thomas Cunningham None None n/a n/a n/a
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR END TABLE
During fiscal 2006 we made no stock option awards to the named executive
officers. The following table sets forth information regarding the outstanding
stock options held by our named officers as of February 29, 2008.
OPTION AWARDS
------------ -------------- ------------ -------- --------------
EQUITY
INCENTIVE
PLAN
NUMBER OF NUMBER OF AWARDS:
SECURITIES SECURITIES NUMBER OF
UNDERLYING UNDERLYING SECURITIES
UNEXERCISED UNEXERCISED UNDERLYING OPTION
OPTIONS OPTIONS UNEXERCISED EXERCISE OPTION
(#) (#) UNEARNED PRICE EXPIRATION
NAME EXERCISABLE UNEXERCISABLE OPTIONS(#) ($) DATE
- ---------- ------------ -------------- ------------ -------- --------------
Terry
Fields 800,000 - - 1.00 April 12, 2012
Peter
Laipnieks 800,000 - - 1.00 April 12, 2012
Thomas
Cunningham 1,000,000 - - 1.90 Jan 15, 2013
OPTION EXERCISES FOR FISCAL YEAR 2006 AND THROUGH SEPTEMBER 30, 2007
During the 2006 fiscal year and through September 30, 2007 none of the
named executive officers exercised options.
58
NONQUALIFIED DEFERRED COMPENSATION
We offer no defined contribution or other plan that provide for the
deferral of compensation on a basis that is not tax-qualified to any of our
employees including the named executive officers.
COMPENSATION OF DIRECTORS
We intend to use a combination of cash and equity-based compensation to
attract and retain candidates to serve on our board of directors. We do not
compensate directors who are also our employees for their service on our board
of directors. Therefore, Mr. Fields and Mr. Laipnieks did not receive any
compensation for their service on our board of directors, and we have not
provided any compensation to any member of our Board of Directors for the fiscal
year ended December 31, 2006 nor through September 30, 2007.
Equity Compensation
We do not currently have a fixed plan for the award of equity compensation
to our non-employee directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
We do not currently have a standing Compensation Committee, rather our
entire board of directors participated in deliberations concerning executive
officer compensation.
COMPENSATION COMMITTEE REPORT
The board of directors has reviewed and discussed the Compensation
Discussion and Analysis required by Item 402(b) of Regulation S-K with
management and, based on such review and discussions, the board of directors
recommended that this Compensation Discussion and Analysis be included in this
Registration Statement on Form 10.
STOCK OPTION AND WARRANT GRANTS TO EMPLOYEES
The Company currently does not participate in a stock option plan for its
employees.
59
On April 11, 2007, the Company granted 1,600,000 warrants to its employees
pursuant to employment agreements, including the following warrants to executive
officers:
Number of % of Total
Securities Options/SARs
Underlying Granted to Exercise or
Name and Options/SARs Employees Base Price Expiration
Position Granted (#) in Fiscal Year ($/Sh) Date
- ----------------- ------------- -------------- ------------- ----------
Peter Laipnieks,
President and
Treasurer 800,000 800,000 $ 1.00 4/11/2012
- ----------------- ------------- -------------- ------------- ----------
Terry Fields,
CEO and Secretary 800,000 800,000 $ 1.00 4/11/2012
- ----------------- ------------- -------------- ------------- ----------
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
RELATED TRANSACTIONS
On April 30, 2007, the Company issued a note to Terry Fields, the Company's
Chief Executive Officer, for a loan of $113,000. The Loan is payable on demand
without interest and is unsecured.
On June 20, 2007, the Company issued a note to Resource Buyers and Distribution,
Inc. for a loan of $35,000. The Loan is payable on demand without interest and
is unsecured.
On June 26, 2007, the Company issued a note to Webworks for a loan of $300,000.
The Loan is payable on demand and bears interest of 8% per annum and is
unsecured. Terry Fields, the Company's Chief Executive Officer, and Peter
Laipnieks, the Company's President, each guaranteed $75,000 of the Webworks'
obligation.
On July 15, 2007, the Company issued a note to David Aisenstat for a loan of
$234,188.34. As additional consideration on the loan, David Aisenstat was
issued 250,000 shares of the Company's common stock. The Loan is payable at a
rate of $50,000 a month starting in September 2007. It is without interest and
is unsecured. The obligation to Mr. Aisenstat is secured by a guarantee by
Terry Fields, the Company's Chief Executive Officer, and Peter Laipnieks, the
Company's President.
On September 30, 2007, the Company issued a note to Peter Laipnieks, the
Company's President, for a loan of $87,774. The Loan is payable on demand
without interest and is unsecured.
60
DIRECTOR INDEPENDENCE
The Company is not listed on any national exchange, or quoted on any
inter-dealer quotation service, that imposes independence requirements on any
committee of the Company's directors, such as an audit, nominating or
compensation committee. The Company does not have any independent directors on
its Board. The company's Board of Directors consists of Terry Fields and Peter
Laipnieks, neither of whom are independent.
ITEM 8. LEGAL PROCEEDINGS.
The Company is not a party to any material legal proceedings and, to the
Company's knowledge, no such proceedings are threatened or contemplated by any
party.
61
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS.
MARKET INFORMATION
Our common stock is quoted in United States markets on the PinkSheets,
maintained by PinkSheets LLC, a privately owned company headquartered in New
York City, under the symbol "SPXP." There is no assurance that the common stock
will continue to be traded on the PinkSheets or that any liquidity exists for
our shareholders.
MARKET PRICE
The following table shows the high and low per share price quotations of the
Company's common stock as reported by the PinkSheets for the periods presented.
These quotations reflect inter-dealer prices, without retail mark-up, mark-down
or commissions, and may not necessarily represent actual transactions. The
PinkSheets market is extremely limited and the prices quoted by brokers are not
a reliable indication of the value of the common stock. The periods presented
represent fiscal quarters, with the fourth quarter of each year ending on
December 31. Prior to January 1, 2007, the Company's common stock rarely traded
and did not reflect any existing business. In addition, the stock preceded a 1
for 660 reverse stock split. As a consequence, pricing prior to such date would
not reflect any real stock transactions or pricing and has been omitted.
HIGH LOW
Fiscal 2007
Fourth Quarter 3.54 1.63
Third Quarter 5.00 2.55
Second Quarter 4.50 2.25
First Quarter 2.25 2.25
Fiscal 2008
First Quarter (through February 29) 2.55 0.61
As of December 31, 2007, the Company had 200,000,000 shares of common stock
authorized, 48,025,800 shares issued and outstanding. These shares were held by
approximately 325 shareholders of record and the Company estimates by more than
1,300 beneficial shareholders.
62
PENNY STOCK REGULATIONS
Our common stock is quoted in United States markets on the PinkSheets,
maintained by PinkSheets LLC, a privately owned company headquartered in New
York City, under the symbol "SPXP." On December 10, 2007 the last reported sale
price of our common stock was $2.36 per share. As such, the Company's common
stock may be subject to provisions of Section 15(g) and Rule 15g-9 of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), commonly
referred to as the "penny stock rule."
Section 15(g) sets forth certain requirements for transactions in penny stocks,
and Rule 15g-9(d) incorporates the definition of "penny stock" that is found in
Rule 3a51-1 of the Exchange Act. The SEC generally defines "penny stock" to be
any equity security that has a market price less than $5.00 per share, subject
to certain exceptions. As long as the Company's common stock is deemed to be a
penny stock, trading in the shares will be subject to additional sales practice
requirements on broker-dealers who sell penny stocks to persons other than
established customers and accredited investors.
DIVIDENDS
The Company has not issued any dividends on the common stock to date, and does
not intend to issue any dividends on the common stock in the near future. We
currently intend to use all profits to further the growth and development of the
Company.
63
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES.
The following represents all unregistered securities sold by the Company during
the last two full fiscal years and through the date of this Registration
Statement.
On November 11, 2005 the Company issued an aggregate of 54,138,554 shares (pre
reverse split) to three accredited investors who had provided consulting
services to the company valued at $56,006.25. The shares were issued in
accordance with Section 4(2) of the Securities Act for an offering not involving
a public offering and included a restrictive legend.
Effective February 8, 2007 the Company issued 16,000,000 shares to or on behalf
of two accredited investors, who were the officers of the Company, for a total
of $66,666. The shares were issued in accordance with Section 4(2) of the
Securities Act for an offering not involving a public offering and included a
restrictive legend.
Effective February 8, 2007 the Company issued 8,000,000 shares to or three
accredited investors for a total of $33,334. The shares were issued in
accordance with Section 4(2) of the Securities Act for an offering not involving
a public offering and included a restrictive legend.
Effective February 8, 2007, the Company issued 750,000 shares to the Company's
legal counsel, an accredited investor, in consideration for legal services. The
shares were issued in accordance with Section 4(2) of the Securities Act for an
offering not involving a public offering and included a restrictive legend.
On February 8, 2007, the Company issued 75,000 shares to an accredited investor
in connection with an agreement on transfer of a note for $35,000. The shares
were issued in accordance with Section 4(2) of the Securities Act for an
offering not involving a public offering and included a restrictive legend.
Effective February 8, 2007, the Company issued 3,375,000 shares to four
accredited investors upon conversion of a convertible note issued in 2000 with
an original principal amount of $50,000. These shares were issued without
legend under Rule 144(k) of the Securities Act.
Effective April 3, 2007, the Company issued 4,000,000 shares to three accredited
investors upon conversion of a convertible note originally issued in 2002 with
an original principal amount and interest due of $30,092.98. These shares were
issued without legend under Rule 144(k) of the Securities Act.
On April 5, 2007, the Company sold 66,000 shares to an accredited investor for
$.50 per share. The shares were issued in accordance with Section 4(2) of the
Securities Act for an offering not involving a public offering and included a
restrictive legend.
64
On April 16, 2007, the Company sold 100,000 shares to an accredited investor for
$.50 per share. The shares were issued in accordance with Section 4(2) of the
Securities Act for an offering not involving a public offering and included a
restrictive legend.
On April 26, 2007, the Company sold 50,000 shares to an accredited investor for
$.50 per share. The shares were issued in accordance with Section 4(2) of the
Securities Act for an offering not involving a public offering and included a
restrictive legend.
Effective May 1, 2007, the Company issued warrants to purchase a total of
2,525,000 shares to four accredited investors exercisable for 5 years at $1.00
per share. 1,600,000 of these options were issued to the Company's founders,
800,000 were issued in connection with consulting services and 125,000 were
issued for legal services. The warrants were issued in accordance with Section
4(2) of the Securities Act for an offering not involving a public offering.
On May 3, 2007, the Company sold 50,000 shares to an accredited investor for
$.50 per share. The shares were issued in accordance with Section 4(2) of the
Securities Act for an offering not involving a public offering and included a
restrictive legend.
On May 11, 2007, the Company sold 50,000 shares to an accredited investor for
$.50 per share. The shares were issued in accordance with Section 4(2) of the
Securities Act for an offering not involving a public offering and included a
restrictive legend.
On June 22, 2007, the Company sold 20,000 shares to an accredited investor for
$.50 per share. The shares were issued in accordance with Section 4(2) of the
Securities Act for an offering not involving a public offering and included a
restrictive legend.
Effective September 21, 2007, the Company issued 15,000,000 shares in connection
with the acquisition of mining properties in Ecuador. These shares were issued
into escrow to be further distributed to a limited number of concession holders
in Ecuador, which was subsequently completed to a total of 72 persons or
entities, all but 24 of which were non United States persons and were related to
the Company's operations in Ecuador. The shares were issued in accordance
either with Regulation S promulgated under the Securities Act or under Section
4(2) of the Securities Act for an offering not involving a public offering, and
all included a restrictive legend.
Effective September 21, 2007, the Company issued 250,000 shares to an accredited
investor as a consulting fee. These shares were issued in accordance with
Section 4(2) of the Securities Act for an offering not involving a public
offering and included a restrictive legend.
Effective October 19, 2007, the Company issued 5,000 shares to an accredited
investor as a finders' fee. The shares were issued in accordance with Section
4(2) of the Securities Act for an offering not involving a public offering and
included a restrictive legend.
65
Effective November 9, 2007, the Company issued 50,000 shares to an accredited
investor for consulting services. The shares were issued in accordance with
Section 4(2) of the Securities Act for an offering not involving a public
offering and included a restrictive legend.
Effective November 9, 2007, the Company issued 1,000 shares to an investor for a
termination fee as the Company's transfer agent. The shares were issued in
accordance with Section 4(2) of the Securities Act for an offering not involving
a public offering and included a restrictive legend.
Effective November 21, 2007, the Company issued 30,000 shares to an accredited
investor for consulting services. The shares were issued in accordance with
Section 4(2) of the Securities Act for an offering not involving a public
offering and included a restrictive legend.
66
ITEM 11. DESCRIPTION OF SECURITIES.
The following sets forth the material terms of the Company's securities.
However, a more detailed description of our securities is contained in the
Company's Articles of Incorporation, incorporated by this reference and included
as an exhibit to this Form 10.
COMMON STOCK
Our Articles of Incorporation authorize the issuance of up to 200,000,000 shares
of common stock, par value $0.001. There were 48,025,800 shares of common stock
issued and issued and outstanding as of December 31, 2007.
Holders of our common stock are entitled to one vote per share on all matters to
be voted on by the stockholders. Holders of common stock are entitled to
receive ratably such dividends, if any, as may be declared by the Board of
Directors out of funds legally available therefore. In the event of a
liquidation, dissolution, or winding up of the Company, the holders of common
stock are entitled to share ratably in all of our assets which are legally
available for distribution after payment of all debts and other liabilities and
liquidation preference of any outstanding common stock.
Holders of our common stock have no preemptive rights to purchase the Company's
common stock. There are no conversion or redemption rights or sinking fund
provisions with respect to the common stock. The outstanding shares of common
stock are validly issued, fully paid and non-assessable.
PREFERRED STOCK
Our Articles of Incorporation authorize the issuance of 100,000,000 shares of
Preferred Stock, par value $.01 per share. There are presently no shares of
preferred stock outstanding. Our Board of Directors has the ability to issue
shares of preferred stock with such dividend rights, liquidation preferences,
voting rights and other terms as they may determine are in the best interests of
the Company. Issuance of preferred stock may have an anti-takeover impact. The
Board of Directors presently has no intention to issue any shares of Preferred
Stock.
DEBT SECURITIES
As of December 31, 2007, there were no outstanding debt securities.
67
OPTIONS
As of December 31, 2007, there were no outstanding options to purchase shares of
common stock.
WARRANTS
As of December 31, 2007, there were 2,512,500 warrants outstanding at a weighted
average exercise price of $1.00.
DIVIDEND POLICY
The Company has not issued any dividends on the common stock to date, and does
not intend to issue any dividends on the common stock in the near future. We
currently intend to use all profits to further the growth and development of the
Company.
REPORTS TO STOCKHOLDERS
The Company intends to comply with the periodic reporting requirements of the
Securities Exchange Act of 1934. The Company plans to furnish its stockholders
with an annual report for each fiscal year ending December 31, 2007 containing
financial statements audited by its independent certified public accountants.
The SEC maintains an Internet site at www.sec.gov that contains reports, proxy
and information statements, and other information regarding issuers that file
electronically with the SEC. The public may also read and copy any materials we
file with the SEC at the SEC's Public Reference Room at 100 F Street, N.E.,
Washington, D.C. 20549 (call 1-800-SEC-0330 for information). Our website is
located at www.spirit-exploration.com.
TRANSFER AGENT
The transfer agent and registrar for our Common Stock is
Transfer Online, Inc.
317 SW Alder Street
2nd Floor
Portland, OR 97204
Phone: 503-227-2950
Fax: 503-227-6874
www.transferonline.com
68
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Nevada Revised Statutes ("NRS") Sec. 78.7502 provides, in effect, that any
person made a party to any action by reason of the fact that he is or was a
director, officer, employee or agent of our company may and, in certain cases,
must be indemnified by our company against, in the case of a non-derivative
action, judgments, fines, amounts paid in settlement and reasonable expenses
(including attorneys' fees) actually and reasonably incurred by him as a result
of such action; and in the case of a derivative action, against amounts paid in
settlement and expenses (including attorneys' fees) actually and reasonably
incurred, if in either type of action he either (1) Is not liable for a breach
of his fiduciary duties to the Company pursuant to NRS 78.138, or (2) acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of our company and in, with respect to any criminal, had
reasonable cause to believe his conduct was lawful. This indemnification does
not apply, in a derivative action, to matters as to which it is adjudged that
the director, officer, employee or agent is liable to our company, unless upon
court order it is determined that, despite such adjudication of liability, but
in view of all the circumstances of the case, he is fairly and reasonably
entitled to indemnification for expenses.
At present, there is no pending litigation or proceeding involving any director
or officer as to which indemnification is being sought, nor are we aware of any
threatened litigation that may result in claims for indemnification by any
director or officer.
69
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Set Forth Below.
70
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS.
As of January 1, 2005, the Company had no operations and had not engaged an
accountant. In November 2007, the Company engaged Gruber & Company LLC to Audit
its financial statements.
Since engaging them, there have been no disagreements between the Company and
Gruber & Company LLC, the Company's accountants, on any matter of accounting
principles or practices, financial statement disclosure or auditing scope of
procedure, which disagreements, if not resolved to the satisfaction of such
firm, would have caused them to make reference to the subject matter thereof in
their report on the Company's financial statements for such periods.
71
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS.
FINANCIAL STATEMENTS
Consolidated Financial Statements as at September 30, 2007, and for the interim
period from January 1, 2007 to September 30, 2007.
EXHIBITS
3.1 Articles of Incorporation of Spirit Exploration, Inc., as amended.
3.2 Constitution of the Company for ECUADORGOLDCORP, S.A. (translated from
Spanish).*
3.3 By-laws of Spirit Exploration, Inc.*
10.1 Employment Agreement between Spirit Exploration, Inc. and Peter
Laipnieks dated April 11, 2007.*
10.2 Employment Agreement between Spirit Exploration, Inc. and Terry Fields
dated April 11, 2007.*
10.3 Consulting Agreement between Spirit Exploration, Inc. and Resource
Buyers and Distribution, Inc. dated April 11, 2007.*
10.4 Assignment and Operating Agreement between Spirit Exploration, Inc. and
Minera del Pacifico Noroeste S.A. dated April 21, 2007 (as amended).
10.5 Engagement Agreement Spirit Exploration and IBK Capital Corp. dated
October 19, 2007.*
10.6 [Deleted]
10.7 Service Agreement between Spirit Exploration, Inc. and Goal Capital LLC
dated November 15, 2007.*
10.8 Consulting Agreement between Spirit Exploration, Inc. and Wakabayashi
Fund LLC dated October 18, 2007 (public relations).*
10.9 Consulting Agreement between Spirit Exploration, Inc. and Wakabayashi
Fund LLC dated October 18, 2007.*
10.10 Assignment and Assumption Agreement between Minera Pacifico Noroeste
S.A. and ECUADORGOLDCORP S.A. dated December 3, 2007
10.11 Assignment and Assumption Agreement between ECUADORGOLDCORP S.A. and
Cutler Ecuador S.A. dated December 3, 2007
10.12 Promissory Note issued to Terry Fields dated April 30, 2007
10.13 Promissory Note issued to Resource Buyers and Distribution, Inc. dated
June 20, 2007
10.14 Promissory Note issued to Webworks dated June 26, 2007
10.15 Promissory Note issued to David Aisenstat dated July 15, 2007
10.16 Promissory Note issued to Peter Laipnieks dated September 30, 2007
10.17 Term Sheet for Debt and Equity Financing Dated November 19, 2007
21 Subsidiaries of the company.*
* Filed with the Company's filing on Form 10-SB, filed December 12, 2007, file
number 000-52977, and hereby incorporated in this Form 10 by this reference.
72
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the registrant has duly caused this Amendment No. 1 to the registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized.
SPIRIT EXPLORATION, INC.
(Registrant)
Date: March 4, 2008 By: /s/ Thomas Cunningham
--------------- -----------------------
Thomas Cunningham
As its President
73
SPIRIT EXPLORATION, INC.
(AN EXPLORATION STAGE COMPANY)
CONSOLIDATED FINANCIAL STATEMENTS
CONTENTS
Financial Statements:
Report of Independent Registered Public Accounting Firm. ....................F-1
Consolidated Balance Sheets as of September 30, 2007 and
December 31, 2006. ..........................................................F-3
Consolidated Statements of Operations for the nine months
ended September 30, 2007, year ended December 31, 2006 and
Inception of Exploration Stage on January 1, 2006 through
September 30, 2007. .........................................................F-4
Consolidated Statements of Changes in Stockholders' Equity
from inception of exploration Stage to September 30, 2007. ..................F-5
Consolidated Statements of Cash Flows for the nine months
ended September 30, 2007, fiscal year ended December 31,
2006 and Inception of Exploration Stage on January 1, 2006
through September 30, 2007. .................................................F-6
Notes to Financial Statements. ......................................F-7 to F-17
GRUBER & COMPANY LLC
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
THE Board of Spirit Exploration, Inc.:
We have audited the accompanying balance sheet of Spirit Exploration, Inc.(An
Exploration Stage Company) as of September 30, 2007 and December 31, 2006, and
the related statements of operations, stockholders equity and cash flows for the
periods then ended and from inception of the Exploration Stage of January 1,
2006 to September 30, 2007. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform our audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes examining
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Spirit Exploration, Inc. as at
September 30, 2007 and December 31, 2006 and the results of its' operations and
its' stockholders equity and cash flows for the years then ended and from
inception of the Exploration Stage of January 1, 2006 to September 30, 2007 in
conformity with accounting principles generally accepted in the United States of
America.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in note 2 to these financial
statements the Company has incurred recurring losses. This raises substantial
doubt about its ability to continue as a going concern. Managements' plans in
dealing with this are also discussed. These financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
F-1
\s\ Gruber & Company
- -------------------------------------------
Gruber & Company, LLC Saint Louis, Missouri
December 11, 2007
F-2
SPIRIT EXPLORATION, INC.
(AN EXPLORATION STAGE COMPANY)
Consolidated Balance Sheets
September30, 2007 December31, 2006
------------------- ------------------
ASSETS
Current assets:
Cash $ 70,495 $ -
Note receivable 385,057 -
------------------- ------------------
Total current assets 455,552 -
Equipment 74,549 -
------------------- ------------------
Total Assets $ 530,101 $ -
=================== ==================
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accruals $ 713,672 $ 3,778
Convertible Note payable - 84,375
Loans payable 988,059 -
Accrued Derivative Liability 137,259 -
------------------- ------------------
Total current liabilities 1,838,990 88,153
------------------- ------------------
Stockholders' Equity (deficit):
Common stock; $.001 par value;
200,000,000 shares authorized and
7,940,800 and 153,800 issued and
outstanding as of September 30,
2007 and December 31, 2006,
respectively 47,940 154
Additional paid-in capital 44,924,664 -
Deficit Accumulated During Exploration
Stage (46,281,493) (88,307)
------------------- ------------------
Total stockholders' equity (deficit) (1,308,889) (88,153)
------------------- ------------------
Total liabilities and
stockholders' deficit $ 30,101 $ -
=================== ==================
The accompanying notes are an integral part of the financial statements.
F-3
SPIRIT EXPLORATION, INC.
(AN EXPLORATION STAGE COMPANY)
Consolidated Statements of Operations
Inception of
Exploration Stage at
January 1, 2006 January 1, 2006
Nine Months Ended Through Through
September 30, 2007 December 31, 2006 September 30, 2007
-------------------- ------------------- ----------------------
Sales $ - $ - $ -
Cost of goods sold - - -
-------------------- ------------------- ----------------------
Gross profit - - -
Operating expenses:
Accrued Management fees 120,000 - 120,000
Personnel and wages 223,413 - 223,412
Selling, general and administrative 418,897 3,778 422,675
-------------------- ------------------- ----------------------
762,310 3,778 766,088
-------------------- ------------------- ----------------------
Impairment on Mineral Rights 45,430,876 - 45,530,876
Loss from operations (46,193,186) (3,778) (46,296,964)
Other (expense) income:
Loss of Derivative Liability 137,259 - 137,259
Interest (expense) income - - -
-------------------- ------------------- ----------------------
137,259 - 137,259
Net loss before taxes (46,193,186) - (46,196,964)
Income tax expense - - -
-------------------- ------------------- ----------------------
Net Loss $ (46,193,186) $ (3,778) $ (46,196,964)
==================== =================== ======================
Loss per share, basic and diluted $ (.97) $ (.02) $ (.97)
==================== =================== ======================
Weighted average number
of common shares outstanding,
basic and diluted 47,603,800 153,800 47,603,800
==================== =================== ======================
The accompanying notes are an integral part of the financial statements.
F-4
SPIRIT EXPLORATION, INC.
(AN EXPLORATION STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
FOR THE PERIOD FROM JANUARY 1, 2006 THROUGH SEPTEMBER 30, 2007
DEFICIT
ACCUMULATED
COMMON STOCK ADDITIONAL DURING
------------------- PAID-IN DEVELOPMENT
SHARES AMOUNT CAPITAL STAGE TOTAL
---------- ------- ----------- ------------- -------------
Balance, January 1, 2006 153,800 $ 154 $ - $ (88,307) $ (88,153)
Balance, January 1, 2007 153,800 $ 154 $ - $ (88,307) $ (88,153)
Issuance of common stock for cash 24,000,000 24,000 76,000 100,000
Issuance of common stock for
Legal services 750,000 750 - - 750
Issuance of common stock on
Conversion of note 3,450,000 3,450 - - 3,450
Issuance of common stock for cash 336,000 336 167,664 - 168,000
Issuance of common stock on
Conversion of note and cash 4,000,000 4,000 1,196,000 - 1,200,000
Issuance of common stock for
Mineral properties 15,000,000 15,000 43,485,000 - 43,500,000
Issuance of common stock for
Consulting services 250,000 250 - - 250
Net loss for the period - - - (46,193,186) (46,193,186)
---------- ------- ----------- ------------- -------------
Balance, September 30, 2007 47,939,800 $47,940 $44,924,664 $(46,281,493) $ (1,308,889)
---------- ------- ----------- ------------- -------------
The accompanying notes are an integral part of the financial statements.
F-5
Spirit Exploration, Inc.
(an exploration stage company)
Consolidated Statements of Cash Flows
Inception of
Exploration Stage on
January 1, 2006 to
September 30, December 31, September 30,
2007 2006 2007
CASH FLOWS FROM (USED IN)
OPERATING ACTIVITIES
Loss for the period (46,193,186) (3,778) (46,196,194)
Common stock issued for acquisition 43,500,000 - 43,500,000
Common stock issued for services and debt 4,450 - 4,450
Non-cash item:
Loss on derivative liability 137,259 - 137,259
Changes in non-cash working capital
Note receivable (385,057) - (385,057)
Accounts payable and accrued liabilities 709,894 3,778 713,672
-------------- ------------- ---------------------
Cash flows from operating activities (2,226,640) - (2,226,640)
-------------- ------------- ---------------------
CASH FLOWS USED IN INVESTING ACTIVITIES
Purchase of equipment (74,549) - (74,549)
-------------- ------------- ---------------------
(74,549) - (74,549)
-------------- ------------- ---------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from Common Stock 1,468,000 - 1,468,000
Increase in Loans Payable 988,059 988,059
Reduction of Debt (84,375) - (84,375)
-------------- ------------- ---------------------
2,371,684 - 2,371,684
-------------- ------------- ---------------------
NET INCREASE IN CASH 70,495 - 70,495
CASH - beginning of the period - - -
-------------- ------------- ---------------------
CASH - end of the period 70,495 - 70,495
============== ============= =====================
The accompanying notes are an integral part of the financial statements.
F-6
SPIRIT EXPLORATION, INC.
(AN EXPLORATION STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD ENDED SEPTEMBER 30, 2007
-------------------------------
NOTE 1 BACKGROUND, SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ORGANIZATION
- --------------------------------------------------------------------------------
Spirit Exploration, Inc. was incorporated on March 10, 1970 in the state of
Utah, and reincorporated in the state of Nevada on March 24, 1998. In 2006 the
name was changed to Spirit Exploration, Inc. The Company currently trades on
the "pink sheets" under the symbol "SPXP.PK".
(A) ORGANIZATION AND BASIS OF PRESENTATION
- ----------------------------------------------
Spirit Exploration, Inc. (an exploration stage company) (the "Company"), through
its 99% owned subsidiary ECUADORGOLDCORP, S.A. ("Ecuadorgold"), is a natural
resource exploration company with an objective of acquiring, exploring and if
warranted and feasible, developing natural resource properties. Activities
during the exploration stage include developing the business plan, raising
capital, acquiring mining properties in Ecuador.
The consolidated financial statements include the accounts of the Company and
Ecuadorgold. Intercompany accounts and transactions have been eliminated in
consolidation.
History of the Company
The Company was originally incorporated on March 10, 1970 for the purpose of
raising capital to develop and possibly put into production certain oil and
mineral deposits. The Company was unable to raise development money and the
Company's operations ceased and the mineral deposits were abandoned. On June 4,
1997 the Company acquired Krystar International Ltd. (Krystar) in exchange for
6,000,000 shares of common stock. Krystar had proprietary ownership of a
technology that transported minerals using Boundary Air/Laminar Flow Technology.
On September 24, 1997, the Board of Directors of the Company discontinued the
operations of Krystar and the 6,000,000 shares of common stock were cancelled.
On June 23, 1997, the Company acquired all of the outstanding shares of Chow's
Consulting Corporation for 90,000 common shares of its common stock. The only
asset of Chow's was a mining claim that has since been deemed worthless and
Chow's was dissolved.
On October 14, 1997 the Company changed its name from Dynasty Oil and Minerals
Corporation to Global Telephone Communication, Inc. The Company's focus at that
time was to seek and develop opportunities in the IT (Information Technology),
telecommunications, and Internet industries. On March 24, 1998, the Company
reincorporated in Nevada by merging into Global Telephone Communication, Inc., a
newly formed Nevada corporation.
Prior to approximately January 1, 2003, the Company as Global Telephone
Communication, Inc. was an operating company with its common shares listed for
trading on the OTCBB market. The company failed to remain current on its SEC
filing requirements and as a result was demoted to the Pink Sheets. The Company
has not filed any periodic reports since the report filed for the quarter ended
September 30, 2002. Subsequently, the Company ceased all business operations
and has been dormant since approximately January 1, 2003. During the same
period, all the Company's officers and directors ceased acting on behalf of the
Company and abandoned their obligations to the Company and its shareholders. As
a result, the Company was considered to be dormant from approximately January 1,
2003 to December 31, 2005.
In early 2006 after discussions with the Company current management took control
and restructured the Company to make it viable for undertaking the current
mineral exploration business of the Company. The two company officers invested
approximately $66,667 for 16,000,000 shares of the Company's common stock in a
private transaction, made other loans to the Company (as more fully reflected
below), and began the Company's current business plan.
F-7
SPIRIT EXPLORATION, INC.
(AN EXPLORATION STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD ENDED SEPTEMBER 30, 2007
-------------------------------
NOTE 1 BACKGROUND, SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ORGANIZATION
- --------------------------------------------------------------------------------
(CONTINUED)
- -----------
Since January 1, 2006, the Company is in the exploration stage and has commenced
its current business plan. The Company formed and is the 99% owner of
ECUADORGOLDCORP., an Ecuadorean corporation which is the operating subsidiary of
the Company. ECUADORGOLDCORP is the entity undertaking the Company's mining
operations in Ecuador. The Company's common shares are currently listed for
trading on the Pink Sheets under the symbol SPXP.PK.
(B) USE OF ESTIMATES
- -----------------------
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
revenues and expenses during the reported period. Actual results could differ
from those estimates.
(C) CASH AND CASH EQUIVALENTS
- ---------------------------------
For purposes of the cash flow statements, the Company considers all highly
liquid investments with original maturities of three months or less at the time
of purchase to be cash equivalents.
(D) INCOME TAXES
- ------------------
The Company accounts for income taxes under the Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). Under
SFAS 109, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Under SFAS 109, the effect
on deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
(E) LOSS PER SHARE
- ---------------------
Basic and diluted net loss per common share is computed based upon the weighted
average common shares outstanding as defined by Statement of Financial
Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"). Per share
amounts have been adjusted to reflect the 1:660 reverse stock split approved and
effective on May 20, 2006.
(F) LONG-LIVED ASSETS
- -----------------------
The Company accounts for long-lived assets under the Statements of Financial
Accounting Standards Nos. 142 and 144 "Accounting for Goodwill and Other
Intangible Assets" and "Accounting for Impairment or Disposal of Long-Lived
Assets" ("SFAS 142 and 144"). In accordance with SFAS 142 and 144, long-lived
assets, goodwill and certain identifiable intangible assets held and used by the
Company are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. For
purposes of evaluating the recoverability of long-lived assets, goodwill and
intangible assets, the recoverability test is performed using undiscounted net
cash flows related to the long-lived assets.
F-8
SPIRIT EXPLORATION, INC.
(AN EXPLORATION STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD ENDED SEPTEMBER 30, 2007
-------------------------------
NOTE 1 BACKGROUND, SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ORGANIZATION
- --------------------------------------------------------------------------------
(CONTINUED)
- -----------
(G) FOREIGN CURRENCY TRANSLATION
- -----------------------------------
In accordance with Statement of Financial Accounting Standards No. 52 "Foreign
Currency Translation" ("SFAS 52"), the Company has determined that its
functional currency is the United States Dollar.
(H) BUSINESS SEGMENTS
- -----------------------
The Company operates in one segment and therefore segment information is not
presented.
(I) CONCENTRATION OF CREDIT RISK
- ------------------------------------
At September 30, 2007, the Company had total cash of $70,495 in a United States
bank which is uninsured.
(J) RECENT ACCOUNTING PRONOUNCEMENTS
- ---------------------------------------
In July 2006, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 48, "ACCOUNTING FOR UNCERTAINTY IN INCOME TAXES" ("FIN 48"),
an interpretation of FAS 109,"ACCOUNTING FOR INCOME TAXES." FIN 48 clarifies the
accounting and reporting for income taxes where interpretation of the law is
uncertain. FIN 48 prescribes a comprehensive model for the financial statement
recognition, measurement, presentation and disclosure of income tax
uncertainties with respect to positions taken or expected to be taken in income
tax returns. FIN 48 is effective for fiscal years beginning after December 15,
2006 and has no current applicability to the Company's financial statements.
In September 2006, the FASB issued Statement of Financial Accounting Standards
No. 157, "FAIR VALUE MEASUREMENTS" ("SFAS 157"). SFAS 157 addresses how
companies should measure fair value when they are required to use a fair value
measure for recognition or disclosure purposes under generally accepted
accounting principles. SFAS 157 defines fair value, establishes a framework for
measuring fair value and expands the required disclosures about fair value
measurements. SFAS 157 is effective for fiscal years beginning after November
15, 2007, with earlier adoption permitted. Management is assessing the impact of
the adoption of SFAS 157.
In September 2006, the FASB issued Statement of Financial Accounting Standards
No. 158, "EMPLOYERS' ACCOUNTING FOR DEFINED BENEFIT PENSION AND OTHER
POSTRETIREMENT PLANS" ("SFAS 158"), an amendment of FASB Statements of Financial
Accounting Standards Nos. 87, 88, 106 and 132(R). SFAS 158 requires (a)
recognition of the funded status (measured as the difference between the fair
value of the plan assets and the benefit obligation) of a benefit plan as an
asset or liability in the employer's statement of financial position, (b)
measurement of the funded status as of the employer's fiscal year-end with
limited exceptions, and (c) recognition of changes in the funded status in the
year in which the changes occur through comprehensive income. The requirement to
recognize the funded status of a benefit plan and the disclosure requirements
are effective as of the end of the fiscal year ending after December 15, 2006.
The requirement to measure the plan assets and benefit obligations as of the
date of the employer's fiscal year-end statement of financial position is
effective for fiscal years ending after December 15, 2008. SFAS 158 has no
current applicability to the Company's financial statements.
F-9
SPIRIT EXPLORATION, INC.
(AN EXPLORATION STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD ENDED SEPTEMBER 30, 2007
-------------------------------
NOTE 1 BACKGROUND, SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ORGANIZATION
- --------------------------------------------------------------------------------
(CONTINUED)
- -----------
In September 2006, the Securities Exchange Commission issued Staff Accounting
Bulletin No. 108 ("SAB 108"). SAB 108 addresses how the effects of prior year
uncorrected misstatements should be considered when quantifying misstatements in
current year financial statements. SAB 108 requires companies to quantify
misstatements using a balance sheet and income statement approach and to
evaluate whether either approach results in quantifying an error that is
material in light of relevant quantitative and qualitative factors. When the
effect of initial adoption is material, companies will record the effect as a
cumulative effect adjustment to beginning of year retained earnings and disclose
the nature and amount of each individual error being corrected in the cumulative
adjustment.
In February 2007, the FASB issued Statement of Financial Accounting Standards
No. 159, "THE FAIR VALUE OPTION FOR FINANCIAL ASSETS AND FINANCIAL LIABILITIES"
("SFAS 159"), an amendment of FASB Statement of Financial Accounting Standards
No. 115. SFAS 159 addresses how companies should measure many financial
instruments and certain other items at fair value. The objective is to mitigate
volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions. SFAS 159 is effective for fiscal years beginning after November 15,
2007, with earlier adoption permitted. Management is assessing the impact of the
adoption of SFAS 159.
(K) EQUIPMENT AND DEPRECIATION
- ---------------------------------
Equipment is recorded at cost, and depreciation is provided on a
declining-balance basis over its estimated useful life.
NOTE 2 GOING CONCERN
- -----------------------
As reflected in the accompanying financial statements, the Company is in the
exploration stage with no revenue and a negative cash flow from operations of
$1,308,889 for the period from January 1, 2006 through September 30, 2007 (which
reflects the operations of the current business). This raises substantial doubt
about its ability to continue as a going concern. The ability of the Company to
continue as a going concern is dependent on the Company's ability to raise
additional capital and implement its business plan. The financial statements do
not include any adjustments that might be necessary if the Company is unable to
continue as a going concern.
Management believes that actions presently being taken to obtain additional
funding (See Note 4) and implement its strategic plans (see Note 3) to provide
the opportunity for the Company to continue as a going concern.
NOTE 3 MINERAL PROPERTIES AND IMPAIRMENT ON MINERAL RIGHTS
- ------------------------------------------------------------------
Effective April 21, 2007 the Company entered into an Assignment and Operating
Agreement (the "Operating Agreement") with Minera Pacifico Noroeste, S.A.
("Pacifico"), pursuant to which the Company acquired certain assets relating to
mining concessions and interests and related obligations including the Muluncay
Project, the Maria Olivia Project and the Kylee concession, all subject to
certain mortgages and obligations. Under the terms of the Agreement with
Pacifico, the Company through its subsidiary ECUADORGOLDCORP., S.A. acquired a
100 % interest in the operating mines and related assets. The purchase
consideration for the interest consisted of 15,000,000 restricted common shares
which the Company valued at market on the date of issue or a total of
$43,500,000.
F-10
SPIRIT EXPLORATION, INC.
(AN EXPLORATION STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD ENDED SEPTEMBER 30, 2007
-------------------------------
NOTE 3 MINERAL PROPERTIES AND IMPAIRMENT ON MINERAL RIGHTS (CONTINUED)
- -------------------------------------------------------------------------------
Under accounting guidelines promulgated by the US Securities and Exchange
Commission in Industry Guide 7, as well as the Financial Accounting Standards
Board ("FASB"), the Company is not permitted to capitalize the value of the
mining rights until such point as they are "proven" or at least "probable"
reserves. Current accounting and disclosure rules prohibit the Company from
including those as assets on its balance sheet. The recoverability of
capitalized costs would likely be insupportable under Financial Accounting
Standard 144 ("FASB 144"), prior to the determination of a commercially minable
deposit, particularly as contemplated by the SEC's Industry Guide for a mining
company in the exploration stage. As a consequence, the SEC Staff has advised
that those costs should be expensed as incurred during the exploration stage
under generally accepted accounting rules.
The three primary properties in the Muluncay Project (the "Lopez" mine, the
"Esperanza" mine and the "Asanza" mine) acquired by the Company included
mortgages payable on the properties which at the time of acquisition from
Pacifico as part of the Operating Agreement totaled $1,560,000. At September
30, 2007, the balance remaining owed on these mortgages was approximately
$1,155,000. Pacifico has entered into an Assignment and Assumption Agreement
with ECUADORGOLDCORP, country-regionS.A., the Company's 99% subsidiary, which
assigned these properties to ECUADORGOLDCORP on behalf of the Company, and
pursuant to which the Company agreed to pay the balance of these mortgages from
the first proceeds of financing received by the Company. As the properties are
part of the expense recorded on the Company's Consolidated Income Statement, and
these mortgages are contingently payable upon receipt of funding by the Company,
the mortgages are included within that expense and are not set out as a separate
liability of the Company.
As part of the Operating Agreement, the Company also agreed to obtain
capitalization and funding required for the operation of the properties,
including without limitation development, exploration and mining operations for
the properties. Such funding shall be pursuant to mutually agreed upon budgets
between the Company and Pacifico. Pacifico will remain the operator on all
properties of the Company in Ecuador in consideration for (i) reimbursement of
all expenses incurred on the projects at cost plus 10%, (ii) fee of the lower of
10% of the net revenues or $10,000 per month, (iii) $10,000 per month for the
first twelve months, which is deferred until the earlier of April 11, 2008 or
funding of the Company (fees payable after that shall be negotiated between
Pacifico and the Company) and (iv) a 3% Net Smelter Return Royalty for 30 years
or the life of the property.
In the event of any material default on the Operating Agreement, the offended
party may immediately terminate the Agreement. Upon any such termination, the
fees and expenses, including without limitation the Net Smelter Return Royalty,
are immediately terminated and neither party would have any further rights or
obligations with respect to the other.
The Company's mineral properties currently consist of its two major projects -
the Muluncay Project and the Maria Olivia Project, as well as the Kylee project
and several optioned properties including Fierro Urco I, Fierro Urco II and
Campo de Oro.
Muluncay Project
- -----------------
The Muluncay Project consists of the acquisition of three mineral exploration
properties and a flotation processing plant in placeSouthern Ecuador. This
initial acquisition has provided properties from which the Company has already
started the production of gold concentrate, with revenues actually received in
the period subsequent to the period ended September 30, 2007. The Muluncay
mines are presently being upgraded. This area has historically yielded in
excess of 4.5 million oz. of gold from epithermal gold/silver vein systems.
Spirit's holding encompasses approximately 2,100 hectares.
The Company plans to undertake production of the Muluncay production in three
phases:
F-11
SPIRIT EXPLORATION, INC.
(AN EXPLORATION STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD ENDED SEPTEMBER 30, 2007
-------------------------------
NOTE 3 MINERAL PROPERTIES AND IMPAIRMENT ON MINERAL RIGHTS (CONTINUED)
- -------------------------------------------------------------------------------
1. Initially through continuation of preparation and modernization with
equipment for proper excavation for the tonnage required for the production
plant(s). The Company intends to acquire 100 hectares for the new Central
Processing Plant for growth and tailing ponds to fulfill the required
Environmental Impact Studies for this future site. The Company will acquire new
equipment to bring the current plant to 150 tons per day at the Company's
Esperanza location and acquire equipment for the new flotation plant that will
begin under construction during Phase 2.
2. In Phase 2, the Company intends to construct a new central flotation
plant, with clearing of land, preparation of utilities and pouring footers to
begin immediately. During concrete curing, the Company will begin tailing pond
preparation and equipment transportation to the site. The Company will then
begin on site assembly of
tanks and crushing line assembly for installation. The Company intends to apply
equipment in order of placement and continue through a test run of plant at 250
tons per day operation.
3. In Phase 3, the Company will continue the mine development and slashing
process to continue to create proper ore feed. The Company will develop holding
deposits for extracting ore for proper blending for the plant. After plant runs
at approximately 250 tons per day for 90 consecutive days, the Company will
begin the process to add additional equipment to raise production to 500 tons
per day. Ore volume per day will dictate the growth stages (50 ton tanks can be
added quickly) based on the mining progress for vein quality
Maria Olivia Project
- ----------------------
The Company also acquired from Pacifico another concession - the "Maria Olivia"
- - in the same region. Both the Muluncay Project and the Maria Olivia Project
are open to depth and management of the Company believes that both projects
could yield substantial reserves. The Company has signed a letter of intent to
joint venture this project with Franzosi S.A., an exploration company based in
Quito, Ecuador. Maria Olivia has similar geology, structures and mineralization
as Muluncay. Franzosi has agreed to provide a total of $4,800,000 in funding
through the four planned stages of production to finance completion and
production in the Maria Olivia concession.
The Company plans to undertake production of the Maria Olivia concession
production in four phases:
1. Initially in Phase 1 through startup exploration, completion of an
environmental impact study, undertaking soil and water studies to begin with
laboratory results and engaging mining engineers to begin surface evaluations
for possible entry points of the main tunnel.
2. In Phase 2, the Company will put its drill program into place. This will
including (i) hiring a drill team with an approved North American Geologist to
prepare cores for booking and lab preparation; (ii) building a security shelter
for cores and equipment; (iii) moving equipment on site and beginning drilling;
(iv) preparing a model from drilling results of the ore body after the first
16,000 feet have been drilled and sampled; (v) beginning calculation of provable
resources based upon early lab reports; (vi) starting a second round of drilling
(16,000 feet); (vii) using these results to assure mining tonnage and grade for
valuations and (viii) repeating the above based upon distance, depth and width
of findings.
3. In Phase 3, the Company will begin underground extraction (mining). The
Company will need to complete an environmental impact study for extraction. The
Company's mining engineers will begin construction for the entry of the main
tunnel and its mechanical engineers will approve final drawings of the flotation
processing plant. Key paperwork will be completed include approval of budgets,
flow charts and objectives from financing to construction, and setting
production objectives.
F-12
SPIRIT EXPLORATION, INC.
(AN EXPLORATION STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD ENDED SEPTEMBER 30, 2007
-------------------------------
NOTE 3 MINERAL PROPERTIES AND IMPAIRMENT ON MINERAL RIGHTS (CONTINUED)
- -------------------------------------------------------------------------------
4. In the final Phase 4, the Company will begin construction of a 200 ton
plant and mining extraction. Included in this phase will be (i) setting footers
for 400 ton per day Processing flotation plant; (ii) purchasing equipment to set
200 ton per day in this Phase; (iii) developing a tailings pond for five year
production at 200 ton per day for a key impact study; (iv) providing rail,
water, air and electricity mine for extraction of a 200 ton per day operation;
(v) building a laboratory on site and (vi) setting a security perimeter around
the active plant and mine area
Kylee Concession
- -----------------
The Company also acquired the Kylee Concession from Pacifico subject to a
mortgage. This project contains at least one major vein of 1 m width, and is
suggested to be 2.3 km long, trending from northeast to southwest, width of vein
suggests strength, continuity and depth. The Company's current workings are on
a vein exposed along Quebrada Zuro of Rio San Francisco, which lies northeast of
the major river, Rio Jubones. There are possible parallel veins in Quebrada
Cuchicorral, which appears to be a gully trending northwest where another vein
may exist. The area has not been explored for parallel structures which may
host similar mineralization. The Company's proposed exploration program would
consist of stream sediment sampling of all creeks in the concession, where
accessible, at approximately 100 m separation along each creek.
Optioned Properties
- --------------------
The Company has acquired and has options to acquire other mineral production and
exploration properties as referenced more fully below in Ecuador totaling in
excess of 80,000 hectares. These optioned properties include Fierro Urco I,
Fierro Urco II and Campo de Oro.
NOTE 4 NOTES AND LOANS PAYABLE
- -----------------------------------
In 2000, the Company issued a convertible note (the "2000 Note") with an
original principal amount of $35,000 bearing interest at prime plus 0.5% per
year, compounded annually. The holder had the ability to demand repayment at
any time. The holder could at any time convert all or any portion of the
outstanding balance of the Note (but not less than $50,000 unless the remaining
balance of the Note is less than such amount), including accrued but unpaid
interest thereon, into shares of the Company's common stock. The conversion
price was the lower of (i) $1.30 per share, adjusted for stock splits and
reverse stock splits, and (ii) 80% of the five day trailing average of the
Company's common stock on the date notice of conversion is delivered to the
Company. Effective February 8, 2007, the Company issued 3,375,000 to accredited
investors upon conversion of the 2000 Note.
On April 30, 2007, the Company issued a note to Terry Fields, the Company's
Chief Executive Officer, for a loan of $113,000. The Loan is payable on demand
without interest and is unsecured.
On June 20, 2007, the Company issued a note to Resource Buyers an d
Distribution, Inc. for a loan of $35,000. The Loan is payable on demand without
interest and is unsecured.
On June 26, 2007, the Company issued a note to Webworks for a loan of $300,000.
The Loan is payable on demand and bears interest of 8% per annum and is
unsecured. Terry Fields, the Company's Chief Executive Officer, and Peter
Laipnieks, the Company's President, each guaranteed $75,000 of the Webworks'
obligation.
F-13
SPIRIT EXPLORATION, INC.
(AN EXPLORATION STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD ENDED SEPTEMBER 30, 2007
-------------------------------
NOTE 5 NOTE RECEIVABLE
- -------------------------
On July 15, 2007, the Company issued a note to David Aisenstat for a loan of
$234,188.34. As additional consideration on the loan, David Aisenstat was
issued 250,000 shares of the Company's common stock. The Loan is payable at a
rate of $50,000 a month starting in September 2007. It is without interest and
is unsecured. The obligation to Mr. Aisenstat is secured by a guarantee by
Terry Fields, the Company's Chief Executive Officer, and Peter Laipnieks, the
Company's President.
On September 30, 2007, the Company issued a note to Peter Laipnieks, the
Company's President, for a loan of $87,774. The Loan is payable on demand
without interest and is unsecured.
The Company was also obligated under a convertible note issued in 2002 (the
"2002 Note") with an original principal amount of $19,000 bearing interest at 9%
per year, compounded annually. The holder had the ability to demand repayment
at any time. The holder could at any time convert all or any portion of the
outstanding balance of the Note including accrued but unpaid interest thereon,
into shares of the Company's common stock. Effective February 10, 2007, the
Company issued 4,000,000 shares of common stock to accredited investors upon
conversion of the 2002 Note. In addition to cancellation of the 2002 Note, the
Company received a Note Receivable for $1,200,000. Of that amount, $814,853 had
been paid to the Company at September 30, 2007. The remaining $385,147 is
listed as a Note Receivable on the Company's consolidated balance sheet.
NOTE 6 DERIVATIVE LIABILITY
- ------------------------------
On May 1, 2007, the Company issued warrants to purchase a total of 2,512,500
shares to four accredited investors exercisable for 5 years at $1.00 per share.
1,600,000 of these options were issued to the Company's founders, 800,000 were
issued in connection with consulting services and 112,500 were issued for legal
services.
The Company is accounting for the warrants as derivative liabilities in
accordance with Statement of Financial Accounting Standards 133, "Accounting for
Derivative Instruments and Hedging Activities" and EITF 00-19 "Accounting for
Derivative Financial Instruments Indexed to and Potentially Settled in a
Company's Own Stock."
The fair value of the warrants was determined to be $137,259 utilizing the
Black-Scholes stock option valuation model. The significant assumptions used in
the valuation are: the exercise price as noted above; the stock price as of
September 30, 2007; expected volatility of 66%; risk free interest rate of
approximately 4.50%; and a term of five years.
NOTE 7 STOCKHOLDERS' EQUITY (DEFICIT)
- -----------------------------------------
Authorized:
300,000,000 common shares with a par value of $0.001
$
----------
Issued 47,939,800 shares 47,940
Paid-in capital 45,108,054
----------
45,155,994
==========
On November 11, 2005, the Company issued 82,028 shares of common stock to three
accredited investors for consulting services valued at $56,006.25 ($0.68 per
share).
F-14
SPIRIT EXPLORATION, INC.
(AN EXPLORATION STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD ENDED SEPTEMBER 30, 2007
-------------------------------
NOTE 7 STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
- ------------------------------------------------------
On May 20, 2006 the Company affected a 1:660 reverse stock split. All share and
per share amounts have been retroactively restated.
Effective February 8, 2007 the Company issued 24,000,000 shares to or on behalf
of three accredited investors for a total of $100,000 ($0.004 per share). Two
of the investors were the Company's officers and directors.
Effective February 8, 2007, the Company issued 750,000 shares to the Company's
legal counsel, an accredited investor, in consideration for legal services
valued at $3,125 ($0.004 per share).
On February 8, 2007, the Company issued 75,000 shares to an accredited investor
in connection with an agreement to sell a convertible note for $35,000. The
Company valued these shares at $313 ($0.004 per share).
Effective February 8, 2007, the Company issued 3,375,000 shares to four
accredited investors upon conversion of a convertible note issued in 2000 with
an original principal amount of $50,000 and together with interest valued at
$83,000 ($0.025 per share).
Effective April 3, 2007, the Company issued 4,000,000 shares to three accredited
investors upon conversion of a convertible note originally issued in 2002 with
an original principal amount and interest due of $30,092.98, for a promissory
note of $1,200,000 ($0.30 per share).
Between April 5, 2007 and June 22, 2007, the Company sold a total of 336,000
shares to six accredited investors at $.50 per share or total consideration of
$168,000.
Effective May 1, 2007, the Company issued warrants to purchase a total of
2,512,500 shares to four accredited investors exercisable for 5 years at $1.00
per share. 1,600,000 of these options were issued to the Company's founders,
800,000 were issued in connection with consulting services and 112,500 were
issued for legal services.
Effective September 21, 2007, the Company issued 15,000,000 shares in connection
with the acquisition of mining properties in Ecuador. These shares were valued
at $2.90 per share or $43,500,000. These shares were issued into escrow to be
further distributed to a limited number of concession holders in Ecuador, which
was subsequently completed to a total of 72 persons or entities, all but 24 of
which were non United States persons and were related to the Company's
operations in Ecuador.
Effective September 21, 2007, the Company issued 250,000 shares to an accredited
investor as a consulting fee.
SHARE PURCHASE WARRANTS
Weighted
Average
Number Exercise
of Warrants Price
------------ --------
BALANCE, DECEMBER 31, 2006 -- $ --
Granted
May 1, 2007 2,512,500 1.00
------------ --------
BALANCE, September 30, 2007 2,512,500 $ 1.00
============ ========
F-15
SPIRIT EXPLORATION, INC.
(AN EXPLORATION STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD ENDED SEPTEMBER 30, 2007
-------------------------------
NOTE 8 RELATED PARTY TRANSACTIONS
- -------------------------------------
Effective April 11, 2007, the Company entered into an employment agreement with
the President which calls for a salary of $10,000 per month for the first
twelve months, which payment is deferred until April 11, 2008 or until funding
of the Company, whichever is earlier. Commencing on April 11, 2008, the Company
will pay the President's base compensation in the gross amount of $20,000 per
month. Thereafter Base Compensation shall increase by 5% annually. The
President also received a grant of 800,000 stock options exercisable for five
years into shares of the Company's common stock at $1.00 per share. The
President is also entitled to other benefits granted to executive officers and
to a bonus of up to 50% of base compensation based on the Company's performance.
Effective April 11, 2007, the Company entered into an employment agreement with
the Chief Executive Officer and Secretary which calls for a salary of $10,000
per month for the first twelve months, which payment is deferred until April
11, 2008 or until funding of the Company, whichever is earlier. Commencing on
April 11, 2008, the Company will pay the officer's base compensation in the
gross amount of $20,000 per month. Thereafter Base Compensation shall increase
by 5% annually. The officer also received a grant of 800,000 stock options
exercisable for five years into shares of the Company's common stock at $1.00
per share. The Chief Executive Officer and Secretary is also entitled to other
benefits granted to executive officers and to a bonus of up to 50% of base
compensation based on the Company's performance.
On April 30, 2007, the Company issued a note to Terry Fields, the Company's
Chief Executive Officer, for a loan of $113,000. The Loan is payable on demand
without interest and is unsecured.
On June 26, 2007, the Company issued a note to Webworks for a loan of $300,000.
The Loan is payable on demand and bears interest of 8% per annum and is
unsecured. Terry Fields, the Company's Chief Executive Officer, and Peter
Laipnieks, the Company's President, each guaranteed $75,000 of the Webworks'
obligation.
On July 15, 2007, the Company issued a note to David Aisenstat for a loan of
$234,188.34. As additional consideration on the loan, David Aisenstat was
issued 250,000 shares of the Company's common stock. The Loan is payable at a
rate of $50,000 a month starting in September 2007. It is without interest and
is unsecured. The obligation to Mr. Aisenstat is secured by a guarantee by
Terry Fields, the Company's Chief Executive Officer, and Peter Laipnieks, the
Company's President.
On September 30, 2007, the Company issued a note to Peter Laipnieks, the
Company's President, for a loan of $87,774. The Loan is payable on demand
without interest and is unsecured.
F-16
SPIRIT EXPLORATION, INC.
(AN EXPLORATION STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD ENDED SEPTEMBER 30, 2007
-------------------------------
NOTE 9 SUBSEQUENT EVENTS
- ---------------------------
Effective October 19, 2007, the Company issued 5,000 shares to an accredited
investor as a finders' fee.
Effective November 9, 2007, the Company issued 50,000 shares to an accredited
investor for consulting services.
Effective November 9, 2007, the Company issued 1,000 shares to the Company's
transfer agent for a termination fee as the Company's transfer agent.
Effective November 21, 2007, the Company issued 30,000 shares to an accredited
investor for consulting services.
In November 2007, we received a firm commitment for the placement of $20,000,000
in asset-backed notes (the "Notes") and $10,000,000 in equity financing (the
"Equity Transaction"). The Note Transaction was oversubscribed by $10,000,000
for a total of $30,000,000 and the Equity Transaction was subsequently increased
to $15,000,000 in financing.
Subsequent to receipt of such commitment, we have been working on providing
various due diligence requirements from the underwriting syndicate including
delivery of substantial background and backup on the Company's operations in
Ecuador, cash flow projections, appropriate Use of Proceeds (as essentially
reflected elsewhere herein for what is required for operation and development of
our Muluncay and Maria Olivia projects), and other materials requested by the
underwriters. We have also completed the documents and formed the entities
required for assignment of the underlying Muluncay assets for security. We have
also negotiated terms and conditions of the financing.
We are advised by the underwriters that they anticipate closing the initial
$20,000,000 in Notes, and the oversubscribed additional $10,000,000 in Notes, as
well as the $15,000,000 in Equity imminently, with the funding to be issued into
trust on behalf of the Company. The Notes will bear interest at 15% per annum
and will be paid semi-annually. The Equity Transaction, which in the terms
sheet was initially based upon a 17.5% discount from the 30 day weighted average
trading price of the Company's common stock, will result in 7,500,000 shares of
common stock issued at a closing price of $2.00 per share. The shares of common
stock in the Equity Transaction will be issued in accordance with Regulation S.
The Notes are secured by the seven different mines which are essentially the
concessions which constitute our Muluncay Property. These properties, which
were initially assigned by Pacifico to Ecuadorgold (our subsidiary), were
assigned to Cutler Ecuador S.A., a wholly owned subsidiary of Cutler Law Group,
which is our Trustee for these financing transactions. All funds issued in the
Note and Equity transaction will be issued and held by the Trustee and disbursed
only in accordance with a specific Use of Proceeds approved by the underwriters
for the Notes and Equity. Essentially, the Company has committed to utilize the
proceeds from the sale of the Notes and the Equity Transaction for exploration
and development of the Muluncay Property, the Maria Olivia Property and other
projects in placecountry-regionEcuador, certain potential acquisitions, and
general corporate working capital.
F-17