As filed with the Securities and Exchange Commission on October 28, 2005
Registration No. 333-
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Form SB-2
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
GOLD RESOURCE CORPORATION
(Name of small business issuer in its charter)
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Colorado 1041 84-1473173
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction of Classification Code Number) Identification No.)
incorporation or
organization)
222 Milwaukee Street, Suite 301, Denver, Colorado 80206
(303) 320-7708
(Address and telephone number of principal executive offices)
222 Milwaukee Street, Suite 301, Denver, Colorado 80206
(Address of principal place of business or intended place of business)
William W. Reid, President
Gold Resource Corporation
222 Milwaukee Street, Denver, Colorado 80206
(303) 320-7708
(Name, address and telephone number of agent for service)
With a copy to:
David J. Babiarz, Esq.
Dufford & Brown, P.C.
1700 Broadway, Suite 2100
Denver, Colorado 80290-2101
(303) 861-8013
Approximate date of commencement of proposed sale to public: As soon as
practical after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.[ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.[ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box. [ ]
CALCULATION OF REGISTRATION FEE
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Title of each
class of Proposed Proposed
securities to Amount maximum maximum
registration to be offering price aggregate Amount of
be registered registered(1) per unit offering price registration fee
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Common Stock,
$.001 par value,
to be offered by the
Company 7,000,000 $1.00 $ 7,000,000 $ 823.90
Common Stock,
$.001 par value,
to be offered by the
selling shareholders 9,390,707 $1.00(2) $ 9,390,707 $1,105.29
Total: 16,390,707 $16,390,707 $1,929.19
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(1) In accordance with Rule 416 under the Securities Act of 1933, as amended,
includes an indeterminate number of additional shares to prevent dilution
in the event of stock splits, stock dividends or similar events.
(2) Estimated based on the price of securities offered by the Company.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION
8(A), MAY DETERMINE.
ii
The information in this prospectus is not complete and may be changed. These
securities may not be sold until the registration statement filed with the
Securities and Exchange Commission is effective. This preliminary prospectus is
not an offer to sell these securities and is not soliciting an offer to buy
these securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED OCTOBER 28, 2005
PROSPECTUS
[Logo] GOLD RESOURCE CORPORATION
7,000,000 Shares
of
Common Stock
Offered by
Gold Resource Corporation
-------------------------
9,390,707 Shares
of Common Stock
Offered by
Selling Shareholders
We are offering up to 7,000,000 shares of our common stock on a "best efforts"
basis at a price of $1.00 per share. We are offering these shares through our
officers and directors for a period of 120 days from the date of this
prospectus, subject to an extension for up to an additional 60 days. There is no
minimum number of shares that must be sold to complete this offering. As a
result, any proceeds from the sale of our shares will be immediately deposited
into our bank account and available for all valid corporate purposes.
Certain of our shareholders identified in the section of this prospectus titled
"SELLING SHAREHOLDERS," may offer and sell from time to time up to 9,390,707
shares of our common stock owned by those shareholders. We will not receive the
proceeds from the sale of those shares. The selling shareholders may sell these
securities to or through one or more underwriters, broker-dealers or agents, or
directly to purchasers on a continuous or delayed basis. The names of any
underwriters or agents will be included in a prospectus supplement, if required.
See "PLAN OF DISTRIBUTION."
There is presently no market for our common stock. Upon completion of the sale
of the shares offered by us, we hope to identify a broker-dealer to apply for
listing of our shares on the "Bulletin Board" maintained by the National
Association of Securities Dealers, Inc. However, there is no assurance that we
will obtain such quotation or that a market for our shares will develop.
-------------------
Investing in our common stock involves risks that are described in the "RISK
FACTORS" section beginning on page 4 of this prospectus.
-------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF OUR COMMON STOCK OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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Underwriting Discount Net proceeds
Price to the public or commissions(1) to the Company(2)
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Per share $1.00 -0- $1.00
Total $7,000,000 -0- $7,000,000
================================================================================
(1) We may sell the shares through broker-dealers or other intermediaries and
pay a commission or other compensation in an amount up to 10% of the sales
price. However, we have no obligation to do so.
(2) Excludes expenses of the offering presently estimated at $45,000, including
legal and accounting fees, printing expenses, and travel.
-------------------------------
The date of this prospectus is October___, 2005
TABLE OF CONTENTS
Page
----
Prospectus Summary................................................... 1
Risk Factors......................................................... 4
Dilution............................................................. 10
Use of Proceeds...................................................... 11
Market Information................................................... 12
Management's Discussion and Analysis or Plan of Operation............ 12
Business and Properties.............................................. 18
Management........................................................... 28
Security Ownership of Certain Beneficial Owners and Management....... 34
Selling Shareholders................................................. 35
Plan of Distribution................................................. 37
Description of Capital Stock......................................... 40
Shares Eligible For Future Sale...................................... 41
Where You Can Find More Information.................................. 42
Legal Matters........................................................ 43
Experts.............................................................. 43
Financial Statements................................................. F-1
About This Prospectus................................................ Back Cover
Additional Information
This prospectus contains descriptions of certain contracts, agreements or other
documents affecting our business. These descriptions are not necessarily
complete. For the complete text of these documents, you can refer to the
exhibits filed with the registration statement of which this prospectus is a
part. See "WHERE YOU CAN FIND MORE INFORMATION."
Special Note Regarding Forward-Looking Statements
Please see the note under "RISK FACTORS" for a description of special factors
potentially affecting forward-looking statements included in this prospectus.
SUMMARY
THE FOLLOWING INFORMATION SUMMARIZES INFORMATION CONTAINED ELSEWHERE IN THIS
PROSPECTUS. PROSPECTIVE INVESTORS ARE URGED TO READ THE BALANCE OF THIS
PROSPECTUS CAREFULLY, INCLUDING THE RISK FACTORS AND FINANCIAL STATEMENTS.
Our Company
We were incorporated in Colorado on August 24, 1998 to engage in the exploration
and development of gold and silver mining properties. In August 2001, after a
period of dormancy, we leased our first property in the State of Hidalgo,
Mexico, known as the Zimapan project. After drilling approximately 1,800 meters
of test holes, we abandoned the lease.
In October 2002, we leased a property in the State of Oaxaca, Mexico, designated
the El Aguila project. This property covers approximately 1,897 hectares(1) and
is located in the historic San Jose del Gracia mining district in the State of
Oaxaca. The El Aguila project is an exploration property in which we have a 100%
interest. Since acquiring that interest, we have drilled approximately 4,000
meters of test holes in one section of the property and have encountered what we
believe to be high grade mineralized material. As of October 25, 2005, we are
continuing our exploration efforts on this property, as we believe additional
exploration is necessary prior to us making a decision whether to place the
property into production. Due to the absence of a feasibility study evaluating
the mineralized material which we have discovered to date, we have no proven or
probable reserves, and there is no assurance that a commercially viable deposit
exists on the property.
In August 2003, we entered into an exploration agreement with Canyon Resources
Corporation, a company whose shares trade on the American Stock Exchange. This
agreement allowed Canyon to earn a 50% interest in the El Aguila property in
exchange for funding of $3.5 million in exploration and development costs.
Pursuant to that agreement, Canyon funded $500,000 in an exploratory drilling
program which we used to explore the El Aguila property. Canyon elected not to
fund the remaining $3 million, and converted its $500,000 of funding into
1,200,000 shares of our common stock. Canyon remains one of our largest
shareholders to date.
In 2005, we obtained some additional property in the Mexican State of Oaxaca.
The El Rey project is an exploration stage property in which we acquired claims
by filing concessions with the Mexican government. We have conducted very
limited exploration of this property to date.
From July 2000 to December 31, 2002, the day-to-day management of our company
was provided by U.S. Gold Corporation, a company engaged in the exploration and
development of gold mining properties with securities traded over the counter
and quoted on the OTC Bulletin Board. William and David Reid, the founders of
our company, were also the president and vice president, respectively, of U.S.
Gold during that time. In 2005, the Reids resigned those positions and the
interest in our company owned by U.S. Gold was transferred to the Reids and
another individual in satisfaction of certain obligations arising from
termination of their employment agreements by U.S. Gold. Since January 2003, our
affairs have been managed by the Reids with the oversight of our Board of
Directors.
------------------------
(1) Please see the glossary appearing at the end of the section titled
"BUSINESS" for a description of certain terms used in this prospectus, including
conversion of metric units.
1
Other than the exploration agreement with Canyon discussed above, our funding
since inception has been provided by the private sale of our equity securities.
In July and August 2005, we raised $1,200,000 from the sale of our common stock
to a natural resource fund and an individual at a price per share of $.50. Since
inception, we have issued an aggregate of 18,304,852 shares of common stock for
cash, services and other consideration totaling $4,123,341.
Our operations in Mexico are conducted through our wholly-owned Mexican
subsidiaries, Don David Gold, S.A. de C.V. and Golden Trump S.A. de C.V. All
references to us or our company in this prospectus include our subsidiaries.
Our principal executive offices are located at 222 Milwaukee Street, Suite 301,
Denver, Colorado 80206, and our telephone number is (303) 320-7708.
The Offering
Common Stock outstanding before the Offering.................. 18,304,852 shares(1)(2)(3)
Common Stock offered by us.................................... 7,000,000 shares
Common Stock outstanding after the Offering................... 25,304,852 shares(1)(2)(3)
Common Stock offered by the Selling Shareholders.............. 9,390,707
Use of Proceeds............................................... The proceeds from the sale of
common stock offered by us will
be used for additional
exploration of our mining
properties, construction of
improvements to our properties,
working capital and if
warranted, additional property
acquisitions. We will not
receive any proceeds from the
sale of common stock by the
selling shareholders.
-------------------------------------
(1) Adjusted to reflect a two for one stock split effective February 21, 2005.
All references in this prospectus have been adjusted to reflect the results
of that split.
(2) Excludes 1,640,000 shares of common stock underlying options which are
presently exercisable.
(3) Includes shares to be offered by the selling shareholders.
---------------------------------------------------
2
Summary Financial Data
The following table presents certain selected historical consolidated financial
data about our company. Historical consolidated financial information as of and
for the fiscal year ended December 31, 2004 and 2003 has been derived from our
consolidated financial statements, which have been audited by Stark Winter
Schenkein & Co., L.L.P., independent accountants. Historical consolidated
financial information as of and for the six months ended June 30, 2005 and 2004
have been derived from our unaudited consolidated financial statements. All
amounts included in this table and elsewhere in this prospectus are stated in
United States dollars. You should read the data set forth below in conjunction
with the section entitled "MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION" and our financial statements and related notes included elsewhere in
this prospectus.
Balance Sheet Data
------------------
(Unaudited)
June 30, December 31,
2005 2004 2004 2003
---- ---- ---- ----
Cash $ 6,812 $ 40,217 $ 9,560 $ 135,849
Total Assets 19,357 41,813 11,141 137,786
Current Liabilities 3,164 337,568 408,476 433,455
Total Liabilities 3,164 337,568 408,476 433,455
Shareholders' Equity (Deficit) 16,193 (795,755) (397,335) (695,669)
Operating Data
--------------
(Unaudited)
Six months ended Year ended
June 30, December 31,
2005 2004 2004 2003
---- ---- ---- ----
Exploration Costs $ 72,399 $ 171,130 $ 257,383 $ 391,316
General and Administrative
Expenses 40,137 20,093 527,732 58,173
Net (Loss) (216,718) (292,087) (853,666) (496,017)
Net (Loss) per Share $ (0.02) $ (0.03) $ (0.08) $ (0.05)
3
RISK FACTORS
INVESTMENT IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK AND COULD RESULT
IN A LOSS OF YOUR ENTIRE INVESTMENT. PRIOR TO MAKING AN INVESTMENT DECISION, YOU
SHOULD CAREFULLY CONSIDER ALL OF THE INFORMATION IN THIS PROSPECTUS AND, IN
PARTICULAR, YOU SHOULD EVALUATE THE RISK FACTORS SET FORTH BELOW.
RISK RELATING TO OUR COMPANY
SINCE WE ARE A NEW BUSINESS WITH NO OPERATING HISTORY, INVESTORS HAVE NO BASIS
TO EVALUATE OUR ABILITY TO OPERATE PROFITABLY. We were organized in 1998 but
have had no revenue from operations since our inception. Our activities to date
have been limited to organizational efforts, raising financing, acquiring mining
properties and conducting limited exploration. We face all of the risks commonly
encountered by other new businesses, including the lack of an established
operating history, need for additional capital and personnel, and intense
competition. There is no assurance our business plan will be successful.
THE REPORT OF OUR INDEPENDENT ACCOUNTANTS ON OUR FINANCIAL STATEMENTS FOR THE
YEAR ENDED DECEMBER 31, 2004 INCLUDES A "GOING CONCERN" QUALIFICATION, MEANING
THAT THERE IS SUBSTANTIAL DOUBT ABOUT OUR ABILITY TO CONTINUE IN OPERATION. The
report cited the following factors in support of our accountant's conclusion:
(i) the substantial losses we incurred for the years ended December 31, 2004 and
2003; (ii) our lack of operating revenue; and (iii) our dependence on sale of
equity securities and receipt of capital from outside sources to continue in
operation. From inception to June 30, 2005, we have accumulated a loss of
$2,907,333. If we are unable to obtain additional financing from outside sources
and eventually produce revenue, we may be forced to sell our assets, curtail or
cease operations. In any event, investors in our common stock could lose all or
part of their investment. (See "FINANCIAL STATEMENTS").
WE ARE DEPENDENT UPON RECEIPT OF ADDITIONAL WORKING CAPITAL TO FUND CONTINUED
EXPLORATION AND DEVELOPMENT OF OUR PROPERTIES. Even if we are successful in
selling all of the common stock offered by us, we will require substantial
additional capital for continued exploration and development of our properties.
The proceeds from this offering have been budgeted for a limited period of time
and limited purposes. If our exploration program proves successful, we will
require significant additional capital to fund development of the El Aguila
project and construction of a mill in order to place it into production. In
addition, we will require additional working capital to fund operations pending
sale of any gold or other precious metals. We are unable at this time to
estimate with any reasonable degree of certainty the amount of capital required
in the future. However, we believe that amount will be significant. Also, any
adverse developments in our exploration efforts may force us to sell our stock
at a discount to raise additional funds.
WE HAVE NO PROVED OR PROBABLE RESERVES, MEANING THERE IS NO ASSURANCE THAT WE
CAN ECONOMICALLY PRODUCE GOLD OR OTHER PRECIOUS MINERALS FROM OUR PROPERTIES. In
order to demonstrate the availability of proved or probable reserves, it will
first be necessary for us to continue exploration to demonstrate the
availability of sufficient mineralized material. Exploration is inherently
risky, with few properties ultimately proving economically successful. If our
efforts are successful, it will then be necessary for us to engage an outside
engineering firm to assess geological data and develop an economic model
demonstrating commercial feasibility of the property. This feasibility study
will require significant additional time and investment. There is no assurance
we can economically produce gold or other precious metals from our properties.
4
AT THE PRESENT TIME, WE ARE TOTALLY DEPENDENT UPON PRODUCTION OF GOLD OR OTHER
PRECIOUS METALS FROM TWO PROPERTIES, RAISING THE RISK IF EITHER OR BOTH OF THOSE
PROPERTIES SHOULD PROVE UNPRODUCTIVE. Since we have never produced gold or other
precious metals from either of our properties, and since we have no proved or
probable reserves, there is no assurance that gold or other precious metals can
be economically produced under existing and future costs and expenses. If we are
unable to economically produce gold from either or both of these properties, we
would be forced to identify and invest substantial sums in one or more
additional properties, and there is no assurance that such properties would be
available on terms favorable to us.
OUR PROPERTIES ARE LOCATED IN MEXICO AND ARE SUBJECT TO CHANGES IN POLITICAL
CONDITIONS AND REGULATIONS IN THAT COUNTRY. Our existing properties are located
in Mexico. In the past, Mexico has been subject to political instability,
changes and uncertainties which may cause changes to existing government
regulations affecting mineral exploration and mining activities. Civil or
political unrest could disrupt our operations at any time. Our mineral
exploration and mining activities in Mexico may be adversely affected in varying
degrees by changing governmental regulations relating to the mining industry or
shifts in political conditions that increase the costs related to our activities
or maintaining our properties. Finally, Mexico's status as a developing country
may make it more difficult for us to obtain required financing for our project.
OUR MINING CONCESSIONS ARE SUBJECT TO PAYMENT OF CONTINUING CLAIM FEES AND THE
RIGHTS OF THE EJIDO (LOCAL INHABITANTS) TO SURFACE USE FOR AGRICULTURAL
PURPOSES, AND IF WE FAIL TO SATISFY THESE CLAIMS, WE MAY LOSE OUR INTEREST IN
THE PROPERTIES. Mining concessions in Mexico are subject to payment of
continuing claim fees to the federal government. Our failure or inability to pay
these claim fees as required by the concessions may cause us to risk losing our
interest in the properties. Further, if we are successful in discovering
sufficient amounts of mineralized material to warrant production, our ability to
mine minerals is subject to making satisfactory arrangements with the Ejido.
Ejidos are groups of local inhabitants who were granted rights to conduct
agricultural activities on the property. We must negotiate a satisfactory
arrangement with these inhabitants in order to disturb or discontinue their
rights to farm. Our inability to successfully negotiate such agreements could
impair or impede our ability to successfully mine the properties.
THE VOLATILITY OF THE PRICE OF GOLD COULD ADVERSELY AFFECT OUR FUTURE OPERATIONS
AND OUR ABILITY TO DEVELOP OUR PROPERTIES. The commercial feasibility of our
properties and our ability to raise funding to conduct continued exploration and
development is dependent on the price of gold and other precious metals. The
price of gold may also have a significant influence on the market price of our
common stock and the value of our properties. Our decision to put a mine into
production and to commit the funds necessary for that purpose must be made long
before the first revenue from production would be received. A decrease in the
price of gold may prevent our property from being economically mined or result
in the writeoff of assets whose value is impaired as a result of lower gold
prices. The price of gold is affected by numerous factors beyond our control,
including inflation, fluctuation of the United States Dollar and foreign
currencies, global and regional demand, the sale of gold by central banks, and
the political and economic conditions of major gold producing countries
throughout the world. During the last five years, the average annual market
price of gold has fluctuated between $271 per ounce and $406 per ounce, as shown
in the table below. Although it is possible for us to protect some price
fluctuations by hedging in certain circumstances, the volatility of mineral
prices represents a substantial risk, which no amount of planning or technical
expertise can eliminate.
2000 2001 2002 2003 2004
$279 $271 $310 $364 $406
5
COMPETITION IN THE MINING INDUSTRY IS INTENSE, AND WE HAVE LIMITED FINANCIAL AND
PERSONNEL RESOURCES WITH WHICH TO COMPETE. Competition in the mining industry
for desirable properties, investment capital and personnel is intense. Numerous
companies headquartered in the United States, Canada and elsewhere throughout
the world compete for properties on a global basis. We are an insignificant
participant in the gold mining industry due to our limited financial and
personnel resources. We may be unable to attract the necessary investment
capital to fully develop our properties and unable to acquire other desirable
properties.
SINCE MOST OF OUR EXPENSES ARE PAID IN MEXICAN PESOS, AND WE ANTICIPATE SELLING
ANY PRODUCTION FROM OUR PROPERTIES IN UNITED STATES DOLLARS, WE ARE SUBJECT TO
ADVERSE CHANGES IN CURRENCY VALUES THAT WILL BE DIFFICULT TO PREVENT. Our
operations in the future could be affected by changes in the value of the
Mexican peso against the United States dollar. At the present time, since we
have no production, we have no plans or policies to utilize forward sales
contracts or currency options to minimize this exposure. If and when these
measures are implemented, there is no assurance they will be cost effective or
be able to fully offset the effect of any currency fluctuations.
OUR ACTIVITIES IN MEXICO ARE SUBJECT TO SIGNIFICANT ENVIRONMENTAL REGULATIONS,
WHICH COULD RAISE THE COST OF DOING BUSINESS. Mining operations are subject to
environmental regulation by SEMARNAP, the environmental protection agency of
Mexico. Regulations require that an environmental impact statement, known in
Mexico as a Manifesto Impacto Ambiental, be prepared by a third party contractor
for submission to SEMARNAP. Studies required to support this impact statement
include a detailed analysis of many subject areas, including soil, water,
vegetation, wildlife, cultural resources and socio-economic impacts. We may also
be required to submit proof of local community support for a project to obtain
final approval. Significant environmental legislation exists in Mexico,
including fines and penalties for spills, release of emissions into the air,
seepage and other environmental damage.
THE NATURE OF MINERAL EXPLORATION AND PRODUCTION ACTIVITIES INVOLVES A HIGH
DEGREE OF RISK AND THE POSSIBILITY OF UNINSURED LOSSES. Exploration for minerals
is highly speculative and involves greater risk than many other businesses. Many
exploration programs do not result in the discovery of mineralization and any
mineralization discovered may not be of sufficient quantity or quality to be
profitably mined. Uncertainties as to the metallurgical amenability of any
minerals discovered may not warrant the mining of these minerals on the basis of
available technology. Our operations are subject to all of the operating hazards
and risks normally incident to exploring for and developing mineral properties,
such as, but not limited to:
o encountering unusual or unexpected formations;
o environmental pollution;
o personal injury, flooding and landslides;
o variations in grades of ore;
o labor disputes; and
o decrease in reserves due to a lower gold price.
We currently have no insurance to guard against any of these risks. If we
determine that capitalized costs associated with any of our mineral interests
are not likely to be recovered, we would incur a writedown on our investment in
such property interest. All of these factors may result in losses in relation to
amounts spent which are not recoverable.
6
IF WE LOSE ANY OF OUR EXISTING OFFICERS OR EMPLOYEES, THERE IS NO ASSURANCE THAT
WE WOULD FIND A SUITABLE REPLACEMENT ON ACCEPTABLE TERMS. If either of our
current officers or employees or our principal consultant in Mexico were to die,
become disabled or leave the company, we would be forced to identify and retain
individuals to replace them. Messrs. William and David Reid are our only
employees and officers at this time. Jose Perez Reynoso is our consultant in
Mexico who oversees our properties and operations. There is no assurance that we
can find suitable individuals to replace them or to add to our employee base if
that becomes necessary. We are entirely dependent on these individuals as our
only personnel at this time. We have no life insurance on any individual at this
time, and we may be unable to hire a suitable replacement for them on favorable
terms, should that become necessary. None of these individuals have signed an
employment agreement with our company.
SINCE WE ARE CONDUCTING THIS OFFERING ON A BEST EFFORTS BASIS, THERE IS NO
ASSURANCE THAT WE WILL RECEIVE SUFFICIENT PROCEEDS TO COMPLETE EXPLORATION OF
OUR PROPERTIES OR ACQUIRE ANOTHER PROPERTY WITH DEVELOPMENT POTENTIAL. There is
no minimum number of shares that we must sell and no minimum amount of proceeds
that we must receive in order to utilize investor funds. As a result, each
dollar received by us will be deposited in our bank account and available for
all valid corporate purposes. There is no assurance that the amount of money we
receive will be sufficient to complete exploration of either of our properties
and the other purposes for which we have budgeted this money. If the results of
this offering are insufficient, we may be forced to sell additional shares of
our stock, with the concurrent risk of additional dilution to our then-existing
shareholders. If we are unable to sell any additional stock, we may be forced to
liquidate our properties, and investors in this offering may lose their
investment. (See "PLAN OF DISTRIBUTION").
COLORADO LAW AND OUR ARTICLES OF INCORPORATION MAY PROTECT OUR DIRECTORS FROM
CERTAIN TYPES OF LAWSUITS. Colorado law provides that our directors will not be
liable to us or our stockholders for monetary damages for all but certain types
of conduct as directors. Our Articles of Incorporation permit us to indemnify
our directors and officers against all damages incurred in connection with our
business to the fullest extent provided or allowed by law. The exculpation
provisions may have the effect of preventing stockholders from recovering
damages against our directors caused by their negligence, poor judgment or other
circumstances. The indemnification provisions may require us to use our limited
assets to defend our directors and officers against claims, including claims
arising out of their negligence, poor judgment, or other circumstances. (See
"MANAGEMENT-Indemnification and Limitation on Liability of Directors").
RISKS RELATING TO OUR COMMON STOCK
A LARGE NUMBER OF OUR SHARES WILL BE ELIGIBLE FOR FUTURE SALE AND MAY DEPRESS
THE PRICE OF OUR COMMON STOCK. In addition to the shares registered for sale by
the selling shareholders in this prospectus, a large number of shares of our
common stock will become eligible for sale in the future under Rule 144. Under
Rule 144, and under certain circumstances, an owner is permitted to sell every
three months the lesser of: (i) 1% of the amount of our outstanding common
stock, or (ii) the average weekly trading volume of our common stock for the
four weeks preceding the sale. The sale of common stock by the selling
shareholders or other shareholders could depress the price of our common stock
in the future. This will be especially true if we are unable to obtain a
sufficient number of broker-dealers to buy and sell our stock. (See "SHARES
ELIGIBLE FOR FUTURE SALE").
A SMALL NUMBER OF EXISTING SHAREHOLDERS CONTROL OUR COMPANY, WHICH COULD LIMIT
YOUR ABILITY TO INFLUENCE THE OUTCOME OF ANY SHAREHOLDER VOTE. Our executive
7
officers and directors, together with our largest shareholder, beneficially own
approximately 62% of our common stock as of the date of this prospectus. Under
our Articles of Incorporation and Colorado law, the vote of a majority of the
shares outstanding is generally required to approve most shareholder action. As
a result, these individuals and entities will be able to control the outcome of
shareholder votes for the foreseeable future, including votes concerning the
election of directors, amendments to our Articles of Incorporation or proposed
mergers or other significant corporate transactions. (See "SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT").
SINCE NO BROKER OR DEALER HAS COMMITTED TO CREATE OR MAINTAIN A MARKET IN OUR
STOCK, THERE IS NO ASSURANCE THAT OUR STOCK WILL BE QUOTED IN THE OTC BULLETIN
BOARD, AND PURCHASERS OF OUR COMMON STOCK MAY HAVE DIFFICULTY SELLING THEIR
SHARES, SHOULD THEY DESIRE TO DO SO. It is our intention to seek one or more
broker-dealers to apply for quotation of our common stock in the OTC Bulletin
Board following completion of this offering by us. However, we have no agreement
with any broker-dealer at this time, and there is no assurance that we will be
successful in finding one in the future. In addition, we believe that our stock
will be characterized as a "micro-cap" security and therefore subject to
increased scrutiny by the NASD. A micro-cap security is generally a low priced
security issued by a small company, or the stock of companies with low
capitalization. If we are unable to obtain quotation of our common stock on the
Bulletin Board, trading in our stock will be limited, and purchasers of our
common stock may have difficulty selling their shares, should they desire to do
so.
SINCE OUR STOCK WILL NOT BE LISTED ON NASDAQ OR A STOCK EXCHANGE, TRADING IN OUR
SHARES WILL LIKELY BE SUBJECT TO RULES GOVERNING "PENNY STOCKS," WHICH WILL
IMPAIR TRADING ACTIVITY IN OUR SHARES. It is likely that our common stock will
not initially be listed on Nasdaq or a stock exchange and may therefore be
subject to rules adopted by the Securities and Exchange Commission regulating
broker dealer practices in connection with transactions in penny stocks. Those
disclosure rules applicable to penny stocks require a broker dealer, prior to a
transaction in a penny stock not otherwise exempt from the rules, to deliver a
standardized disclosure document required by the SEC. These rules also require a
cooling off period before the transaction can be finalized. These requirements
may have the effect of reducing the level of trading activity in any secondary
market for our common stock. Many brokers may be unwilling to engage in
transactions in our common stock because of the added disclosure requirements,
thereby making it more difficult for stockholders to dispose of their shares.
OUR STOCK PRICE MAY BE VOLATILE AND AS A RESULT YOU COULD LOSE ALL OR PART OF
YOUR INVESTMENT. In addition to volatility associated with OTC securities in
general, the value of your investment could decline due to the impact of any of
the following factors upon the market price of our common stock:
o Changes in the worldwide price for gold;
o Disappointing results from our exploration or development efforts;
o Failure to meet our revenue or profit goals or operating budget;
o Decline in demand for our common stock;
o Downward revisions in securities analysts' estimates or changes in general
market conditions;
o Technological innovations by competitors or in competing technologies;
o Investor perception of our industry or our prospects; and
o General economic trends
In addition, stock markets have experienced extreme price and volume
fluctuations and the market prices of securities have been highly volatile.
8
These fluctuations are often unrelated to operating performance and may
adversely affect the market price of our common stock. As a result, investors
may be unable to resell their shares at a fair price.
ISSUANCES OF OUR STOCK IN THE FUTURE COULD DILUTE EXISTING SHAREHOLDERS AND
ADVERSELY AFFECT THE MARKET PRICE OF OUR COMMON STOCK, IF A PUBLIC TRADING
MARKET DEVELOPS. We have the authority to issue up to 60,000,000 shares of
common stock, 5,000,000 shares of preferred stock, and to issue options and
warrants to purchase shares of our common stock without stockholder approval.
Because our common stock is not currently quoted in Nasdaq or listed on an
exchange, we are not required to solicit shareholder approval prior to issuing
large blocks of our stock. These future issuances could be at values
substantially below the price paid for our common stock by our current
shareholders. In addition, we could issue large blocks of our common stock to
fend off unwanted tender offers or hostile takeovers without further stockholder
approval. Because we believe that trading in our common stock will initially be
limited, the issuance of our stock may have a disproportionately large impact on
its price compared to larger companies.
WE HAVE NEVER PAID DIVIDENDS ON OUR COMMON STOCK AND THERE IS NO ASSURANCE THAT
WE WILL PAY ANY IN THE FUTURE. We have not paid dividends on our common stock to
date, and there is no assurance that we will be in a position to pay dividends
in the foreseeable future. Our ability to pay dividends is dependent on our
ability to successfully develop one or more properties and generate revenue from
operations. Further, our initial earnings, if any, may be retained to finance
our growth. Any future dividends will be directly dependent upon our earnings,
our then-existing financial requirements and other factors. (See "MARKET
INFORMATION.")
DUE TO THE ABSENCE OF A TRADING MARKET FOR OUR COMMON STOCK OR THE PARTICIPATION
OF AN UNDERWRITER IN THIS OFFERING, THE PRICE OF OUR COMMON STOCK HAS BEEN
ARBITRARILY DETERMINED. Investors in this offering will not share the benefit of
an established trading market as an indication of the value of our common stock.
Furthermore, we have not retained an investment banker to assist in marketing
our common stock. The offering price of our stock has been determined
arbitrarily by us and bears no necessary relationship to our book value, lack of
earnings or other traditional criteria of value. As a result, investors may not
be able to sell their stock for a profit, and may realize a loss on their
investment.
IN THE EVENT OF A DISPUTE REGARDING TITLE TO OUR PROPERTY OR ANY FACET OF OUR
OPERATIONS, IT WILL LIKELY BE NECESSARY FOR US TO RESOLVE THE DISPUTE IN MEXICO,
WHERE WE WOULD BE FACED WITH UNFAMILIAR LAWS AND PROCEDURES. The resolution of
disputes in foreign countries can be costly and time consuming, similar to the
situation in the United States. However, in a foreign country, we face the
additional burdens of understanding unfamiliar laws and procedures. We may not
be entitled to a jury trial, as we might be in the United States. Further, to
litigate in any foreign country, we would be faced with the necessity of hiring
lawyers and other professionals who are familiar with the foreign laws. For
these reasons, we may incur unforeseen losses if we are forced to resolve a
dispute in Mexico or any other foreign country.
Forward-Looking Statements
This prospectus and the information incorporated by reference, contain
statements that plan for or anticipate the future. Forward-looking statements
include statements about our ability to develop and produce gold or other
precious metals, statements about our future business plans and strategies,
statements about future revenue and the receipt of working capital, and most
other statements that are not historical in nature. In these documents,
forward-looking statements are often identified by the words "anticipate,"
"plan," "believe," "expect," "estimate," and the like. Because forward-looking
9
statements involve future risks and uncertainties, there are factors that could
cause actual results to differ materially from those expressed or implied.
Prospective investors are urged not to put undue reliance on these
forward-looking statements.
A few of the uncertainties that could affect the accuracy of forward-looking
statements, besides the specific Risk Factors identified above, include:
o Changes in the general economy affecting the disposable income of the
public;
o Technological changes in the mining industry;
o Our costs;
o The level of demand for our products; and
o Changes in our business strategy.
The Private Securities Litigation Reform Act of 1995, which provides a "safe
harbor" for similar statements by existing public companies, does not apply to
our offering, as we were not previously registered as a public company.
DILUTION
The net tangible book value of the 15,736,852 shares of our common stock
outstanding at June 30, 2005, was $16,193, or approximately $.0010 per share.
Assuming the maximum number of shares offered hereby are sold, of which there is
no assurance, that per share value will be increased as a result of this
offering to approximately $.3086 (exclusive of other changes in net tangible
book value subsequent to June 30, 2005), resulting in immediate substantial
dilution to new shareholders of 69%. Dilution is the reduction of value of the
purchaser's investment measured by the difference between the price per share in
this offering and the sum of the net tangible book value at June 30, 2005 and
the increase attributable to purchases by investors in this offering.
The following table illustrates the effect of dilution per share of common stock
on purchasers in the offering based on the number of shares outstanding at June
30, 2005 and assuming sales of different amounts of common stock up to and
including the maximum, of which there can be no assurance.
Number of Shares Sold
2,000,000 5,000,000 7,000,000
--------------------------------------
Net Tangible Book Value Per Share
June 30, 2005(1) $.0010 $.0010 $.0010
Net Tangible Book Value Per Share
After Offering(2) .1137 .2419 .3086
Increase in Per Share Attributable
to New Shareholders .1127 .2409 .3076
Dilution to Purchasers of Stock 88.63% 75.81% 69.14%
--------------------
(1) Net tangible book value is equal to tangible assets minus total
liabilities. The net tangible book value excludes any amounts spent on
property acquisition or exploration, as such amounts have been expensed
under relevant accounting principles.
(2) Includes the net tangible book value at June 30, 2005 of $16,193, plus the
gross proceeds of this offering.
---------------------------------
10
The following table summarizes the number of shares of common stock issued by us
to current shareholders as of the date of this prospectus, and the total amount
paid or received by us for those shares; the number of shares to be issued in
this offering, and the total amount to be paid by new investors; the percentage
of equity ownership of each group, and the percentage of the total consideration
which each group will have paid for issuance of shares following completion of
this offering; and finally, the average price per share paid by the current
shareholders and the new investors. Since there is no fixed number of shares
which must be sold in this offering, we have presented two alternate scenarios,
neither of which should be taken as a guarantee of the results of this offering.
Amount of Offering Shares Purchased Total Consideration
------------------ ------------------------- ---------------------------------------
Average
Percent Percent Price
$3,000,000 Number (%) Amount (%) Per Share
---------- ---------- ------- ---------- ------- ---------
Present shareholders 18,304,852 85.9 $4,123,341 57.9 $.225
New Investors 3,000,000 14.1 3,000,000 42.1 $1.00
$7,000,000
Present shareholders 18,304,852 72.3 $4,123,341 37.1 $.225
New investors 7,000,000 27.7 7,000,000 62.9 $1.00
USE OF PROCEEDS
The following table illustrates the proposed use of proceeds from the offering
of shares by us. Since there is no minimum number of shares that must be sold to
complete the offering, we have illustrated various amounts. However, there is no
assurance that we will sell any or all of the shares. The proposed applications
are listed in order of priority.
Amount of Proceeds(1)
----------------------------------------------
Proposed use $2,000,000 $5,000,000 $7,000,000
----------------------------------------------------------------------------------------------
Additional exploration 1,500,000 3,500,000 4,000,000
Property improvements and infrastructure -- 500,000 1,000,000
Feasibility study 1,000,000
Working capital(2) 500,000 1,000,000 1,000,000
---------------
(1) Excludes expenses of the offering, estimated at $45,000, including legal
and accounting fees, printing and travel expenses.
(2) Includes overhead expenses, such as consulting fees, rent and travel. Also
includes a reserve for contingencies. A portion of the proceeds will be
paid to our officers in the form of compensation. See "MANAGEMENT."
----------------------------
If the results of our continuing exploration program prove unsuccessful, we will
increase our efforts to identify and acquire additional properties.
11
Pending application in accordance with our plan of operation, the proceeds of
this offering may be invested in temporary interest-bearing investments such as
checking accounts, time deposits, certificates of deposit and short-term
government obligations. We do not intend to invest the proceeds of this offering
in a manner that would subject us to regulation as an investment company for
purposes of United States securities laws.
MARKET INFORMATION
Certain Market Information
There currently exists no public trading market for our common stock. We do not
intend to develop a public trading market until we have completed the offering
of our shares. At that time, we intend to identify a broker-dealer to make
application to the NASD to quote our common stock on the OTC Bulletin Board.
There can be no assurance that a public trading market will develop at that time
or be sustained in the future. Without an active public trading market, you may
not be able to liquidate your shares without considerable delay, if at all. If a
market does develop, the price for our securities may be highly volatile and may
bear no relationship to our actual financial condition or results of operations.
Factors that we discuss in this prospectus, including the many risks associated
with an investment in us, may have a significant impact on the market price of
our common stock. Also, because of the relatively low price of our common stock,
many brokerage firms may not effect transactions in the common stock.
As of October 25, 2005, we had 70 beneficial owners of our common stock.
Dividend Policy
We have never declared or paid dividends on our common stock. Payment of future
dividends, if any, will be at the discretion of our board of directors after
taking into account various factors, including the terms of any credit
arrangements, our financial condition, operating results, current and
anticipated cash needs and plans for expansion. At the present time, we are not
party to any agreement that would limit our ability to pay dividends.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION
Introduction
The following discussion summarizes our plan of operation for the next twelve
months. It also analyzes our financial condition at June 30, 2005, and compares
it to our financial condition at year-end December 31, 2004. We also compare our
financial condition at December 31, 2004 to that at December 31, 2003, the end
of our prior fiscal year. The discussion of our results of operations compares
the six months ended June 30, 2005 to the comparable period ended June 30, 2004,
and the year ended December 31, 2004 to the year ended December 31, 2003. For
additional information about our financial condition and results of operations,
please refer to the financial statements and footnotes appearing in this
prospectus.
On February 21, 2005, we effected a two-for-one split of our outstanding common
stock. All of the financial information included in this discussion and in the
financial statements appearing in this prospectus has been adjusted to reflect
the results of that stock split.
12
Plan of Operation
Introduction. Our plan of operation is to continue exploration of the El Aguila
property until we discover sufficient mineralization to justify a decision to
place the property into production or alternatively, determine to abandon the
lease. We also intend to undertake exploration of the El Rey property, although
that property is in an earlier stage of exploration. Our ultimate objective is
to become a producer of gold and other precious metals. We are unable at this
time to predict when, if ever, that objective will be achieved.
Our business plan targets high-grade ore deposits which can be mined with
relatively low capital investment. Since we are a relatively small company
compared to others operating in the mining industry, we can initially look for
smaller deposits with the potential for quicker returns because we do not have
to support a larger organization with high overhead. In order to achieve that
objective, we hope to mine the ore initially from an open pit. By limiting
capital costs necessarily incurred in constructing a mill, we hope to enhance
the return on our capital investments. We believe the El Aguila property
represents an opportunity to meet these objectives.
In an effort to maintain our low overhead and because we have limited personnel,
we anticipate using independent contractors to do most of the work on our
projects. We currently retain an independent contractor to manage and oversee
our operations in Mexico and we utilize contractors for exploration and other
business activities. We expect this situation to continue for the foreseeable
future.
As an exploration and mining company, our activities include, at various times
and to various degrees, property rights acquisition, geological evaluation,
exploration and feasibility studies of properties and, where warranted,
development and construction of mining and processing facilities, mining and
processing and the sale of gold and silver, other metals and by-products. We may
also enter into joint ventures, partnerships or other arrangements to accomplish
these activities. All refined bullion would either be sold to outside companies,
delivered in satisfaction of spot or forward sale delivery contracts, or held in
inventory for later disposition.
Exploration and Development. Our initial drilling program on the El Aguila
project commenced in early 2004 and was funded by Canyon Resources Corporation
under an exploration agreement which contemplated a 50% earn-in for a total of
$3.5 million in costs. The initial drilling program consisted of approximately
3,900 meters of rotary drilling in 69 holes. The results of this initial program
suggested the presence of mineralized material in sufficient grade and quantity
to justify continued exploration. However, Canyon elected not to fund the
remaining $3 million of the program and instead elected to receive 1,200,000
shares our common stock in satisfaction of its initial contribution. (See
"BUSINESS AND PROPERTIES" for a more detailed summary of the drilling results).
Our current round of exploratory drilling on the El Aguila project commenced in
July 2005 and is being funded with the proceeds of a private placement completed
in August 2005. We estimate this phase to include approximately 3,000 meters in
50 holes. While the initial program funded by Canyon involved rotary drilling,
our current program involves core drilling where the samples of the rock are
left whole for better geologic interpretation and analysis. While core drilling
is more expensive, we believe that the quality of the resulting data is
superior. In our current program, we hope to refine the results of our initial
drilling by defining and extending the boundaries of the mineralized material.
13
We do not expect the proceeds from the private placement to be sufficient to
fund the entire remaining exploration program. Accordingly, significant proceeds
from this offering have been budgeted for that purpose. We hope to identify
sufficient estimated mineralized material to mine for not less than four years
in order to make a decision to commence mining and construction of a mill. For
that reason, we anticipate the need for additional exploration following
completion of this offering. We cannot accurately estimate at this time the
amount of money or the time necessary to complete our exploration activities.
If the results of our exploration program prove successful, we intend to retain
one or more consultants to prepare a feasibility study relating to the property
prior to making a decision to place the property into production. A feasibility
study is designed, as the name implies, to determine the economic feasibility of
placing the property into production and producing gold and other metals. It
analyzes the estimated quality and quantity of the resource discovered during
the exploration stage, estimates the costs of mining and processing the material
and compares that to the estimated sales price of the finished product. It
includes information on mining, processing, metallurgical, economic and other
relevant data. If the results of the feasibility study are positive, and
assuming the availability of necessary capital, a decision will be made to place
the property into production.
Capital Investment. In addition to expenses of exploration, we also anticipate
infrastructure improvements to the El Aguila project. Foremost among these is
the construction of a better road to the proposed mill site. As our exploration
program continues, we will determine whether and when it is expedient to
commence construction of this road and other necessary improvements to continue
our activities.
If a decision is made to commence mining, we will incur significant capital
costs in construction of a mill and acquisition of necessary equipment. If we
determine to place the property in production, it will be necessary for us to
conduct a feasibility study relating to the property to raise additional funding
to finance the construction of the mill. At present, we anticipate obtaining
such funding through additional equity financing, although we have no specific
plans at this time.
At some time in the future, we may also investigate the acquisition of
additional properties. This decision will be made on the basis of the results of
our exploration of the El Aguila and El Rey properties, and the availability and
cost of other prospects.
Corporate Overhead. Included in our plan of operation are the expenses of
overseeing our business and paying other general and administrative expenses.
These expenses primarily include salaries and other compensation, rent and
travel. We currently estimate these expenses at $60,000 per month, based on
existing commitments and expectations. We expect these expenses will be paid
from the proceeds of equity financing until such time, if ever, we are
successful in placing one or more of our properties in production.
Liquidity and Capital Resources
June 30, 2005. Our financial condition and liquidity improved significantly at
June 30, 2005 compared to the end of our prior fiscal year. At June 30, 2005, we
had working capital of $3,648, an improvement of $402,564 from December 31,
2004. Subsequent to June 30, 2005, our financial condition improved even
further, when we received an additional $1,200,000 from the sale of our common
stock. We are utilizing the proceeds of those transactions to fund our ongoing
14
exploration program. We anticipate those proceeds to be adequate for
continuation of the drilling program and to pay property holding costs and other
overhead for the next 12 months.
The report of our independent accountants on our financial statements at
December 31, 2004 contains a qualification about our ability to continue as a
going concern. This qualification is based on our lack of operating revenue and
limited working capital, among other things. During 2005, we have taken
significant steps to alleviate this risk. However, we remain dependent on
receipt of capital from outside sources, and ultimately, generating revenue from
operations, to continue as a going concern.
Due to our lack of proved or probable reserves at this time, all of our
investment in mining properties has been expensed, and does not appear as an
asset on our balance sheet. However, during the six months ended June 30, 2005,
we spent $89,144 on acquisition, exploration and evaluation expenses. This
compares to 182,093 for the six months ended June 30, 2004, when we utilized the
proceeds of the Canyon funding. During the years 2002 through 2004, we spent
$424,325, $438,066 and $325,974 on the acquisition and exploration of our
properties. We expect to incur significant additional exploration expenses
during the balance of 2005.
Since inception, our capital resources have been provided exclusively through
the sale of equity securities. From inception through June 30, 2005, we have
received $2,923,341 in cash, services and other consideration through issuance
of our common stock in private transactions. Since we have not generated any
cash from operations, we have been forced to rely on sale of equity to pay our
expenses. During the six months ended June 30, 2005, we issued 558,000 shares of
our common stock for cash of $207,500, 40,500 shares for services valued at
$15,000, 1,750,000 shares as stock grants valued at $437,500 and 1,280,000
shares in satisfaction of payables totaling $320,000.
December 31, 2004. At December 31, 2004, we had a working capital deficit of
$398,916, consisting of current assets of $9,560 and current liabilities of
$408,476. This represents a decrease of $101,310 from our working capital
deficit at December 31, 2003. A significant portion of the accrued expenses
included in that working capital deficit at December 31, 2004 was satisfied
during 2005, as discussed above.
Our operating activities during 2004 used $378,289 of cash. Our net loss during
2004 of $853,666 represented the largest portion of that amount. The use of cash
from the net loss during the year was reduced by non-cash stock compensation in
the amount of $150,000 and stock subscribed in the amount of $350,000.
During 2003, we received $400,000 and during 2004, another $100,000 from Canyon
for the exploration program discussed above. As a result of the other
transactions discussed above, the shareholders' deficit of $397,335 at December
31, 2004 improved to $16,193 at June 30, 2005.
Results of Operations
We are considered a development stage company for accounting purposes, since we
have not received significant revenues from operations. We are unable to predict
with any degree of accuracy when that situation will change.
Six Months Ended June 30, 2005. During the six months ended June 30, 2005, we
reported a net loss of $216,718, or $.02 per share. This compares to a net loss
15
of $292,086, or $.03 per share, for the six months ended June 30, 2004. We
expect to incur losses until such time, if ever, as we begin generating revenue
from operations.
During the six months ended June 30, 2005, general and administrative expenses
remained generally constant compared to the same period of the prior year,
increasing approximately 16%. Property acquisition and exploration expenses
decreased significantly from the six months ended June 30, 2004 to the
comparable period of 2005, decreasing $92,949, or 51%. This decrease is
attributable to our lack of working capital during early 2005. However, with the
proceeds of the recent private placement described above, our exploration
program is now proceeding.
Year Ended December 31, 2004. During the year ended December 31, 2004, we
reported a net loss of $853,666, or $.08 per share. This compares to a net loss
of $496,017, or $.05 per share, for the year ended December 31, 2003. In neither
period did we report any revenue except interest income.
General and administrative expenses increased eight-fold in 2004 compared to
2003, showing an increase of $469,559. A majority of the increase in 2004, or
$350,000, represents accrued compensation for our employees and a financial
consultant. We also granted common stock with a value of $150,000 to our mining
consultant and property manager in Mexico. We believe that the stock grant to
this individual was a one-time expense. Property acquisition and exploration
expenses decreased approximately 26% from 2003 to 2004, reflecting our reduced
capital available for such expenditures. As a development-stage company, our
acquisition and exploration budget is dependent upon available working capital.
Critical Accounting Policies
We believe the following more critical accounting policies are used in the
preparation of our consolidated financial statements.
Exploration and Development Costs: Mineral property acquisition, exploration and
related costs are expensed as incurred unless proven and probable reserves exist
and the property is a commercially minable property. When it has been determined
that a mineral property can be economically developed, the costs incurred to
develop such property, including costs to further delineate the ore body and
develop the property for production, may be capitalized. In addition, we may
capitalize previously expensed acquisition and exploration costs if it is later
determined that the property can economically be developed. Interest costs, if
any, allocable to the cost of developing mining properties and constructing new
facilities are capitalized until operations commence. Mine development costs
incurred either to develop new ore deposits, expand the capacity of operating
mines, or to develop mine areas substantially in advance of current production
are also capitalized.
All such capitalized costs, and estimated future development costs, are then
amortized using the units-of-production method over the estimated life of the
ore body. Costs incurred to maintain current production or to maintain assets on
a standby basis are charged to operations. Costs of abandoned projects are
charged to operations upon abandonment. We evaluate, at least quarterly, the
carrying value of capitalized mining costs and related property, plant and
equipment costs, if any, to determine if these costs are in excess of their net
realizable value and if a permanent impairment needs to be recorded. The
periodic evaluation of carrying value of capitalized costs and any related
property, plant and equipment costs are based upon expected future cash flows
and/or estimated salvage value in accordance with Statement of Financial
Accounting Standards (SFAS) No. 144, "Accounting for Impairment or Disposal of
Long-Lived Assets."
16
Property Retirement Obligation: We implemented SFAS 143, "Accounting for Asset
Retirement Obligations," effective January 1, 2003. SFAS 143 requires the fair
value of a liability for an asset retirement obligation to be recognized in the
period that it is incurred if a reasonable estimate of fair value can be made.
The associated asset retirement costs are capitalized as part of the carrying
amount of the long-lived asset. We have determined that we have no property
retirement obligations as of December 31, 2004.
Stock Option Plans: We apply APB Opinion 25, "Accounting for Stock Issued to
Employees", and related Interpretations in accounting for all stock option
plans. Under APB Opinion 25, no compensation cost has been recognized for stock
options issued to employees as the exercise price of stock options which we
granted equals or exceeds the market price of the underlying common stock on the
date of grant.
SFAS 123, "Accounting for Stock-Based Compensation," requires us to provide pro
forma information regarding net income as if compensation costs for our stock
option plans had been determined in accordance with the fair value based method
prescribed in SFAS No. 123. To provide the required pro forma information, we
estimate the fair value of each stock option at the grant date by using the
Black-Scholes option-pricing model. Since our shares are not publicly traded,
the fair value of each stock option or stock grant is determined by us.
Foreign Operations: Our present activities are in Mexico. As with all types of
international business operations, currency fluctuations, exchange controls,
restrictions on foreign investment, changes to tax regimes, political action and
political instability could impair the value of the Company's investments.
Foreign Currency Translation: The local currency is the functional currency for
our subsidiaries. Assets and liabilities are translated using the exchange rate
in effect at the balance sheet date. Income and expenses are translated at the
average exchange rate for the year. Translation adjustments are reported as a
separate component of stockholders' equity.
Estimates. The preparation of our consolidated financial statements in
conformity with accounting principles generally accepted in the United States of
America requires us to make estimates and assumptions that affect the amount of
assets and liabilities, the disclosure of contingent assets and liabilities at
the date of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Recent Accounting Pronouncements
In November 2004, the FASB issued SFAS 151, "Inventory Costs." SFAS 151 amends
the accounting for abnormal amounts of idle facility expense, freight, handling
costs, and wasted material (spoilage) under the guidance in ARB 43, Chapter 4,
"Inventory Pricing." This statement is effective for inventory costs incurred
during fiscal years beginning after June 15, 2005. Management does not expect
adoption of SFAS 151 to have a material impact on our financial statements.
In December 2004, the FASB issued SFAS 123(R), "Share-Based Payment." SFAS
123(R) amends SFAS 123, "Accounting for Stock-Based Compensation," and APB
Opinion 25, "Accounting for Stock Issued to Employees." SFAS 123(R) requires
that the cost of share-based payment transactions (including those with
17
employees and non-employees) be recognized in the financial statements. SFAS
123(R) applies to all share-based payment transactions in which an entity
acquires goods or services by issuing (or offering to issue) its shares, share
options, or other equity instruments (except for those held by an ESOP) or by
incurring liabilities (1) in amounts based (even in part) on the price of the
entity's shares or other equity instruments, or (2) that require (or may
require) settlement by the issuance of an entity's shares or other equity
instruments. This statement is effective (1) for public companies qualifying as
SEC small business issuers, as of the first interim period or fiscal year
beginning after December 15, 2005, (2) for all other public companies, as of the
first interim period or fiscal year beginning after June 15, 2005, or (3) for
all nonpublic entities, as of the first fiscal year beginning after December 15,
2005. Management is currently assessing the effect of SFAS No. 123(R) on our
financial statements.
BUSINESS AND PROPERTIES
Our History
We were organized under the laws of the State of Colorado in 1998 to engage in
the exploration and development of mining properties. From inception to 2000, we
were essentially dormant. In July 2000, we entered into a management agreement
with U.S. Gold Corporation, a corporation engaged in the exploration and mining
business with shares traded over the counter and quoted on the OTC Bulletin
Board. Pursuant to that agreement, U.S. Gold managed our affairs, including
investigation of mining properties in Mexico, in exchange for an equity interest
in our company. Through a transaction completed in July 2005, U.S. Gold disposed
of our common stock and no longer owns an interest in our company.
In August 2001, we leased our first property, known as the Zimapan project,
located in the State of Hidalgo, Mexico. After drilling approximately 1,800
meters of test holes, we abandoned that property. In connection with the
acquisition of the lease and our exploration activities on the Zimapan property,
we spent approximately $294,000.
Our Properties
We currently own an interest in two properties, the El Aguila project and the El
Rey project. We lease the El Aguila property from an individual who serves as
our consultant in Mexico and own mining concessions in the El Rey property. Both
of these properties are in the exploration stage and have no proved or probable
reserves.
The El Aguila Project
Background. Effective October 14, 2002, we leased a prospective gold/silver
property comprised of three concessions, El Aguila, El Aire and La Tehuana, from
Jose Perez Reynoso, a consultant to our company. The lease agreement is subject
to a 4% net smelter return royalty where production is sold in the form of
gold/silver dore and 5% for production sold in concentrate form. We have made
periodic advance royalty payments under the lease totaling $160,000 to date with
one remaining advance payment of $100,000 due October 14, 2006. There are no
advance royalty payments due after that date.
We have acquired additional claims in the area by filing concessions under the
Mexican mining laws. The table below summarizes the concessions that give us the
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right to explore and mine the properties and the ensuing map shows their general
location. The mineral concessions making up the El Aguila project are located
within the San Pedro Totolapam Ejido.
El Aguila Project Concessions
Concession Type Expediente/Titulo No. Hectares
---------- ---- --------------------- --------
El Aire Exploitation 158272 72.00
El Aguila Exploitation 222844 899.00
La Tehuana Exploration 210029 925.00
Total 1,896.00
Location Map for the El Aguila Project
[MAP TO BE INSERTED HERE]
Location and Access. The El Aguila project is located in the Sierra Madre del
Sur of southern Mexico, in the central part of the State of Oaxaca. Access to
the property is by way of the Pan American Highway (Highway # 190),
approximately 120 kilometers southeast of the state's capital city, Oaxaca. At
the village of San Jose del Gracia, a gravel road goes approximately four
kilometers northwest to the property.
The climate of the El Aguila area is dry and warm to very warm with most
rainfall occurring in the summer and annual precipitation averaging only 423.7
mm (17 inches). The average yearly temperature is 26.6 degrees centigrade
(80(degree) F). The area is very rocky with scarce vegetation. Subsistence
farming occurs and the main agricultural crop is agave cactus that is cultivated
for the production of mescal.
Exploration Activities. The early history of activity at the El Aguila property,
as known by us, is prospecting and limited mining for gold and silver from the
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early 1900's to the mid 1960's. In 1998, Mr. Perez Reynoso acquired the
concessions and leased them to Apex Silver Corporation of Denver, Colorado. Apex
carried out an exploration program involving geologic mapping, surface sampling
and an 11 hole drilling program (1,242 meters). The results did not meet Apex's
expectations so it dropped the lease on the property in 2002. We leased the
property from Mr. Perez Reynoso in October of 2002.
In August 2003, we entered into an exploration agreement with Canyon Resources
Corporation pertaining to our interest in the El Aguila property whereby Canyon
paid $500,000 in exploration and development costs. The drilling programs were
completed in 2003 and included approximately 3,900 meters of drilling focused on
one target area of the property. This exploration drilling encountered some
high-grade gold intercepts which will require additional exploration drilling in
order to fully evaluate. Through June 30, 2005, we have spent or incurred
approximately $853,184 in acquisition, exploration and related costs for the El
Aguila project, of which $325,974 was spent in year 2004.
We have carried out exploration on the project that has included geologic
mapping, surface sampling and two rounds of exploratory drilling. The results of
the drilling programs have resulted in some high-grade gold and silver
intercepts which are listed in the table below. The Company has also had
preliminary metallurgical recovery tests run on some composites of the
intercepts with positive results.
EL AGUILA PROJECT SELECTED DRILL HOLE INTERCEPTS
Hole No. Drill Type Interval Starting At Interval Length Gold Silver
(Meters) (Meters) g/t g/t
-------- -------- --- ---
301 RC 40 16 6.56 23
302 RC 30 6 16.65 112
303 RC 22 6 18.79 133
306 RC 4 4 14.58 74
and 24 6 8.99 76
307 RC 18 4 3.91 84
and 26 2 3.69 70
309 RC 56 2 3.79 37
311 RC 16 2 4.53 25
314 RC 6 2 6.89 69
326 RC 2 4 3.84 83
327 RC 8 8 3.54 136
327A RC 12 8 3.97 78
330 RC 6 6 8.46 111
331 RC 50 4 54.71 701
332 RC 16 8 6.07 18
333 RC 2 2 3.67 63
and 8 6 15.69 101
334 RC 6 6 9.40 25
338 RC 20 10 3.71 65
343 RC 62 14 6.69 38
349 RC 34 6 7.50 78
354 RC 34 4 7.50 68
363 RC 4 6 11.63 100
20
365 RC 0 4 5.73 10
366 RC 0 4 3.74 100
509 CORE 20 6 10.20 281
511 CORE 40 12 10.18 20
512 CORE 34.6 12 4.67 74
901 RC 4 12 6.72 51
RC: Reverse Circulation Drilling
CORE: Diamond Core Drilling
Facilities. The project is without any plant or equipment at this time. The
federal power grid is located along the Pan American Highway and could be
utilized in operations, if any. Water would be available from the Totolapam
River and would require pumping to any facilities. Water rights are owned by the
Mexican nation and administered by an agency of the federal government, the
Comision Nacional de Agua ("CNA"). The CNA has granted water concessions to
private parties throughout the defined Oaxaca Hydrologic Basis and granting of
water concessions for development and operation of the El Aguila properties, if
any, is expected to be available.
Geology and Mineralization. The El Aguila Project is located in the San Jose del
Gracia Mining District in the Sierra Madre del Sur of southern Mexico. Multiple
volcanic domes of various scales, and probably non-vented intrusive domes,
dominate the district geology. These volcanogenic features are imposed on a
prevolcanic basement of sedimentary rocks. Gold and silver mineralization in
this district is related to the manifestations of this classic volcanogenic
system and is considered epithermal in character.
The geologic setting for our project area is thought to be along the southern
edge of a volcanic caldera (the Las Margerita Caldera) which appears to be 11
kilometers in diameter and is located along a northwest-southeast trending
horst-graben fault system. Tertiary age volcanic rocks in the district consist
of progressively more felsic units that vary in composition from andesite to
rhyolite. Several rhyolite domes occur in the El Aguila area that appear to be
outside the southern rim of the caldera and the mineralization appears related
to them.
The deposits on the El Aguila property are primarily hosted in a quartz rich,
stratiform zone (manto). There appear to be several manto units on the property,
one main manto and one or more lower mantos. The main manto is comformable with
the sedimentary and volcanic rock above and below the manto. It varies in
thickness from less than two meters to more than 30 meters.
Surface sampling yielded significant gold and silver values from early district
wide exploration where silicified zones were encountered. In addition, a small,
shallow adit and winze provided limited sampling underground yielding
indications of high grade gold values (plus 1 oz/ton) in a silicified,
sub-horizontal manto. Based on these early anomalous exploration samples a
limited drilling program was carried out by us that in fact resulted in defining
a central zone of continuous, shallow, sub-horizontal, high-grade gold.
The following diagrams illustrate a cross section of the estimated
mineralization at the El Aguila project:
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EL AGUILA GEOLOGICAL CROSS SECTION A-A'
The first diagram, the El Aguila geological cross-section labeled A-A' in the
prospectus, is described as follows:
The graphic image depicts a cross-section of a portion of the El Aguila
property prepared on October 17, 2005. A legend to the image describes
various symbols used in the image, including a symbol for an outline of an
area estimated to contain at least one gram per tonne of gold, a symbol for
higher grade intercepts and a symbol for underground workings. The legend
indicates that the geology included in the graphic image was prepared by
David Reid.
The graphic image depicts an underground cross-section of the property in
which several holes have been drilled and an estimated area of mineralized
material which resulted from the drilling. The overall cross section
illustrates a section of the El Aguila property that begins at a surface
elevation of approximately 1,153 meters on the far left of the image (A),
slopes downward to a low point of approximately 1,130 meters of elevation
and upward again to a maximum elevation of approximately 1,150 meters on
the far right of the image (A'). The image contains an outline of an area
within the cross section estimated to contain at least one gram of gold per
ton. Higher grade intercepts within the outline are separately indicated.
Underground workings are also depicted.
The following narrative summarizes drill hole results depicted in the image
(beginning on the left side of the image and continuing in order to the right
side of the image):
o ORC-343 depicts a drill hole beginning at a surface elevation of
approximately 1,153 meters and dipping to the northeast at an angle of 60
degrees with a total depth of 84 meters. That hole shows a high grade
intercept beginning at 62 meters depth for 14 meters at 6.69 grams per
tonne of gold.
o ORC-301 depicts a drill hole beginning at a surface elevation of
approximately 1,140 meters and dipping to the southwest at an angle of 60
degrees with a total depth of 78 meters. That hole shows a high grade
intercept beginning at 40 meters depth for 16 meters at 6.56 grams per
tonne of gold.
o ORC-302 depicts a drill hole beginning at a surface elevation of
approximately 1,138 meters and drilled vertically for a total depth of 48
meters. That hole shows a high grade intercept beginning at 30 meters depth
for 6 meters at 16.65 grams per tonne of gold.
o ORC-303 depicts a drill hole beginning at a surface elevation of
approximately 1,138 meters and dipping to the northeast at an angle of 60
degrees with a total depth of 60 meters. That hole shows a high grade
intercept beginning at 22 meters depth for 6 meters at 18.79 grams per
tonne of gold.
o ARC-1 depicts a drill hole beginning at a surface elevation of
approximately 1,135 meters and drilled vertically for a total depth of 148
meters (bottom of the hole is off the cross-section). That hole shows a
high grade intercept beginning at 4 meters depth for 8 meters at 6.72 grams
per tonne of gold.
o ORC-334 depicts a drill hole beginning at a surface elevation of
approximately 1,135 meters and dipping to the northeast at an angle of 60
degrees with a total depth of 40 meters. That hole shows a high grade
intercept beginning at 6 meters depth for 6 meters at 9.4 grams per tonne
of gold.
o ORC-333 depicts a drill hole beginning at a surface elevation of
approximately 1,143 meters and drilled to the southwest at an angle of 70
degrees with a total depth of 58 meters. That hole shows a high grade
intercept beginning at 2 meters depth for 2 meters at 3.67 grams per tonne
of gold and another high grade intercept at 8 meters depth for 6 meters at
15.69 grams per tonne of gold.
o ORC-306 depicts a drill hole beginning at a surface elevation of
approximately 1,143 meters and drilled to the northeast at an angle of 60
degrees with a total depth of 66 meters. That hole shows a high grade
intercept beginning at 4 meters depth for 4 meters at 14.58 grams per tonne
of gold and another high grade intercept beginning at 24 meters depth for 6
meters at 8.99 grams per tonne of gold.
The image also depicts numerous underground samples taken from underground
workings, showing the following:
For samples taken at a depth of approximately 1,102 meters:
Grams of gold/tonne Grams of silver/tonne
35.3 64.8
57.6 61.6
131.5 19.0
15.6 34.0
53.0 74.0
For samples taken at a depth of approximately 1,120 meters:
Grams of gold/tonne Grams of silver/tonne
50.1 1.6
62.5 90.6
39.2 120.0
26.3 192.0
28.3 193.0
45.0 58.0
20.9 140.0
The second diagram illustrates an aerial cross section, with the section line
going from the northhwest (A) across the area of interest to the northeast (A').
22
The mineralized zone drilled to date (see previous diagram) is a gently dipping,
highly silicified manto that appears to be a silica-replaced rhyolite breccia
located below the unconformable contact with the rhyolite flows and overlying
the sandstone/shale sequence. This silicified replacement zone appears to be
bounded on the west by post mineral faulting but open in the other directions.
Field observations and geologic inference suggest that several additional
similar zones of mineralization should exist in the immediate vicinity.
The sediments below the silicified manto may also have the potential to be
mineralized as possible veins. Higher grade gold and silver values have not been
found thus far in the sandstone/siltstone, however, the shale unit has been
found to be mineralized, with one sample taken at the bottom of the interior
shaft running 3 grams/tonne gold and 485 grams/tonne silver
As stated above, this volcanogenic system is quite large and robust, intruded
into very receptive sedimentary basement rocks and exhibits, from surface
samples, widespread high-grade gold and silver values. This district, while only
in its earliest phase of exploration, holds the possibility for additional
mineralization.
The El Rey Property
Location and Access. The El Rey Property is an exploration stage property and is
located in the Sierra Madre del Sur of southern Mexico in the central part of
the state of Oaxaca. Access to the property is by way of the Pan American
Highway (Highway # 190) approximately 80 kilometers southeast of the state's
capital city, Oaxaca, where a right turn heads east toward the village of San
Baltasar Chichicapan. At the village, another gravel road leads another 15
kilometers to another gravel road, where a turn north leads another 3 kilometers
to the site.
Background. We have acquired claims in the area by filing concessions under the
Mexican mining laws. The following table summarizes the concessions that give us
the right to the properties for exploration and mining purposes and the ensuing
map shows their general location. The mineral concessions making up the El Rey
Property are located within the San Baltazar Chichicapam Ejido.
El Rey Project Concessions
Concession Type Expediente/Titulo No. Hectares
---------- ---- -------------------- --------
El Rey Exploration 225373 164.00
La Reyna Exploration 225401 700.00
El Virrey Exploration 629662 36.00
------
Total 900.00
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Location Map for the El Rey Project
[TO BE INSERTED HERE]
The El Rey Property is an exploration stage property. Not much is known about
this property by us and we have not yet undertaken any exploration except for
two surface samples from an existing waste dump to an old existing vertical
shaft. These two samples were selected with the intent of sampling only what
appeared to be vein material. Those two samples assayed 80 g/tonne gold and 85
g/tonne gold. We intend to explore this property in the future with a view to
evaluating the potential for a high-grade gold vein.
If exploration is successful for a high-grade gold vein, any mining would
probably require an underground mine but any high-grade material could be
processed at the El Aguila project mill if one was to be built in the future.
Hauling any El Rey material to the El Aguila project would be approximately 40
miles.
Mineral Concessions
Mineral rights in Mexico belong to the Mexican government and are administered
pursuant to Article 27 of the Mexican Constitution. Exploration and exploitation
concessions may be granted or transferred to Mexican citizens and corporations.
Our leases or concessions are held by our Mexican subsidiaries. Exploration
concessions are granted for a term of six years, with the right to convert to an
exploitation concession with a term of 50 years. Concessions grant the holder
the right to explore and exploit all minerals found in the ground. Maintenance
of concessions requires the semi-annual payment of mining duties (due in January
and July) and the performance of assessment work, on a calendar year basis, with
assessment work reports required to be filed in the month of May for the
preceding calendar year. The amount of mining duties and annual assessment are
set by regulation and increase over the life of the concession and includes
24
periodic adjustments for inflation. Mining concessions are registered at the
Public Registry of Mining in Mexico City and in regional offices in Mexico.
Ejido Lands and Surface Right Acquisitions
Surface lands in the El Aguila property area are Ejido lands (agrarian
cooperative lands granted by the federal government to groups of Campesinos
pursuant to Article 27 of the Mexican Constitution of 1917). Prior to January 1,
1994, Ejidos could not transfer Ejido lands into private ownership. Amendments
to Article 27 of the Mexican Constitution in 1994 now allow individual property
ownership within Ejidos and allow Ejidos to enter into commercial ventures with
individuals or entities, including foreign corporations. We have an agreement
with the local San Pedro Totolapam Ejido allowing exploration of the El Aguila
property. In order to begin mining at the property, we will have to secure
surface rights agreements for all lands to be disturbed by, or adjacent to, any
such proposed operation.
Competition
The exploration for, and the acquisition and development of, gold properties are
subject to intense competition. Due to our recent organization, limited capital
and personnel, we may be at a competitive disadvantage compared to other
companies with regard to exploration and development. In general, properties
with a higher grade of recoverable material or which are more readily mineable
afford the owner a competitive advantage. Our present limited funding means that
our ability to compete for properties to be explored and developed is limited.
We believe that competition for acquiring mineral prospects will continue to be
intense in the future. The availability of funds for exploration is sometimes
limited, and we may find it difficult to compete with larger and more well-known
companies for capital. Even though we have the right to the minerals on our
claims, there is no guarantee we will be able to raise sufficient funds in the
future to maintain our mineral claims in good standing. Therefore, if we do not
have sufficient funds for exploration, our claims might lapse and be staked by
other mining interests. We might be forced to seek a joint venture partner to
assist in the exploration of our mineral claims. In this case, there is the
possibility that we might not be able to pay our proportionate share of the
exploration costs and might be diluted to an insignificant carried interest. Our
inability to develop our mining properties due to lack of funding could have a
material adverse effect on our operation and financial position.
Government Regulations and Permits
In connection with mining, milling and exploration activities, we are subject to
extensive Mexican federal, state and local laws and regulations governing the
protection of the environment, including laws and regulations relating to
protection of air and water quality, hazardous waste management and mine
reclamation as well as the protection of endangered or threatened species. The
department responsible for environmental protection in Mexico is SEMARNAP, which
is similar to the United States Environmental Protection Agency. SEMARNAP has
broad authority to shut down and/or levy fines against facilities that do not
comply with its environmental regulations or standards. Potential areas of
environmental consideration for mining companies, including ours if we are
successful in commencing mining operations, include acid rock drainage, cyanide
containment and handling, contamination of water courses, dust and noise.
Prior to the commencement of any mining operations at the El Aguila property, if
any, we will have to secure various regulatory permits from federal, state and
25
local agencies. These governmental and regulatory permits generally govern the
processes being used to operate, the stipulations concerning air quality and
water issues, and the plans and obligations for reclamation of the properties at
the conclusion of operations. Regulations require that an environmental impact
statement, known in Mexico as a Manifesto Impacto Ambiental ("MIA") be prepared
by a third-party contractor for submittal to SEMARNAP. Studies required to
support the MIA include a detailed analysis of these areas, among others: soil,
water, vegetation, wildlife, cultural resources and socio-economic impacts.
Although the regulatory process in Mexico has a public review component, proof
of local community support for a project is required to gain final MIA approval.
A risk analysis must also be prepared in conjunction with the MIA for approval
by SEMARNAP. The most significant other approvals that might be necessary for
our operations would be permits to extract water from the Totolapam River and an
explosives permit, issued by the Mexican army, to purchase, store and use
explosives. In Mexico, water rights are managed by the Comision National del
Aqua ("CNA"). According to Mexican water law, all users must pay for the right
to use national waters regardless of how the rights were obtained, with the
rates being determined by the availability of water and the method of
extraction.
We have obtained, and will obtain at the appropriate time, environmental
permits, licenses or approvals required for potential operations, if any. We are
not aware of any material violations of environmental permits, licenses or
approvals issued with respect to our operations.
Glossary
Adit: A more or less horizontal drive (walk-in mine) into a hill
that is usually driven for the purpose of intersecting or
mining an ore body. An adit may also be driven into a hill
to intersect or connect a shaft for the purpose of
dewatering. Adits were commonly driven on a slight incline
to enable loaded mine trucks to have the advantage of a
downhill run out, while the empty (lighter) truck was pushed
uphill back into the hill. The incline also allows water to
drain out of the adit. An adit only becomes a tunnel if it
comes out again on the hill somewhere, like a train tunnel.
Andesite: A gray to black volcanic rock with between about 52 to 63
weight percent silica (SiO2). Andesite magma commonly erupts
from stratovolcanoes as thick lava flows, some reaching
several km in length.
Breccia: A rock consisting of fragment, more or less angular, in a
matrix of finer-grained material or of cementing material.
Caldera: A large depression formed from a collapsed volcano. Calderas
are often circular or elliptical. Crater Lake (in Oregon,
USA) is an example of a large caldera (it is 16 miles
across).
Cretaceous period: Flowering plants appeared and dinosaurs were at
their height during the Cretaceous period. 146-65 million
years ago. There was a mass extinction (the K-T extinction)
at the end of the Cretaceous, marking the end of the
dinosaurs and many other species.
Dore: Unrefined gold and silver bars usually containing more than
90% precious metal.
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Epithermal: Used to describe gold deposits found on or just below the
surface close to vents or volcanoes, formed at low
temperature and pressure.
Felsic: The minerals feldspar and quartz or an igneous rock or
metamorphic rock made predominantly of feldspar and quartz;
poor in iron and magnesium. Light-colored.
Gram: A metric unit of weight and mass, equal to 1/1000th of a
kilogram. One gram equals .035 ounces. One ounce equals
31.103 grams.
Hectare: Another metric unit of measurement, for surface area. One
hectare equals 1/200th of a square kilometer, 10,000 square
meters, or 2.47 acres. A hectare is approximately the size
of a soccer field.
Horst-graben: Horst and graben are formed by widespread block faults
giving rise to a mountain and valley topography that owes
its origin in part at least to regional block faulting.
Kilometer: Another metric unit of measurement, for distance. The prefix
"kilo" means 1000, so one kilometer equals 1,000 meters, one
kilometer equals 3,280.84 feet, which equals 1,093.6 yards,
which equals 0.6214 miles.
Manto: A mineralogy term meaning a layer or stratum.
Minerals or
Mineralized
Material: Any mass of host rock in which minerals of potential
commercial value occur. Net Smelter Return Royalty A share
of the net revenue generated from the sale of metal produced
by the mine.
Ore or Ore
Deposit: Rocks that contain economic amounts of minerals in them and
that are expected to be profitably mined.
Rhyolite: A type of volcanic lava or rock that is usually light in
color: it contains 69% silica and is high in potassium and
sodium.
Silicified: Is combined or impregnated with silicon or silica.
Tertiary period: This period lasted from 65 to 1.8 million years ago. It
followed the Cretaceous period (the end of the Mesozoic Era)
and the K-T extinction. Many mammals developed then,
including primitive whales, rodents, pigs, cats, rhinos,
etc.
Tonne: A metric ton. One tonne equals 1000 kg. It is approximately
equal to 2,204.62262 pounds.
Volcanogenic: Of volcanic origin.
27
Volcanic domes: These are mounds that form when viscous lava is erupted
slowly and piles up over the vent, rather than moving away
as lava flow. The sides of most domes are very steep and
typically are mantled with unstable rock debris formed
during or shortly after dome emplacement. Most domes are
composed of silica-rich lava which may contain enough
pressurized gas to cause explosions during dome extrusion.
Winze: Secondary or tertiary vertical or near-vertical opening sunk
from a point inside a mine for the purpose of connecting
with a lower level or of exploring the ground for a limited
depth below a level.
Employees
We currently have two employees, both of whom serve as our executive officers.
These individuals devote a majority of their business time to our affairs. We
also engage two consultants, one to oversee our property and activities in
Mexico and one to assist with our administrative and financial affairs. Our
consultant in Mexico serves on a full-time basis and the other as his services
are necessary. We have good relations with our employees and consultants and
believe their services will be adequate for the foreseeable future.
We engage independent contractors in connection with the exploration and
development of our mining properties.
Facilities
Effective October 1, 2005, we lease approximately 1,000 square feet of office
space under a three year agreement with an independent third party. Monthly rent
equals $1,428 the first year, $1,469 the second year and $1,490 the third year,
plus our share of operating expense escalations. We have prepaid the rent for
the first year. We believe this space is adequate for our needs for the
foreseeable future.
Legal Proceedings
We are not currently subject to any legal proceedings, and to the best of our
knowledge, no such proceeding is threatened, the results of which would have a
material impact on our properties, results of operation, or financial condition.
Nor, to the best of our knowledge, are any of our officers or directors involved
in any legal proceedings in which we are an adverse party.
MANAGEMENT
Directors and Executive Officers
The following individuals presently serve as our officers and directors:
Name Age Positions With the Company Board Position Held Since
---- --- -------------------------- -------------------------
William W. Reid 57 President, Chief Executive Officer 1998
and Director
David C. Reid 55 Vice President, Secretary, Treasurer
and Director 1998
28
Each of our Directors is serving a term which expires at the next annual meeting
of shareholders and until his successor is elected and qualified or until he
resigns or is removed. Our officers serve at the will of our Board of Directors.
Messrs. William and David Reid should be considered founders of our company, as
each has taken initiative in the organization of our business. William Reid and
David Reid are brothers.
The following information summarizes the business experience of each of our
officers and directors for at least the last five years:
William W. Reid. Mr. Reid has served as a director and our President and Chief
Executive Officer since our inception in 1998. Since August 2005, Mr. Reid has
devoted substantially all of his business time to our affairs. From 1977 to
August 18, 2005, he served as the President, Chief Executive Officer and
Chairman of the Board of Directors of U.S. Gold Corporation, a Colorado
corporation engaged in the exploration and development of gold mining
properties. During his tenure with U.S. Gold, that entity acquired, developed
and produced gold from five different mines. U.S. Gold had not produced any
revenue since 1990. From July 2001 through July 2005, U.S. Gold owned an
interest in our company. In August 2005, as part of terminating their employment
contracts with U.S. Gold, that interest was distributed to our officers and a
financial consultant. The common stock of U.S. Gold is traded over the counter
and quoted on the OTC Bulletin Board.
Mr. Reid received a Bachelor of Science in Physics in 1970 and a Master's in
Economic Geology in 1972 from Purdue University.
David C. Reid. Mr. David Reid has served as a director and our Vice President
since our inception in 1998. Since August 2005, he has devoted substantially all
of his time to our business and affairs. From 1977 to August 18, 2005, he was
the Vice President and a director of U.S. Gold during the time that it acquired,
developed and produced gold. Mr. Reid received a Bachelor of Science degree in
geology from Ball State University in 1972.
In addition to our officers and directors, we also utilize the services of the
following significant consultants:
William F. Pass. Mr. Pass has served our company as a financial consultant since
January 2002, a capacity in which he devotes a minor amount of his business
time. Since 1996, he has also been Vice President, Chief Financial Officer and
Secretary of U.S. Gold. His responsibilities as a financial consultant include
certain administrative duties and assisting in the preparation of filings with
the SEC.
Jose Perez Reynoso. Mr. Reynoso, a Mexican national, has served our company as a
full time consultant since 2002. In that capacity, he oversees all our
operations in Mexico, and provides advice in relations with the Mexican
Government. From 1995 to 2002, he was a consulting geologist for mining
companies operating in Mexico. Mr. Reynoso received an undergraduate degree in
geology and engineering in 1974 and a master's degree in economic geology in
1979 from the National University of Mexico. We leased the El Aguila property
from Mr. Reynoso in 2002.
Currently, we do not have a standing audit, compensation or nominating committee
of our Board of Directors. During the current fiscal year, we hope to add two or
29
more independent directors to our Board, and plan to investigate the formation
of one or more committees, especially an audit committee. If appointed, an audit
committee would be responsible for the following items, among others:
o Overseeing the external audit function, including the annual nomination and
compensation of our independent public accountants;
o Reviewing accounting policies and policy decisions;
o Reviewing the financial statements, including interim financial statements
and annual financial statements, together with auditor's opinions;
o Inquiring about the existence and substance of any significant accounting
accruals, reserves or estimates made by management;
o Reviewing with management the Management's Discussion and Analysis section
of our Annual Report;
o Reviewing the letter of management representations given to our independent
public accountants;
o Meeting privately with the independent public accountants to discuss all
pertinent matters; and
o Reporting regularly to the Board of Directors regarding its activities.
Director Compensation
We have not paid any cash compensation to our directors in their capacities as
such in the past. If we retain independent directors in the future, we reserve
the right to compensate them in accordance with industry standards as may be
determined by our Board of Directors.
All directors are reimbursed for reasonable and necessary expenses incurred in
their capacities as such.
Executive Compensation
The following table summarizes the total compensation of our executive officers
for the three fiscal years ended December 31, 2004.
Summary Compensation Table
Long Term Compensation Awards
-----------------------------
Securities
Annual Compensation Underlying
Name and Principal Position Year Salary Bonus Options
---------------------------------------------------------------------------------------------
William W. Reid, 2004 $-0- $-0- 400,000(1)
President and CEO 2003 -0- -0- 400,000(1)
2002 -0- -0- $-0-
David C. Reid , 2004 -0- -0- 200,000(1)
Vice President 2003 -0- -0- 400,000(1)
2002 -0- -0- $-0-
(1) All of the options are immediately exercisable at a price of $.25 per share.
-------------------------------
Although our officers were not paid any cash compensation during the last three
fiscal years, we began paying them in 2005. During the months of August and
30
September 2005, each individual was paid at the rate of $4,800 per month. In
October 2005, William Reid was paid $20,000 and David Reid was paid $14,167, and
it is expected that we will continue to pay them at those rates for the
foreseeable future.
Option Grants in Last Fiscal Year
During 2004, we granted the following stock options to our executive officers
pursuant to our Non-Qualified Stock Option and Stock Grant Plan (the "Plan"):
Number of % of Total
Securities Options Granted
Underlying to Employees
Options in Fiscal Exercise Expiration
Name Granted Year(1) Price/Share Date(2)
--------------------------------------------------------------------------------
William W. Reid 400,000 66.67% $0.25 10/9/2013
David C. Reid 200,000 33.33% $0.25 10/9/2013
---------------
(1) Does not include options granted to our consultants.
(2) All of the options shown in the table are exercisable immediately.
-------------------------
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Table
Value
Shown below is information at December 31, 2004 and for the year then ended with
respect to the exercised and unexercised options to purchase our common stock
issued to executive officers under the Plan.
Number of
Securities
Underlying Value of
Unexercised Unexercised
Shares Options at Options at
Acquired 12/31/04(#) 12/31/04($)
On Value Exercisable/ Exercisable/
Name Exercise(#) Realized($) Unexercisable Unexercisable(1)
------------------------------------------------------------------------------
William W. Reid 0 0 800,000/0 $N/A
David C. Reid 0 0 600,000/0 $N/A
----------------
(1) There was no public market for our common stock as of December 31, 2004.
--------------------------------
Equity Incentive Plan
Our Non-Qualified Stock Option and Stock Grant Plan (also as referred to as the
"Plan") was adopted by us effective March 4, 1999. The Plan terminates by its
terms on March 3, 2009. Under the Plan, as approved by shareholders on March 4,
2005, a total of 6,000,000 shares of common stock are reserved for issuance
thereunder.
Under the Plan, non-qualified stock options and/or grants of our common stock
may be issued to key persons. Key persons include officers, directors,
31
employees, consultants and others providing service to us. The Plan was
established to advance the interests of our company and our stockholders by
affording key persons, upon whose judgment, initiative and efforts we may rely
for the successful conduct of our businesses, an opportunity for investment in
our company and the incentive advantages inherent in stock ownership in our
company. This Plan gives our Board of Directors broad authority to grant options
and make stock grants to key persons selected by the Board while considering
criteria such as employment position or other relationship with us, duties and
responsibilities, ability, productivity, length of service or association,
morale, interest in us, recommendations by supervisors, and other matters, and
to set the option price, term of option, and other broad authorities. Options
may not be granted at less than the fair market value at the date of grant and
may not have a term in excess of 10 years.
Options granted under the Plan do not generally give rise to taxable income to
the recipient or any tax consequence to us, since the Plan requires that the
options be issued at a price not less than the fair market value of the common
stock on the date of grant. However, when an option is exercised, the holder is
subject to tax on the difference between the exercise price of the option and
the fair market value of the stock on the date of exercise. We receive a
corresponding deduction for income tax purposes. Recipients of stock grants are
subject to tax on the fair market value of the stock on the date of grant and we
receive a corresponding deduction. The foregoing is intended as a summary of the
income tax consequences to an individual recipient of an option or stock grant,
and should not be construed as tax advice. Holders of stock options or common
stock should consult their own tax advisors.
Shares issued upon exercise of Options or upon stock grants under the Plan are
"restricted securities" as defined under the Securities Act of 1933, unless a
Registration Statement covering such shares is effective. Restricted shares
cannot be freely sold and must be sold pursuant to an exemption from
registration (such as Rule 144) which exemptions typically impose conditions on
the sale of the shares.
As of October 25, 2005, options to purchase an aggregate of 1,650,000 shares of
our common stock have been granted under the Plan, of which 1,640,000 remain
outstanding.
Indemnification and Limitation on Liability of Directors
Our Articles of Incorporation and Bylaws provide that we must indemnify, to the
fullest extent permitted by Colorado law, any of our directors, officers,
employees or agents made or threatened to be made a party to a proceeding, by
reason of the person serving or having served in a capacity as such, against
judgments, penalties, fines, settlements and reasonable expenses incurred by the
person in connection with the proceeding if certain standards are met. At
present, there is no pending litigation or proceeding involving any of our
directors, officers, employees or agents where indemnification will be required
or permitted. Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to our directors, officers and
controlling persons pursuant to the foregoing provisions, or otherwise, we have
been advised that in the opinion of the SEC, such indemnification is against
public policy as expressed in the Securities Act of 1933 and is, therefore,
unenforceable.
The Colorado Business Corporation Act (the "Act") allows indemnification of
directors, officers, employees and agents of a company against liabilities
incurred in any proceeding in which an individual is made a party because he was
a director, officer, employee or agent of the company if such person conducted
himself in good faith and reasonable believed his actions were in, or not
opposed to, the best interests of the company, and with respect to any criminal
action or proceeding, had no reasonable cause to believe his conduct was
32
unlawful. A person must be found to be entitled to indemnification under this
statutory standard by procedures designed to assure that disinterested members
of the board of directors have approved indemnification or that, absent the
ability to obtain sufficient numbers of disinterested directors, independent
counsel or shareholders have approved the indemnification based on a finding
that the person has met the standard. Indemnification is limited to reasonable
expenses.
Our Articles of Incorporation limit the liability of our directors to the
fullest extent permitted by the Act. Specifically, our directors will not be
personally liable for monetary damages for breach of fiduciary duty as
directors, except for:
o any breach of the duty of loyalty to us or our stockholders,
o acts or omissions not in good faith or that involved intentional misconduct
or a knowing violation of law,
o dividends or other distributions of corporate assets that are in
contravention of certain statutory or contractual restrictions,
o violations of certain laws, or
o any transaction from which the director derives an improper personal
benefit. Liability under federal securities law is not limited by the
Articles.
Certain Relationships and Related Transactions
Initial Financing. In 1998 and 1999, we issued a total of 3,800,000 shares of
common stock to each of William and David Reid, our officers and directors. The
shares, commonly called "founders' shares," were issued for a price of $.0005
per share in the form of services rendered in connection with the organization
of our company.
During 2001, William and David Reid purchased an additional 100,000 shares each
in exchange for the cancellation of debentures purchased by them. The shares
issued in those transactions were valued at a total of $50,000, or $.25 per
share.
On January 2, 2005, we issued a total of 1,750,000 shares to William and David
Reid and William Pass for services rendered and to be rendered to us. William
Pass is our financial consultant, and the owner of more than five percent of our
common stock. Of that amount, 1,000,000 shares were issued to William Reid,
500,000 to David Reid and 250,000 shares to William Pass. The shares were valued
at a total of $437,500, or $.25 per share, based on the contemporaneous sales of
our stock to independent third parties. Messrs. William and David Reid were the
only members of our Board of Directors participating in the decision to issue
the shares in these transactions. However, our Board determined that the
transactions were no less favorable than could have been obtained from an
unaffiliated third party.
On March 22, 2005, Mr. Pass exercised an option to acquire an additional 10,000
shares of our common stock for a total of $2,500, or $.25 per share.
U.S. Gold Corporation. During the period July 1, 2000 through December 31, 2001,
we issued a total of 2,560,000 shares to U.S. Gold Corporation in connection
with a management agreement executed with that entity. U.S. Gold Corporation was
previously the owner of more than five percent of our common stock. Each of the
shares issued in those transactions was valued at between $.14 and $.17 per
share, based on the estimated fair market value of our stock as of the date of
the transaction.
33
Effective January 1, 2002, we executed a new management agreement with U.S. Gold
which continued through December 31, 2002. Under the terms of that agreement, we
agreed to pay U.S. Gold $30,000 per month, or a total of $360,000. During 2002,
we paid a total of $30,000 under that agreement. During 2005, we satisfied the
remaining obligation by paying $10,000 in cash and issuing 1,280,000 shares of
our common stock valued at $.25 per share. Messrs. William and David Reid were
officers and directors of our company and of U.S. Gold at the time of these
transactions.
Exploration Agreement with Canyon Resources Corporation. In 2004, we issued
1,200,000 share of our common stock to Canyon Resources Corporation under the
terms of an exploration and development agreement. Canyon is the owner of more
than five percent of our common stock, and one of its directors is also a
director of U.S. Gold. The shares in that transaction were valued at $.423 as
set forth in the agreement. Under the terms of this agreement, Canyon also has
first right to acquire any shares offered by us in the future. Based on our
history with Canyon, we expect that the right will be waived with regard to the
sale of the shares offered by this prospectus.
Subscription With Heemskirk. During 2005, we issued a total of 2,150,000 shares
of our common stock to Heemskirk Consolidated Limited, an Australian
corporation. Heemskirk is the owner of more than five percent of our common
stock, but had no relationship before it purchased the stock. Heemskirk paid a
total of $1,075,000 for its stock, or $.50 per share.
Under the terms of its agreement with us, Heemskirk also has the first right to
acquire all or a part, but not less than 25%, of any securities offered by us in
the future, subject to the first right of Canyon set forth above. This right
does not apply to the securities offered by this prospectus.
SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of October 25, 2005, there are a total of 18,304,852 shares of our common
stock outstanding, our only class of voting securities currently outstanding.
The following table describes the ownership of our voting securities by: (i)
each of our officers and directors; (ii) all of our officers and directors as a
group; and (iii) each shareholder known to us to own beneficially more than 5%
of our common stock. All share amounts have been adjusted to reflect a
two-for-one split of our outstanding stock effective February 21, 2005. Unless
otherwise stated, the address of each of the individuals is our address, 222
Milwaukee Street, Suite 301, Denver, Colorado 80206. All ownership is direct,
unless otherwise stated.
In calculating the percentage ownership for each shareholder, we assumed that
any options owned by an individual exercisable within 60 days is exercised, but
not the options owned by any other individual.
Name and Address of Shares Beneficially Owned
Beneficial Owner Number Percentage (%)
---------------- ------ --------------
William W. Reid(1) 5,219,606(2)(3) 27.3
David C. Reid(1) 4,311,539(4) 22.8
Beth Reid 5,219,606(5) 27.3
25 Downing Street, #1-501
Denver, CO 80218
34
Heemskirk Consolidated Limited 2,150,000 11.75
Box 96
Collins Street West
Melbourne, Victoria 8007
Australia
William F. Pass 1,561,207(6) 8.4
14820 W. 58th Pl
Golden, CO 80403
Canyon Resources Corporation 1,200,000 6.56
14142 Denver West Pkwy.,
Suite 250
Golden, CO 80401
All officers and director
as as a group (2 persons) 9,531,145(2)(3)(4) 48.4
--------------------
(1) Officer and director.
(2) Includes options to purchase 800,000 shares which are currently
exercisable.
(3) Includes 2,200,000 shares owned by the reporting person's spouse, of which
he disclaims beneficial ownership.
(4) Includes options to purchase 600,000 shares which are currently
exercisable.
(5) Includes 3,019,606 shares owned by the reporting person's spouse, of which
she disclaims beneficial ownership.
(6) Includes options to purchase 240,000 shares which are currently
exercisable.
-------------------------------
Changes in Control
Two holders of our common stock, Canyon Resources Corporation and Heemskirk
Consolidated Limited, hold the first right to acquire any stock offered by us in
the future except the stock offered by this prospectus. While we have no
immediate plans to issue any other stock in the future, to the extent we do and
either or both of these entities exercise their right to acquire all or a
portion of that stock, the percentage interest in our company owned by one or
both of these entities may increase. This may result in a change in control.
SELLING SHAREHOLDERS
On behalf of certain of our shareholders, we have agreed to file a registration
statement with the SEC covering the resale of our common stock as described in
the table below. The shares offered by the selling shareholders are all of our
outstanding shares that have been held by our shareholders for less than two
years except some of the shares held by our officers and a member of their
family, which are not being offered. We have also agreed to use our best efforts
to keep the registration statement effective and update the prospectus until the
securities owned by the selling shareholders have been sold or may be sold
without registration or prospectus delivery requirements under the Securities
Act of 1933. We will pay the costs and fees of registering the shares, but the
selling shareholders will pay any brokerage commissions, discounts or other
expenses relating to the sale of the shares.
35
The registration statement which we have filed with the SEC, of which this
prospectus forms a part, covers the resale of our common stock by the selling
shareholders from time to time under Rule 415 of the 1933 Act. Our agreement
with the selling shareholders is designed to provide those shareholders some
liquidity in their ownership of common stock and to permit secondary public
trading of our securities. The selling shareholders may offer our securities
covered under this prospectus for resale from time to time. The selling
shareholders may also sell, transfer or otherwise dispose of all or a portion of
our securities in transactions exempt from the registration requirements of the
1933 Act. See "PLAN OF DISTRIBUTION."
The table below presents information as of October 25, 2005 regarding the
selling shareholders and our common stock that the selling shareholders may
offer and sell from time to time under this prospectus. The table is prepared
based on information supplied to us by those shareholders. Although we have
assumed, for purposes of the table below, that the selling shareholders will
sell all of the securities offered by this prospectus, because they may offer
all or some of the securities in transactions covered by this prospectus or in
another manner, no assurance can be given as to the actual number of shares that
will be resold by the selling shareholders. Information covering the selling
shareholders may change from time to time, and changed information will be
presented in a supplement to this prospectus if and when required. Except as
described above, there are no agreements, arrangements or understandings with
respect to resale of any of the securities covered by this prospectus.
Number of Number Shares Owned
Shares Owned of Shares After Offering (1)(2)
Name of Prior to the to be -------------------------
Selling Shareholder Offering Offered Number Percentage(%)
-------------------------------------------------------------------------------------------------
Beth Reid 2,200,000(3) 1,000,000 1,200,000 6.55
David C. Reid 3,711,529(4) 1,000,000 2,711,529 14.8
Heemskirk Consolidated Limited 2,150,000 2,150,000 0 0
William F. Pass 1,321,207(4) 1,321,207 0 0
Canyon Resources Corporation 1,200,000 1,200,000 0 0
Jose Perez Reynoso 600,000 600,000 0 0
Don I. and Dorothera Philips 480,000 240,000 240,000 1.3
Philip Katz 400,000 400,000 0 0
David F. Wersebe 286,000 206,000 80,000 *
Declan J. Costelloe 218,500 178,500 40,000 *
TSC Enterprises, Inc. 200,000 200,000 0 0
J. Paul Consulting Corporation 200,000 200,000 0 0
Ciliamarie F. McGinnis Trust 120,000 20,000 100,000 *
Erica Johnson 60,000 60,000 0 0
Patrick Bartz 40,000 40,000 0 0
Julia K. Reid, Custodian for
Katherine Louise Patterson 52,000 52,000 0 0
Julia K. Reid, Custodian for
Jack Everett Patterson 52,000 52,000 0 0
Jason D. Reid, Custodian for
Bailey Dylan Reid 52,000 52,000 0 0
Jason D. Reid, Custodian for
Cailan Riley Reid 52,000 52,000 0 0
Thomas W. and
Marjorie G. Clarke 50,000 50,000 0 0
Jack Noble 40,000 40,000 0 0
Don I. and Thomas Phillips 40,000 28,000 12,000 *
Virgil and Jeane Lamb 40,000 40,000 0 0
36
Number of Number Shares Owned
Shares Owned of Shares After Offering (1)(2)
Name of Prior to the to be -------------------------
Selling Shareholder Offering Offered Number Percentage(%)
-------------------------------------------------------------------------------------------------
Anthony R. McGinnis 30,000 10,000 20,000 *
Lee C. Pegorsch 20,000 20,000 0 0
R. Brock Silverstein 20,000 20,000 0 0
C. William Reid 10,000 10,000 0 0
Carolyn P. McFarland 10,000 10,000 0 0
Allee Messina 10,000 10,000 0 0
Jeffrey R. Pass 37,000 37,000 0 0
Daniel C. Pass 36,500 36,500 0 0
Molly B. Pass 36,500 36,500 0 0
Claude W. & Elizabeth Pass 5,000 5,000 0 0
John T. Upmeier 2,500 2,500 0 0
Darleen M. Upmeier 2,500 2,500 0 0
Jennifer A.C. Eis 2,500 2,500 0 0
Deborah M. Bangoli 2,500 2,500 0 0
Caycee Poole 2,000 2,000 0 0
Sean C. McGinnis 2,000 2,000 0 0
---------
TOTAL: 9,390,707
--------------------
* Less than 1%
(1) Assumes that all of the shares offered hereby are sold, of which there is
no assurance.
(2) Excludes the effect of any sales by us.
(3) Excludes shares owned by the selling shareholder's spouse.
(4) Excludes stock options owned by the selling shareholder.
---------------------------
To the best of our knowledge, none of the selling shareholders are affiliates of
United States broker-dealers, nor at the time of purchase did any of the selling
shareholders have any agreements or understandings, directly or indirectly, with
any persons to distribute the securities.
PLAN OF DISTRIBUTION
Our Distribution
We are offering a total of 7,000,000 shares on a "best efforts" basis at an
offering price of $1.00 per share. The shares are being offered by us through
our officers and directors, who will rely on the "safe harbor" provisions of
Rule 3a4-1 of the Securities Exchange Act of 1934. Generally, Rule 3a4-1
provides an exemption from the broker-dealer registration requirements for
persons associated with the issuer of the securities. No commission will be paid
by us to our officers or directors for sales of shares made by them. However, we
may retain broker-dealers or other intermediaries to assist in the sale of our
shares, and we reserve the right to pay a commission up to 10% of the offering
price for sales effectuated through these intermediaries.
No one, including us, or our officers and directors, has made any commitment to
purchase any or all of the shares. Rather, we will use our best efforts to find
purchasers for the shares for a period of 120 days from the date of this
prospectus, subject to any extension in our discretion for up to an additional
60 days. There is no minimum number of shares which must be sold, or sales
proceeds which must be received, to complete this offering. As a result, all
proceeds will be immediately deposited in our bank account and available for all
corporate purposes. Purchasers in this offering will not be entitled to a return
of their investment following receipt by us.
37
We anticipate offering the shares to individuals or entities whom we believe may
be interested or who have contacted us with an interest in purchasing the
shares. We may sell the shares to a person or entity if they are resident in a
state in which we may legally offer and sell the shares. We may also offer the
shares to non-residents of the United States. However, we are not obligated to
sell the shares to anyone. Due to the restrictions on resale imposed by
applicable securities laws, it is not anticipated that any individual or entity
will purchase 10% or more of the amount of our stock outstanding at the time of
the sale.
In the view of the SEC, any broker-dealer participating in this offering that
sells securities would be deemed an "underwriter" as defined in Section 2(11) of
the Securities Act of 1933. Further, prior to the participation of any
broker-dealer, we may be required to obtain the consent of the NASD to the
underwriting compensation and arrangements.
The offering price of the shares was determined by us primarily with reference
to recent sales prices of our common stock. We also considered factors such as
our history and lack of revenue, our assets and the anticipated expenses of
exploring and developing our mining properties. However, the offering price of
the common stock should not be used as an indication of the value of the
securities or an assurance that purchasers will be able to resell the securities
for an amount equal to the offering price or an amount in excess thereof.
Inasmuch as we are offering the common stock directly, and we have not retained
an underwriter as might be the case in other offerings, our determination of the
offering price has not been determined through negotiation with an underwriter.
To the extent that an underwriter has not been involved in determining the price
of our securities, investors are subject to an increased risk that the price of
our securities have been arrived at arbitrarily.
Selling Shareholder Distribution
The selling shareholders and their pledgees, donees, transferees or other
successors in interest may offer the shares of our common stock from time to
time after the date of this prospectus and will determine the time, manner and
size of each sale in the over-the-counter market, in privately negotiated
transactions or otherwise, at market prices prevailing at the time of sale, at
prices related to prevailing market prices, or at negotiated prices. The selling
shareholders may negotiate, and may pay, brokers or dealers commissions,
discounts or concessions for their services. In effecting sales, brokers or
dealers engaged by the selling shareholders may allow other brokers or dealers
to participate. However, the selling shareholders and any brokers or dealers
involved in the sale or resale of the shares may qualify as "underwriters"
within the meaning of Section 2(a)(11) of the 1933 Act. In addition, the
brokers' or dealers' commissions, discounts or concessions may qualify as
underwriters' compensation under the 1933 Act.
The methods by which the selling shareholders may sell the shares of our common
stock include:
o A block trade in which a broker or dealer so engaged will attempt to sell
the shares as agent but may position and resell a portion of the block, as
principal, in order to facilitate the transaction;
o Sales to a broker or dealer, as principal, in a market maker capacity or
otherwise and resale by the broker or dealer for its account;
o Ordinary brokerage transactions and transactions in which a broker solicits
purchases;
38
o Privately negotiated transactions;
o Short sales;
o Any combination of these methods of sale; or
o Any other legal method.
In addition to selling their shares under this prospectus, the selling
shareholders may transfer their shares in other ways not involving market makers
or established trading markets, including directly by gift, distribution, or
other transfer, or sell their shares under Rule 144 of the Securities Act rather
than under this prospectus, if the transaction meets the requirements of Rule
144. Any selling shareholder who uses this prospectus to sell his shares will be
subject to the prospectus delivery requirements of the 1933 Act.
Regulation M under the Securities Exchange Act of 1934 provides that during the
period that any person is engaged in the distribution of our shares of common
stock, as defined in Regulation M, such person generally may not purchase our
common stock. The selling shareholders are subject to these restrictions, which
may limit the timing of purchases and sales of our common stock by the selling
shareholders. This may affect the marketability of our common stock.
The selling shareholders may use agents to sell the shares. If this happens, the
agents may receive discounts or commissions. The selling shareholders do not
expect these discounts and commissions to exceed what is customary for the type
of transaction involved. If required, a supplement to his prospectus will set
forth the applicable commission or discount, if any, and the names of any
underwriters, brokers, dealers or agents involved in the sale of the shares. The
selling shareholders and any underwriters, brokers, dealers or agents that
participate in the distribution of our common stock offered hereby may be deemed
to be "underwriters" within the meaning of the Securities Act of 1933, and any
profit on the sale of shares by them and any discounts, commissions, concessions
or other compensation received by them may be deemed to be underwriting
discounts and commissions under the 1933 Act. The selling shareholders may agree
to indemnify any broker or dealer or agent against certain liabilities relating
to the selling of the shares, including liabilities arising under the Securities
Act.
Upon notification by the selling shareholders that any material arrangement has
been entered into with a broker or dealer for the sale of the shares through a
block trade, special offering, exchange distribution or secondary distribution
or a purchase by a broker or dealer, we will file a supplement to this
prospectus, if required, pursuant to Rule 424(b) under the Securities Act,
disclosing the material terms of the transaction.
39
DESCRIPTION OF CAPITAL STOCK
Our authorized capital consists of 60,000,000 shares of common stock, $.001 par
value per share, and 5,000,000 shares of preferred stock, $.01 per share. As of
October 25, 2005, we had 18,304,852 shares of common stock issued and
outstanding, and no shares of preferred stock outstanding.
The following discussion summarizes the rights and privileges of our capital
stock. This summary is not complete, and you should refer to our Articles of
Incorporation, as amended, which have been filed as an exhibit to the
registration statement of which this prospectus forms a part.
Common Stock
The holders of our common stock are entitled to one vote for each share held of
record on all matters submitted to stockholders, including the election of
directors. Cumulative voting for directors is not permitted. Except as provided
by special agreement, the holders of common stock are not entitled to any
preemptive rights and the shares are not redeemable or convertible. All
outstanding common stock is, and all common stock offered hereby will be, when
issued and paid for, fully paid and nonassessable. The number of authorized
shares of common stock may be increased or decreased (but not below the number
of shares then outstanding or otherwise reserved under obligations for issuance
by us) by the affirmative vote of a majority of shares cast at a meeting of our
shareholders at which a quorum is present.
Our Articles of Incorporation and Bylaws do not include any provision that would
delay, defer or prevent a change in control of our company. However, as a matter
of Colorado law, certain significant transactions would require the affirmative
vote of a majority of the shares eligible to vote at a meeting of shareholders
which requirement could result in delays to or greater cost associated with a
change in control of the company.
The holders of our common stock are entitled to dividends if, as and when
declared by our Board of Directors from legally available funds, subject to the
preferential rights of the holders of any outstanding preferred stock. Upon any
voluntary or involuntary liquidation, dissolution or winding up of our affairs,
the holders of our common stock are entitled to share, on a pro rata basis, all
assets remaining after payment to creditors and prior to distribution rights, if
any, of any series of outstanding preferred stock.
The SEC has adopted regulations which generally define a penny stock to be any
equity security that has a market price of less than $5.00 per share or that is
not registered or authorized on a national securities exchange or Nasdaq. As our
common stock will likely fall within the definition of a penny stock, these
regulations will require the delivery, prior to any transaction involving our
common stock, of a risk disclosure schedule explaining the penny stock market
and the risks associated with it. Disclosure is also required to be made
regarding the compensation payable to both the broker-dealer and the registered
representative, and current quotations for the securities. In addition, monthly
statements are required to be sent disclosing recent price information for the
penny stock. As a result, the ability of both the dealers and our shareholders
to sell our common stock in the secondary market would be limited, and the
market liquidity for our common stock could be severely and adversely affected.
We can provide no assurance that trading in our common stock will not be subject
to these or other regulations in the future, which would negatively affect the
market for our stock.
40
Preferred Stock
Our Articles of Incorporation vest our Board of Directors with authority to
divide the preferred stock into series and to fix and determine the relative
rights and preferences of the shares of any such series so established to the
full extent permitted by the laws of the State of Colorado and our Articles of
Incorporation in respect to, among other things, (i) the number of shares to
constitute such series and the distinctive designations thereof; (ii) the rate
and preference of dividends, if any, the time of payment of dividends, whether
dividends are cumulative and the date from which any dividend shall accrue;
(iii) whether preferred stock may be redeemed and, if so, the redemption price
and the terms and conditions of redemption; (iv) the liquidation preferences
payable on preferred stock in the event of involuntary or voluntary liquidation;
(v) sinking fund or other provisions, if any, for redemption or purchase of
preferred stock; (vi) the terms and conditions by which preferred stock may be
converted, if the preferred stock of any series are issued with the privilege of
conversion; and (vii) voting rights, if any.
As of the date of this prospectus, we have not designated or authorized any
preferred stock for issuance.
Restrictions on Future Sales of Our Common Stock
Under the terms of agreements entered into with certain purchasers of our common
stock, we are obligated to offer these entities the first right to purchase our
common stock in any future offering. The holders of this right are Canyon
Resources Corporation and Heemskirk Consolidated Limited. We do not believe the
terms of this arrangement will affect any market for our common stock which may
develop, or our future operations. However, it provides the holders the ability
to preserve or increase their percentage interest in the company.
Transfer Agent
We have appointed Corporate Stock Transfer, Inc. ("CST") in Denver as transfer
agent for our common stock. CST is located at 3200 Cherry Creek Drive South,
Suite 430, Denver, Colorado 80209 and its telephone number is (303) 282-4800.
Reports to Shareholders
In connection with the offer of our shares under this prospectus, we have
registered our common stock with the SEC under the Securities Exchange Act of
1934. As a result, we will be required to file periodic reports with the SEC and
to deliver an annual report to our shareholders in conjunction with each annual
meeting of shareholders. Copies of the reports that we file with the SEC can be
viewed on the SEC website. See, "WHERE YOU CAN FIND MORE INFORMATION." We may
also deliver quarterly or other periodic information to our shareholders.
We are also subject to the proxy solicitation rules established by the SEC.
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of common stock (including shares issued upon the
exercise of outstanding options) in the public market after this offering could
cause the market price of our common stock to decline. Those sales also might
41
make it more difficult for us to sell equity-related securities in the future or
reduce the price at which we could sell any equity-related securities.
All of the shares sold in this offering will be freely tradable without
restriction under the Securities Act of 1933 unless those shares are held by
"affiliates," as that term is defined in Rule 144 under the Securities Act of
1933. Of the outstanding shares not sold in this offering, 3,409,000 shares will
be eligible for sale immediately as of the date of this prospectus, a portion of
which will be subject to Rule 144 volume limitations.
Rule 144
In general, under Rule 144 as currently in effect, beginning 90 days after the
date of this prospectus, a person deemed to be our affiliate, or a person
holding restricted shares who beneficially owns shares that were not acquired
from us or our affiliate within the previous one year, would be entitled to sell
within any three-month period a number of shares that does not exceed the
greater of:
o 1% of the then outstanding shares of our common stock, or
o the average weekly trading volume of our common stock during the four
calendar weeks preceding the date on which notice of the sale is filed
with the Securities and Exchange Commission.
Sales under Rule 144 are subject to requirements relating to manner of sale,
notice and availability of current public information about us.
Rule 144(k)
A person who is not deemed to have been our affiliate at any time during the 90
days immediately preceding a sale and who owned shares for at least two years,
including the holding period of any prior owner who is not an affiliate, would
be entitled to sell restricted shares following this offering under Rule 144(k)
without complying with the volume limitations, manner of sale provisions, public
information or notice requirements of Rule 144.
WHERE YOU CAN FIND MORE INFORMATION
You may read and copy any document we file at the SEC's Public Reference Rooms
at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at
1-800-SEC-0330 for further information on the Public Reference Rooms. You can
also obtain copies of our SEC filings by going to the SEC's website at
http://www.sec.gov.
We have filed with the SEC a Registration Statement on Form SB-2 to register the
shares of our common stock. This prospectus is part of that Registration
Statement and, as permitted by the SEC's rules, does not contain all of the
information set forth in the Registration Statement. For further information
about us or our common stock, you may refer to the Registration Statement and to
the exhibits filed as part of the Registration Statement. The description of all
agreements or the terms of those agreements contained in this prospectus are
specifically qualified by reference to the agreements, filed or incorporated by
reference in the Registration Statement.
42
Prior to the date of this prospectus, we were not subject to the informational
filing requirements of the Exchange Act. However, as a result of this offering,
we have become subject to these requirements and will file periodic reports,
including annual reports containing audited financial statements, reports
containing unaudited interim financial statements, quarterly and special
reports, proxy statements and other information with the SEC. We will provide
copies of our reports and other information which we file with the SEC without
charge to each person who receives a copy of this prospectus. Your request for
this information should be directed to our President, William Reid, at our
corporate office in Denver, Colorado. You can also review this information at
the public reference rooms of the SEC and on the SEC's website as described
above.
LEGAL MATTERS
We have been advised on the legality of the shares included in this prospectus
by Dufford & Brown, P.C., of Denver, Colorado.
EXPERTS
Our financial statements as of December 31, 2004 and for the two years then
ended included in this prospectus have been included in reliance on the report
of Stark Winter Schenkein & Co., LLP, our independent accountants. These
financial statements have been included on the authority of this firm as an
expert in auditing and accounting.
43
FINANCIAL STATEMENTS
Page
----
Index to Financial Statements F-1
Six Month Periods Ended June 30, 2005 and 2004 (Unaudited)
Consolidated Statements of Operations for the six
months ended June 30, 2005 and 2004 F-2
Consolidated Balance Sheet at June 30, 2005 F-3
Consolidated Statements of Cash Flows for the six months F-4
ended June 30, 2005 and 2004
Notes to Consolidated Financial Statements F-5
Year Ended December 31, 2004 and 2003
Report of Independent Auditors F-7
Consolidated Statements of Operations for the years
ended December 31, 2004 and 2003 F-8
Consolidated Balance Sheet at December 31, 2004 F-9
Consolidated Statements of Changes in Shareholders'
Equity for the years ended December 31, 2004 and 2003 F-10
Consolidated Statements of Cash Flows for the
years ended December 31, 2004 and 2003 F-11
Notes to Consolidated Financial Statements F-12
F-1
GOLD RESOURCE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Six Months Ended June 30, 2005 and 2004
(Unaudited)
2005 2004
---- -----
Revenues:
Interest income $ 63 $ 99
--------- ---------
Costs and Expenses:
General, administration 40,137 20,093
Stock compensation 87,500 90,000
Property acquisition related cost 16,745 10,963
Property exploration and
evaluation 72,399 171,130
--------- ---------
Total expenses 216,781 292,186
--------- ---------
Net (loss) (216,718) (292,087)
--------- ---------
Comprehensive income (loss):
Translation gain 246 1
--------- ---------
Net comprehensive (loss) $(216,472) $(292,086)
========= =========
Basic and diluted per share data:
Net (loss)
Basic and diluted $ (0.02) $ (0.03)
========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
F-2
GOLD RESOURCE CORPORATION
CONSOLIDATED BALANCE SHEET
June 30, 2005
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 6,812
-----------
Total current assets 6,812
-----------
Investment in mineral properties --
Other assets 12,545
-----------
Total assets $ 19,357
===========
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 1,456
Other liabilities-related parties 1,708
-----------
Total current liabilities 3,164
-----------
Shareholders' equity:
Preferred stock, $.001 par value, 5,000,000
shares authorized, none issued or
outstanding --
Common stock, $.001 par value, 60,000,000
shares authorized, 15,736,852 shares
issued and outstanding 15,737
Additional paid-in capital 2,907,604
Accumulated (deficit) (2,907,333)
Other comprehensive income:
Currency translation adjustment 185
-----------
Total shareholders' equity 16,193
-----------
Total liabilities and shareholders' equity $ 19,357
===========
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
GOLD RESOURCE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 2005 and 2004
(Unaudited)
2005 2004
---- ----
Cash flows from operating activities:
Cash paid to property owners, consultants,
contractors and suppliers $(200,311) $(297,731)
Interest received 63 99
Income taxes paid -- --
--------- ---------
Cash (used in) operating activities (200,248) (297,632)
--------- ---------
Cash flows from investing activities:
Cash provided by (used in) investing activities -- --
--------- ---------
Cash flows from financing activities:
Repayment of borrowing - U.S. Gold (10,000) --
Sale of stock for cash 207,500 102,000
Exploration agreement funding - Canyon Resources -- 100,000
--------- ---------
Cash provided by financing activities 197,500 202,000
--------- ---------
Increase (decrease) in cash and cash equivalents (2,748) (95,632)
--------- ---------
Cash and cash equivalents, beginning of year 9,560 135,849
--------- ---------
Cash and cash equivalents, end of period $ 6,812 $ 40,217
========= =========
Reconciliation of net (loss) to cash (used in)
operating activities:
Net (loss) $(216,472) $(292,086)
Items not requiring cash:
Currency translation adjustment 246 1
Stock compensation 87,500 90,000
(Increase) decrease in assets related to operations (10,963) 439
Increase (decrease) in liabilities related to operations-
Other liabilities-related parties (57,271) 768
Accounts payable and accrued liabilities (3,288) (96,754)
--------- ---------
Cash (used in) operating activities $(200,248) $(297,632)
========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
GOLD RESOURCE CORPORATION
NOTES TO CONOLIDATED FINANCIAL STATEMENTS
June 30, 2005
(Unaudited)
1. Summary of Significant Accounting Policies
Basis of Presentation: The interim consolidated financial statements included
herein have been prepared by the Company in accordance with the rules and
regulations of the Securities and Exchange Commission, without audit. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America have been condensed or omitted pursuant to such rules
and regulations, although the Company believes that the disclosures are adequate
to make the information presented not misleading.
Certain reclassifications have been made in the financial statements for June
30, 2004, to conform to accounting and financial statement presentation for the
period ended June 30, 2005. The changes had no effect on Net (loss) for the
three and six months ended June 30, 2004.
These statements reflect all adjustments, consisting of normal recurring
adjustments which, in the opinion of management, are necessary for fair
presentation of the information contained therein. However, the results of
operations for the interim period may not be indicative of results expected for
the full fiscal year. It is suggested that these financial statements be read in
conjunction with the audited financial statements and notes thereto as of and
for the year ended December 31, 2004.
Per Share Amounts: SFAS 128, "Earnings Per Share", provides for the calculation
of "Basic" and "Diluted" earnings per share. Basic earnings per share includes
no dilution and is computed by dividing income available to common shareholders
by the weighted-average number of shares outstanding during the six month period
ended June 30, 2005 and 2004 (14,384,076 for June 30, 2005 and 9,892,208 for
2004). As of June 30, 2005 and 2004, stock options are not considered in the
computation of diluted earnings per share as their inclusion would be
antidilutive.
2. Going Concern
The Company's financial statements are prepared on a going concern basis, which
contemplates the satisfaction of obligations in the normal course of business.
The Company has no source of operating revenue and has financed operations
through the sale and exchange of equity. The Company has incurred losses since
its inception and has working capital of $3,648 at June 30, 2005.
The Company's ability to continue as a going concern is contingent upon its
abilities to raise funding through the sale of equity, joint venture or sale of
its assets, and to attain profitable operations. The financial statements do not
include any adjustments to the amount and classification of assets and
liabilities that may be necessary should the Company not continue as a going
concern.
3. Mineral Properties
In 2005 the Company paid the lessor of the El Aguila property $30,000 of the
remaining 2004 amount due under the lease. The lease payment required for 2005
of $75,000 was paid subsequent to June 30, 2005.
4. Shareholders' Equity
Effective February 21, 2005, the Company declared and effected a 100% forward
stock split where one additional share of common stock, par value $.001, was
issued for each common share outstanding as of that date, in the form of new
stock certificates aggregated by shareholder. These financial statements have
been restated to retroactively reflect the effect of this 100% stock split.
F-5
Effective January 2, 2005, the Company made common stock awards to its two
executive officers and an consultant of aggregate 1,750,000 shares valued at
$.25/share, or $437,500, for services to the Company for 2004 and through June
30, 2005 of which $350,000 was for 2004 and $87,500 was for 2005. Of this total
William W. Reid received 1,000,000 shares, David C. Reid received 500,000 shares
and William F. Pass received 250,000 shares. Also effective January 2, 2005, a
stock option agreement with William F. Pass covering 400,000 shares of common
stock at exercise price of $.25/share was reduced by 250,000 shares leaving
150,000 shares remaining subject to option.
During the six months ended June 30, 2005, the Company issued 588,500 shares for
aggregate $220,000. In addition, an individual exercised stock options for
10,000 shares for $2,500 in exercise price. In June 2005, the Company issued
1,280,000 shares to U.S. Gold Corporation in satisfaction of $320,000 owed for a
prior years management contract.
Subsequent to June 30, 2005 the Company issued 2,568,000 shares raising
$1,200,000. In July and August of 2005, the Company closed transactions under a
Subscription Agreement and Stock Purchase Option Agreement with Heemskirk
Consolidated Limited ("Heemskirk"), an Australian global mining investment
institution, whereby Heemskirk purchased 2,000,000 shares of common stock of the
Company at $.467 per share net of a finders fee paid to a third party of 140,000
shares also valued at $.467 per share. Heemskrik had already been a shareholder
of the Company and with these transactions they currently own a total of
2,150,000 shares as of September 30, 2005, representing approximately 11.75% of
the outstanding shares of the Company. The Company agreed to give Heemskirk a
first right of offer for any financings, including sale of equity, the Company
may pursue, subject to the prior rights of Canyon discussed below. During August
2005, the Company sold 400,000 shares to another investor raising $200,000 with
a finders fee paid to a third party of 28,000 shares.
In August 2003 the Company entered into an exploration agreement with Canyon
Resources Corporation, a public company with shares traded on the American Stock
Exchange under symbol "CAU" ("Canyon"), whereby Canyon, effective September 1,
2004 elected to convert their prior funding of $500,000 into 1,200,000 shares of
common stock of the Company representing approximately 6.56% of the outstanding
shares as of September 30, 2005. Related to this agreement, Canyon shall have a
right of first offer related to any sale of common shares by the Company with 14
days after written notice by the Company to elect to accept the offer and 10
days thereafter to close any such purchase.
F-6
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Shareholders and Board of Directors
Gold Resource Corporation
We have audited the accompanying consolidated balance sheet of Gold Resource
Corporation as of December 31, 2004, and the related consolidated statements of
operations, shareholders' (deficit) and cash flows for the years ended December
31, 2004 and 2003. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the auditing standards of the Public
Company Accounting Oversight Board (United States.) Those standards require that
we plan and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates be management, as well as evaluating
the overall financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Gold Resource
Corporation as of December 31, 2004, and the results of its operations and its
cash flows for the years ended December 31, 2004 and 2003, in conformity with
accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has suffered recurring losses and
has working capital and shareholders' deficits. These factors raise substantial
doubt about the Company's ability to continue as a going concern. Management's
plans in regard to these matters are also discussed in Note 2. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ Stark Winter Schenkein & Co., LLP
Stark Winter Schenkein & Co., LLP
Certified Public Accountants
March 22, 2005
Denver, Colorado
F-7
GOLD RESOURCE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 2004 and 2003
2004 2003
---- -----
Revenues:
Interest income $ 113 $ 193
--------- ---------
Costs and Expenses:
General, administration 527,732 58,173
Property acquisition related costs 68,591 46,750
Property exploration and
evaluation 257,383 391,316
--------- ---------
Total Expenses 853,706 496,239
--------- ---------
Net (Loss) (853,593) (496,046)
--------- ---------
Comprehensive income (loss):
Translation gain (charge) (73) 29
--------- ---------
Net comprehensive (loss) $(853,666) $(496,017)
========= =========
Basic and diluted per share data:
Net (loss)
Basic and diluted $ (0.08) $ (0.05)
========= =========
The accompanying notes are an integral part of these consolidated
financial statements.
F-8
GOLD RESOURCE CORPORATION
CONSOLIDATED BALANCE SHEET
December 31, 2004
ASSETS
Current assets:
Cash and cash equivalents $ 9,560
-----------
Investment in mineral properties --
Other assets 1,581
-----------
Total Assets $ 11,141
===========
LIABILITIES AND SHAREHOLDERS' (DEFICIT)
Current liabilities:
Accounts payable and accrued liabilities $ 4,744
-----------
Property lease payment 30,000
Management contract fees payable to U.S. Gold 330,000
Other liabilities-related parties 43,732
-----------
Total current liabilities 408,476
-----------
Shareholders' (deficit):
Preferred stock, $.001 par value, 5,000,000 shares
authorized, none issued or outstanding --
Common stock, $.001 par value, 20,000,000 shares
Authorized, 12,108,352 shares issued and outstanding 12,108
Additional paid-in capital 2,281,233
Accumulated (deficit) (2,690,615)
Other comprehensive income:
Currency translation adjustment (61)
-----------
Total shareholders' (deficit) (397,335)
-----------
Total Liabilities and Shareholders' (Deficit) $ 11,141
===========
The accompanying notes are an integral part of these consolidated
financial statements.
F-9
GOLD RESOURCE CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' (DEFICIT)
December 31, 2002 to December 31, 2004
Number of Stock Additional Total
Common Par Paid-in Accumulated Comprehensive Shareholders'
Shares Value Capital (Deficit) Income (Loss) (Deficit)
----------- ----------- ----------- ------------ ------------- -------------
Balance,
December 31, 2002 9,123,352 $ 9,123 $ 962,641 $(1,340,976) $ (17) $ (369,229)
Shares issued for cash at $.25
per share 577,000 577 143,673 -- -- 144,250
Share issuance costs
forgiven -- -- 25,327 -- -- 25,327
Net (loss) -- -- -- (496,046) 29 (496,017)
----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 2003 9,700,352 9,700 1,131,641 (1,837,022) 12 (695,669)
----------- ----------- ----------- ----------- ----------- -----------
Shares issued for cash at $.25
per share 608,000 608 151,392 -- -- 152,000
Shares under exploration
agreement at $.42 per share 1,200,000 1,200 498,800 -- -- 500,000
Shares issued as stock grant
at $.25 per share 600,000 600 149,400 -- -- 150,000
Shares subscribed -- -- 350,000 -- -- 350,000
Net (loss) -- -- -- (853,593) (73) (853,666)
----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 2004 12,108,352 $ 12,108 $ 2,281,233 $(2,690,615) $ (61) $ (397,335)
=========== =========== =========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements.
F-10
GOLD RESOURCE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2004 and 2003
2004 2003
---- ----
Cash flows from operating activities:
Cash paid to property owners, consultants,
contractors and suppliers $(387,402) $(413,045)
Interest received 113 193
Income taxes paid -- --
--------- ---------
Cash (used in) operating activities (378,289) (412,852)
--------- ---------
Cash flows from investing activities:
Cash provided by (used in) investing activities -- --
--------- ---------
Cash flows from financing activities:
Borrowing - U.S. Gold -- 30,000
Repayment of borrowing - U.S. Gold -- (30,000)
Sale of stock for cash 152,000 144,250
Exploration agreement funding - Canyon Resources 100,000 400,000
--------- ---------
Cash provided by financing activities 252,000 544,250
--------- ---------
Increase (decrease) in cash and cash equivalents (126,289) 131,398
--------- ---------
Cash and cash equivalents, beginning
of year 135,849 4,451
--------- ---------
Cash and cash equivalents, end of year $ 9,560 $ 135,849
========= =========
Reconciliation of net comprehensive (loss) to cash (used in) operating
activities:
Net comprehensive (loss) $(853,666) $(496,017)
Items not requiring cash:
Currency translation adjustment 73 29
Issuance costs forgiven -- 25,327
Stock compensation 150,000 --
Stock subscribed 350,000 --
(Increase) decrease in assets related to operations-
Other 268 194
Increase (decrease) in liabilities related to operations-
Property lease payment 30,000 --
Other liabilities-related parties 38,635 (9,375)
Accounts payable and accrued liabilities (93,599) 67,019
--------- ---------
Cash (used in) operating activities $(378,289) $(412,852)
========= =========
Non-cash financing and investing activities:
Conversion of Canyon Resources funding
to common stock $ 500,000 $ --
========= =========
The accompanying notes are an integral part of these consolidated financial statements.
F-11
GOLD RESOURCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
1. Summary of Significant Accounting Policies
Basis of Presentation: Gold Resource Corporation (the "Company") was organized
under the laws of the State of Colorado on August 24, 1998. The Company has been
engaged in the exploration for precious and base metals, primarily in Mexico.
The Company has not generated any revenues from operations. The consolidated
financial statements included herein are expressed in United States dollars.
Effective February 21, 2005, the Company declared and effected a 100% forward
stock split where one additional share of common stock, par value $.001, was
issued for each common share outstanding as of that date, in the form of new
stock certificates aggregated by shareholder. These financial statements have
been restated to retroactively reflect the effect of this 100% stock split.
Basis of Consolidation: The consolidated financial statements include the
accounts of the Company and its wholly owned Mexican corporation subsidiaries,
Don David Gold S.A. de C.V. and Golden Trump S.A. de C.V. The expenditures of
Don David Gold and Golden Trump are generally incurred in Mexican Pesos.
Significant intercompany accounts and transactions have been eliminated.
Statements of Cash Flows: The Company considers cash in banks, deposits in
transit, and highly liquid debt instruments purchased with original maturities
of three months or less to be cash and cash equivalents.
Exploration and Development Costs: Mineral property acquisition, exploration and
related costs are expensed as incurred unless proven and probable reserves exist
and the property is a commercially minable property. When it has been determined
that a mineral property can be economically developed, the costs incurred to
develop such property, including costs to further delineate the ore body and
develop the property for production, may be capitalized. In addition, the
Company may capitalize previously expensed acquisition and exploration costs if
it is later determined that the property can economically be developed. Interest
costs, if any, allocable to the cost of developing mining properties and to
constructing new facilities are capitalized until operations commence. Mine
development costs incurred either to develop new ore deposits, expand the
capacity of operating mines, or to develop mine areas substantially in advance
of current production are also capitalized. All such capitalized costs, and
estimated future development costs, are then amortized using the
units-of-production method over the estimated life of the ore body. Costs
incurred to maintain current production or to maintain assets on a standby basis
are charged to operations. Costs of abandoned projects are charged to operations
upon abandonment. The Company evaluates, at least quarterly, the carrying value
of capitalized mining costs and related property, plant and equipment costs, if
any, to determine if these costs are in excess of their net realizable value and
if a permanent impairment needs to be recorded. The periodic evaluation of
carrying value of capitalized costs and any related property, plant and
equipment costs are based upon expected future cash flows and/or estimated
salvage value in accordance with Statement of Financial Accounting Standards
(SFAS) No. 144, "Accounting for Impairment or Disposal of Long-Lived Assets."
Equipment: Equipment is carried at cost not in excess of their estimated net
realizable value. Normal maintenance and repairs are charged to earnings while
expenditures for major maintenance and betterments are capitalized. Gains or
losses on disposition are recognized in operations. Equipment is depreciated
over the estimated economic lives ranging from 3 to 5 years.
Property Retirement Obligation: The Company implemented SFAS 143, "Accounting
for Asset Retirement Obligations," effective January 1, 2003. SFAS 143 requires
the fair value of a liability for an asset retirement obligation to be
recognized in the period that it is incurred if a reasonable estimate of fair
value can be made.
F-12
GOLD RESOURCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
The associated asset retirement costs are capitalized as part of the carrying
amount of the long-lived asset. The Company has determined that it has no
property retirement obligations as of December 31, 2004.
Stock Option Plans: The Company applies APB Opinion 25, "Accounting for Stock
Issued to Employees", and related Interpretations in accounting for all stock
option plans. Under APB Opinion 25, no compensation cost has been recognized for
stock options issued to employees as the exercise price of the Company's stock
options granted equals or exceeds the market price of the underlying common
stock on the date of grant.
SFAS 123, "Accounting for Stock-Based Compensation", requires the Company to
provide pro forma information regarding net income as if compensation costs for
the Company's stock option plans had been determined in accordance with the fair
value based method prescribed in SFAS No. 123. To provide the required pro forma
information, the Company estimates the fair value of each stock option at the
grant date by using the Black-Scholes option-pricing model. Since the shares of
the Company are not publically traded the fair value of each stock option or
stock grant is determined by the Company.
Per Share Amounts: SFAS 128, "Earnings Per Share", provides for the calculation
of "Basic" and "Diluted" earnings per share. Basic earnings per share includes
no dilution and is computed by dividing income available to common shareholders
by the weighted-average number of shares outstanding during the period
(10,827,672 for 2004 and 9,386,958 for 2003). Diluted earnings per share reflect
the potential dilution of securities that could share in the earnings of the
Company, similar to fully diluted earnings per share. As of December 31, 2004
and 2003, stock options are not considered in the computation of diluted
earnings per share as their inclusion would be antidilutive.
Income Taxes: The Company accounts for income taxes under SFAS 109, "Accounting
for Income Taxes". Temporary differences are differences between the tax basis
of assets and liabilities and their reported amounts in the financial statements
that will result in taxable or deductible amounts in future years.
Use of Estimates: The preparation of the Company's consolidated financial
statements in conformity with generally accepted accounting principles requires
the Company's management to make estimates and assumptions that affect the
amounts of assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Business Risks: The Company continually reviews the mining and political risks
it encounters in its operations. It mitigates the likelihood and potential
severity of these risks through the application of high operating standards. The
Company's operations have been and in the future may be, affected to various
degrees by changes in environmental regulations, including those for future site
restoration and reclamation costs. The Company's business is subject to
extensive license, permits, governmental legislation, control and regulations.
The Company endeavors to be in compliance with these regulations at all times.
Fair Value of Financial Instruments: SFAS 107, "Disclosures About Fair Value of
Financial Instruments," requires disclosure of fair value information about
financial instruments. Fair value estimates discussed herein are based upon
certain market assumptions and pertinent information available to management as
of December 31, 2004.
The respective carrying value of certain on-balance-sheet financial instruments
approximate their fair values. These financial instruments include cash, cash
equivalents, accounts payable and accrued liabilities. Fair values were assumed
to approximate carrying values for these financial instruments since they are
short term in nature and their carrying amounts approximate fair value or they
are receivable or payable on demand.
F-13
GOLD RESOURCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
Concentration of Credit Risk: The Company's cash balances are maintained in bank
depositories and periodically exceed federally insured limits. At December 31,
2004, the Company's balance did not exceeded insured limits.
Foreign Operations: The Company's present activities are in Mexico. As with all
types of international business operations, currency fluctuations, exchange
controls, restrictions on foreign investment, changes to tax regimes, political
action and political instability could impair the value of the Company's
investments.
Foreign Currency Translation:
The local currency, the Mexican Peso, is the functional currency for the
Company's subsidiaries. Assets and liabilities are translated using the exchange
rate in effect at the balance sheet date. Income and expenses are translated at
the average exchange rate for the year. Translation adjustments are reported as
a separate component of stockholders' (deficit).
Recent Pronouncements:
In November 2004, the FASB issued SFAS 151, "Inventory Costs." SFAS 151 amends
the accounting for abnormal amounts of idle facility expense, freight, handling
costs, and wasted material (spoilage) under the guidance in ARB 43, Chapter 4,
"Inventory Pricing." Paragraph 5 of ARB 43, Chapter 4, previously stated that
"...under some circumstances, items such as idle facility expense, excessive
spoilage, double freight, and rehandling costs may be so abnormal as to require
treatment as current period charges...." This Statement requires that those
items be recognized as current-period charges regardless of whether they meet
the criterion of "so abnormal." In addition, this Statement requires that
allocation of fixed production overheads to the costs of conversion be based on
the normal capacity of the production facilities. This statement is effective
for inventory costs incurred during fiscal years beginning after June 15, 2005.
Management does not expect adoption of SFAS 151 to have a material impact on the
Company's financial statements.
In December 2004, the FASB issued SFAS 153, "Exchanges of Nonmonetary Assets,"
an amendment to Opinion No. 29, "Accounting for Nonmonetary Transactions."
Statement 153 eliminates certain differences in the guidance in Opinion No. 29
as compared to the guidance contained in standards issued by the International
Accounting Standards Board. The amendment to Opinion No. 29 eliminates the fair
value exception for nonmonetary exchanges of similar productive assets and
replaces it with a general exception for exchanges of nonmonetary assets that do
not have commercial substance. Such an exchange has commercial substance if the
future cash flows of the entity are expected to change significantly as a result
of the exchange. SFAS 153 is effective for nonmonetary asset exchanges occurring
in periods beginning after June 15, 2005. Earlier application is permitted for
nonmonetary asset exchanges occurring in periods beginning after December 16,
2004. Management does not expect adoption of SFAS 153 to have a material impact
on the Company's financial statements.
F-14
GOLD RESOURCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
In December 2004, the FASB issued SFAS 123(R), "Share-Based Payment." SFAS
123(R) amends SFAS 123, "Accounting for Stock-Based Compensation," and APB
Opinion 25, "Accounting for Stock Issued to Employees." SFAS 123(R) requires
that the cost of share-based payment transactions (including those with
employees and non-employees) be recognized in the financial statements. SFAS
123(R) applies to all share-based payment transactions in which an entity
acquires goods or services by issuing (or offering to issue) its shares, share
options, or other equity instruments (except for those held by an ESOP) or by
incurring liabilities (1) in amounts based (even in part) on the price of the
entity's shares or other equity instruments, or (2) that require (or may
require) settlement by the issuance of an entity's shares or other equity
instruments. This statement is effective (1) for public companies qualifying as
SEC small business issuers, as of the first interim period or fiscal year
beginning after December 15, 2005, or (2) for all other public companies, as of
the first interim period or fiscal year beginning after June 15, 2005, or (3)
for all nonpublic entities, as of the first fiscal year beginning after December
15, 2005. Management is currently assessing the effect of SFAS No. 123(R) on the
Company's financial statements.
2. Going Concern
The Company's financial statements are prepared on a going concern basis, which
contemplates the satisfaction of obligations in the normal course of business.
The Company has no source of operating revenue and has financed operations
through the sale and exchange of equity. The Company has incurred losses since
its inception aggregating $2,690,615 and has a working capital deficit of
$(398,916) and a shareholders' deficit of $(397,335) at December 31, 2004.
The Company's ability to continue as a going concern is contingent upon its
abilities to raise funding through the sale of equity, joint venture or sale of
its assets, and to attain profitable operations. The financial statements do not
include any adjustments to the amount and classification of assets and
liabilities that may be necessary should the Company not continue as a going
concern.
3. Mineral Properties
El Aguila
---------
Effective November 1, 2002, the Company, through its subsidiary, Don David Gold
S.A. de C.V. leased a prospective gold/silver property located in the state of
Oaxaca, Mexico, designated the "El Aguila" property, from Jose Perez Reynoso, a
consultant to the Company. The El Aguila property is an exploration stage
property and incorporates approximately 7.3 square miles as of December 31,
2004. The lease agreement for El Aguila is subject to a 4% net smelter return
royalty to the lessor where production is sold in the form of gold/silver dore
and 5% for production sold in concentrate form. The Company has made periodic
payments required under the lease of $30,000 in 2003 and $20,000 in 2004 with an
additional $30,000 remaining due and payable at December 31, 2004. In January
2005 the Company paid the lessor $20,000 of the remaining amount due for 2004.
As of December 31, 2004, the lease requires future periodic advance royalty
payments to the lessor as follows:
Remaining due for 2004 $ 30,000
Due November 1, 2005 75,000
Due November 1, 2006 100,000
----------
Total future payments $ 205,000
==========
In August 2003 the Company entered into an exploration agreement with Canyon
Resources Corporation, a public company with shares traded on the American Stock
Exchange under symbol "CAU" ("Canyon"), whereby Canyon had the right to earn a
50% interest in the El Aguila property from the Company in exchange for funding
$3.5 million in exploration and development costs at the El Aguila property, or
alternatively, Canyon could receive 1,200,000 shares of the common stock of the
Company for funding $500,000 for Phase I and Phase II exploration drilling
program at El Aguila. The drilling programs were completed in 2003 and included
approximately 12,939 feet of drilling focused on one target area of the
property. This exploration drilling encountered some high-grade gold intercepts
which will require additional exploration drilling in order to fully evaluate.
Effective September 1, 2004, Canyon elected to convert their prior funding of
$500,000 into 1,200,000 shares of common stock of the Company, which represent
approximately 9.9% of the outstanding shares at December 31, 2004.
F-15
GOLD RESOURCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
Through December 31, 2004, the Company has spent or incurred approximately
$605,000 in acquisition, exploration and related costs for El Aguila of which
approximately $255,000 was spent in 2004.
Zimapan
-------
Effective August 23, 2001 the Company, through its subsidiary Don David Gold
S.A. de C.V., leased a prospective mining property in the Zimapan Mining
District in Mexico designated the "Zimapan" property. During August 2003 the
Company terminated the Zimapan property lease. The Company spent a total of
$293,763 related to acquisition, exploration and evaluation of the Zimapan
property which was expended in 2002.
4. Income Taxes
At December 31, 2004, the Company estimates that tax loss carry forwards to be
approximately $1,980,000 expiring through 2024. The principal difference between
the net loss for book purposes and the net loss for income tax purposes relates
to the $330,000 liability to U.S. Gold Corporation ("U.S. Gold") which is
deductible for tax purposes when paid by the Company, and $650,000 expense for
stock grants and stock bonus accruals.
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 2004 are
presented below:
Deferred tax assets:
Net operating (loss) carryforward $ 436,000
---------
Total gross deferred tax assets 436,000
---------
Less valuation allowance (436,000)
---------
Net deferred tax assets -
---------
Deferred tax liabilities: -
---------
Total net deferred tax asset $ -
=========
The Company believes at this time that it is unlikely that the net deferred tax
asset will be realized. Therefore, a valuation allowance has been provided for
net deferred tax assets. The change in valuation allowance was approximately
$76,000 during 2004.
A reconciliation of the tax provision for 2004 and 2003 at statutory rates is
comprised of the following components:
2004 2003
---- ----
Statutory rate tax provision on book (loss) $(295,000) $(171,000)
Book to tax adjustments:
Valuation allowance 295,000 171,000
--------- ---------
Tax provision $ - $ -
========= =========
5. Shareholders' (Deficit)
Effective February 21, 2005, the Company declared and effected a 100% forward
stock split where one additional share of common stock, par value $.001, was
issued for each common share outstanding as of that date, in the form of new
stock certificates aggregated by shareholder. These financial statements have
been restated to retroactively reflect the effect of this 100% stock split.
F-16
GOLD RESOURCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
The Company was formed August 24, 1998 by William W. Reid and David C. Reid (the
"Founders"). As of December 31, 2004, the Founders directly hold a total of
2,826,000 shares or approximately 23% of the outstanding shares.
During 2003, the Company sold 577,000 shares at $.25 per share raising net
proceeds of $144,250. Effective September 30, 2003, U.S. Gold acquired the
shares of the institutional investor in exchange for U.S. Gold shares, and
terminated the obligation of the Company to pay the institutional investor
approximately $25,327 in transaction costs, which has been added back into
paid-in-capital. At December 31, 2004, U.S. Gold owns approximately 32% of the
Company. During 2004, the Company sold 608,000 shares at $.25 per share raising
net proceeds of $152,000. Also during 2004, as explained further in Note 3, the
Company issued 1,200,000 shares at approximately $.42 per share to Canyon for
$500,000 in prior funding of exploration cost at the El Aguila property.
In 2005, through March 22, 2005, the Company has sold 286,000 shares raising net
proceeds of $71,500 and as discussed in Note 7 the Company issued aggregate
1,750,000 shares to the executive officers of the Company and to a consultant,
for services. The Company may continue to raise capital through the sale of its
common shares and may also seek other funding or corporate transactions to
achieve its business objectives, including possible merger of the Company into
another entity, which would normally require approval by shareholders of the
Company.
The Company has a non-qualified stock option and stock grant plan under which
stock options and stock grants may be granted to key employees, directors and
others (the "Plan"). Options to purchase shares under the Plan must be granted
at fair value as of the date of the grant. A total of 3,000,000 common shares
have been reserved under the Plan. During 2003, the company granted 400,000
share stock options exercisable for 10 years with exercise price of $0.25 per
share to both William Reid and David Reid, the executive officers of the
Company. In 2004 the option agreement with Mr. Reynoso was terminated and the
Company awarded Mr. Reynoso a stock award of 600,000 common shares outside of
the Plan valued at $.25 per share. Also during 2004, the Company granted stock
options with an exercise price of $.25 per share of 400,000 shares to William
Reid, 200,000 shares to David Reid and 100,000 shares to Mr. Pass. All of these
individuals were determined to be a key person to the benefit of the Company.
The Company recorded expense of $150,000 related to the stock grant to Mr.
Reynoso. No compensation costs were recorded related to the issuances of stock
options. No other stock options have been granted under the Plan.
2004 2003
------------------------ ----------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Prices Shares Prices
--------- -------- --------- --------
Outstanding, beginning of year 1,800,000 $.25 1,000,000 $.25
Granted 700,000 $.25 800,000 $.25
Terminated (600,000) $.25 - -
Exercised - - - -
--------- ---------
Outstanding, end of year 1,900,000 $.25 1,800,000 $.25
Options exercisable, end of year 1,900,000 $.25 1,600,000 $.25
========= ==== ========= ====
Weighted average fair value of
Option granted during year $.25 $.25
==== ====
SFAS 123 requires the Company to provide proforma information regarding net
income and earnings per share as if compensation cost for the Company's stock
option plans had been determined in accordance with the fair value based method
prescribed in SFAS 123. The fair value of the option grants is estimated on the
F-17
GOLD RESOURCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
date of grant utilizing the minimum value option-pricing model using the
following assumptions: Expected life 10 years, stock price on date of grant
$.25, fair market value on date of grant $.25, dividend yield 0% and interest
rate 3%. These results may not be representative of those to be expected in
future years. The pro-forma results of operations for 2004 and 2003 are as
follows:
2004 2003
---- ----
Net (loss)
As reported $(853,666) $(496,046)
Proforma $(899,166) $(561,046)
Basic and diluted (loss) per share
As reported $(.08) $(.05)
Proforma $(.08) $(.06)
6. Related Party Transactions:
U.S. Gold-
Effective July 1, 2000, the Company and U.S. Gold entered into a management
contract whereby U.S. Gold provided general management of the business
activities of the Company through December 31, 2001 in exchange for 2,560,000
shares of common stock of the Company valued at $392,191 or approximately $.15
per share, representing the actual allocated internal costs recorded by U.S.
Gold in its performance of the contract. Effective January 1, 2002, the Company
and U.S. Gold entered into a second Management Contract with a duration of one
year (the "2002 Management Contract"). Under the 2002 Management Contract U.S.
Gold provided general management of the business activities of the Company
through December 31, 2002 in exchange for the obligation of $30,000 per month to
U.S. Gold. The Company has paid U.S. Gold only $30,000 under the 2002 Management
Contract and owes U.S. Gold $330,000 at December 31, 2004. U.S. Gold is an
affiliate of the Company and the executive officers of the Company are executive
officers of U.S. Gold. U.S. Gold owns approximately 32% of the Company as of
December 31, 2004. Since January 1, 2003, Company has managed its own affairs.
During 2003, U.S. Gold made a non-interest bearing $30,000 loan to the Company
that was repaid during that year.
Jose Perez Reynoso-
The Company has certain contractual business arrangements with Jose Perez
Reynoso, a Mexican national and consultant to the Company. Mr. Reynoso has been
retained as a full-time consultant to the Company at $5,000 per month under a
month-to-month arrangement since September 2001. Mr. Reynoso was granted as a
finders fee a 1% percent net smelter return royalty on the Zimapan property
which royalty was terminated upon the Company dropping the Zimapan lease in
August 2003. The Company also leased the El Aguila Property from Mr. Reynoso,
paying him $5,000 advance royalty during 2002, $25,000 in 2003, and $20,000 of a
total obligation of $50,000 in 2004. Of the $30,000 remaining owned to Mr.
Reynoso as of December 31, 2004, $20,000 was paid in January 2005, as further
discussed further in Footnote 3. Also as noted in Footnote 4 above, Mr. Reynoso
was granted a stock bonus of 600,000 common shares valued at $.25 per share for
$150,000 during 2004 and a stock option agreement with Mr. Reynoso covering
600,000 common shares at exercise price of $.25 per share of the Company was
terminated by mutual consent.
F-18
GOLD RESOURCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
Other-
During 2004 the executive officers and Mr. Reynoso have made certain cash
advances to the Company to allow payment of certain obligations. As of December
31, 2004, the net amount of such advances was $43,732 which is reflected as a
liability on the consolidated balance sheet as of December 31, 2004.
7. Subsequent Events:
Effective January 2, 2005, the Company made common stock awards to its two
executive officers and a consultant of aggregate 1,750,000 shares valued at $.25
per share for aggregate $437,500 for services to the Company both prior and
through June 30, 2005. Of this total William W. Reid received 1,000,000 shares,
David C. Reid received 500,000 shares and William F. Pass received 250,000
shares. Related to this stock award and as of December 31, 2004, the Company
recorded a stock subscription of $350,000 representing the portion awarded for
services through that date. Also effective January 2, 2005, a stock option
agreement with William F. Pass covering 400,000 shares of common stock at
exercise price of $.25 per share was reduced by 250,000 leaving 150,000 shares
remaining subject to option.
F-19
You should rely only on the information contained in this document or that
we have referred you to. We have not authorized anyone to provide you with
information that is different. This prospectus is not an offer to sell common
stock and is not soliciting an offer to buy common stock in any state where the
offer or sale is not permitted.
Until _______________, 2006, all dealers that effect transactions in these
securities, whether or not participating in this offering, may be required to
deliver a prospectus. This is in addition to the dealers' obligation to deliver
a prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
TABLE OF CONTENTS
Prospectus Summary..................................1
Risk Factors........................................4
Dilution...........................................10
Use of Proceeds....................................11
Market Information.................................12
Management's Discussion and Analysis
Or Plan of Operation............................12
Business and Properties............................18
Management.........................................28
Security Ownership of Certain
Beneficial Owners and Management................34
Selling Shareholders...............................35
Plan of Distribution...............................37
Description of Capital Stock.......................40
Shares Eligible For Future Sale....................41
Where You Can Find More Information................42
Legal Matters......................................43
Experts............................................43
Financial Statements..............................F-1
16,390,707 Shares
GOLD RESOURCE CORPORATION
Common Stock
--------------------
PROSPECTUS
--------------------
October __, 2005
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
Included in the prospectus.
Item 25. Other Expenses of Issuance and Distribution.
We will pay all expenses in connection with the issuance and distribution of the
securities being registered except selling discounts and commissions of the
selling shareholders. The following table sets forth expenses and costs related
to this offering (other than underwriting discounts and commissions) expected to
be incurred with the issuance and distribution of the securities described in
this registration statement. All amounts are estimate except for the Securities
and Exchange Commission's registration fee:
SEC registration fee $ 1,930
Legal fees 30,000
Accounting fees 10,000
Blue Sky filing fees and expenses 500
Printing and engraving expenses 500
Transfer Agent fees and expenses 1,000
Miscellaneous 1,070
Total $45,000
=======
Item 26. RECENT SALES OF UNREGISTERED SECURITIES.
During the preceding three years, the Company has issued an aggregate of
11,844,852 shares of its common stock and 1,500,000 options without registering
those securities under the Securities Act of 1933, as amended. The following
information describes the transactions in which those securities were issued.
During the period September 2001 through December 2002, the Company sold an
aggregate of 1,312,000 shares of its common stock to 20 individuals or entities
at a price of $.25 per share. No underwriting discounts or commissions were paid
by the Company in any of these transactions, since the shares were offered
through its officers and directors. The Company relied on the exemption from
registration provided by Rule 504 of Regulation D of the Securities Act in
connection with the offer and sale of these shares.
On November 6, 2002, the Company sold a total of 1,351,352 shares to RMB
International (Dublin) Ltd. at a price of $224,673, or $.166 per share. RMB is a
natural resource investment company. No underwriting discounts or commissions
were paid in connection with this transaction. As in the foregoing offering, the
Company relied on the exemption provided by Rule 504 of Regulation D of the
Securities Act.
II-1
Between June 2003 and February 2005, the Company sold an additional 1,583,000
shares of common stock to 26 individuals or entities at a price of $.25 per
share, or a total of $395,750. Again, the Company relied on the exemption from
registration provided by Rule 504 of Regulation D of the Securities Act.
On April 4, 2004, the Company issued 600,000 shares of its common stock to Jose
Perez Reynoso for services rendered to the Company valued at $150,000, or $.25
per share. The Company relied on the exemption provided by Section 4(2) of the
1933 Act.
On September 1, 2004, the Company issued 1,200,000 shares of its common stock to
Canyon Resources Corporation in connection with an exploration and development
agreement executed with that entity. Canyon was afforded the opportunity to earn
up to 50% of the Company's interest in the El Aguila project in exchange for
funding $3.5 million of exploration and development costs. After funding a
minimum of $500,000, Canyon was afforded the option to convert its investment
into 1,200,000 shares of the Company's common stock, which option was exercised
in September 2004. The Company relied on the exemption provided by Section 4(2)
of the Securities Act in connection with this transaction.
On October 10, 2003, the Company granted a total of 800,000 options to acquire
its common stock to its two employees. On April 23, 2004, the Company issued an
additional 600,000 options to these employees and 100,000 options to a
consultant. On March 22, 2005, the consultant exercised 10,000 options at a
price of $.25 per share, or a total of $2,500. All of these options and the
shares were issued pursuant to the exemption from registration provided by
Section 4(2) of the Securities Act. All of the individuals were employees or
consultants of the Company and each of the individuals was afforded access to
the type of information that would have been included in a registration
statement. Certificates representing the securities issued in the transaction
were embossed with a restricted legend required by Rule 144.
On January 2, 2005, the Company issued 1,750,000 shares of its common stock to
its two employees and a financial consultant for total consideration valued at
$437,500, or $.25 per share. The Company relied on the exemption provided by
Section 4(2) of the Securities Act in offering these shares.
On February 21, 2005, the Company's Board of Directors declared a two-for-one
split of all outstanding common stock.
On April 18, 2005, the Company issued 150,000 shares to Heemskirk Consolidated
Limited, a natural resource investment fund, for a total of $75,000, or $.50 per
share. On July 15, 2005 and August 2, 2005, the Company sold an additional
600,000 and 1,400,000 shares of its common stock, respectively, to Heemskirk,
also at a price of $.50 per share. On August 5, 2005, the Company sold 400,000
shares to a single, accredited investor, for a price of $.50 per share. The
Company relied on the exemption from registration provided by Regulation 506 of
Regulation D in connection with these transactions.
On three separate occasions in 2005, the Company issued a finder's fee to Declan
Costelloe for services rendered in connection with locating two investors in the
Company's placements described in the immediately preceding paragraph. Those
issuances equaled 10,500, 42,000 and 126,000 shares. In June 2005, the Company
also issued 30,000 shares to David Wersebe for services rendered in connection
with locating an investor. The Company relied on the exemption from registration
provided by Section 4(2) of the Securities Act in connection with these
transactions.
Finally, on June 3, 2005, the Company issued 1,280,000 shares of its common
stock to U.S. Gold Corporation in exchange for services rendered in the amount
of $320,000, or $.25 per share. Again, the Company relied on the exemption from
registration provided by Section 4(2) of the Securities Act in connection with
this transaction. The officers and directors of the Company were also officers
of the directors of U.S. Gold, so U.S. Gold was provided the same type of
information that would have been included in a registration statement.
In each transaction where the Company relied on Rule 504 or 506, it did not
engage in any general solicitation or advertising. In each case, the subscriber
was provided with a subscription agreement detailing the restrictions on
transfer of the shares. Further, stop transfer restrictions were placed on each
of the certificates issued in connection with the offering.
II-2
In each case where the Company relied on the exemption provided by Section 4(2)
of the Securities Act, it had a preexisting relationship with the investor. The
Company also took steps to insure that the investor had available the same type
of information that would be included in a registration statement. Finally, each
of certificates representing shares issued pursuant to that exemption has been
inscribed by the restrictive legend described in Rule 144.
Item 27. EXHIBITS
The following exhibits are filed with, or incorporated by reference in, this
registration statement:
3.1 Articles of Incorporation of the Company as filed with the Colorado
Secretary of State on August 24, 1998.
3.1.1 Articles of Amendment to the Articles of Incorporation as filed with
the Colorado Secretary of State on September 16, 2005.
3.2 Bylaws of the Company dated August 28, 1998.
*4. Specimen Stock Certificate.
*5. Opinion on Legality (Included in Exhibit 23.2).
10.1 Exploitation and Exploration Agreement between the Company and Jose
Perez Reynoso dated October 14, 2002.
10.2 Non-Qualified Stock Option and Stock Grant Plan.
10.3 Form of Stock Option Agreement.
10.4 Lease Agreement dated September 2005.
10.5 Agreement dated July 28, 2003 between the Company and Canyon Resources
Corporation.
10.6 Agreement dated August 2, 2005 between the Company and Heemskirk
Consolidated Limited.
10.7 Agreement dated July 15, 2005 by and between the Company and
Heemskirk Consolidated Limited.
21. Subsidiaries of the Company.
23.1 Consent of Stark Winter Schenkein & Co., LLP.
*23.2 Consent of Dufford & Brown, P.C.
---------------
* To be filed by amendment.
--------------------------------
II-3
Item 28. UNDERTAKINGS.
The undersigned registrant hereby undertakes that it will:
1. File, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement:
a. To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
b. To reflect in the prospectus any facts or events which, individually
or together, represent a fundamental change in the information in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering
range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes
in volume and price represent no more than a 20% change in the maximum
aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement.
c. Include any additional or changed material information on the plan of
distribution.
2. For the purposes of determining liability under the Securities Act of 1933,
treat each post-effective amendment as a new registration statement of the
securities offered, and the offering of the securities at that time to be
the initial bona fide offering.
3. To file a post effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
4. Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense
of any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question, whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
II-4
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Lakewood, State of Colorado, on October 27, 2005.
GOLD RESOURCE CORPORATION
(Registrant)
/s/ William W. Reid
By: William W. Reid
President and Chief Executive Officer
In accordance with the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the capacity
and on the dates stated.
/s/ William W. Reid
-------------------------------------------
Date: October 27, 2005
William W. Reid
Title: President, Chief Executive Officer and
Chairman of the Board of Directors
/s/ David C. Reid
-------------------------------------------
Date: October 27, 2005
David C. Reid
Title: Vice President and Member of the Board of Directors
/s/ William F. Pass
-------------------------------------------
Date: October 27, 2005
William F. Pass
Title: Financial Consultant
II-5
EXHIBIT INDEX
The following Exhibits are filed or incorporated by reference as part
of this registration statement on Form SB-2.
Item No. Description
-------- -----------
3.1 Articles of Incorporation of the Company as filed with the Colorado
Secretary of State on August 24, 1998.
3.1.1 Articles of Amendment to the Articles of Incorporation as filed with
the Colorado Secretary of State on September 16, 2005.
3.2 Bylaws of the Company dated August 28, 1998.
*4. Specimen Stock Certificate.
*5. Opinion on Legality (Included in Exhibit 23.2).
10.1 Exploitation and Exploration Agreement between the Company and Jose
Perez Reynoso dated October 14, 2002.
10.2 Non-Qualified Stock Option and Stock Grant Plan.
10.3 Form of Stock Option Agreement.
10.4 Lease Agreement dated September 2005.
10.5 Agreement dated July 28, 2003 between the Company and Canyon Resources
Corporation.
10.6 Agreement dated August 2, 2005 between the Company and Heemskirk
Consolidated Limited.
10.7 Agreement dated July 15, 2005 by and between the Company and
Heemskirk Consolidated Limited.
21. Subsidiaries of the Company.
23.1 Consent of Stark Winter Schenkein & Co., LLP.
*23.2 Consent of Dufford & Brown, P.C.
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* To be filed by amendment.
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II-6