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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______ TO _______
COMMISSION FILE NUMBER 1-12401
- --------------------------------------------------------------------------------
WITS BASIN PRECIOUS MINERALS INC.
(Exact Name of Registrant as specified in Its Charter)
MINNESOTA 84-1236619
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
800 NICOLLET MALL, SUITE 2690, MINNEAPOLIS, MN 55402
(Address of Principal Executive Offices)
(612) 664-0570
(Issuer's Telephone Number, Including Area Code)
(Former Name, Former Address and Former Fiscal Year, If Changed Since
Last Report)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the issuer was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes [X] No [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes [ ] No [X]
As of November 10, 2003, there were 29,747,181 shares of common stock, $.01 par
value, outstanding.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-Q contains forward-looking statements (as such term is defined in
Section 27A of the Securities Act of 1933, as amended and Section 21E of the
Securities Exchange Act of 1934, as amended) and information relating to us that
is based on the current beliefs of our management as well as assumptions made by
and information currently available to management, including statements related
to the markets for our products, general trends in our operations or financial
results, plans, expectations, estimates and beliefs. In addition, when used in
this Form 10-Q, the words "may," "could," "should," "anticipate," "believe,"
"estimate," "expect," "intend," "plan," "predict" and similar expressions and
their variants, as they relate to us or our management, may identify
forward-looking statements. These statements reflect our judgment as of the date
of this Form 10-Q with respect to future events, the outcome of which is subject
to risks, which may have a significant impact on our business, operating results
or financial condition. Readers are cautioned that these forward-looking
statements are inherently uncertain. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results or outcomes may vary materially from those described herein. We
undertake no obligation to update forward-looking statements. The risks
identified in the section of Item 2 entitled "RISK FACTORS," among others, may
impact forward-looking statements contained in this Form 10-Q.
2
WITS BASIN PRECIOUS MINERALS INC.
(f/k/a ACTIVE IQ TECHNOLOGIES, INC.)
FORM 10-Q INDEX
SEPTEMBER 30, 2003
Page
----
PART I FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements 4
Condensed Consolidated Balance Sheets -
As of September 30, 2003 and December 31, 2002 4
Condensed Consolidated Statements of Operations -
For the three months and nine months ended
September 30, 2003 and September 30, 2002 5
Condensed Consolidated Statements of Cash Flows - For the nine
months ended September 30, 2003
and September 30, 2002 6
Notes to the Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk 21
Item 4. Controls and Procedures 21
PART II OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 23
3
WITS BASIN PRECIOUS MINERALS INC. AND SUBSIDIARIES
(f/k/a ACTIVE IQ TECHNOLOGIES, INC.)
PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
September 30, December 31,
2003 2002
------------- ------------
Assets
Current Assets
Cash and equivalents $ 17,325 $ 13,211
Accounts receivable, net -- 35,107
Prepaid expenses 3,334 35,542
------------- ------------
Total current assets 20,659 83,860
Property and Equipment, net -- 123,505
Prepaid Royalties -- 975,000
Prepaid Exploration Costs 200,000 --
Exploration Agreement 4,967,389 --
------------- ------------
$ 5,188,048 $ 1,182,365
============= ============
Liabilities and Shareholders' Equity
Current Liabilities
Accounts payable $ 158,016 $ 304,526
Net liabilities of operations of discontinued
accounting software business -- 93,078
Accrued expenses 21,324 195,628
------------- ------------
Total current liabilities 179,340 593,232
Minority interest in Active Hawk Minerals, LLC 1,950,000 --
------------- ------------
Commitments and Contingencies
Shareholders' Equity
Common stock, $0.01 par value, 150,000,000 shares authorized;
17,057,181 and 13,264,681 shares issued and outstanding 170,572 132,647
Additional paid-in capital 23,529,582 22,616,833
Stock subscriptions receivable -- (2,000,000)
Deferred compensation -- (182,213)
Warrants 2,602,860 2,602,860
Accumulated deficit (23,244,306) (22,580,994)
------------- ------------
Total shareholders' equity 3,058,708 589,133
------------- ------------
$ 5,188,048 $ 1,182,365
============= ============
See accompanying notes to condensed consolidated financial statements
4
WITS BASIN PRECIOUS MINERALS INC. AND SUBSIDIARIES
(f/k/a ACTIVE IQ TECHNOLOGIES, INC.)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ ------------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Revenues $ -- $ 108,233 $ 132,455 $ 377,792
------------ ------------ ------------ ------------
Operating Expenses:
Cost of goods -- 177,738 35,354 378,681
Selling, general and administrative 135,491 716,238 645,743 2,749,265
Exploration expenses 300,000 -- 300,000 --
Depreciation -- 32,638 8,935 111,514
Loss on disposal of assets -- 3,894 -- 101,319
Loss on impairment of goodwill -- 417,273 884 417,273
------------ ------------ ------------ ------------
Total operating expenses 435,491 1,347,781 990,916 3,758,052
------------ ------------ ------------ ------------
Loss from Operations (435,491) (1,239,548) (858,461) (3,380,260)
------------ ------------ ------------ ------------
Other Income (Expense):
Interest and dividend income 175 23,862 25,323 84,620
Other income -- -- 150,000 20,000
Interest expense -- -- -- (5,456)
Loss on sale of prepaid royalties -- -- (434,895) --
------------ ------------ ------------ ------------
Total other income (expense) 175 23,862 (259,572) 99,164
------------ ------------ ------------ ------------
Loss from Operations before Tax Refund,
Minority Interest and Discontinued
Operations (435,316) (1,215,686) (1,118,033) (3,281,096)
------------ ------------ ------------ ------------
Income Tax Refund -- -- 243,920 --
Minority Interest in Loss of
Consolidated Subsidiary 150,000 -- 150,000 --
------------ ------------ ------------ ------------
Loss from Continuing Operations $ (285,316) $ (1,215,686) $ (724,113) $ (3,281,096)
Discontinued Operations (See Note 5)
Gain (loss) from operations of discontinued
accounting software business -- (421,255) 60,801 (3,824,989)
------------ ------------ ------------ ------------
Net Loss $ (285,316) $ (1,636,941) $ (663,312) $ (7,106,085)
============ ============ ============ ============
Basic and Diluted Net
Loss per common share:
Continuing operations $ (0.02) $ (0.09) $ (0.05) $ (0.27)
Discontinued operations -- (0.03) -- (0.31)
------------ ------------ ------------ ------------
Net Loss $ (0.02) $ (0.12) $ (0.05) $ (0.58)
============ ============ ============ ============
Basic and Diluted Weighted Average
Outstanding Shares 17,057,181 13,298,014 14,444,271 12,300,947
============ ============ ============ ============
See accompanying notes to condensed consolidated financial statements
5
WITS BASIN PRECIOUS MINERALS INC. AND SUBSIDIARIES
(f/k/a ACTIVE IQ TECHNOLOGIES, INC.)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine months ended September 30,
2003 2002
----------- -----------
Operating Activities:
Net loss $ (663,312) $(7,106,085)
Adjustments to reconcile net loss to cash flows from operating
activities:
Depreciation and amortization 18,899 1,014,248
Deferred compensation expense 182,213 96,850
Loss on disposal of assets 884 101,319
Loss on impairment of goodwill -- 2,548,664
Issue of options, warrants and common stock for services 54,645 430,614
Interest expense related to common stock issued in excess of note payable -- 80,000
Amortization of debt discount -- 104,820
Amortization of acquired software developed 53,884 333,745
Exchange of assets for services 2,644 --
Loss on sale of prepaid royalties 434,895 --
Minority interest in loss of consolidated subsidiary (150,000) --
Changes in operating assets and liabilities:
Accounts receivable, net 154,980 77,512
Inventories 7,983 13,862
Prepaid expenses 343,842 (20,865)
Prepaid royalties -- 309,745
Other assets (2,890) 57,553
Accounts payable (191,960) (31,576)
Deferred revenue (130,498) 56,865
Accrued expenses 99,719 (190,642)
----------- -----------
Net cash provided by (used in) operating activities 215,928 (2,123,371)
----------- -----------
Investing Activities:
Payments received on note receivable -- 500,000
Proceeds from sale of property and equipment 109,895 405,095
Proceeds from sale of prepaid royalties 540,105 --
Purchases of property and equipment (3,880) (49,792)
Investment in Active Hawk Minerals LLC (527,889) --
----------- -----------
Net cash provided by investing activities 118,231 855,303
----------- -----------
Financing Activities:
Payments on long-term notes payable (84,732) (1,712,569)
Common stock repurchased and retired -- (63,035)
Cash proceeds from issuance of common stock -- 950,000
Cash proceeds from exercise of options and warrants -- 142,500
Cash proceeds from stock subscription receivable -- 200,000
Cash proceeds from short-term notes payable -- 450,000
----------- -----------
Net cash used in financing activities (84,732) (33,104)
----------- -----------
Change in Cash and Equivalents of Discontinued
Accounting Software Business (245,313) 42,321
----------- -----------
Increase (Decrease) in Cash and Equivalents 4,114 (1,258,851)
Cash and Equivalents, beginning of period 13,211 1,377,315
----------- -----------
Cash and Equivalents, end of period $ 17,325 $ 118,464
=========== ===========
See accompanying notes to condensed consolidated financial statements
6
WITS BASIN PRECIOUS MINERALS INC.
(f/k/a ACTIVE IQ TECHNOLOGIES, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(UNAUDITED)
NOTE 1 - NATURE OF BUSINESS
Wits Basin Precious Minerals Inc., formerly Active IQ Technologies, Inc., a
Minnesota corporation, ("we," "us," "our," "its" or the "Company") is a junior
gold exploration company. On June 26, 2003, we entered into a joint venture with
Hawk Precious Minerals USA, Inc., a Minnesota corporation and wholly owned
subsidiary of Hawk Precious Minerals Inc., (a corporation organized under the
laws of the Canadian Province of Ontario) for the exploration of gold minerals
in the Republic of South Africa. The joint venture, named Active Hawk Minerals,
LLC (a Minnesota limited liability company), was created to pursue the mineral
rights to the FSC Project ("FSC") area in South Africa held by Kwagga Gold
(Proprietary) Limited ("Kwagga"). Mineral rights are in the form of exclusive,
notarized Prospecting Contracts applied for and/or issued by the State and
various option agreements with private owners over a land package totaling
approximately 269,000 acres. The area has excellent infrastructure, is easily
accessible, has limited environmental issues, has no known indigenous land
claims, and a provision has been made to convert the rights under the new
Minerals and Petroleum Development Act of South Africa. Kwagga is a wholly owned
subsidiary of AfriOre International (Barbados) Ltd. ("AfriOre"). AfriOre is a
coal producer and a precious minerals exploration company with offices in
Johannesburg, South Africa and is the operator of the project. We believe the
FSC area has the potential for containing Witwatersrand-type gold
mineralization. The historic Witwatersrand basin is host to the world's largest
reserves of gold. It has produced over 1.5 billion ounces of gold during the
past 117 years.
Prior to April 30, 2003, we provided accounting software through our Accounting
Software Business ("ASB") and until March 14, 2003, we provided
industry-specific solutions for managing, sharing and collaborating on business
information on the Internet though our Hosted Solutions Business ("HSB"). In
December 2002, our Board of Directors authorized a plan to sell the ASB. As a
result of the formal plan, the results of operations have been reported as
discontinued operations (the "Discontinued Operations") and previously reported
condensed consolidated financial statements have been restated for the three
months and nine months ended September 30, 2002. See Note 5 for further
discussion regarding the Discontinued Operations of ASB.
Subsequent to our decision to sell the ASB, we came to the conclusion that due
to current market conditions for capital funding of Internet opportunities, it
would be extremely unlikely for us to secure the financing necessary to fund our
HSB beyond the near term and thereby provide assurance to future customers of
our long-term viability. On March 14, 2003, we sold all of our assets related to
the HSB. See Note 3 for a further discussion regarding the HSB.
We were originally incorporated under Colorado law in December 1992 under the
name Meteor Industries, Inc. In April 2001, in conjunction with our merger with
activeIQ Technologies Inc., we reincorporated under Minnesota law and changed
our name to Active IQ Technologies, Inc. On July 9, 2003, following the
formation of our joint venture with Hawk Precious Minerals USA, Inc., we
changed our name to Wits Basin Precious Minerals Inc. in order to further
associate our new business model with our corporate name. Presently, our only
business model involves sharing in the rights of mineral exploration,
specifically, in search of new goldfields.
Our principal office is located at 800 Nicollet Mall, Suite 2690, Minneapolis,
Minnesota 55402. Our telephone number is (612) 664-0570 and our Internet address
is www.witsbasin.com. Our common stock trades on the Over-the-Counter Bulletin
Board ("OTCBB") under the symbol WITM. Prior to August 20, 2003, our common
stock's OTCBB trading symbol was AIQT.
7
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Financial Statement Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared by us in accordance with accounting principles generally accepted in
the United States of America ("US GAAP") for interim financial information
pursuant to the rules and regulations of the Securities and Exchange Commission.
Accordingly, they do not include all of the information and footnotes required
by US GAAP for complete financial statements. The unaudited condensed
consolidated financial statements should be read in conjunction with the audited
financial statements and notes thereto included in our Form 10-K filed March 31,
2003. In the opinion of management, all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation have been
included. Operating results for the nine months ended September 30, 2003 are not
necessarily indicative of the results that may be expected for the year as a
whole.
Revenue Recognition and Deferred Revenue
We did derive revenues from customers of the online document management service
for monthly access to the service and initial service
configuration/implementation. Customers were invoiced at the beginning of each
month for access service and revenue was recognized when invoiced.
Configuration/implementation revenue was invoiced the month after the services
were performed and recognized in the month invoiced.
We recognized the revenues derived from ASB sales after all of the following
criteria had been met: there was an executed license agreement, software had
been delivered to the customer, the license fee was fixed and payable within
twelve months, collection was deemed probable and product returns were
reasonably estimable. Revenues related to multiple element arrangements were
allocated to each element of the arrangement based on the fair values of
elements such as license fees, maintenance, and professional services. Fair
value was determined based on vendor specific objective evidence. Service
revenue was recognized ratably over the term of the agreement, which was
typically one year. All service revenue invoiced in excess of revenue recognized
was recorded as deferred revenue. At December 31, 2002, deferred revenue was
$1,774,491, as reported in the Discontinued Operations, see Note 5.
Net Loss per Common Share
Basic and diluted net loss per common share is computed by dividing the net loss
by the weighted average number of common shares outstanding during the periods
presented. The impact of common stock equivalents has been excluded from the
computation of weighted average common shares outstanding, as the net effect
would be antidilutive.
Use of Estimates
Preparing financial statements in conformity with US GAAP requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Income Taxes
We account for income taxes using the liability method to recognize deferred
income tax assets and liabilities. Deferred income taxes are provided for
differences between the financial reporting and tax bases of our assets and
liabilities at currently enacted tax rates.
We have recorded a full valuation allowance against the net deferred tax asset
due to the uncertainty of realizing the related benefits.
8
Capitalization of Exploration Costs
Exploration costs incurred in the search for new mineral properties are charged
to expense as incurred. When it has been determined that a mineral property is
economically viable, we will begin to capitalize the costs of subsequent reserve
definition and expansion of the property.
Stock Based Compensation
In accordance with Accounting Principles Board ("APB") Opinion No. 25
"Accounting for Stock Issued to Employees" and related interpretations, we use
the intrinsic value-based method for measuring stock-based compensation cost
which measures compensation cost as the excess, if any, of the quoted market
price of our common stock at the grant date over the amount the employee must
pay for the stock. Our general policy is to grant stock options and warrants at
fair value at the date of grant.
We have adopted the disclosure only provisions of Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation." We recorded compensation expense pursuant to APB Opinion No. 25
and related interpretations on options granted due to modifications of options
of $182,213 and $96,850, for the nine months ended September 30, 2003 and 2002,
respectively. We recorded expense related to stock based compensation issued to
non-employees in accordance with SFAS No. 123. Had compensation costs for
employees been recognized based upon the fair value of options at the grant date
consistent with the provisions of SFAS No. 123, our results would have been as
follows for:
Three Months Ended Sept. 30, Nine Months Ended Sept. 30,
---------------------------- ------------------------------
2003 2002 2003 2002
----------- ------------- ------------- -------------
Net loss:
As reported $ (285,316) $ (1,636,941) $ (663,312) $ (7,106,085)
Pro forma $ (882,102) $ (2,027,599) $ (2,460,834) $ (8,278,060)
Basic and diluted net loss per share:
As reported $ (0.02) $ (0.12) $ (0.05) $ (0.58)
Pro forma $ (0.05) $ (0.15) $ (0.17) $ (0.67)
Stock-based compensation
As reported $ 9,377 $ 32,638 $ 182,213 $ 96,850
Pro forma $ 596,786 $ 390,658 $ 1,797,522 $ 1,171,975
In determining the compensation cost of the options granted during the three and
nine months ended September 30, 2003 and 2002, as specified by SFAS No. 123, the
fair value of each option granted has been estimated on the date of grant using
the Black-Scholes option pricing model and the weighted average assumptions used
in these calculations are summarized below for the three and nine months ended
September 30:
2003 2002
-------- --------
Risk free interest rate 4.5% 5%
Expected life of options granted 10 years 10 years
Expected volatility range 308.1% 168.6%
Expected dividend yield 0% 0%
NOTE 3 - HOSTED SOLUTIONS BUSINESS AND PREPAID ROYALTIES
In 2001, through a licensing agreement, we acquired the rights to develop and
market, on a hosted basis, the online document management solutions of Stellent,
Inc. This application service provider (ASP) software license agreement was the
basis for our HSB, in which we were required to make advanced royalty payments
and certain
9
minimum royalty fee payments to Stellent. The balance of our prepaid royalties
at December 31, 2002 was $975,000. During the quarter ended March 31, 2003, we
recorded $54,776 against the prepaid. The remaining balance of the prepaid
royalties was expensed and netted together with the assets and liabilities in
the sale of the HSB as described below.
On March 14, 2003, we sold all of the assets relating to our HSB to Stellent,
Inc. for $650,000 cash, the reimbursement of transaction-related expenses
incurred by us in the amount of $150,000 and the assumption of certain
obligations, liabilities and employees of the Company. The transaction was not
subject to shareholder approval. With the completion of this sale, we no longer
operate in the online document management business. Revenues generated from our
HSB were $0 and $108,233 during the three months ended September 30, 2003 and
2002, respectively.
NOTE 4 - EXPLORATION AGREEMENT
On June 26, 2003, we entered into a joint venture with Hawk Precious Minerals
USA, Inc., ("Hawk USA") a Minnesota corporation and wholly owned subsidiary of
Hawk Precious Minerals Inc., (a corporation organized under the laws of the
Canadian Province of Ontario), for the exploration of gold minerals in the
Republic of South Africa. The joint venture, named Active Hawk Minerals, LLC
(the "LLC") a Minnesota limited liability company, was created to pursue the
mineral rights to the FSC Project area in South Africa held by Kwagga Gold
(Proprietary) Limited ("Kwagga"). Kwagga is a wholly owned subsidiary of AfriOre
International (Barbados) Ltd. ("AfriOre"). AfriOre is a coal producer and a
precious minerals exploration company with offices in Johannesburg, South Africa
and is the operator of the project.
Through a Joint Venture and Joint Contribution Agreement (the "Agreement"), the
Company and Hawk USA have both made certain contributions to the LLC in exchange
for equal ownership in the LLC. We made an initial $500,000 contribution as
specified under the Agreement. This was the first of three contributions that
will total $2,100,000. The balance of the remaining two contributions was
originally scheduled as follows: on September 27, 2003, $1,000,000 was due, and
on November 11, 2003, $600,000 was due. The September 27, 2003 contribution was
subsequently extended to October 15, 2003, and has been made. The terms of the
November 11, 2003 contribution were amended to allow the contribution to be paid
in 2 equal payments of $300,000 on each of November 11, 2003 and April 30, 2004.
Hawk USA contributed the interests it held in the FSC Project, known as "Heads
of Agreement" as well as its interest in the "Oxide Zones" on its Holdsworth
Property near Wawa, Ontario, Canada.
The LLC has no revenues year to date and has recorded $300,000 in exploration
expenses for the period ended September 30, 2003. All subsidiary transactions
and balances have been eliminated in consolidation.
As additional consideration for Hawk USA's mineral rights contributions, Hawk
USA was issued 3,750,000 unregistered common shares of our common stock valued
at $0.73 per share, based on the closing sale price of our common stock on June
26, 2003 as listed on the OTCBB.
We issued an option to purchase 100,000 shares of common stock with an exercise
price of $0.40 per share to one of our former directors for the consulting
services rendered to complete this joint venture transaction. The option was
valued at $102,000 using the Black-Scholes pricing model.
Components of exploration agreement are as followings:
September 30, December 31,
2003 2002
------------- ------------
Total value of consideration contributed by Hawk USA 2,100,000 --
Issuance of common stock to Hawk USA 2,737,500 --
Issuance of option to former director 102,000 --
Joint venture costs 27,889 --
------------- ------------
$ 4,967,389 $ --
============= ============
10
In a news release dated October 8, 2003, AfriOre announced that it had
commissioned the first drillhole of an initial three drillhole program and that
the initial drillhole will take some three months to complete. The data obtained
from the three drillholes will be used to calculate factors for the remaining
drillhole program at the FSC Project. Due to the fact that the exploration began
so late in the quarter, the LLC did not have sufficient data to determine what a
reasonable amortization basis for the intangible asset would be (exploration
agreement). Based on future information, a determination will be made on an
amortization period for the intangible asset.
NOTE 5 - DISCONTINUED OPERATIONS
In December 2002, our Board of Directors authorized a plan to sell our ASB to
key employees of that division. The ASB publishes traditional accounting and
financial management software for small and medium sized businesses, farms and
ranches throughout North America. We acquired (through the acquisition of 3
companies) the ASB during the year ended December 31, 2001 for the purpose of
utilizing the business customer base to market other of our E-commerce products
and services. The ASB consisted of two accounting software applications
companies: Red Wing Business Systems, Inc. and Champion Business Systems, Inc.,
collectively referred to as "Red Wing." Also, during 2002, we determined to
abandon our E-commerce business after acquiring the rights to develop and market
hosted online document solution products. Therefore, once we abandoned the
E-commerce business model to focus on the hosted solutions business, the
accounting software business no longer fit within our business plan.
On April 30, 2003, we completed the sale of substantially all of the assets of
the ASB to key employees of that division (the "Purchaser"). The assets sold
consisted primarily of all intellectual property rights, cash, accounts
receivable, inventories, property and equipment, and customer contracts. The
Purchaser assumed substantially all the liabilities of the ASB incurred in the
ordinary course of the business consisting of trade payables, accrued expenses,
debt and liabilities arising from contractual obligations related to the ongoing
operations. In addition, the Purchaser paid us cash sufficient to discharge
outstanding debt that was incurred during 2001 to acquire the ASB. The
shareholders of the Company approved the sale at a special meeting on April 29,
2003.
The following are condensed consolidated statements of discontinued operations
for the:
Three Months Ended Sept. 30, Nine Months Ended Sept. 30,
---------------------------- ----------------------------
2003 2002 2003 2002
---------- ------------- ----------- -----------
Revenues $ -- $ 964,488 $ 1,491,059 $ 2,982,350
-------- ----------- ----------- -----------
Operating Expenses:
Cost of goods sold -- 252,672 371,971 973,741
Selling, general and administrative -- 447,482 617,417 1,954,507
Depreciation and amortization -- 415,111 63,848 1,236,376
Product development -- 194,156 231,243 276,830
Loss on impairment of goodwill -- -- -- 2,131,391
-------- ----------- ----------- -----------
Total operating expenses -- 1,309,421 1,284,479 6,572,845
-------- ----------- ----------- -----------
Income (loss) from discontinued operations -- (344,933) 206,580 (3,590,495)
Other expense -- (76,322) (145,779) (234,494)
-------- ----------- ----------- -----------
Net income (loss) from discontinued operations $ -- $ (421,255) $ 60,801 $(3,824,989)
======== =========== =========== ===========
11
Assets and liabilities of the ASB consisted of the following at December 31,
2002:
Cash $ 526,447
Accounts receivable, net 176,370
Inventories 46,438
Property and equipment, net 119,561
Acquired software developed, net 492,170
Goodwill, net 1,318,260
Other intangibles, net 869,927
Other assets 40,568
-------------
Total assets $ 3,589,741
-------------
Accounts payable 81,064
Accrued expenses 244,360
Deferred revenue 1,774,491
Notes payable 1,582,904
=============
Total liabilities $ 3,682,819
-------------
Net liabilities of operations of discontinued
Accounting Software Business $ (93,078)
=============
With the completion of the sale of the ASB on April 30, 2003, all assets and
liabilities listed above were transferred to the Purchaser.
NOTE 6 - MINORITY INTEREST IN ACTIVE HAWK MINERALS LLC
As a 50% owner in the joint venture LLC with Hawk USA, we will be sharing in the
rights from mineral exploration projects being operated by AfriOre in the FSC
Project area of South Africa. Our ownership is based on cash contributions that
will total $2,100,000. Hawk USA has contributed its interest in the Heads of
Agreement, as well as its interest in the "Oxide Zones" on its Holdsworth
Property near Wawa, Ontario, Canada.
We have a "Buyout Option" in which we can acquire Hawk USA's 50% interest in the
LLC by issuing Hawk USA 2,500,000 of unregistered common shares, on or before
October 6, 2003. Hawk USA subsequently extended the exercise date of the Buyout
Option until November 7, 2003, and on that date, we exercised such option.
Based on our 50% ownership and the Buyout Option we have in the LLC, we have
consolidated the financial statements, as of September 30, 2003, of Active Hawk
Minerals, LLC into our own with a minority interest presented for the 50% owned
by Hawk USA.
NOTE 7 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Nine Months Ended September 30,
2003 2002
----------- -----------
Cash paid for interest $ -- $ 58,553
Non-cash financing and investing activities:
Common stock issued in exchange for stock subscription receivable $ -- $ 2,025,000
Conversion of preferred stock into common stock $ -- $ 365,000
Conversion of notes payable into common stock $ -- $ 348,757
Conversion of accrued wages into common stock $ 56,529 $ --
Cancellation of stock subscription receivable $ 2,000,000 $ --
Conversion of accounts payable into common stock $ 250,000 $ --
Issuance of common stock and warrant for investment
in Active Hawk Minerals, LLC $ 2,839,500 $ --
12
NOTE 8 - SUBSEQUENT EVENTS
On October 9, 2003, the Company's Board of Directors approved an extension on
the expiration of our 690,000 publicly traded redeemable warrants until May 31,
2004 from the previous extended date of November 28, 2003.
In October 2003, we completed a private placement of 10,190,000 units of our
securities, each unit consisting of one share of common stock and a one-year
warrant to purchase one-half of one share of common stock at a price of $0.75
per share. The units were sold at a price of $0.25 per unit, resulting in gross
proceeds of $2,547,500 before agent commissions and other offering related
expenses.
On November 7, 2003, the Company exercised its Buyout Option with respect to the
joint venture. Pursuant to the terms of the Buyout Option, the Company issued
2,500,000 shares of its common stock in exchange for Hawk USA's 50% interest in
the joint venture.
NOTE 9 - LEGAL PROCEEDINGS
On June 19, 2003, we were named as a defendant in a lawsuit by Jack A. Johnson,
who served as our President and CEO until leaving the Company to accept
employment with Stellent, Inc., following the sale to Stellent of our hosted
solutions business. Mr. Johnson's Complaint asserts claims for breach of
contract and seeks damages in excess of $50,000. We have denied all liability
and are vigorously defending against Mr. Johnson's claims. The matter is
currently in the discovery phase. We are unable to state, with any degree of
certainty, the probable outcome of this matter.
As reported in the Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 2003, the Company was a defendant in two separate and unrelated actions
brought in District Court, City and County of Denver, Colorado. One such action
was a proceeding brought by Farmers State Bank of Ft. Morgan, Colorado, in which
is was alleged that the Company was liable to the plaintiff as a result of its
guaranty of certain secured debt obligations of one of Meteor Marketing, Inc.,
one of the Company's former subsidiaries. In October 2003, the parties reached a
settlement of such litigation and filed with the court a stipulation for
dismissal without prejudice. Pursuant to such settlement, the Company was not
obligated to make any payments to the plaintiff, although the Company remains
contingently liable pursuant to the guaranty.
The other legal proceeding venued in District Court in Denver, Colorado that was
described in the Company's most recent Quarterly Report on Form 10-Q involved an
action brought by Timothy L. White against the Company and Meteor Marketing,
Inc. in which the plaintiff alleged that the Company was liable in the amount of
$102,750 for certain obligations of Meteor Marketing as a result of an April
1999 guaranty. As previously reported by the Company, the plaintiff obtained a
default judgment against the Company. On October 9, 2003, the action was
dismissed and such default judgment was vacated for improper service of process.
Mr. White and Meteor Marketing subsequently entered into a forbearance agreement
with respect to Meteor Marketing's outstanding obligations. Although, to the
Company's knowledge, no attempt has since been made by the plaintiff to
re-commence the action, in the event Meteor Marketing breaches or otherwise
defaults upon its obligations under the forbearance agreement, Mr. White may
again seek to hold the Company liable pursuant to its guaranty.
On May 15, 2003, Bobby Abrams filed suit against Red Wing Business Systems, Inc.
and Champion Business Systems, Inc. (collectively "Red Wing") our wholly owned
subsidiaries, in the amount of $100,000, relating to an accounting software
upgrade for his personal business. We settled the litigation with a payment in
the amount of $1,750 made to Mr. Abrams and on August 19, 2003, we received
notice of a settlement agreement and mutual release, whereby the action was
dismissed with prejudice as to all of the parties.
13
WITS BASIN PRECIOUS MINERALS INC.
(f/k/a ACTIVE IQ TECHNOLOGIES, INC.)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following management's discussion and analysis of financial condition and
results of operations should be read in connection with the accompanying
unaudited condensed consolidated financial statements and related notes thereto
included elsewhere in this report and the audited consolidated financial
statements and notes thereto included in our Form 10-K for the fiscal year ended
December 31, 2002.
OVERVIEW
Wits Basin Precious Minerals Inc., formerly Active IQ Technologies, Inc., a
Minnesota corporation, ("we," "us," "our," "its" or the "Company") is a junior
gold exploration company. On June 26, 2003, we entered into a joint venture with
Hawk Precious Minerals USA, Inc., a Minnesota corporation and wholly owned
subsidiary of Hawk Precious Minerals Inc., (a corporation organized under the
laws of the Canadian Province of Ontario) for the exploration of gold minerals
in the Republic of South Africa. The joint venture, named Active Hawk Minerals,
LLC (a Minnesota limited liability company), was created to pursue the mineral
rights to the FSC Project ("FSC") area in South Africa held by Kwagga Gold
(Proprietary) Limited ("Kwagga"). Mineral rights are in the form of exclusive,
notarized Prospecting Contracts applied for and/or issued by the State and
various option agreements with private owners over a land package totaling
approximately 269,000 acres. The area has excellent infrastructure, is easily
accessible, has limited environmental issues, has no known indigenous land
claims, and a provision has been made to convert the rights under the new
Minerals and Petroleum Development Act of South Africa. Kwagga is a wholly owned
subsidiary of AfriOre International (Barbados) Ltd. ("AfriOre"). AfriOre is a
coal producer and a precious minerals exploration company with offices in
Johannesburg, South Africa and is the operator of the project. We believe the
FSC area has the potential for containing Witwatersrand-type gold
mineralization. The historic Witwatersrand basin is host to the world's largest
reserves of gold. It has produced over 1.5 billion ounces of gold during the
past 117 years.
Prior to April 30, 2003, we provided accounting software through our Accounting
Software Business ("ASB") and until March 14, 2003, we provided
industry-specific solutions for managing, sharing and collaborating on business
information on the Internet though our Hosted Solutions Business ("HSB"). In
December 2002, our Board of Directors authorized a plan to sell the ASB. As a
result of the formal plan, the results of operations have been reported as
discontinued operations (the "Discontinued Operations") and previously reported
condensed consolidated financial statements have been restated for the three
months and nine months ended September 30, 2002. See Note 5 for further
discussion regarding the Discontinued Operations of ASB.
Subsequent to our decision to sell the ASB, we came to the conclusion that due
to current market conditions for capital funding of Internet opportunities, it
would be extremely unlikely for us to secure the financing necessary to fund our
HSB beyond the near term and thereby provide assurance to future customers of
our long-term viability. On March 14, 2003, we sold all of our assets related to
the HSB. See Note 3 for a further discussion regarding the HSB.
We were originally incorporated under Colorado law in December 1992 under the
name Meteor Industries, Inc. In April 2001, in conjunction with our merger with
activeIQ Technologies Inc., we reincorporated under Minnesota law and changed
our name to Active IQ Technologies, Inc. On July 9, 2003, following the
formation of our joint venture with Hawk Precious Minerals USA, Inc., we
changed our name to Wits Basin Precious Minerals Inc. in order to further
associate our new business model with our corporate name. Presently, our only
business model involves sharing in the rights of mineral exploration,
specifically, in search of new goldfields.
Our principal office is located at 800 Nicollet Mall, Suite 2690, Minneapolis,
Minnesota 55402. Our telephone number is (612) 664-0570 and our Internet address
is www.witsbasin.com. Our common stock trades on the Over-
14
the-Counter Bulletin Board ("OTCBB") under the symbol WITM. Prior to August 20,
2003, our common stock's OTCBB trading symbol was AIQT.
RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2003
COMPARED TO THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2002.
Revenues
Revenues for the three months ended September 30, 2003 were $0 compared to
$108,233 for the same period in 2002. The 2002 revenues of $108,233 were
generated by our HSB.
Revenues for the nine months ended September 30, 2003 were $132,455 compared to
$377,792 for the same period in 2002. All of the 2003 revenues were generated by
our HSB, whereas, the 2002 revenues were generated as follows: our HSB generated
$331,018, and our former E-commerce model, called the Epoxy Network, generated
$46,774. We sold our rights to the E-commerce model in 2002.
Since the completion of the sale of our HSB during the first quarter of 2003 and
the reclassification of our ASB to Discontinued Operations, we do not anticipate
having any future revenues until an economic mineral deposit is discovered or
unless we make further acquisitions or complete other mergers or joint ventures
with business models that produce such results. We anticipate that our success
in providing shareholder value is directly connected to the performance and
discoveries made in the exploration for new goldfields in the FSC Project area.
Operating Expenses
Cost of goods sold for the three months ended September 30, 2003 were $0
compared to $177,738 for the same period in 2002. Cost of goods sold for the
nine months ended September 30, 2003 were $35,354 compared to $378,681 for the
same period in 2002. These costs include hosting fees and royalty payments due
under the license agreement of the HSB. At this time, we do not anticipate
incurring any more costs associated with sales, unless in the future, we add a
business model with such components of operating expense.
Selling, general and administrative expenses were $135,491 for the three months
ended September 30, 2003 as compared to $716,238 for the same period in 2002.
Selling, general and administrative expenses for the nine months ended September
30, 2003 were $645,743 as compared to $2,749,265 for the same period in 2002.
These large reductions show the effect of the sale of all of our operating
assets during the first half of 2003. We anticipate the rate of spending for the
fourth quarter pertaining to selling, general and administrative expenses to
approximate the third quarter level.
Exploration expenses relate to the expenditures being reported to Active Hawk
Minerals LLC, on the work-in-process from the project operator, AfriOre, at the
FSC site. AfriOre made an announcement on October 8, 2003, of their commencement
of the first of three drillholes.
Depreciation expense of property and equipment for the three months ended
September 30, 2003 was $0 compared to $32,638 for the same period in 2002.
Depreciation expense of property and equipment for the nine months ended
September 30, 2003 was $8,935 compared to $111,514 for the same period in 2002.
The large decreases reflect the overall decrease in our fixed asset base. With
the completion of the sale of the HSB and ASB, we no longer have any depreciable
assets and until such time as we make capital expenditures for new property or
equipment, we do not expect to record any depreciation expense in future
quarters. Our only amortization expense is reported in the Discontinued
Operations as detailed below.
During the three months ended September 30, 2003, we had $0 loss on disposal of
assets as compared to $3,894 for the same period in 2002. During the nine months
ended September 30, 2003, we had $0 loss on disposal of assets as compared to
$101,319 for the same period in 2002. The 2002 losses primarily represent the
closing of the Epoxy Network, our former E-commerce model, office located in Las
Vegas and the sale of older computer hardware in
15
preparation of the HSB model.
Other Income and Expenses
Our other income and expense consists of interest and dividend income, other
income, interest expense, and the loss on prepaid royalties. Interest income for
the three months ended September 30, 2003 was $175 compared to $23,862 for the
same period in 2002. Interest income for the nine months ended September 30,
2003 was $25,323 compared to $84,620 for the same period in 2002. The interest
income we reported for 2003 was primarily earned from a federal income tax
refund filed with the IRS. The interest and dividend income we reported for 2002
was related equally to portfolio interest and the interest accrued on stock
subscription receivables. For the nine months ended September 30, 2002, we
recorded an interest expense of $5,456 related to a short term note payable.
For the nine months ended September 30, 2003, we recorded $150,000 of other
income for referral fees for our sales efforts in connection with customers that
were not candidates for our online document management hosted solution. We
recorded $20,000 of other income for the nine months ended September 30, 2002,
when we granted the non-exclusive rights to use and distribute our E-commerce
business to an unrelated third party.
For the nine months ended September 30, 2003, we had a loss on prepaid royalties
$434,895 of other expense related to the sale of our HSB to Stellent, Inc.,
which occurred in March 2003. The remaining balance of the prepaid royalties was
expensed and netted together with the assets and liabilities of the HSB sold in
the transaction.
Income Tax Refund
We filed an amended Federal Income Return on prior Non-Operating Losses (NOL's)
and received a tax refund in the amount of $243,920 during the quarter ended
June 30, 2003. No further refunds will be available based on current tax law for
the periods previously amended.
Discontinued Operations
The following are condensed consolidated statements of discontinued operations
for the:
Three Months Ended Sept. 30, Nine Months Ended Sept. 30,
---------------------------- ----------------------------
2003 2002 2003 2002
---------- ------------- ----------- -----------
Revenues $ -- $ 964,488 $ 1,491,059 $ 2,982,350
-------- ----------- ----------- -----------
Operating Expenses:
Cost of goods sold -- 252,672 371,971 973,741
Selling, general and administrative -- 447,482 617,417 1,954,507
Depreciation and amortization -- 415,111 63,848 1,236,376
Product development -- 194,156 231,243 276,830
Loss on impairment of goodwill -- -- -- 2,131,391
-------- ----------- ----------- -----------
Total operating expenses -- 1,309,421 1,284,479 6,572,845
-------- ----------- ----------- -----------
Income (loss) from discontinued operations -- (344,933) 206,580 (3,590,495)
Other expense -- (76,322) (145,779) (234,494)
-------- ----------- ----------- -----------
Net income (loss) from discontinued operations $ -- $ (421,255) $ 60,801 $(3,824,989)
======== =========== =========== ===========
Liquidity and Capital Resources
We have funded our operations and satisfied our capital requirements primarily
through the sale of our business assets and the sale of securities. Net cash
provided by operating activities was $215,928 for the nine months ended
16
September 30, 2003, compared to net cash used by operating activities of
$2,123,371 for the same period in 2002.
We had working capital deficit of $158,681 at September 30, 2003, compared to
working capital deficit of $509,372 at December 31, 2002. Cash and equivalents
were $17,325 at September 30, 2003, representing an increase of $4,114 from the
cash and equivalents of $13,211 at December 31, 2002.
On March 14, 2003, we sold all of the assets relating to our HSB to Stellent,
Inc. for $650,000 cash, the reimbursement of transaction-related expenses
incurred by us in the amount of $150,000, and the assumption of certain
obligations, liabilities and employees of the Company. The transaction was not
subject to shareholder approval. With the completion of this sale, we no longer
operate in the online document management business.
On April 30, 2003, we completed the sale of substantially all of the assets of
the ASB to key employees of that division (the "Purchaser"). The assets sold
consisted primarily of all intellectual property rights, cash, accounts
receivable, inventories, property and equipment, and customer contracts. The
Purchaser assumed substantially all the liabilities of the ASB incurred in the
ordinary course of the business consisting of trade payables, accrued expenses,
debt and liabilities arising from contractual obligations related to the ongoing
operations. In addition, the Purchaser paid us cash sufficient to discharge
outstanding debt that was incurred during 2001 to acquire the ASB.
On June 26, 2003, we began our participation in a joint venture with Hawk
Precious Minerals USA, Inc., ("Hawk USA") a Minnesota corporation and wholly
owned subsidiary of Hawk Precious Minerals Inc., (a corporation organized under
the laws of the Canadian Province of Ontario), for the exploration of gold
minerals in the Republic of South Africa. The joint venture, named Active Hawk
Minerals, LLC (the "LLC") a Minnesota limited liability company, was created to
pursue the mineral rights to the FSC Project area in South Africa held by Kwagga
Gold (Proprietary) Limited ("Kwagga"). Kwagga is a wholly owned subsidiary of
AfriOre International (Barbados) Ltd. ("AfriOre"). AfriOre is a coal producer
and a precious minerals exploration company with offices in Johannesburg, South
Africa and is the operator of the project.
Through a Joint Venture and Joint Contribution Agreement (the "Agreement"), the
Company and Hawk USA have both made certain contributions to the LLC in exchange
for equal ownership in the LLC. We made an initial $500,000 contribution as
specified under the Agreement. This was the first of three contributions that
will total $2,100,000. The balance of the remaining two contributions was
originally scheduled as follows: on September 27, 2003, $1,000,000 was due, and
on November 11, 2003, $600,000 was due. The September 27, 2003 contribution was
subsequently extended to October 15, 2003, and has been made. The terms of the
November 11, 2003 contribution were amended to allow the contribution to be paid
in 2 equal payments of $300,000 on each of November 11, 2003 and April 30, 2004.
In addition, we have a "Buyout Option" in which we can acquire Hawk USA's 50%
interest in the LLC by issuing Hawk USA 2,500,000 common shares, on or before
October 6, 2003. Hawk USA subsequently extended the exercise date of the Buyout
Option until November 7, 2003, and on that date, we exercised such option.
We anticipate that the existing sources of liquidity will not provide cash to
fund operations for the next twelve months. We will continue our attempt to
raise additional capital. Some of the possibilities available to us are through
private equity transactions and to develop a credit facility with a lender or
the exercise of options and warrants. There can be no assurance that additional
capital will be available on terms acceptable to us or on any terms whatsoever.
In the event that we are unable to obtain additional capital, we would be forced
to reduce operating expenditures and/or cease operations altogether.
RISKS FACTORS
OUR COMMON STOCK HAS BEEN DELISTED FROM THE NASDAQ SMALL CAP MARKET.
Since our common stock has been delisted from the Nasdaq SmallCap Market,
trading, if any, in our common stock will be conducted in the over-the-counter
markets in the so-called "pink sheets" or the "OTC Bulletin Board."
Consequently, the liquidity of our common stock is impaired, not only in the
number of shares which can be bought
17
and sold, but also through delays in the timing of the transactions, reduction
in the coverage of our securities by security analysts and the news media, and
lower prices for our securities than might otherwise prevail. In addition, our
common stock has become subject to certain rules of the Securities and Exchange
Commission relating to "penny stocks." These rules require broker-dealers to
make special suitability determinations for purchasers other than established
customers and certain institutional investors and to receive the purchasers'
prior written consent for a purchase transaction prior to sale. Consequently,
these "penny stock rules" may adversely affect the ability of broker-dealers to
sell our common stock and may adversely affect stockholders' ability to sell
shares of our common stock in the secondary market.
WE HAVE SOLD OUR ONLY CONTINUING OPERATIONS REVENUE SOURCE AND SUBSTANTIALLY ALL
OF OUR ASSETS
On March 14, 2003, we executed a definitive purchase agreement with Stellent,
Inc. and completed the sale of the Hosted Solutions Business, which was our only
source of revenue from continuing operations. We received $650,000 in cash for
the assets used in the Hosted Solutions Business and we were reimbursed $150,000
for expenses we incurred as a result of the transaction.
On April 30, 2003, we completed the sale of substantially all of the assets of
the Accounting Software Business to key employees of that division. Our original
reason for acquiring these companies was to utilize the businesses' customer
base in order to market to those customers our E-commerce products and services.
We concluded that these customers would not be prospects for any type of
Web-based, hosted solution products or services. Therefore, since we had already
sold the E-commerce to focus on the Hosted Solutions Business, the Accounting
Software Business no longer fit our business plan. Furthermore, the results of
operations have been reported as discontinued operations, providing no future
benefit to our ongoing business plan.
Accordingly, we do not anticipate having any future revenues until an economic
mineral deposit is discovered or unless we make further acquisitions or complete
other mergers or joint ventures with business models that produce such results.
We anticipate that our success in providing shareholder value is directly
connected to the performance and discoveries made via the FSC Project in South
Africa.
WE ANTICIPATE INCURRING LOSSES FOR THE FORESEEABLE FUTURE.
For the nine months ended September 30, 2003, we had a net loss of $285,316, and
since our inception through September 30, 2003, we have incurred an aggregate
net loss of $23,244,306. As of September 30, 2003, we had total assets of
$5,188,048. We expect operating losses to continue for the foreseeable future.
There can be no assurance that we will ever be able to operate profitably.
WE WILL REQUIRE FUTURE FINANCING.
Additional financing will be needed in order to fund beyond the initial 5 to 7
drillhole program at the FSC Project, to fund exploration of the Holdsworth
Property near Wawa, Ontario, Canada, or to potentially make further acquisitions
or complete other mergers or joint ventures with other business models. We
cannot guarantee that the additional financing will be available when needed.
Our activities will be initially directed to the search for and the development
of new mineral deposits, and significant capital investment will be required to
achieve commercial production from successful exploration efforts. There is no
assurance that we will have, or be able to raise, the required capital to
continue these activities.
FLUCTUATIONS IN GOLD PRICES
Our development efforts and the profitability of our operations, once commenced,
will be significantly affected by changes in the market price of gold. Mine
production and the willingness of third parties such as central banks to sell or
lease gold affect the supply of gold. Demand for gold can be influenced by
economic conditions, attractiveness as an investment vehicle and the relative
strength of the US dollar and local investment currencies. Other factors include
the level of interest rates, exchange rates, inflation and political stability.
The aggregate effect of these
18
factors is impossible to predict with accuracy. Gold prices are also affected by
worldwide production levels. In addition, the price of gold has on occasion been
subject to very rapid short-term changes due to speculative activities.
Fluctuations in gold prices may adversely affect our financial performance and
results of operations.
UNCERTAINTY OF RESERVE AND MINERAL RESOURCE ESTIMATES
At this time, we cannot make any estimates regarding probable ore reserves and
mineral resources; and therefore, no assurance can be given that any size of
reserves or grades of reserves will be realized. The ore grade actually
discovered by us and if recoverable, may differ from the reserves and mineral
resources already discovered and recovered by others in the same region of our
planned exploration. Production, if begun, could differ dramatically for the
following reasons:
- mineralization or formations could be different from those predicted
by drilling, sampling and similar examinations;
- increases in mining operating costs and processing costs could
adversely affect ore reserves;
- the grade of the ore reserves may vary significantly from time to time
and there is no assurance that any particular level of gold may be
recovered from the ore reserves; and
- declines in the market price of gold may render the mining of some or
all of our ore reserves uneconomic.
Any of these factors could require us to significantly alter operations or
increase our costs. Short-term factors, such as the need for the additional
development of a deposit or the processing of new or different grades, may
impair our profitability. Should the market price of gold fall, we could be
required to materially write down our investment in mining properties or delay
or discontinue production or the development of new projects.
NATURE OF MINERAL EXPLORATION AND MINING
The exploration for and development of mineral deposits involves significant
financial risks, which even experience and knowledge may not eliminate,
regardless of the amount of careful evaluation applied to a process. While the
discovery of an ore body may result in substantial rewards, few properties are
ultimately developed into producing mines. Major expenses may be required to
establish ore reserves, to develop metallurgical processes and to construct
mining and processing facilities at a site. It is impossible to ensure that the
current programs planned by us will result in a profitable commercial mining
operation.
Our operations are subject to all of the hazards and risks normally incident to
exploration, development and production of gold, any of which could result in
damage to life or property, environmental damage and possible legal liability
for any or all damage. Our activities may be subject to prolonged disruptions
due to weather conditions, depending on the location of operations in which we
have interests. Hazards, such as unusual or unexpected formations, rock bursts,
pressures, cave-in, flooding or other conditions may be encountered in the
drilling and removal of material. While we may obtain insurance against certain
risks, in such amounts as we consider adequate, the nature of these risks are
such that liabilities could exceed policy limits or could be excluded from
coverage. There are also risks against which we cannot insure or against which
we may elect not to insure. The potential costs which could be associated with
any liabilities not covered by insurance or in excess of insurance coverage or
compliance with applicable laws and regulations, may cause substantial delays
and require significant capital outlays, adversely affecting our earnings and
competitive position in the future and, potentially, our financial position and
results of operation.
Whether a gold deposit will be commercially viable depends on a number of
factors, some of which are: the particular attributes of the deposit, such as
its size and grade; proximity to infrastructure; financing costs; and
governmental regulations, including regulations relating to prices, taxes,
royalties, infrastructure, land use, importing and exporting of gold and
environmental protection. The effect of these factors cannot be accurately
predicted, and the combination of any of these factors may result in our not
receiving an adequate return on invested capital.
19
CAPITAL INVESTMENT
Mineral exploration involves financial risk and capital investment and our only
means of acquiring investment capital will be by the sale of equity shares or
the rights to acquire equity shares. Other than the interest earned on our
short-term investments or further financing, we have no other source of funds to
engage in additional exploration and development, which may be necessary to
exploit our properties.
LICENSES AND PERMITS
Our operations require licenses and permits from various governmental
authorities. We will endeavor to seek all necessary licenses and permits under
applicable laws and regulations with respect to our mining and exploration
properties. There can be no guarantee that we will be able to obtain or maintain
all necessary licenses and permits, that may be required to explore and develop
our properties, to commence construction or the operation of mining facilities
and properties under exploration or to development or to maintain continued
operations that economically justify the cost.
COMPETITION
The mineral exploration and mining business is competitive in all of its phases.
There is a limited supply of desirable mineral properties available for claim
staking, lease or other acquisition in the areas where we contemplate conducting
exploration activities. We compete with numerous other companies and
individuals, including competitors with greater financial, technical and other
resources than we possess, in the search for and the acquisition of attractive
mineral properties. Our ability to acquire properties in the future will depend
not only on our ability to develop our present properties, but also on our
ability to select and acquire suitable producing properties or prospects for
mineral exploration. There is no assurance that we will continue to be able to
compete successfully with our competitors in acquiring such properties or
prospects.
POLITICAL RISK
We believe that governments in the countries in which we currently operate and
explore support the development of their natural resources by foreign companies.
However, there is no assurance that future political and economic conditions in
these countries will not result in their governments adopting different policies
respecting foreign ownership of mineral resources, taxation, rates of exchange,
environmental protection, labor relations, repatriation of income or return of
capital. The possibility that a future government in any of these countries may
adopt substantially different policies, which might extend to the expropriation
of assets, cannot be ruled out.
TITLE MATTERS
We expect that we will have good and proper right, title and interest in and to
the mining claims we currently respectively own, have optioned or intend to
acquire, of the mining claims that we will explore and develop, subject to the
description of the properties appearing elsewhere in this information. No
assurance, however, can be given that such claims are not subject to prior
unregistered agreements or interests or undetected claims or interests, which
could be material and adverse on us. The failure to comply with all applicable
laws and regulations, including failure to pay taxes and to carry out and file
assessment work, may invalidate title to portions of the properties where the
mineral rights are held by us.
GOVERNMENT REGULATION AND ENVIRONMENTAL MATTERS
Our proposed activities are subject to extensive federal, provincial and local
laws and regulations controlling not only the exploration for and mining of
mineral properties, but also the possible effects of such activities upon the
environment. Permits from a variety of regulatory authorities are required for
many aspects of mine operation and reclamation. Future legislation and
regulations could cause additional expense, capital expenditures, restrictions
and delays in the development of our properties or optioned properties, the
extent of which cannot be predicted. In the context of environmental permitting,
including the approval of reclamation plans, we must comply with known
standards, existing laws and regulations which may entail greater or lesser
costs and delays depending on the nature
20
of the activity to be permitted and how stringently the regulations are
implemented by the permitting authority. It is possible that the costs and
delays associated with the compliance of such laws, regulations and permits
could become such that we would not proceed with the development or operation of
a mine. While we are not presently aware of any material environmental
constraints affecting the development of our properties that would preclude
their economic development or operation, the manner in which environmental
legislation is evolving indicates there could be stricter standards and
enforcement, increased fines and penalties for non-compliance, more stringent
environmental assessments of proposed projects and a heightened degree of
responsibility for companies and their officers, directors and employees. There
can be no assurance that future changes to environmental regulation, if any,
will not adversely affect our operations. Environmental hazards may exist on the
properties in which we hold interests that have been caused by previous or
existing owners or operators. Furthermore, compliance with environmental
reclamation, closure and other requirements may involve significant costs and
other liabilities.
PERFORMANCE OF KEY PERSONNEL
We are dependent on a relatively small number of key employees and consultants,
the loss of any could have an adverse effect on us. We currently do not have key
person insurance on these individuals.
CONFLICTS OF INTEREST
Certain directors and officers of ours may serve as directors or officers of
other companies, or have shareholdings in other companies, involved in natural
resource exploration and development, and to the extent that such other
companies may participate in ventures in which we may participate, the directors
of the Company may have a conflict of interest in negotiating and concluding
terms respecting the extent of such participation.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk Sensitivity
We do not enter into contracts for speculative purposes, nor are we a party to
any leveraged instruments. There has been no material change in our market risks
associated with debt obligations during the quarter ended September 30, 2003.
ITEM 4. CONTROLS AND PROCEDURES
Under the supervision and with the participation of the company's management,
including the Chief Executive Officer and Chief Financial Officer, the company
conducted an evaluation of the effectiveness of the design and operation of its
disclosure controls and procedures, as such term is defined under Exchange Act
Rules 13a--15(e) and 15d--15(e), as of September 30, 2003. Based on that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that the design and operation of these disclosure controls and procedures were
effective. There have been no significant changes in the company's internal
controls or in other factors that could significantly affect these controls
subsequent to the date of the evaluation referenced above, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On June 19, 2003, we were named as a defendant in a lawsuit by Jack A. Johnson,
who served as our President and CEO until leaving the Company to accept
employment with Stellent, Inc., following the sale to Stellent of our hosted
solutions business. Mr. Johnson's Complaint asserts claims for breach of
contract and seeks damages in excess of $50,000. We have denied all liability
and are vigorously defending against Mr. Johnson's claims. The matter is
currently in the discovery phase. We are unable to state, with any degree of
certainty, the probable outcome of this matter.
As reported in the Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 2003, the Company was a defendant in two separate and unrelated actions
brought in District Court, City and County of Denver, Colorado. One such action
was a proceeding brought by Farmers State Bank of Ft. Morgan, Colorado, in which
is was alleged that the Company was liable to the plaintiff as a result of its
guaranty of certain secured debt obligations of one of Meteor Marketing, Inc.,
one of the Company's former subsidiaries. In October 2003, the parties reached a
settlement of such litigation and filed with the court a stipulation for
dismissal without prejudice. Pursuant to such settlement, the Company was not
obligated to make any payments to the plaintiff, although the Company remains
contingently liable pursuant to the guaranty.
The other legal proceeding venued in District Court in Denver, Colorado that was
described in the Company's most recent Quarterly Report on Form 10-Q involved an
action brought by Timothy L. White against the Company and Meteor Marketing,
Inc. in which the plaintiff alleged that the Company was liable in the amount of
$102,750 for certain obligations of Meteor Marketing as a result of an April
1999 guaranty. As previously reported by the Company, the plaintiff obtained a
default judgment against the Company. On October 9, 2003, the action was
dismissed and such default judgment was vacated for improper service of process.
Mr. White and Meteor Marketing subsequently entered into a forbearance agreement
with respect to Meteor Marketing's outstanding obligations. Although, to the
Company's knowledge, no attempt has since been made by the plaintiff to
re-commence the action, in the event Meteor Marketing breaches or otherwise
defaults upon its obligations under the forbearance agreement, Mr. White may
again seek to hold the Company liable pursuant to its guaranty.
On May 15, 2003, Bobby Abrams filed suit against Red Wing Business Systems, Inc.
and Champion Business Systems, Inc. (collectively "Red Wing") our wholly owned
subsidiaries, in the amount of $100,000, relating to an accounting software
upgrade for his personal business. We settled the litigation with a payment in
the amount of $1,750 made to Mr. Abrams and on August 19, 2003, we received
notice of a settlement agreement and mutual release, whereby the action was
dismissed with prejudice as to all of the parties.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
31.1 Certification of CEO pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of CFO pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
None.
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SIGNATURES
In accordance with the requirements of the Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
WITS BASIN PRECIOUS MINERALS INC.
(f/n/a ACTIVE IQ TECHNOLOGIES, INC.)
By: /s/ H. Vance White
----------------------------------
H. Vance White
Chief Executive Officer
By: /s/ Mark D. Dacko
----------------------------------
Mark D. Dacko
Chief Financial Officer
Date: November 12, 2003
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