UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September, 30 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________________ to __________________________
Commission file number 0-20430
AZCO MINING INC.
--------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 84-1094315
- --------- -----------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
7239 N. El Mirage Road
Glendale, Arizona 85307
(Address of principal executive offices)
(Zip Code)
(623)935-0774
(Registrant's telephone number, including area code)
(Former name,former address and former fiscal year,if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ____
------
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
The Company had 32,159,646 shares of Common Stock outstanding as of
November 12, 2002. AZCO MINING INC.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Page
Consolidated Balance Sheets 3
Consolidated Statements of Operations 4
Consolidated Statements of Cash Flows 5
Consolidated Statement of Stockholders' Equity 6
Notes to Interim Consolidated Financial Statements 7-14
AZCO MINING INC.
CONSOLIDATED BALANCE SHEETS
September June 30,
ASSETS 2002 2002
(Unaudited) (Audited)
Current assets:
Cash and cash equivalents $ 34,284 $ 884,647
Prepaids and other 279,235 179,225
Inventories (Note 3) 1,086,309 1,095,780
Total current assets 1,399,828 2,159,652
----------- ----------
Capital assets:
Mineral properties, plant & equipment, net (Note 2) 10,178,413 10,352,872
Capital assets 263,354 288,148
10,441,767 10,641,020
Restricted cash 190,400 190,400
----------- -----------
Total assets $12,031,995 $ 12,991,072
================ ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 574,722 $ 540,768
Notes payable (Note 4) 391,877 443,672
Accrued settlement obligation 240,000 586,000
1,206,599 1,570,440
Long term liabilities:
Accrued settlement obligation 360,000 444,900
Financing lease liability (Note 4) 2,018,534 1,975,650
Notes payable to related party (Note 4) 656,315 615,068
Other liabilities 114,122 275,127
3,148,971 3,310,745
---------------- ---------------
Total liabilities 4,355,570 4,881,185
---------------- ---------------
Contingencies and commitments (Note 5)
Stockholders' equity
Common stock: $.002 par value, 100,000,000 shares
authorized; 32,159,646 shares outstanding as of 64,319 62,304
September 30, 2002 and 31,151,121 shares
outstanding as of June 30, 2002
Additional paid-in capital 31,972,106 30,951,523
Deficit (24,360,000) (22,903,940)
---------------- ---------------
7,676,425 8,109,887
---------------- ---------------
Total liabilities and stockholders' equity $12,031,995 $12,991,072
================ ===============
The accompanying notes are an integral part of these consolidated financial
statements.
AZCO MINING INC.
CONSOLIDATED STATEMENTS OF
OPERATIONS (Unaudited)
Three Months Ended
September 30,
--------------------------------
2002 2001
Sales 20,462 -
Operating costs and expenses
Production costs 537,034 244,917
General and administrative 567,314 141,389
Salaries 87,186 83,622
Exploration 15,227 47,866
Amortization & depreciation 50,070 32,730
Financing 28,000 0
Accretion of asset retirement obligation
(Note 7) 1,250 0
--------------- ---------------
Total operating costs and expenses 1,286,081 550,524
Operating loss $(1,265,619) $(550,524)
Other income/expense:
Interest expense (163,336) (21,430)
Interest income 2,995 803
--------------- ---------------
(160,341) (20,627)
--------------- ---------------
Loss before cumulative effect of accounting (1,425,960) (571,151)
change
Cumulative effect of accounting change, net 13,902 (0.02)
of taxes of $0 (Note 7)
--------------- ---------------
Net loss $(1,439,862) $(571,151)
=============== ===============
Basic loss per share before cumulative (0.04) (0.02)
effect of accounting change
Cumulative effect of accounting change 0 0
--------------- ---------------
Diluted loss per share before cumulative
effect of accounting change (0.04) (0.02)
Cumulative effect of accounting change 0 0
--------------- ---------------
Diluted loss per common share $ (0.04) $ (0.02)
=============== ===============
Weighted average common shares 31,870,011 30,050,621
=============== ===============
The accompanying notes are an integral part of these consolidated financial
statements.
AZCO MINING INC.
CONSOLIDATED STATEMENTS OF
CASH FLOWS (Unaudited)
Three Months Ended
September 30,
2002 2001
Cash flows from operating activities:
Net loss $(1,439,862) $(571,151)
Adjustments to reconcile net loss to net cash
used in operations:
Depreciation and amortization 50,070 32,730
Accretion of asset retirement obligation 1,250
Stock option compensation and other
non-cash expenses 363,000
Amortization of debt discount 132,336 52,474
Cumulative effect of accounting change 13,902
Changes in assets and liabilities, net:
Prepaid and other (109,820) 61,965
Inventories 9,471 (4,870)
Accounts payable and accrued liabilities 350,954 (131,763)
Accrued settlement obligation (124,900)
Net cash used in operating activities (753,599) (560,615)
------------- --------------
Cash flows from financing activities:
Proceeds from loan 0 400,000
Payments on notes payable (100,000) 0
Proceeds from sale of stock 0 150,000
Payments on capital lease obligations (17,164) 0
Proceeds from exercise of options 20,400 0
------------- --------------
Net cash (used in) provided by financing
activities: (96,764) 550,000
------------- --------------
Net decrease in cash and cash equivalents (850,363) (10,615)
Cash and cash equivalents at beginning of period 884,647 39,920
------------- --------------
Cash and cash equivalents at end of period $ 34,284 $29,305
============= ==============
The accompanying notes are an integral part of these consolidated financial
statements.
AZCO MINING INC.
CONSOLIDATED
STATEMENT OF
STOCKHOLDERS' EQUITY
(Unaudited)
Common
Stock Additional
paid-in
Shares Amount capital Deficit Total
Balance June 30, 2002 31,152,121 62,304 30,951,523 (22,903,940) 8,109,887
Increase in warrant value
(Note 4) 16,198 (16,198) 0
Common shares issued
(Note 6) 977,525 1,955 984,045 986,000
Exercise of options 30,000 60 20,340 20,400
Net loss (1,439,862) (1,439,862)
----------- ------- ----------- ------------ -----------
Balance September 30,
2002 32,159,646 64,319 31,972,106 (24,360,000) 7,676,425
=========== ======= =========== ============ ===========
The accompanying notes are an integral part of these consolidated financial
statements.
Azco Mining Inc.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 1. Basis of Presentation and Going Concern
The unaudited consolidated financial information presented herein has been
prepared in accordance with the instructions to Form 10-Q and does not include
all of the information and note disclosures required by generally accepted
accounting principles. Therefore, this information should be read in conjunction
with the consolidated financial statements and notes thereto included in the
Azco Mining Inc. ("Azco" or "the Company") Annual Report on Form 10-K for the
fiscal year ended June 30, 2002. This interim financial information reflects all
adjustments that are, in the opinion of management, necessary to a fair
statement of the results for the interim period.
The consolidated balance sheet as of June 30, 2002 included herein has been
derived from the audited consolidated balance sheet included in the Company's
annual report on Form 10-K for the year ended June 30, 2002, but does not
include all the disclosures required by generally accepted accounting
principals.
Azco Mining Inc. is a mining company incorporated in Delaware. Its general
business strategy is to acquire, explore and develop mineral properties. The
Company's principal assets are the 100% owned Black Canyon Mica Project in
Arizona and an interest in the Piedras Verdes Project in Sonora, Mexico.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue to operate as a going concern. The Company has
suffered recurring losses from operations and the Company will require
additional funds to continue operations. On November 4, 2002 the Company
temporarily ceased production at its Black Canyon Mine crushing and
concentrating facilities due to cash constraints. Production will start again
once adequate financing has been raised. On November 12, 2002 the Company's Form
S-1 Registration Statement, filed with the Securities and Exchange Commission in
regard to the Equity Line of Credit, became effective. The Company is now
eligible to, at our discretion, periodically issue and sell to Cornell Capital
Partners shares of common stock for a total purchase price of $5 million for a
period of up to two years after November 12, 2002, whichever comes first.
Management is actively seeking additional financing; however, there is no
assurance that these efforts will be successful or on terms acceptable to the
Company. These matters raise doubt about the Company's ability to continue as a
going concern. These consolidated financial statements do not include the
adjustments that would be necessary, including a provision for impairment of
plant and equipment which could be material, should the Company be unable to
continue as a going concern.
The Company will need a minimum of $2 million of additional funding during
fiscal 2003 to cover operating requirements. The Company is also seeking a
minimum of $1.5 million of funding for capital improvements to its Black Canyon
process facilities.
Azco Mining Inc.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Continued)
Note 2. Black Canyon Mica Project (Arizona)
During the quarter ended September 30, 2002, the sales of feldspathic sand into
the golf course and stucco markets began on a limited basis; in addition
production testing of mica-reinforced plastics for three potential vendors was
initiated. Funding will be necessary to advance the project further.
Detail of mica project mineral properties, plant and equipment is as follows:
September 30, June 30,
2002 2002
------------ ------------
Acquisition of mineral properties 2,219,996 2,219,996
Mining and processing plant and equipment 7,122,679 7,122,679
Development costs 943,704 1,104,966
Accumulated amortization (107,966) (94,769)
--------- --------
Total 10,178,413 10,352,872
---------- ----------
Detail of other capital assets is as follows:
September 30, June 30,
2002 2002
---- ----
Office building 152,997 152,997
Furniture and equipment 381,383 381,383
Vehicles 81,146 81,146
Accumulated depreciation (352,172) (327,378)
----------- ----------
Total 263,354 288,148
Note 3. Inventories
September 30, June 30,
2002 2002
---- ----
Broken ore 645,569 725,202
Mica work-in-process 331,640 277,378
Mica finished goods 93,200 93,200
Sand finished goods 15,900 0
--------- ---------
Total 1,086,309 1,095,780
-------------------------
Azco Mining Inc.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Continued)
Note 4. Notes payable, warrants and other financing
On October 12, 2001, the Company restructured its $800,000 loan agreement with
Mr. Olson the Company's Chairman, CEO and President. Mr. Olson agreed to extend
the note payable an additional year to March 15, 2003 in consideration for
700,000 warrants to purchase the Company's stock at an exercise price of $0.40.
The warrants vested in December 2001 and shall expire on October 12, 2003. In
addition, effective October 1, 2001, the interest rate payable on the $800,000
Olson loan was adjusted from prime plus 1% to 12% annually. In June 2002, the
loan was extended an additional year and Azco entered into a security agreement
with Mr. Olson, whereby Azco's assets secured the loan. The loan is currently
due on March 14, 2004.
On September 4, 2001, the Company received a one-year $100,000 loan, bearing
interest at 12% per annum, from Mr. Barrenachea, a shareholder. In connection
with this loan, the Company issued a warrant to purchase 125,000 shares of the
Company's common stock at $.40 per share. On September 4, 2002 the loan and the
warrants were extended an additional year under the same terms. The warrant is
exercisable through September 4, 2004. The increase of $16,198 in the fair value
of the warrant has been reflected as a current period accretion to
paid-in-capital.
On October 19, 2001, the Company received an additional one-year $100,000 loan,
bearing interest at 12% per annum, from Mr. Barrenachea. In connection with this
loan, the Company issued a warrant to purchase 125,000 shares of the Company's
common stock at $.40 per share. On October 19, 2002 the loan and the warrants
were extended an additional year under the same terms. The warrant is
exercisable through October 19, 2003
On December 3, 2001, the Company received an additional one-year $100,000 loan,
bearing interest at 12% per annum, from Mr. Barrenachea. In connection with this
loan, the Company issued a warrant to purchase 125,000 shares of the Company's
common stock at $.40 per share. The warrant vested in February 2002 and is
currently excercisable through December 3, 2002. Mr. Barrenachea and the Company
have agreed to extend the loan and the warrants an additional year under the
same terms through December 3, 2003.
In January 2002, Azco completed a financing lease transaction that yielded the
Company net proceeds of $2,842,500. Under the terms of the transaction, the
Company sold a 40 percent ownership in the Company's mica processing facility
located in Glendale, Arizona. Subsequently, Azco leased the property back for an
initial period of 10 years, with an option to repurchase the stake for 120
percent of the purchase price after the second year. The repurchase price of the
property increases by 10 percent of the purchase price each year the option
remains unexercised up to a maximum of 150 percent of the purchase price.
Payments for the first 6 months under the lease agreement are $30,000, for the
second 6 months they increase to $37,500 after which time they are $45,000 per
month.
Azco Mining Inc.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Continued)
In connection with this transaction, the Company issued a warrant to purchase
2,550,000 shares of the Company's common stock at $.50 per share. This warrant
vested in January 2002 and is exercisable through January 16, 2007.
The notes payable, financing lease and related warrants have been reflected in
the accompanying balance sheet at their relative fair values. The discount
associated with the notes payable and financing lease is being amortized over
the term of the respective instrument using an effective interest method.
The fair value of the warrants has been determined by the Company using the
Black Scholes valuation model and have been reflected as additional-paid in
capital.
Notes payable at September 30, 2002 consisted of the following:
Principal Unamortized Discount
- ------------------------------------------------- ------------------- --------------------
12% note due September 4, 2003 200,000 -
12% note due October 19, 2002 100,000 2,102
12% note due December 3, 2002 100,000 6,021
12% note due March 15, 2003 800,000 143,685
Total 1,200,000 151,808
- ------------------------------------------------- ------------------- --------------------
Financing lease 2,018,534 2,481,466
- ------------------------------------------------------------------------------------------
Note 5. Contingencies
Litigation
In July 2002, Azco entered into a settlement agreement regarding fees payable
under terminated management agreements with two of its former officers and
directors, Mr. Alan P. Lindsay and Mr. Anthony R. Harvey. Azco agreed to pay
each former director the sum of $350,000. The amount is to be paid in an initial
payment of $20,000 each, due upon the signing of the Agreement, and in monthly
payments of $10,000 thereafter, with the entire balance due within 24 months of
the date this Agreement is signed. In addition, Azco paid $24,898 representing
one half of the legal fees incurred by the former directors. Under the terms of
the agreement, Azco provided Harvey and Lindsay each with 150,000 shares of
common stock, which shares shall be unrestricted as allowed pursuant to Rule S-8
of the Rules of the Securities and Exchange Commission.
Azco Mining Inc.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Continued)
On January 22, 1999, the trustee (Petitioner) in bankruptcy proceedings against
Eagle River served a petition, in the Quebec Superior Court, District of Hull,
upon the Company in order to recover assets from the Company. The Petitioner
alleges that, through the Company's involvement with Eagle River in the Mali
Project, the Company is guilty of contractual breaches in excess of $3,400,000.
In management's opinion, this claim is unfounded although the eventual outcome
of the case is not yet determinable.
No accrual has been made for this claim because the Company does not believe it
is probable that the case will be determined against the Company.
On June 25, 2002 Azco received a demand for arbitration filed by iCapital
Corporation seeking $144,000 in relief due to failure to pay under a June 26,
2001 Financial Consulting Agreement. It is the position of Azco and its counsel
that the contract is void and it is unlikely that iCapital will prevail on their
claim.
Note 6. Capital Stock and Outstanding Options
In July 2002, the Company issued 300,000 shares of the Company's common stock in
conjunction with a settlement agreement reached in fiscal 2002 with two of its
former officers and directors. The Company did not receive any proceeds from
this issuance. The settlement amount was accrued at June 30, 2002.
In July 2002, the Company issued 430,000 shares of the Company's common stock in
conjunction with the consulting agreement with Pacifica Financial Group. The
Company did not receive any proceeds from this issuance. The Company has
reflected the value of this transaction of $363,000 as a component of general
and administrative expenses in its Statement of Operations.
In September 2002, the Company issued 247,525 shares of the Company's common
stock in conjunction with commitment fees due on the Equity Line of Credit
Agreement with Cornell Capital Partners LLC. The Company did not receive any
proceeds from this issuance. The fees were accrued at June 30, 2002.
Options to purchase 1,234,500 and 2,815,500 shares of the Company's common stock
were outstanding under the Company's Stock Option Plan at September 30, 2002 and
2001, respectively. The impact of these options has been excluded from the
diluted EPS calculation, as their effect would be anti-dilutive. These options
are exercisable between $0.44 and $1.20 per common share at varying dates
through 2007. As of September 30, 2002, the Company had not issued but has
agreed to issue 10,000 shares of the Company's common stock as a legal retainer.
Azco Mining Inc.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Continued)
Note 7.Change in Accounting Policy - Accounting for Asset Retirement Obligations
On July 1, 2003, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 143, "Accounting for Asset Retirement Obligations"
(SFAS No. 143). SFAS No. 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs estimated to aggregate approximately $250,000.
Specifically, the Statement requires that retirement obligations be recognized
when they are incurred and displayed as liabilities with the initial measurement
being at the present value of estimated third party costs. In addition, the
asset retirement cost is capitalized as part of the asset's carrying value and
subsequently allocated to expense over the assets useful life.
The asset retirement costs associated with the Mica project consist of
reclamation of disturbed property as well as the disposal and dismantling of
related property and equipment. The Company previously accounted for these costs
through periodic charges to earnings using the units-of-production method. The
change in accounting resulted in a cumulative effect charge to earnings during
the period of $13,902.
As of September 30, 2002, the Company maintained the following restricted assets
associated with reclamation costs for the Black Canyon Mica property pursuant to
regulatory requirements:
-$50,000 held on deposit for the Arizona State Treasurer in a one-year
automatically renewable short-term investment; and
-$140,400 held as collateral against an irrevocable letter of credit of the
same amount to the U.S. Bureau of Land Management which renewed October 9,
2002 for an additional year.
A roll forward of the Company's asset retirement obligation through September
30, 2002 is as follows:
Initial liability recognition, July 1, 2002 $45,309
Accretion 1,250
-------
Balance, September 30, 2002 $46,559
-------
Azco Mining Inc.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Continued)
Note 8. New Pronouncements
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" (SFAS No. 144). SFAS No. 144 replaces certain
previously issued accounting guidance, develops a single accounting model for
long- lived assets other than goodwill and indefinite-lived intangibles, and
broadens the framework previously established for assets to be disposed of by
sale (whether previously held or newly acquired). This Statement was effective
as of the beginning of fiscal 2003 and did not have a material impact on the
Company's financial position, results of operations or cash flows.
In April 2002, the FASB issued SFAS No.145, "Rescission of FASB Statements No.
4, 44, and 64, Amendments of FASB Statement No. 13, and Technical Corrections"
(SFAS No.145). This Statement rescinds SFAS No. 4, SFAS No. 64 and further
clarifies debt extinguishments, which classify as extraordinary. Additionally,
SFAS No. 145 amends SFAS No. 13 in order to clarify the accounting for the
treatment of lease modifications. Provisions of this Statement are effective for
fiscal year 2003 and the pronouncement did not have a material impact on its
financial position, results of operations or cash flows.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities" (SFAS No. 146). SFAS No. 146 replaces Emerging
Task Force Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit and Activity (including Certain
Costs Incurred in a Restructuring)". The primary difference from existing
guidance is that SFAS No. 146 requires the recognition of exit cost at fair
value when a liability is incurred, versus at the date of the exit plan
approval. This Statement is effective for exit and disposal activities of the
Company that are initiated after December 31, 2002. The Company has not
historically had significant exit or disposal activities.
Note 9. Subsequent Events
In October 2002, Azco raised $500,000 from the sale of convertible debentures.
These debentures are convertible into shares of common stock, at the holders
option, at a price equal to either (a) an amount equal to 120% of the closing
bid price of the common stock as of the closing date or (b) an amount equal to
80% of the average of the three lowest closing bid prices of the common stock
for the five trading days immediately preceding the conversion date. These
convertible debentures accrue interest at a rate of 6% per year, are convertible
and have a term of two years. At Azco's option, these debentures may be paid in
cash or redeemed at a 12% premium prior to October 2004.
Azco Mining Inc.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Continued)
On November 12, 2002 the Form S-1 Registration Statement, filed with the
Securities and Exchange Commission in regard to the Equity Line of Credit,
became effective. The Company is now eligible to, at our discretion,
periodically issue and sell to Cornell Capital Partners shares of common stock
for up to a total purchase price of $5 million for a period of up to two years
after November 12, 2002, whichever comes first. For each share of common stock
purchased under the Equity Line of Credit, Cornell Capital Partners will pay
92.5% of the lowest closing bid price of our common stock on the American Stock
Exchange for the five trading days immediately following the notice date. The
amount of each advance is subject to a maximum of $500,000 per advance, with a
minimum of five trading days between advances. In addition, Cornell Capital
Partners will retain 5% of each advance under the Equity Line of Credit. Cornell
Capital Partners received 237,624 shares of common stock as a one-time
commitment fee, which was equal to $240,000 based on a closing bid of $1.01 on
June 19, 2002. Cornell Capital Partners intends to sell any shares purchased
under the Equity Line of Credit at the then prevailing market price.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Management's Discussion and Analysis of Financial Condition and Results of
Operations contains statements concerning trends and other forward-looking
information, within the meaning of the federal securities laws. Such
forward-looking statements are subject to uncertainties and factors relating to
our operations and business environment, all of which are difficult to predict
and many of which are beyond our control. We believe that the following factors,
among others, could affect our future performance and cause actual results to
differ materially from those expressed or implied by forward-looking statements
made by us or on our behalf: (1) unfavorable weather conditions, in particular,
high water levels in the Agua Fria river which could temporarily limit access to
the Black Canyon mica mine site; (2) the lack of commercial acceptance of our
mica product or by-products; (3) changes in environmental laws; (4) problems
regarding availability of materials and equipment; (5) failure of the mica
project equipment to process or operate in accordance with specifications,
including expected throughput, which could prevent the project from producing
commercially viable output; and (6) our lack of necessary financial resources to
complete development of the mica product and by-products, successfully market
our mica product and fund our other capital commitments.
References to "we", "us", "our", and Azco Mining, refer to Azco Mining Inc. and
its subsidiaries, on a consolidated basis, unless the context otherwise
requires.
General
We were formed in 1988. In December 1995, we sold our Sanchez copper project and
a 70% interest in our Mexican copper project, the Piedras Verdes Project, to
Phelps Dodge Corporation for $40 million. Principal income since the sale has
been a result of interest earned on the proceeds of the sale of these assets.
We are currently focused on the start up of our facilities designed to produce
high quality muscovite mica and feldspathic sand from our 100% owned Black
Canyon mica project located near Phoenix, Arizona. The Company is seeking
financing that will be necessary to continue operations.
Critical accounting policies and estimates
As of July 1, 2003, the Company adopted SFAS 143, which governs the accounting
of the treatment for its asset retirement obligations. Previously, the Company
accrued for such costs on a units of production basis over the estimated
reserves. Upon the adoption of the new standard, the Company has recorded the
current fair value of its expected cash outflows with its reclamation activity.
This change in accounting treatment resulted in a charge to current period
earnings of $13,902. (See also Note 7 to the interim consolidated financial
statements).
Results of Operations
Three Months ended September 30, 2002 compared to Three Months ended September
30, 2001
The net loss for the three months ended September 30, 2002 was $1,439,862 ($0.04
per share) compared to a net loss of $ 571,151 ($0.02 per share) for the three
months ended September 30, 2001. The increased net loss is the result of
increased production costs and general and administrative expenses in the
current period.
Production expense for the three months ended September 30 2002 was $537,034
compared to $244,917 for the three months ended September 30, 2001. Increased
expenses in the current quarter are due to the initial production for sale of
feldspathic sand.
General and administrative expense was $567,314 for the three months ended
September 30 2002 compared to $141,389 for the three months ended September30,
2001. The increase in general and administrative expense is due to a $363,000
charge in the current quarter resulting from the issuance of 430,000 shares for
consulting services.
Interest expense was $163,336 for the three months ended September 30 2002
compared to $21,430 for the three months ended September 30, 2001. The increase
is due to interest expense associated with loans, entered into over the last
year, and with the amortization of the value of the related debt discount.
FINANCIAL CONDITION
As of September 30 2002, we had unrestricted cash of $34,284.
Net cash used in operating activities was $753,599 for the first three months of
fiscal 2002 as compared to $560,615 in the same period of the prior year. The
increase was due primarily to payments for the settlement obligation with former
officers combined with the increase in production activities undertaken this
quarter.
Net cash flows used in financing activities were $96,764 for the first three
months of fiscal 2002 as compared to $550,000 in the same period of the prior
year. The variance from the prior year is the result of the proceeds from two
notes issued in the prior year combined with less stock option exercise
activity.
The Company has suffered recurring losses from operations and assuming it will
continue to operate as a going concern it will require additional funds to
continue operations. On November 4, 2002 the Company temporarily ceased
production at its Black Canyon Mine crushing and concentrating facilities due to
cash constraints. Production will start again once adequate financing has been
raised. On November 12, 2002 the Company's Form S-1 Registration Statement,
filed with the Securities and Exchange Commission in regard to the Equity Line
of Credit, became effective. The Company is now eligible to, at our discretion,
periodically issue and sell to Cornell Capital Partners shares of common stock
for a total purchase price of $5 million for a period of up to two years after
November 12, 2002, whichever comes first. The Company plans to use the proceeds
for immediate cash needs until a major financing deal can be closed. Management
is actively seeking additional major financing; however, there is no assurance
that these efforts will be successful or on terms acceptable to the Company.
These matters raise doubt about the Company's ability to continue as a going
concern. These consolidated financial statements do not include the adjustments
that would be necessary, including a provision for impairment of plant and
equipment which could be material, should the Company be unable to continue as a
going concern.
The Company will need a minimum of $2 million of additional funding during
fiscal 2003 to cover operating requirements. The Company is also seeking a
minimum of $1.5 million of funding for capital improvements to its Black Canyon
process facilities.
Lease Arrangements and Contractual Obligations
Azco leases some heavy equipment. Certain equipment leases are classified as
capital leases and, accordingly, the equipment and related obligation are
recorded on our balance sheet. The Company is committed to lease its former
executive office in Vancouver BC through April 2004 and currently has a tenant
under a sub-lease contract.
Currently Azco has a total of $1,200,000 of short-term notes due and payable
before March 15, 2004. In addition, the Company has entered into a
sale-leaseback financing arrangement where it may re-purchase the equipment it
sold under this transaction in January of 2004 or thereafter, but is not
contractually obligated to do so until 2011.
In conjunction with the departure of two former executives in October 2000, Azco
entered into a severance agreement in June 2002 whereby Azco is required to make
monthly payments of $10,000, to each director, through June 2004, with the
remaining balance of $90,000 due in July 2004. Under the terms of the agreement,
Azco was required to provide Messrs. Harvey and Lindsay each with 150,000 shares
of unrestricted common stock in Azco Mining Inc. The shares were issued in July
2002.
The following table is provided to detail our contractual obligations and lease
commitments:
Payments due
Payments due in in Payments due
Payments due through 1-3 years 4-5 years after
June 30, 2003 2003-2005 2006-2007 2007
Equipment leases 62,466 84,727 - -
Office lease 45,260 51,400 - -
Settlement
payments 180,000 420,000 - -
Notes payable 201,000 1,170,000 - -
Financing lease 382,500 1,080,000 1,080,000 6,930,000
------- --------- --------- ---------
Total contractual
obligations 871,226 2,806,127 1,080,000 6,930,000
New Accounting Pronouncements
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" (SFAS No. 144). SFAS No. 144 replaces certain
previously issued accounting guidance, develops a single accounting model for
long- lived assets other than goodwill and indefinite-lived intangibles, and
broadens the framework previously established for assets to be disposed of by
sale (whether previously held or newly acquired). This Statement was effective
as of the beginning of fiscal 2003 and did not have a material impact on the
Company's financial position, results of operations or cash flows.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendments of FASB Statement No. 13, and Technical Corrections"
(SFAS No. 145). This Statement rescinds SFAS No. 4, SFAS No. 64 and further
clarifies debt extinguishments, which classify as extraordinary. Additionally,
SFAS No. 145 amends SFAS No. 13 in order to clarify the accounting for the
treatment of lease modifications. Provisions of this Statement are effective for
fiscal year 2003 and the pronouncement did not have a material impact on its
financial position, results of operations or cash flows.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities". SFAS No. 146 replaces Emerging Task Force
Issue No. 94- 3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit and Activity (including Certain Costs Incurred
in a Restructuring)" (SFAS No. 146). The primary difference from existing
guidance is that SFAS No. 146 requires the recognition of exit cost at fair
value when a liability is incurred, versus at the date of the exit plan
approval. This Statement is effective for exit and disposal activities of the
Company that are initiated after December 31, 2002. The Company has not
historically had significant exit or disposal activities.
Item 3: Quantitative and Qualitative Disclosures about Market Risk
None.
Item 4: Controls and Procedures
The Company maintains a system of disclosure controls and procedures that is
designed to ensure information required to be disclosed by the Company is
accumulated and communicated to management in a timely manner. Management has
reviewed this system of disclosure controls and procedures within 90 days of the
date hereof, and has concluded that the current system of controls and
procedures is effective.
The Company maintains a system of internal controls and procedures for financial
reporting. Since the date of management's most recent evaluation, there were no
significant changes in internal controls or in other factors that could
significantly affect internal controls.
PART II. OTHER INFORMATION
Item 1: Legal Proceedings
On January 22, 1999, the trustee (Petitioner) in bankruptcy proceedings against
Eagle River served a petition, in the Quebec Superior Court, District of Hull,
upon the Company in order to recover assets from the Company. The Petitioner
alleges that, through the Company's involvement with Eagle River in the Mali
Project, the Company is guilty of contractual breaches in excess of $3,400,000.
In management's opinion, this claim is unfounded although the eventual outcome
of the case is not yet determinable. No accrual has been made for this claim
because the Company does not believe it is probable that the case will be
determined against the Company.
On June 25, 2002 Azco received a demand for arbitration filed by iCapital
Corporation seeking $144,000 in relief due to failure to pay under a June 26,
2001 Financial Consulting Agreement. It is the position of Azco and its counsel
that the contract is void and it is unlikely that iCapital will prevail on their
claim.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AZCO MINING INC.
-----------------
(Registrant)
Date: November 13, 2002 BY: /s/ Lawrence G. Olson
----------------------- ---------------------
Lawrence G. Olson
CEO, President and Chairman
Date: November 13, 2002 BY: /s/ Ryan A. Modesto
----------------- --------------------
Ryan A. Modesto
Vice President Finance,
Corporate Secretary
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Azco Mining Inc. (the "Company") on
Form 10-K for the period ended June 30, 2002 as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), each of the undersigned,
in the capacities and on the dates indicated below, hereby certifies pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that to his knowledge:
1. The Quarterly Report on Form 10-Q for the quarterly period ended September
30, 2002 as filed with the Securities and Exchange Commission on the date
hereof, fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934; as amended; and
2. The information contained in the Quarterly Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
/s/ Lawrence G. Olson
- ------------------------
Lawrence G. Olson, Chief Executive
Officer
/s/ Ryan Modesto
- -----------------------
Ryan Modesto, Vice President Finance
Certifications
I, Lawrence G. Olson, Chief Executive Officer, certify that:
l. I have reviewed this quarterly report on Form 10-Q of AZCO Mining Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedure to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
November 13, 2002
/s/ Lawrence G. Olson
- -----------------------
Chief Executive Officer
I, Ryan Modesto, Vice President Finance, certify that:
l. I have reviewed this quarterly report on Form 10-Q of AZCO Mining Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedure to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
November 13, 2002
/s/ Ryan Modesto
- ----------------------
Vice President Finance