Attached files
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EX-4.1 - WITS BASIN PRECIOUS MINERALS INC | v202381_ex4-1.htm |
EX-31.2 - WITS BASIN PRECIOUS MINERALS INC | v202381_ex31-2.htm |
EX-32.1 - WITS BASIN PRECIOUS MINERALS INC | v202381_ex32-1.htm |
EX-31.1 - WITS BASIN PRECIOUS MINERALS INC | v202381_ex31-1.htm |
EX-10.1 - WITS BASIN PRECIOUS MINERALS INC | v202381_ex10-1.htm |
EX-32.2 - WITS BASIN PRECIOUS MINERALS INC | v202381_ex32-2.htm |
U.
S. 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, 2010
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 Small Business Issuer as Specified in its Charter)
MINNESOTA
|
84-1236619
|
|
(State
or Other Jurisdiction of
|
(I.R.S.
Employer Identification Number)
|
|
Incorporation
or Organization)
|
900 IDS
CENTER, 80 SOUTH EIGHTH STREET, MINNEAPOLIS, MINNESOTA 55402-8773
(Address
of Principal Executive Offices)
612.349.5277
(Issuer’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) 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. Yesx
No ¨
Indicate
by check mark whether the Registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of
this chapter) during the preceding 12 months (or such shorter period that the
registrant was required to submit and post such files). Yes ¨ No
x
Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large
accelerated filer ¨
Accelerated filer ¨
Non-accelerated filer ¨
Smaller reporting company x
(Do not
check if a smaller reporting company)
Indicate
by check mark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes ¨ No x
As of
November 12, 2010, there were 180,952,179 shares of the Registrant’s common
stock, par value $0.01, outstanding.
WITS
BASIN PRECIOUS MINERALS INC.
FORM
10-Q
TABLE
OF CONTENTS
SEPTEMBER
30, 2010
Page
|
|||
PART
I
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FINANCIAL
INFORMATION
|
||
Item
1.
|
Condensed
Consolidated Financial Statements
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4
|
|
Condensed
Consolidated Balance Sheets - As of September 30, 2010 and December 31,
2009
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4
|
||
Condensed
Consolidated Statements of Operations - For the three months and nine
months ended September 30, 2010 and 2009
|
5
|
||
Condensed
Consolidated Statements of Cash Flows - For the nine months ended
September 30, 2010 and 2009
|
6
|
||
Notes
to the Condensed Consolidated Financial Statements
|
8
|
||
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
27
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Item
4T.
|
Controls
and Procedures
|
32
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|
PART
II
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OTHER
INFORMATION
|
||
Item
1.
|
Legal
Proceedings
|
33
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Item
1A.
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Risk
Factors
|
33
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|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
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33
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|
Item
3.
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Defaults
Upon Senior Securities
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33
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|
Item
5.
|
Other
Information
|
33
|
|
Item
6.
|
Exhibits
|
33
|
|
Signatures
|
34
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2
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Form
10-Q contains certain statements which are forward-looking in nature and are
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 uncertainty of the quantity or quality of probable ore reserves, the
fluctuations in the market price of such reserves, 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. We have attempted to identify, in context,
certain of the factors that we believe may cause actual future experience and
results to differ materially from our current expectations, which may have a
significant impact on our business, operating results, financial condition or
your investment in our common stock, as described in Part I, Item 1A entitled
“Risk Factors” in our Annual Report on Form 10-K for the year ended December 31,
2009.
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 publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
However, your attention is directed to any further disclosures made on related
subjects in our subsequent periodic reports filed with the Securities and
Exchange Commission on Forms 10-K, 10-Q and 8-K.
3
WITS
BASIN PRECIOUS MINERALS INC. AND SUBSIDIARIES
(AN
EXPLORATION STAGE COMPANY)
PART
1 – FINANCIAL INFORMATION
Item
1. Condensed Consolidated Financial Statements
Condensed
Consolidated Balance Sheets
September 30,
|
December 31,
|
|||||||
2010
|
2009
|
|||||||
(unaudited)
|
(audited)
|
|||||||
Assets
|
||||||||
Current
assets:
|
||||||||
Cash
and cash equivalents
|
$ | 14,783 | $ | 1,109,544 | ||||
Prepaid
expenses
|
139,829 | 10,986 | ||||||
Total
current assets
|
154,612 | 1,120,530 | ||||||
Property,
plant and equipment, net
|
1,469,572 | 1,536,408 | ||||||
Mineral
properties and development costs
|
5,660,726 | 5,660,726 | ||||||
Restricted
cash escrowed for debt repayment
|
— | 2,000,000 | ||||||
Investment
in partially-owned equity affiliates
|
29,075 | 44,853 | ||||||
Debt
issuance costs, net
|
153,504 | 546,381 | ||||||
Total
assets
|
$ | 7,467,489 | $ | 10,908,898 | ||||
Liabilities
and Shareholders’ Deficit
|
||||||||
Current
liabilities:
|
||||||||
Short-term
notes payable, net of discount
|
$ | 287,756 | $ | 315,000 | ||||
Current
portion of convertible notes payable, net of original issue
discount
|
1,728,246 | 1,915,587 | ||||||
Current
portion of long-term notes payable
|
10,518,054 | 6,009,202 | ||||||
Accounts
payable
|
341,331 | 214,626 | ||||||
Accrued
interest
|
1,436,987 | 529,326 | ||||||
Other
accrued expenses
|
978,741 | 793,636 | ||||||
Total
current liabilities
|
15,291,115 | 9,777,377 | ||||||
Long-term
liabilities:
|
||||||||
Convertible
notes payable, long-term portion
|
179,923 | 314,923 | ||||||
Long-term
notes payable, net of discount
|
10,296,027 | 15,033,964 | ||||||
Other
liability
|
205,933 | 205,933 | ||||||
Total
liabilities
|
25,972,998 | 25,332,197 | ||||||
Shareholders’
deficit:
|
||||||||
Common
stock, $0.01 par value, 300,000,000 shares authorized: 180,952,179 and
166,182,703 shares issued and outstanding at September 30, 2010 and
December 31, 2009, respectively
|
1,809,522 | 1,661,827 | ||||||
Additional
paid-in capital
|
69,922,180 | 67,362,825 | ||||||
Warrants
outstanding
|
7,165,989 | 7,243,688 | ||||||
Accumulated
deficit
|
(22,932,460 | ) | (22,932,460 | ) | ||||
Deficit
accumulated during the exploration stage, subsequent to April 30,
2003
|
(74,895,546 | ) | (67,654,919 | ) | ||||
Total
Wits Basin shareholders’ deficit
|
(18,930,315 | ) | (14,319,039 | ) | ||||
Non-controlling
interest
|
424,806 | (104,260 | ) | |||||
Total
shareholders’ deficit
|
(18,505,509 | ) | (14,423,299 | ) | ||||
Total
liabilities and shareholders’ deficit
|
$ | 7,467,489 | $ | 10,908,898 |
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
4
WITS
BASIN PRECIOUS MINERALS INC. AND SUBSIDIARIES
(AN
EXPLORATION STAGE COMPANY)
Condensed
Consolidated Statements of Operations
(unaudited)
May 1, 2003
|
||||||||||||||||||||
Three Months Ended
|
Nine Months Ended
|
(inception) to
|
||||||||||||||||||
September 30,
|
September 30,
|
September
|
||||||||||||||||||
2010
|
2009
|
2010
|
2009
|
30, 2010 | ||||||||||||||||
Revenues
|
$ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||
Operating
expenses:
|
||||||||||||||||||||
General
and administrative
|
836,972 | 1,263,905 | 3,069,779 | 3,067,581 | 32,638,864 | |||||||||||||||
Exploration
expenses
|
135,473 | 24,044 | 293,156 | 119,833 | 12,506,592 | |||||||||||||||
Depreciation
and amortization
|
21,754 | 26,431 | 66,836 | 79,293 | 714,015 | |||||||||||||||
Merger
transaction costs
|
— | 291,169 | — | 291,169 | 1,564,131 | |||||||||||||||
Loss
on impairment of assets
|
— | — | — | — | 7,870,814 | |||||||||||||||
Stock
issued as penalty
|
— | — | — | — | 2,152,128 | |||||||||||||||
Loss
on sale of mining properties
|
— | — | — | — | 571,758 | |||||||||||||||
Loss
on disposal of assets
|
— | — | — | — | 13,995 | |||||||||||||||
Loss
from equity investments in partially-owned affiliates
|
991 | 6,142 | 18,729 | 7,906 | 54,993 | |||||||||||||||
Total
operating expenses
|
995,190 | 1,611,691 | 3,448,500 | 3,565,782 | 58,087,290 | |||||||||||||||
Loss
from operations
|
(995,190 | ) | (1,611,691 | ) | (3,448,500 | ) | (3,565,782 | ) | (58,087,290 | ) | ||||||||||
Other
income (expense):
|
||||||||||||||||||||
Other
income (expense), net
|
— | — | 312 | 9 | 104,608 | |||||||||||||||
Interest
expense
|
(1,098,939 | ) | (1,400,294 | ) | (3,860,033 | ) | (4,227,556 | ) | (17,567,340 | ) | ||||||||||
Loss
on debt extinguishment, net
|
— | — | — | — | (1,485,558 | ) | ||||||||||||||
Gain
on deconsolidation of subsidiary, net
|
— | — | — | 1,461,078 | 1,461,078 | |||||||||||||||
Foreign
currency gains (losses)
|
(113,253 | ) | (429,921 | ) | (110,981 | ) | (777,242 | ) | 209,362 | |||||||||||
Total
other income (expense)
|
(1,212,192 | ) | (1,830,215 | ) | (3,970,702 | ) | (3,543,711 | ) | (17,277,850 | ) | ||||||||||
Loss
from operations before income taxes and discontinued
operations
|
(2,207,382 | ) | (3,441,906 | ) | (7,419,202 | ) | (7,109,493 | ) | (75,365,140 | ) | ||||||||||
Income
tax benefit (provision)
|
— | — | — | — | 243,920 | |||||||||||||||
Loss
from continuing operations
|
(2,207,382 | ) | (3,441,906 | ) | (7,419,202 | ) | (7,109,493 | ) | (75,121,220 | ) | ||||||||||
Discontinued
operations:
|
||||||||||||||||||||
Gain
from discontinued operations
|
— | — | — | — | 21,154 | |||||||||||||||
Loss
after discontinued operations
|
(2,207,382 | ) | (3,441,906 | ) | (7,419,202 | ) | (7,109,493 | ) | (75,100,066 | ) | ||||||||||
Net
loss attributable to non-controlling interest
|
78,147 | — | 178,575 | — | 204,520 | |||||||||||||||
Net
loss attributable to Wits Basin
|
$ | (2,129,235 | ) | $ | (3,441,906 | ) | $ | (7,240,627 | ) | $ | (7,109,493 | ) | $ | (74,895,546 | ) | |||||
Basic
and diluted net loss per common share attributable to Wits
Basin:
|
||||||||||||||||||||
Continuing
operations
|
$ | (0.01 | ) | $ | (0.02 | ) | $ | (0.04 | ) | $ | (0.05 | ) | $ | (0.80 | ) | |||||
Discontinued
operations
|
— | — | — | — | — | |||||||||||||||
Net
loss per common share attributable to Wits Basin
|
$ | (0.01 | ) | $ | (0.02 | ) | $ | (0.04 | ) | $ | (0.05 | ) | $ | (0.80 | ) | |||||
Basic
and diluted weighted average shares outstanding
|
177,651,267 | 154,149,716 | 171,633,581 | 148,669,358 | 94,069,189 |
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
5
WITS
BASIN PRECIOUS MINERALS INC. AND SUBSIDIARIES
(AN
EXPLORATION STAGE COMPANY)
Condensed
Consolidated Statements of Cash Flows
(unaudited)
May 1, 2003
|
||||||||||||
Nine Months Ended
|
(inception) to
|
|||||||||||
September 30,
|
September
|
|||||||||||
2010
|
2009
|
30, 2010 | ||||||||||
OPERATING
ACTIVITIES:
|
||||||||||||
Net
loss
|
$ | (7,419,202 | ) | $ | (7,109,493 | ) | $ | (75,100,066 | ) | |||
Adjustments
to reconcile net loss to cash flows from operating
activities:
|
||||||||||||
Depreciation
and amortization
|
66,836 | 79,293 | 714,015 | |||||||||
Loss
from investments in partially-owned equity affiliates
|
18,729 | 7,906 | 54,993 | |||||||||
Gain
on deconsolidation of subsidiary, net
|
— | (1,461,078 | ) | (1,461,078 | ) | |||||||
Loss
(gain) on foreign currency
|
110,981 | 777,242 | (209,362 | ) | ||||||||
Amortization
of prepaid consulting fees related to issuance and modifications of
warrants and issuance of common stock
|
270,000 | 55,109 | 6,919,899 | |||||||||
Amortization
of debt issuance costs
|
392,877 | 44,768 | 771,721 | |||||||||
Amortization
of original issue discount & beneficial conversion
feature
|
2,289,059 | 3,104,805 | 11,254,739 | |||||||||
Compensation
expense related to stock options and warrants
|
1,350,894 | 1,271,834 | 6,150,172 | |||||||||
Issuance
of common stock and warrants for exploration rights
|
— | — | 5,885,372 | |||||||||
Issuance
of common stock and warrants for services
|
154,000 | — | 2,601,737 | |||||||||
Loss
on debt extinguishment
|
— | — | 1,485,558 | |||||||||
Issuance
of common stock and warrants for interest expense
|
— | 40,000 | 1,213,420 | |||||||||
Loss
on impairment of assets
|
— | — | 7,870,814 | |||||||||
Issuance
of common stock as penalty related to private placement
|
— | — | 2,152,128 | |||||||||
Loss
on sale of mining projects
|
— | — | 571,758 | |||||||||
Contributed
services by an executive
|
— | — | 274,500 | |||||||||
Non-cash
loss on nickel property (exploration)
|
— | — | 150,000 | |||||||||
Gain
on disposal of miscellaneous assets
|
— | — | (51,585 | ) | ||||||||
Gain
from discontinued operations
|
— | — | (21,154 | ) | ||||||||
Changes
in operating assets and liabilities:
|
||||||||||||
Other
receivable, net
|
— | — | 18,017 | |||||||||
Prepaid
expenses
|
(8,843 | ) | 24,117 | (218,604 | ) | |||||||
Accounts
payable
|
130,205 | 177,492 | 274,550 | |||||||||
Accrued
expenses
|
1,109,191 | 1,148,090 | 5,334,851 | |||||||||
Net
cash used in operating activities
|
(1,535,273 | ) | (1,839,915 | ) | (23,363,605 | ) | ||||||
INVESTING
ACTIVITIES:
|
||||||||||||
Purchases
of property and equipment
|
— | — | (143,629 | ) | ||||||||
Purchase
of Bates-Hunter Mine (acquisition costs)
|
— | — | (364,680 | ) | ||||||||
Advance
to partially-owned equity affiliate
|
— | — | (450,000 | ) | ||||||||
Proceeds
from sale of mining projects
|
— | — | 220,820 | |||||||||
Proceeds
from sale of miscellaneous assets
|
— | — | 89,639 | |||||||||
Purchases
of investments
|
— | — | (2,244,276 | ) | ||||||||
Advance
payments on equity investments
|
— | — | (5,150,000 | ) | ||||||||
Net
cash used in investing activities
|
— | — | (8,042,126 | ) |
6
WITS
BASIN PRECIOUS MINERALS INC. AND SUBSIDIARIES
(AN
EXPLORATION STAGE COMPANY)
Condensed
Consolidated Statements of Cash Flows, continued
(unaudited)
May 1, 2003
|
||||||||||||
Nine Months Ended
|
(inception) to
|
|||||||||||
September 30,
|
September
|
|||||||||||
2010
|
2009
|
30, 2010 | ||||||||||
FINANCING
ACTIVITIES:
|
||||||||||||
Payments
on short-term and long-term debt
|
(1,782,673 | ) | (5,382,144 | ) | (5,573,424 | ) | ||||||
Restricted
cash escrowed for debt repayment
|
2,000,000 | — | — | |||||||||
Cash
proceeds from issuance of common stock, net of offering
costs
|
98,185 | — | 8,100,413 | |||||||||
Cash
proceeds from exercise of stock options
|
— | — | 199,900 | |||||||||
Cash
proceeds from exercise of warrants
|
— | — | 6,724,547 | |||||||||
Cash
proceeds from short-term debt and convertible notes
payable
|
100,000 | 760,000 | 16,215,000 | |||||||||
Cash
proceeds from long-term debt
|
— | 6,100,000 | 5,150,000 | |||||||||
Capital
contributed by non-controlling interest
|
25,000 | 231,672 | 231,672 | |||||||||
Debt
issuance costs
|
— | (30,095 | ) | (324,634 | ) | |||||||
Net
cash provided by financing activities
|
440,512 | 1,679,433 | 30,723,474 | |||||||||
Decrease
in cash and cash equivalents
|
(1,094,761 | ) | (160,482 | ) | (682,257 | ) | ||||||
Cash
and cash equivalents, beginning of period
|
1,109,544 | 230,729 | 697,040 | |||||||||
Cash
and cash equivalents, end of period
|
$ | 14,783 | $ | 70,247 | $ | 14,783 | ||||||
Supplemental
cash flow information:
|
||||||||||||
Cash
paid for interest
|
$ | 244,012 | $ | 338,816 | $ | 2,115,592 | ||||||
Cash
paid for income taxes
|
$ | — | $ | — | $ | — | ||||||
Issuance
of common stock in lieu of cash for debt, interest, accounts payable and
accrued expenses
|
$ | 69,925 | $ | — | $ | 514,586 | ||||||
Conversion
of debt principal to common stock
|
$ | 455,500 | $ | 495,094 | $ | 1,276,889 | ||||||
Issuance
of common stock, warrants and options for prepaid consulting
fees
|
$ | 90,000 | $ | — | $ | 5,897,065 | ||||||
Issuance
of debt and warrants for financing costs
|
$ | — | $ | 75,000 | $ | 600,591 | ||||||
Debt
paid through issuance of subsidiary stock
|
$ | — | $ | 250,000 | $ | 250,000 | ||||||
Current
liabilities converted to debt
|
$ | — | $ | 489,828 | $ | 1,652,150 |
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
7
WITS
BASIN PRECIOUS MINERALS INC. AND SUBSIDIARIES
(AN
EXPLORATION STAGE COMPANY)
Notes
to Consolidated Financial Statements
September
30, 2010
(unaudited)
NOTE 1 - NATURE OF
BUSINESS
Wits
Basin Precious Minerals Inc. (with its subsidiaries “we,” “us,” “our,” “Wits
Basin” or the “Company”) is a minerals exploration and development company based
in Minneapolis, Minnesota. As of September 30, 2010, we hold (i) a
majority equity interest of approximately 92% of Standard Gold, Inc. (f/k/a
Princeton Acquisitions, Inc.) which owns a past producing gold mine in Colorado
(the “Bates-Hunter Mine”), (ii) a 50% equity interest in China Global Mining
Resources (BVI) Ltd., which owns a producing iron ore mine and
processing plant in the People’s Republic of China, (the “PRC”), and (iii) a 35%
equity interest in Kwagga Gold (Barbados) Limited, which holds prospecting
rights in South Africa (the “FSC Project”). The following is a summary of these
projects:
Standard
Gold, Inc.
On June
12, 2008, we transferred our right to purchase the Bates-Hunter Mine, a prior
producing gold mine located in Central City, Colorado, to a newly created wholly
owned subsidiary of ours, the Hunter Bates Mining Corporation (the “Hunter
Bates”). Concurrent with this transfer, Hunter Bates completed the acquisition
of the Bates-Hunter Mine. On September 29, 2009, Standard Gold, Inc., a Colorado
corporation (“Standard Gold”) (formerly known as Princeton Acquisitions, Inc., a
public shell corporation at the time) completed a reverse acquisition via a
share exchange with Hunter Bates and all of its shareholders, whereby the
holders of capital securities of Hunter Bates exchanged all of their capital
securities, on a share-for-share basis, into similar capital securities of
Standard Gold (the “Share Exchange”). Accordingly, the Share Exchange
represented a change in control (reverse merger) and Hunter Bates became a
wholly owned subsidiary of Standard Gold. We hold an aggregate of 21,513,544
shares of Standard Gold common stock (or approximately 92% of the issued and
outstanding shares of common stock) and thus, Standard Gold is a majority owned
subsidiary of ours. Standard Gold’s common stock is quoted on the OTCBB under
the symbol “SDGR.”
On
September 7, 2010, Standard Gold entered into an option agreement with US
American Exploration Inc., which specifies terms and conditions by which they
may acquire an interest in the Rex Gold Mine project (“Rex”) located in La Paz
County, Arizona. In order for Standard Gold to acquire an irrevocable ten
percent (10%) joint venture interest in the Rex, they paid an initial $100,000
non-refundable fee and must provide an additional $1,900,000 for exploration
expenditures that must begin within five months and be completed within 23
months.
China
Global Mining Resources (BVI) Ltd.
On March
17, 2009, we entered into a joint venture with London Mining, Plc, a United
Kingdom corporation (“London Mining”) for the purpose of acquiring the
processing plant of Nanjing Sudan Mining Co. Ltd (“Sudan”) and the iron ore mine
of Xiaonanshan Mining Co. Ltd (“Xiaonanshan”) (the Sudan and Xiaonanshan
collectively are referred to as the “PRC Properties”). Pursuant to that certain
Amended and Restated Subscription Agreement, dated March 17, 2009 by and between
London Mining and the Company, London Mining purchased 100 ordinary A Shares of
China Global Mining Resources (BVI) Ltd, a British Virgin Islands corporation
and at the time, a wholly owned subsidiary of ours (“CGMR (BVI)”) for $38.75
million, which A Shares constitute a 50% equity interest in CGMR (BVI). We hold
the remaining 50% equity interest in the form of 100 ordinary B Shares. The A
Shares carry a preference with respect to return of capital and distributions (A
Shares are entitled to 99%) until London Mining receives an aggregate of $44.5
million in return of capital or distributions and certain other conditions are
met. On March 17, 2009, CGMR (BVI), through its wholly owned subsidiary China
Global Mining Resources Limited, a Hong Kong corporation (“CGMR HK”), acquired
the PRC Properties. At that time, we deconsolidated CGMR (BVI) as a subsidiary
of ours.
8
Kwagga
Gold (Barbados) Limited
We hold a
35% equity interest in Kwagga Gold (Barbados) Limited (“Kwagga Barbados”),
which, through its wholly owned subsidiary Kwagga Gold (Proprietary) Limited, a
South African entity (“Kwagga Pty”), holds mineral exploration rights in South
Africa. This project is referred to as the “FSC Project” and is located adjacent
to the historic Witwatersrand Basin. From October 2003 through August 2005, we
completed only two range-finding drillholes (our $2,100,000 investment to
acquire the 35% equity was utilized to fund the drillholes) and we have not
performed any further exploration activities since. On December 12, 2007, we
entered into an agreement with AfriOre International (Barbados) Limited
(“AfriOre”), the holder of the other 65% of Kwagga Barbados, whereby we may
acquire all of AfriOre’s interest of Kwagga Barbados, which agreement required
completion on or before June 30, 2009. Documentation has been submitted to
obtain the consent of South Africa’s Minister of Minerals and Energy, who
oversees the Department of Minerals and Energy (the “DME”) to allow for the sale
of the controlling interest in Kwagga Pty to a U.S. company, all of which is
still under review. We have a verbal agreement from AfriOre regarding an
extension of time to obtain consent from the DME. Other than limited
maintenance, no other activities will be conducted until consent is issued by
the DME.
As of
September 30, 2010, we possess only a few pieces of equipment and we employ
insufficient numbers of personnel necessary to actually explore and/or mine for
minerals. Therefore, we are substantially dependent on the third party
contractors we engage to perform such operations. As of the date of this
Quarterly Report, we do not claim to have any mineral reserves at the
Bates-Hunter Mine or the FSC Project.
NOTE 2 – SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
Principles of
Consolidation
The
consolidated financial statements include the accounts of Wits Basin Precious
Minerals Inc., and our majority owned subsidiary of Standard Gold, Inc. (and its
wholly owned subsidiaries). All significant intercompany transactions and
balances have been eliminated in consolidation.
Foreign
Currencies
All
dollar amounts expressed in the consolidated financial statements are in US
Dollars ($), unless specifically noted, as certain transactions are denominated
in the Canadian Dollar (“Cdn$”).
Fair Value of Financial
Instruments
The
respective carrying value of certain on-balance sheet financial instruments
approximates their fair values. These financial instruments include
cash, accounts receivable, accounts payable, accrued liabilities and debt. Fair
values were assumed to approximate cost or carrying values as most of the debt
was incurred recently and the assets were acquired within one year. At September
30, 2010 and December 31, 2009, we did not have any financial assets or
financial liabilities measured at fair value on a recurring basis using
significant unobservable inputs.
Investment in
partially-owned equity affiliates
Investments
in companies over which the Company exercises significant influence, but does
not consolidate, are accounted for using the equity method, whereby the
investment is carried at the Company’s original cost plus its proportionate
share of undistributed earnings/losses. The excess carrying value of the
Company’s investment over its underlying equity in the net assets is included in
the consolidated balance sheet as “Investment in Partially-Owned Equity
Affiliates.”
9
Non-Controlling Interests in
Consolidated Financial Statements
On
January 1, 2009, the Company adopted guidance provided by the Financial
Accounting Standards Board with regards to accounting for the non-controlling
interest of a subsidiary. Such guidance establishes new accounting and reporting
standards for the non-controlling interest in a subsidiary and the accounting
for the deconsolidation of a subsidiary. The guidance also clarifies that
changes in a parent’s ownership interest in a subsidiary that do not result in
deconsolidation are equity transactions if the parent retains its controlling
financial interest and requires that a parent recognize a gain or loss in net
income when a subsidiary is deconsolidated. The gain or loss will be measured
using the fair value of the non-controlling equity investment on the
deconsolidation date.
NOTE 3 – BASIS OF
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
(the “SEC”). 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 April 15, 2010. 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, 2010 are not necessarily indicative of the results
that may be expected for the year as a whole.
NOTE 4 – EARNINGS (LOSS) PER
COMMON SHARE
Basic net
loss per common share is computed by dividing net loss applicable to common
shareholders by the weighted average number of common shares outstanding during
the periods presented. Diluted net loss per common share is
determined using the weighted average number of common shares outstanding during
the periods presented, adjusted for the dilutive effect of common stock
equivalents, consisting of shares that might be issued upon exercise of options,
warrants and conversion of convertible debt. In periods where losses
are reported, the weighted average number of common shares outstanding excludes
common stock equivalents, because their inclusion would be
anti-dilutive.
The
following table provides a reconciliation of the numerators and denominators
used in calculating basic and diluted earnings (loss) per share are as
follows:
Three Months Ended
September 30,
|
Nine Months Ended
September 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Basic
earnings (loss) per share calculation:
|
||||||||||||||||
Net
income (loss) attributable to Wits Basin common
shareholders
|
$ | (2,129,235 | ) | $ | (3,441,906 | ) | $ | (7,240,627 | ) | $ | (7,109,493 | ) | ||||
Weighted
average of common shares outstanding
|
177,651,267 | 154,149,716 | 171,633,581 | 148,669,358 | ||||||||||||
Basic
net earnings (loss) per share
|
$ | (0.01 | ) | $ | (0.02 | ) | $ | (0.04 | ) | $ | (0.05 | ) | ||||
Diluted
earnings (loss) per share calculation:
|
||||||||||||||||
Net
income (loss) attributable to Wits Basin common
shareholders
|
$ | (2,129,235 | ) | $ | (3,441,906 | ) | $ | (7,240,627 | ) | $ | (7,109,493 | ) | ||||
Basic
weighted average common shares outstanding
|
177,651,267 | 154,149,716 | 171,633,581 | 148,669,358 | ||||||||||||
Options,
convertible debentures and warrants
|
(1 | ) | (2 | ) | (1 | ) | (2 | ) | ||||||||
Diluted
weighted average common shares outstanding
|
177,651,267 | 154,149,716 | 171,633,581 | 148,669,358 | ||||||||||||
Diluted
net earnings (loss) per share
|
$ | (0.01 | ) | $ | (0.02 | ) | $ | (0.04 | ) | $ | (0.05 | ) |
10
(1)
|
As
of September 30, 2010, we had (i) 10,993,500 shares of common stock
issuable upon the exercise of outstanding stock options, (ii) 74,603,070
shares of common stock issuable upon the exercise of outstanding warrants
and (iii) reserved an aggregate of 28,507,937 shares of common stock
issuable under outstanding convertible debt agreements. These 114,104,507
shares, which would be reduced by applying the treasury stock method, were
excluded from diluted weighted average outstanding shares amount for
computing the net loss per common share, because the net effect would be
antidilutive for each of the periods
presented.
|
(2)
|
As
of September 30, 2009, we had (i) 16,643,500 shares of common stock
issuable upon the exercise of outstanding stock options, (ii) 53,746,403
shares of common stock issuable upon the exercise of outstanding warrants
and (iii) reserved an aggregate of 39,943,824 shares of common stock
issuable under outstanding convertible debt agreements. These 110,333,727
shares, which would be reduced by applying the treasury stock method, were
excluded from diluted weighted average outstanding shares amount for
computing the net loss per common share, because the net effect would be
antidilutive for each of the periods
presented.
|
NOTE 5 – COMPANY’S CONTINUED
EXISTENCE
The
accompanying condensed consolidated financial statements have been prepared in
conformity with US GAAP, assuming we will continue as a going concern, which
contemplates the realization of assets and satisfaction of liabilities in the
normal course of business. For the nine months ended September 30, 2010, we
incurred losses from continuing operations of $7,419,202. At September 30, 2010,
we had an accumulated deficit of $97,828,006 and a working capital deficit of
$15,136,503. Our ability to continue as a going concern is dependent on our
ability to raise the required additional capital or debt financing to meet short
and long-term operating requirements. We believe that private placements of
equity capital and debt financing may be adequate to fund our long-term
operating requirements, provided the Company receives shareholder approval to
increase its authorized shares. We may also encounter business endeavors that
require significant cash commitments or unanticipated problems or expenses that
could result in a requirement for additional cash. If we raise additional funds
through the issuance of equity or convertible debt securities, the percentage
ownership of our current shareholders could be reduced, and such securities
might have rights, preferences or privileges senior to our common stock.
Additional financing may not be available upon acceptable terms, or at all. If
adequate funds are not available or are not available on acceptable terms, we
may not be able to take advantage of prospective business endeavors or
opportunities, which could significantly and materially restrict our operations.
We are continuing to pursue external financing alternatives to improve our
working capital position. If we are unable to obtain the necessary capital, we
may have to cease operations.
As of the
date of this Quarterly Report, we do not claim to have any mineral reserves at
the Bates-Hunter Mine or the FSC Project.
NOTE 6 – PROPERTY, PLANT AND
EQUIPMENT
Prior to
our acquisition of the Bates-Hunter Mine in June 2008, we made purchases of
various pieces of equipment necessary to operate and de-water the Bates-Hunter
Mine property. After the acquisition, we added additional assets of land,
buildings and other additional equipment all related to the Bates-Hunter
Mine.
11
Depreciation
on our assets is calculated on a straight-line method over the estimated useful
life, presently ranging from two to twenty years. Components of our property,
plant and equipment are as follows:
September 30,
|
December 31,
|
|||||||
2010
|
2009
|
|||||||
Land
|
$ | 329,280 | $ | 329,280 | ||||
Buildings
|
1,206,954 | 1,206,954 | ||||||
Equipment
|
199,694 | 199,694 | ||||||
Less
accumulated depreciation
|
(266,356 | ) | (199,520 | ) | ||||
$ | 1,469,572 | $ | 1,536,408 |
NOTE 7 – MINERAL PROPERTIES
AND DEVELOPMENT COSTS
With the
acquisition of the Bates-Hunter Mine in 2008, we also acquired certain mining
claims and permits in the transaction. Since that time, we have not commenced
any mining operations due to the lack of funding and therefore, we have not
recorded any amortization expense and we have determined that no impairment has
occurred for the period ended September 30, 2010. Components of our mineral
properties and development costs are as follows:
September 30,
|
December 31,
|
|||||||
2010
|
2009
|
|||||||
Mining
claims (1)
|
$ | 5,657,383 | $ | 5,657,383 | ||||
Mining
permits (2)
|
3,343 | 3,343 | ||||||
$ | 5,660,726 | $ | 5,660,726 |
(1)
|
We
acquired some surface rights and some mining rights to 22 parcels located
in Gilpin County, Colorado.
|
(2)
|
We
acquired various mining, special use, water discharge, stormwater and
drilling permits, all of which require renewal at various
times.
|
On
September 7, 2010, when Standard Gold entered into the option agreement to
acquire an interest in the Rex project, they made an initial $100,000
non-refundable payment. Since this is a non-refundable fee and Standard Gold is
further required to provide an additional $1,900,000 for exploration
expenditures (that must begin within five months), this entire initial $100,000
payment was expensed as an exploration expense.
NOTE 8 – RESTRICTED CASH
ESCROWED FOR DEBT REPAYMENT
On
December 16, 2009, London Mining negotiated terms with us to reduce certain of
their outstanding debt. In connection with the agreement, we paid $2,000,000 to
be held in escrow until final terms were negotiated on which debt to apply it
against. The funds were released out of an escrow account held by legal counsel
of London Mining on January 7, 2010 and $242,327 was applied to accrued interest
and $1,757,673 was recorded as a principal payment against their $5,750,000
promissory note (see Note 14 – Long-term Notes Payable for further
details).
NOTE 9 – INVESTMENT IN
PARTIALLY-OWNED EQUITY AFFILIATES
Kwagga
Gold (Barbados) Limited
We hold a
35% interest in Kwagga Barbados which is accounted for under the equity method.
Kwagga Gold (Proprietary) Limited, a wholly owned subsidiary of Kwagga Barbados,
holds the mineral exploration rights in the FSC Project. AfriOre, the majority
owner (65%) of Kwagga Barbados, has decided not to commit any further resources
to this project at this time; therefore, in an effort to maintain the permits
and land claims of the FSC Project, we advanced $60,000 in 2008 to Kwagga
Barbados. Under current accounting guidance, we will recognize 100% of this
$60,000 advance as a loss from investment in partially-owned affiliates to
coincide with the funds being dispersed by Kwagga Barbados over time. Since the
losses relate to exploration activities, an integral part of our operations, the
losses are shown in operations under the caption, “Loss from equity investments
in partially-owned affiliates.” Other than maintenance of property and
prospecting rights and our submission to the Department of Minerals and Energy
(the “DME”), no other exploration activities will be conducted until consent is
issued by the DME.
12
The
following table summarizes our investment in partially-owned equity
affiliates:
Balance
at December 31, 2009
|
$ | 44,853 | ||
Net
loss recorded during 2010 from Kwagga
|
(18,729 | ) | ||
2010
unrealized foreign currency gain
|
2,951 | |||
Balance
at September 30, 2010
|
$ | 29,075 |
China
Global Mining Resources (BVI) Ltd. (CGMR)
We hold a
50% interest in CGMR with equal voting rights and an equal representation on the
board. Therefore, we exercise significant influence over the operations and
financial policies of the joint venture but do not exercise
control. Accordingly, the investment is accounted for under the
equity method of accounting. However, in 4th quarter 2009, the Company made the
determination to impair their entire investment in CGMR (BVI) for the
following reasons: (i) the joint venture had a loss in 2009, (ii)
the joint venture missed a significant additional purchase price
payment due the seller because of cash flow shortages from operations
and (iii) the Company is not certain when, and if they will
receive their limited distribution of 1%. Accordingly,
the Company has discontinued recording any further operating income or loss in
2010 for their 1% share under the equity method. If and when any actual
distributions are received from CGMR in the future, the Company will record
income at that time.
NOTE 10 – DEBT ISSUANCE
COSTS
We
recorded debt issuance costs with respect to legal services and promissory notes
relating to debt issued during 2009. The following table summarizes
the amortization of debt issuance costs:
September 30,
|
December 31,
|
|||||||
2010
|
2009
|
|||||||
Debt
issuance costs, net, beginning of period
|
$ | 546,381 | $ | 7,514 | ||||
Add:
additional debt issuance costs
|
— | 665,999 | ||||||
Less:
amortization of debt issuance costs
|
(392,877 | ) | (127,132 | ) | ||||
Debt
issuance costs, net, end of period
|
$ | 153,504 | $ | 546,381 |
Future
annual amortization is scheduled to be as follows for the years ending December
31:
2010
— Remaining
|
$ | 94,261 | ||
2011
|
55,903 | |||
2012
|
3,340 | |||
Total
|
$ | 153,504 |
13
NOTE 11 – SHORT-TERM NOTES
PAYABLE
The
following table summarizes the Company’s short-term notes payable:
September 30,
2010
|
December
31,
2009
|
|||||||
Secured
$110,000 loan originally issued to Platinum V; interest rate of 10%;
accrued interest of $17,118 and $7,959 at September 30, 2010 and December
31, 2009, respectively; due February 15, 2010; currently past due,
original terms apply in the default period.
|
$ | 110,000 | $ | 110,000 | ||||
Promissory
note of $50,000 issued as a debt issuance cost; note and accrued interest
of $3,708 paid with issuance of 833,592 shares of common stock on March
10, 2010.
|
— | 50,000 | ||||||
Unsecured
loan of $50,000; original interest rate of 2%, lender extended maturity
date in exchange of new interest rate of 10% effective January 1, 2010;
accrued interest of $5,501 and $1,585 at September 30, 2010 and December
31, 2009, respectively; due June 30, 2010, currently past due, original
terms apply in the default period.
|
50,000 | 50,000 | ||||||
Unsecured
promissory note of $75,000 issued November 2009 as a debt issuance cost;
effective May 6, 2010, note was re-issued as convertible debt; see Note 12
– Convertible Notes Payable.
|
— | 75,000 | ||||||
Unsecured
$30,000 loan; interest rate of 0%, repayment of loan is tied to any
potential future projects conducted in Chile including, (i) a 50/50
distribution of earnings, profits and/or cash for the first $540,000 in
aggregate distributions and, (ii) a 2% non-dilutive net smelter right to
the lender (subject to the Company’s right to repurchase at terms to be
agreed upon).
|
30,000 | 30,000 | ||||||
Promissory
note of $25,000 net of remaining unamortized discount of $2,244 related to
the fair value ($7,921) of 50,000 warrant issued in connection with the
debt; interest rate of 18%; accrued interest of $530 at September 30,
2010; due October 17, 2010; currently past due, original terms apply in
the default period.
|
22,756 | — | ||||||
Promissory
note of $25,000 issued to the President of Standard Gold, Stephen
Flechner, utilized for the Rex; interest rate of 5%; accrued interest of
$79 at September 30, 2010; due November 30, 2010.(1)
|
25,000 | — | ||||||
Promissory
note of $50,000 utilized for the Rex; interest rate of 5%; accrued
interest of $158 at September 30, 2010; due November 30,
2010.(1)
|
50,000 | — | ||||||
Totals
|
$ | 287,756 | $ | 315,000 |
(1) In
connection with these notes and to induce the note holders into these
agreements, Standard Gold granted each note holder the right to share in an
aggregate one percent (1%) net smelter return royalty (“NSR”). Until such time
as Standard Gold were to sell its majority of the Rex project yet to be
acquired, the two note holders would receive a 0.375% and 0.625% NSR of the
actual cash flow earned by Standard Gold, respectively. See Note 17 –
Contingencies and Commitments for further details.
The
weighted average interest rate on short-term notes payable at September 30, 2010
was 9%.
14
Summary
The
following table summarizes the short-term notes payable balances:
Balance
at December 31, 2009
|
$ | 315,000 | ||
Add:
gross proceeds received in 2010
|
100,000 | |||
Less:
issuance of common stock in lieu of cash for principal
|
(50,000 | ) | ||
Less:
re-issued conventional note as convertible note
|
(75,000 | ) | ||
Less:
value assigned to warrant issued with $25,000 note
|
(7,921 | ) | ||
Add:
amortization of original issue discount
|
5,677 | |||
Balance
at September 30, 2010
|
$ | 287,756 |
NOTE 12 – CONVERTIBLE NOTES
PAYABLE
The
following table summarizes the Company’s convertible notes:
September
30,
|
December
31,
|
|||||||
2010
|
2009
|
|||||||
London
Mining unsecured convertible loan; interest rate of 8%; accrued interest
of $163,266 and $103,430 at September 30, 2010 and December 31, 2009,
respectively; convertible at $0.10 per share; due August 22, 2009,
currently past due, original terms apply in the default
period.
|
$ | 1,000,000 | $ | 1,000,000 | ||||
Original
$1.02 million Platinum V senior secured convertible loan; interest rate of
10%; accrued interest of $37,919 and $28,827 at September 30, 2010 and
December 31, 2009, respectively; see following description for other terms
and changes.
|
143,246 | 238,746 | ||||||
Cabo
$511,590 secured convertible debenture net of unamortized discount of
$31,667 at September 30, 2010; stated interest rate of 12% with an initial
effective rate of 18.5%; accrued interest of $92,661 and $41,712 at
September 30, 2010 and December 31, 2009, respectively; convertible at
$0.20 per share; $300,000 payment due April 27, 2011 with the balance due
April 27, 2012; see following description for other terms and changes.
Hunter Bates has guaranteed Wits Basin’s obligations under the
debenture.
|
479,923 | 464,923 | ||||||
Burnham
$310,000 unsecured convertible loan; interest rate was 0% with an
effective rate of 58.8%; $25,000 principal paid in cash and $285,000 of
principal converted into 4,950,000 shares of common stock; see following
description for additional information.
|
— | 276,667 | ||||||
Unsecured
promissory note of $75,000 issued November 2009 as a debt issuance cost;
interest rate of 10%; accrued interest of $6,936 and $1,039 at September
30, 2010 and December 31, 2009, respectively; due November 10, 2010.
Effective May 6, 2010, note was re-issued as convertible debt at the
lesser of $0.08 per share or 85% of the lowest VWAP (volume-weighted
average price) for the 10 trading days preceding the conversion notice
date, with a floor of $0.03 per share.
|
75,000 | — | ||||||
Other
convertible notes; see following description for terms and
changes.
|
210,000 | 250,174 | ||||||
Totals
|
1,908,169 | 2,230,510 | ||||||
Less
current portion
|
(1,728,246 | ) | (1,915,587 | ) | ||||
Long-term
portion
|
$ | 179,923 | $ | 314,923 |
15
Platinum
V Senior Secured Convertible Promissory Note
On
February 13, 2008, we entered into a Note and Warrant Purchase Agreement (the
“Platinum Agreement”) dated February 11, 2008 with Platinum Long Term Growth V,
LLC (“Platinum”), pursuant to which we issued to Platinum a 10% Senior Secured
Convertible Promissory Note in the principal amount of $1,020,000 with an
original maturity date of February 11, 2009 (the “Platinum Note”). The Platinum
Note is convertible at any time into shares of our common stock at an initial
conversion price of $0.18 per share. The conversion price is further
subject to weighted-average anti-dilution adjustments in the event we issue
equity or equity-linked securities at a price below the then-applicable
conversion price. After August 11, 2008, if the seven trailing trading day
volume-weighted average price (“VWAP”) of our common stock is less than $0.30
per share (as appropriately adjusted for any splits, combinations or like events
relating to the common stock), the holder shall have the option to: (i) require
us to prepay in cash all or any portion of the Platinum Note at a price equal to
115% of the aggregate principal amount to be repaid together with accrued and
unpaid interest (“Option 1”) or (ii) demand that all or a portion of the
Platinum Note be converted into common stock at a conversion price equal to the
lesser of the then-applicable conversion price or 85% of the lowest VWAP for the
10 trading days preceding such demand (“Option 2”).
In June
2009, Platinum sold its rights to the Platinum Agreement, including the Platinum
Note (along with its $110,000 10% Senior Secured Promissory Note, as described
in Note 11 – Short-term Notes Payable), to China Gold. China Gold then resold an
aggregate of $400,000 out of its Platinum Note during the remainder of 2009,
which retained the original terms as the Platinum Note. On December 17, 2009, we
entered into amendments with China Gold on the balance of the Platinum Note it
held, whereby the maturity date was amended to be due and payable on demand on
or after February 15, 2010 and limited the conversion price, as adjusted, with a
floor price of $0.01 per share.
|
·
|
China
Gold’s remaining convertible principal balance on its portion of the
original Platinum Note is $117,391 (along with $35,509 of accrued
interest) as of September 30, 2010.
|
|
·
|
Of
the aggregate $400,000 China Gold sold out of the Platinum Note (in three
tranches: $100,000, $150,000 and $150,000) there remains a convertible
balance of $25,855 (along with $2,410 of accrued
interest).
|
The sale
to China Gold by Platinum of its secured convertible note, results in China Gold
holding a security interest in all assets of the Company, Hunter Bates and
Gregory Gold (a wholly owned subsidiary of Hunter Bates), subject to certain
priority liens and matters of record.
During
the nine months ended September 30, 2010, we received notices from the holder of
the Platinum Note to convert an aggregate of $95,500 of principal and $7,099 of
accrued interest into 2,935,750 shares of our common stock at prices ranging
from $0.022 to $0.06647 per share (1) resulting in a beneficial conversion
charges of $426,151 (2).
(1)
|
The
conversion prices were calculated pursuant to Option 2 that became
effective after August 11, 2008 as described
above.
|
(2)
|
Because
the reset feature occurred resulting in additional shares being issued, an
additional beneficial conversion charge was recorded as interest expense
and credited to additional paid in
capital.
|
As of
September 30, 2010, all previous discounts to the debt for the issuance of
warrants and initial beneficial conversion feature have been fully amortized to
interest expense.
Cabo
Secured Convertible Debenture
On April
28, 2009, Wits Basin entered into a convertible debenture with Cabo Drilling
(America) Inc., a Washington corporation formerly known as Advanced Drilling,
Inc (“Cabo”), pursuant to which Wits Basin issued to Cabo a 12% Convertible
Debenture dated April 27, 2009 (the “Debenture”), in the principal amount of
$511,590. The Debenture has a maturity date of April 27, 2012, with originally
scheduled payments of $150,000 due each anniversary with a final payment due of
the remaining balance on the third anniversary. The Debenture is convertible at
the option of the holder at any time into shares of Wits Basin common stock at a
conversion price of $0.20 per share. The Debenture was issued to Cabo in
satisfaction of an outstanding payable totaling $451,590 for drilling services
performed relating to the Bates-Hunter Mine property. The difference between the
face amount of the Debenture and the outstanding payable totaling $60,000 is
treated as a discount to the debt and is being amortized to interest expense
over the 3-year term of the Debenture.
16
On April
22, 2010, a $15,000 penalty payment was made to Cabo in order to receive an
extension on the first $150,000 anniversary payment that was due April 27, 2010.
On September 24, 2010, Wits Basin executed a modification agreement to extend
the Debenture (the “Debenture Modification Agreement”). The Debenture
Modification Agreement extends the April 27, 2010 payment date and combines it
with the April 27, 2011 payment, thereby requiring a single payment of $300,000
plus all accrued interest on April 27, 2011; failure to make such payment shall
constitute a default under the terms of the Debenture. The Debenture
Modification Agreement further required that we provide 1,500,000 of the
Standard Gold common shares we own to be placed with an escrow agent as further
collateral pursuant to the Debenture Modification Agreement.
Burnham
Securities and Broadband Capital Management
In order
to satisfy a liability related to our affiliate, CGMR (BVI), we borrowed
$240,000 from Burnham Securities in consideration of an unsecured convertible
promissory note with Burnham Securities (the “Burnham Convertible Note”). The
Burnham Convertible Note (i) had a face value of $270,000, requiring the
recording of a discount fee of $30,000 (which was fully amortized to interest
expense by December 16, 2009), (ii) bore no interest, (iii) was convertible (at
a rate equal to the greater of fair market value and $0.05 per share), and (iv)
the principal amount increased to $310,000 since the Burnham Convertible Note
was not paid by December 16, 2009 and became payable upon demand at any time
after March 16, 2010 per the original terms of the agreement. We recorded an
additional $40,000 discount fee on December 16, 2009. All discounts have been
fully amortized to interest expense as of September 30, 2010.
On March
3, 2010 we received a notice to convert $100,000 of principal of the Burnham
Convertible Note into 1,250,000 shares of our common stock at $0.08 per share
and we paid $25,000 in cash and on July 16, 2010, they converted the remaining
principal balance of $185,000 into 3,700,000 shares of our common stock at $0.05
per share.
Other
Third Parties
As of
September 30, 2010, other convertible notes consist of two notes totaling
$210,000; stated interest rates of 10% and 12.25%; accrued interest of $54,727;
convertible at $0.05 and $0.20 per share; both of the notes have a February 26,
2010 maturity date and are currently past due, original terms apply in the
default period.
During
the nine months ended September 30, 2010, we received notices to convert $75,000
of principal into 2,203,029 shares of common stock at prices ranging from
$0.02618 to $0.05355 per share. The conversions occurred at 85% of the lowest
VWAP for the 10 trading days preceding the conversions.
Summary of All Convertible
Notes
The
following table summarizes the convertible notes balances:
Balance
at December 31, 2009, net of remaining discounts of
$114,826
|
$ | 2,230,510 | ||
Less:
conversion of principal to common stock
|
(455,500 | ) | ||
Less:
value assigned to additional beneficial conversion feature
|
(785,567 | ) | ||
Add:
amortization of original issue discount and beneficial conversion
feature
|
868,726 | |||
Add:
note re-issued as convertible debt
|
75,000 | |||
Less:
principal payments
|
(25,000 | ) | ||
Balance
at September 30, 2010, net of remaining discounts of
$31,667
|
1,908,169 | |||
Less:
current portion
|
(1,728,246 | ) | ||
Long-term
convertible portion
|
$ | 179,923 |
17
Convertible
debt has the following scheduled annual maturities for the years ending December
31:
2010
— Remaining
|
$ | 1,428,246 | ||
2011
|
300,000 | |||
2012
|
211,590 | |||
2013
|
— | |||
2014
|
— | |||
Thereafter
|
— | |||
Total
|
$ | 1,939,836 |
NOTE 13 – OTHER ACCRUED
EXPENSES
The
Company has recorded a number of expenses relating to its transactions for the
acquisition of various global mining properties, consulting agreements and
general and administrative expenses. The following table summarizes the ending
balances of other accrued expenses by relevant transaction:
September 30,
|
December 31,
|
|||||||
2010
|
2009
|
|||||||
China
related transactions
|
$ | 39,473 | $ | 39,473 | ||||
Bates-Hunter
Mine
|
618,730 | 360,185 | ||||||
FSC
Project
|
123,849 | 123,849 | ||||||
Other
expenses
|
196,689 | 270,129 | ||||||
$ | 978,741 | $ | 793,636 |
NOTE 14 – LONG-TERM NOTES
PAYABLE
The
following table summarizes the Company’s long-term notes payable:
September 30,
|
December 31,
|
|||||||
2010
|
2009
|
|||||||
Note
payable - Otten
|
$ | 6,303,700 | $ | 6,189,768 | ||||
Note
payable – China Gold
|
6,153,322 | 6,009,202 | ||||||
Note
payable – London Mining
|
3,992,327 | 5,750,000 | ||||||
Note
payable - Kenglo
|
4,364,732 | 3,094,196 | ||||||
Totals
|
20,814,081 | 21,043,166 | ||||||
Less
current portion
|
(10,518,054 | ) | (6,009,202 | ) | ||||
Long-term
portion
|
$ | 10,296,027 | $ | 15,033,964 |
Long-term
limited recourse promissory note – Otten
On June
12, 2008, Hunter Bates completed the acquisition of the Bates-Hunter Mine
properties, which included land, buildings, equipment, mining claims and
permits, financed through a limited recourse promissory note of Hunter Bates
payable to Mr. George Otten (on behalf of all of the Sellers) in the principal
amount of Cdn$6,750,000 (the “Otten Note”). The Otten Note required an initial
payment of Cdn$250,000 due by December 1, 2008, which was ultimately paid on
November 13, 2009. As of September 30, 2010, the outstanding principal balance
is Cdn$6,500,000 (approximately $6,303,700 US).
18
Commencing
on April 1, 2010, a quarterly installment of accrued interest plus a Production
Revenue Payment (as defined below) becomes payable. The Otten Note was
interest-free until January 1, 2010, and from such date the interest is at a
rate of 6% per annum, with a maturity date of December 31, 2015. The
Otten Note balance reflected a discount (valued at $580,534 and fully amortized
to interest expense as of December 31, 2009) relating to the recourse note being
non-interest bearing until the first payment in 2010. Hunter Bates’ payment
obligations under the Otten Note is secured by a deed of trust relating to all
of the property acquired in favor of Gilpin County Public Trustee for the
benefit of Mr. Otten. Hunter Bates is required to make quarterly principal
repayments (each a “Production Revenue Payment”) beginning April 1, 2010, which
payment(s) shall equal:
|
1.
|
For
all calendar quarters March 31, 2010 to December 31, 2012, 75% of the
profit realized by Hunter Bates for the immediately preceding calendar
quarter, and
|
|
2.
|
For
calendar quarters ending after December 31, 2012, the greater of (a) 75%
of the profit realized by Hunter Bates for the relevant calendar quarter
or (b) Cdn$300,000.
|
Furthermore,
if Hunter Bates has not been obligated to make a Production Revenue Payment by
December 31, 2012, then beginning on April 1, 2013 and continuing on each
payment date until Hunter Bates has become obligated to make a Production
Revenue Payment, Hunter Bates shall make principal repayments in the amount of
Cdn$550,000. Upon Hunter Bates becoming obligated to make a Production Revenue
Payment at anytime after April 1, 2013, Hunter Bates shall make Production
Revenue Payments in accordance with #2 above.
The
Company has not made the quarterly interest payments as of the date of this
report, which were due on April 1, 2010, July 1, 2010 and October 1, 2010, for
an aggregate due of $281,548. Additionally, no production payment was made on
April 1, 2010, because the mine is not in production at this time. On May 17,
2010, we made a $10,000 penalty payment for an extension on the April 1, 2010
interest payment, deferring it until August 1, 2010. The Company currently is in
discussions with Mr. Otten regarding these past due interest
payments.
Second
Amended and Restated Promissory Note with China Gold, LLC
On
December 22, 2008, we entered into Amendment No. 3 to Convertible Notes Purchase
Agreement (“Amendment No. 3”) with China Gold. Pursuant to Amendment No. 3, the
parties consolidated that certain Secured Promissory Note dated October 28, 2008
in the principal amount of $441,000 and that certain Amended and Restated
Promissory Note dated November 10, 2008 in the principal amount of $9.8 million
into a Second Amended and Restated Promissory Note in the aggregate principal
amount of $10,421,107 (the “Consolidated Note”), which reflected the outstanding
principal and accrued interest under the existing notes. This refinancing was
accounted for as an extinguishment of debt, which resulted in a discount to the
Consolidated Note of $1,894,948 in December 2008. The discount has been fully
amortized using the effective interest method.
Pursuant
to the Consolidated Note, we received an extension on the maturity dates
relating to the prior notes from December 31, 2008 to February 15, 2010. The
Consolidated Note accrues interest at a rate of 12.25% per annum with the
principal and interest due on demand at any time on or after February 15,
2010.
On March
17, 2009 and contemporaneously with the closing of the joint venture with London
Mining, we: (i) made a prepayment to China Gold under the Consolidated Note in
the amount of $5.6 million, which included principal of $5,284,041 and accrued
interest of $315,959 (China Gold returned $100,000 of the $5.6 million to us
resulting in a net amount of $5,184,041 being applied to the outstanding
principal balance) and (ii) reduced the exercise price of two warrants to
purchase up to an aggregate of 40,082,000 shares of our common stock issued to
China Gold to $0.075 per share (from $0.15 and $0.11 under the respective
warrants) in consideration for China Gold consenting to a security interest
granted to London Mining for a loan made to the Company, which resulted in an
additional fair value of $86,200 recorded as a discount to the remaining debt,
which has been fully amortized to interest expense as of September 30,
2010.
In June
2009, September 2009 and November 2009, we received an additional $100,000,
$150,000 and $150,000, respectively, from China Gold under the terms of the
existing Consolidated Note.
19
On
December 17, 2009, we entered into Amendment No. 4 (“Amendment No. 4”) to the
Convertible Notes Purchase Agreement, pursuant to which the parties (i)
consolidated certain loan obligations of ours with China Gold into a Third
Amended and Restated Promissory Note dated December 17, 2009 in the principal
amount of $6,153,322 (the “Third Amended Note”), which reflected the outstanding
principal and interest under such consolidated loan obligations, (ii) amended
and modified certain security agreements between the parties to consolidate the
security interests of China Gold, (iii) extend and make certain other
modifications to Platinum Note and the short-term Platinum $110,000 note, and
(iv) reflect certain other agreements between the parties in consideration of
certain accommodations made to us by China Gold, from time to time, including
without limitation China Gold’s consent to our grant to Kenglo (see further
details below) of a security interest that was pari passu to that of China
Gold.
China
Gold’s security interest under the Purchase Agreement was principally governed
by the terms of that certain Amended and Restated Security Agreement dated
December 22, 2008 (the “Prior Security Agreement”) and that certain Second
Amended and Restated Pledge Agreement dated December 22, 2008 (the “Prior Pledge
Agreement”). With the acquisition of the February Note and July Note
from a third-party lender in April 2009, China Gold also acquired a security
interest in certain other assets of the Wits Basin, Hunter Bates and Gregory
Gold, principally pursuant to the terms of that certain Security Agreement dated
February 11, 2008 by and between China Gold (as a successor-in-interest), Wits
Basin, Hunter Bates and Gregory Gold (the “Platinum Security Agreement”).
Pursuant to Amendment No. 4, the parties consolidated the security interests
held by China Gold under the Prior Security Agreement and Prior Pledge Agreement
with those held pursuant to the Platinum Security Agreement into that certain
Second Amended and Restated Security Agreement (the “Amended Security
Agreement”) and Third Amended and Restated Pledge Agreement (the “Amended Pledge
Agreement”), each dated December 17, 2009 and entered into by and between China
Gold, Wits Basin, Hunter Bates and Gregory Gold, resulting in a security
interest in all assets of Wits Basin, Hunter Bates and Gregory Gold, subject to
certain priority liens and matters of record. Pursuant to the Amended
Pledge Agreement, Wits Basin pledged its equity interest in 18,584,544 shares of
Standard Gold (constituting approximately 81% of the equity interest in Standard
Gold), its 35% equity interest in Kwagga Gold (Barbados) Ltd., and its 50%
equity interest in CGMR (BVI), and Hunter Bates pledged its 100% equity interest
in Gregory Gold. Pursuant to the terms of a consent to the Kenglo financing as
referenced above, China Gold agreed to permit Wits Basin to grant a similar
security interest to Kenglo that is pari passu to the security
interests set forth in the Amended Security Agreement and Amended Pledge
Agreement.
As
consideration for entering into Amendment No. 4 and certain other accommodations
that China Gold made to the Company from time to time, including without
limitation China Gold’s consent to the Company’s grant to Kenglo of a security
interest that is pari
passu to the security interest held by China Gold to secure China Gold’s
right to repayment of approximately $6,500,000 in obligations of the Company,
the Company issued China Gold a five-year warrant to purchase 1,600,000 shares
of the Company’s common stock at an exercise price of $0.01, and agreed to
modify the terms of that certain warrant to purchase 38,200,000 shares of the
Company’s common stock issued on November 10, 2008 (the “November Warrant”) and
that certain warrant to purchase 882,000 shares of the Company’s common stock
issued on October 28, 2008 (the “October Warrant”) to reduce the exercise price
of such Warrants from $0.075 per share to $0.01 per share. The October Warrant
was further modified to extend the expiration date from October 28, 2010 to
October 28, 2013 as originally intended by the parties. The fair value of the
warrants issued, extended and repriced were valued at $400,591 and was recorded
as a debt issuance cost in connection with the Kenglo One promissory note more
fully discussed below.
As of
September 30, 2010, the outstanding principal balance of the China Gold note is
$6,153,322 with accrued interest of $622,074.
Promissory
Note with London Mining Plc
Pursuant
to the LM Subscription Agreement, London Mining made a loan to us in the
aggregate amount of $5.75 million (the “WB Loan”). The WB Loan
provides for interest at a rate equal to the prime rate plus 2% per annum
(subject to a cap of 8%), and the obligation matures on the earlier of January
31, 2014 or upon termination of the LM Shareholders’ Agreement. We used the
proceeds of the loan to make: (i) a $5.6 million payment towards our obligation
under the Second Amended and Restated Promissory Note with China Gold (as
described above) and (ii) reductions in our accounts payable.
20
On
December 16, 2009, London Mining negotiated terms with us to reduce certain of
their outstanding debt. In connection with the agreement, we paid $2,000,000 to
be held in escrow until final terms were negotiated on which debt to apply it
against. The funds were released out of an escrow account held by legal counsel
of London Mining on January 7, 2010 and $242,327 was applied to accrued interest
and $1,757,673 was recorded as a principal payment against the WB Loan. As of
September 30, 2010, the note has a principal balance of $3,992,327 and accrued
interest of $154,470 with an interest rate of 5.25%.
Promissory
Note with Kenglo One, Ltd.
On
December 14, 2009, we entered into a loan agreement with Kenglo One, Ltd.
(“Kenglo”) whereby we issued to Kenglo a secured promissory note in the face
amount of $5,000,000 (the “Kenglo Note”) in consideration of a loan of
$4,000,000. The Kenglo Note was issued with an original issue discount of
$1,000,000, and otherwise bears no interest. The maturity date of the
Kenglo Note is February 14, 2011.
As
additional consideration for the loan, we issued Kenglo (i) a five-year warrant
to purchase 16,000,000 shares of our common stock at an exercise price of $0.10
per share (the “Kenglo Warrant”) and (ii) a third-party option to purchase from
Wits Basin 1,299,000 shares of common stock of Standard Gold, Inc. held by the
Company at a price per share of $1.00. The Kenglo Warrant contains standard
anti-dilution rights, and includes a net exercise right on behalf of Kenglo. The
fair value of the warrant was $868,215 based on the Black Scholes pricing model
and is being amortized over the term of the loan.
As of
September 30, 2010, the outstanding principal balance of the Kenglo Note is
$5,000,000 with an unamortized discount balance of $635,268.
Summary
The
following table summarizes the long-term notes payable balances:
Balance
at December 31, 2009, net of remaining discounts of
$2,049,924
|
$ | 21,043,166 | ||
Add:
unrealized foreign currency loss from the Otten limited recourse
note
|
113,932 | |||
Add:
amortization of original issue discount
|
1,414,656 | |||
Less:
principal payments
|
(1,757,673 | ) | ||
Balance
at September 30, 2010, net of remaining discounts of
$635,268
|
20,814,081 | |||
Less:
current portion
|
(10,518,054 | ) | ||
Long-term
portion
|
$ | 10,296,027 |
Long-term
debt has the following scheduled annual maturities for the years ending December
31:
2010
— Remaining
|
$ | 6,153,322 | ||
2011
|
5,000,000 | |||
2012
|
— | |||
2013
|
2,133,560 | |||
2014
|
6,125,887 | |||
Thereafter
|
2,036,580 | |||
Total
|
$ | 21,449,349 |
NOTE 15 – OTHER
LIABILITY
During
2009, the Company in connection with a private placement offering of our common
stock and a debt financing transaction, granted the participating investors
certain options to purchase Standard Gold (our majority owned subsidiary) equity
securities from the Company. The Standard Gold options were used as
incentives to entice the investors to invest in the Company. The
following options were granted:
21
|
·
|
Kenglo
Promissory Note (see Note 14 – Long-term Notes Payable) – includes an
option to purchase from the Company 1,299,000 shares of common stock of
Standard Gold, Inc. at a price of $1.00 per
share.
|
|
·
|
Private
placement of 6,300,000 shares of Wits’ common stock (such that for each
200,000 shares of Wits Basin common stock they purchased, they received an
option to purchase from Wits Basin 20,000 units (“Standard Gold Units”) of
Standard Gold, at a price of $0.50 per Standard Gold Unit) – includes an
option to purchase from the Company 630,000 Standard Gold Units. Each
Standard Gold Unit consists of one share of Standard Gold’s common stock
and a warrant to purchase a share of Standard Gold common stock at an
exercise price of $1.00 per share.
|
Since
these Standard Gold options were not directly and closely related to the equity
of the Company, the estimated total fair value for both of these options was
$205,933 and was recorded as a liability classified as “Other Liability” in the
balance sheet. This liability will reverse through the statement of operations
upon exercise of the options or when the options expire in five
years.
NOTE 16 - SHAREHOLDERS’
EQUITY
Common Stock
Issuances
During
the nine months ended September 30, 2010, we issued the following shares of our
unregistered common stock:
|
·
|
We
issued 3,666,667 shares of our unregistered common stock through a private
placement unit offering at $0.03 per unit, each unit consisting of one
share of our common stock, par value $0.01 per share and one three-year
warrant to purchase a share of common stock at an exercise price of $0.03
per share, resulting in net cash proceeds of
$98,185.
|
|
·
|
We
received notices to convert $183,217 of principal and interest of the
original Platinum Long Term Growth V, LLC 10% Senior Secured Convertible
Promissory Note and notes sold to secondary lenders into 5,249,217 shares
of our common stock at prices ranging from $0.022 to $0.06647 per
share.
|
|
·
|
We
issued 833,592 shares of our common stock in lieu of cash for the
satisfaction of a $50,000 short-term note payable and accrued interest of
$3,708.
|
|
·
|
We
received notices to convert $285,000 of principal of the Burnham
Convertible Note into 4,950,000 shares of our common
stock.
|
|
·
|
We
issued 70,000 shares of our common stock in lieu of cash for the
satisfaction of a $3,500 payable to The Chief Executive Officers Club,
Inc, an entity owned by Joseph Mancuso, a member of our board of
directors.
|
Stock Option
Grants
We have
five stock option plans: the 1999 Stock Option Plan, the 2000 and 2003 Director
Stock Option Plans, the 2001 Employee Stock Option Plan and the 2007 Stock
Incentive Plan. Stock options, stock appreciation rights, restricted stock and
other stock and cash awards may be granted under the plans. In general, options
vest over a period ranging from immediate vesting to five years and expire 10
years from the date of grant. Additionally, we have two non-plans, each titled
“Non-Plan Stock Options” which are outside of the five plans listed
above. As of September 30, 2010, an aggregate of 21,250,000 shares of
our common stock were originally available to be granted under our plans and
non-plans as determined by the board of directors, of which 301,500 are
available for future issuances.
The
Company uses the Black-Scholes pricing model as a method for determining the
estimated fair value for employee stock awards. Compensation expense for
employee stock awards is recognized on a straight-line basis over the vesting
period of service awards and for performance based awards, the Company
recognizes the expense when the performance condition is probable of being
met.
22
No option
grants were issued by Wits Basin during the nine months ended September 30, 2010
or 2009, however, Standard Gold, a consolidated subsidiary, granted 800,000
stock options during the three months ended September 30, 2010. We recorded
$197,911 (of which $120,326 relates to Standard Gold options) and $423,944
related to employee stock compensation expense for the three months ended
September 30, 2010 and 2009, respectively, and $1,248,894 (of which $720,326
relates to Standard Gold options) and $1,271,834 related to employee stock
compensation expense for the nine months ended September 30, 2010 and 2009,
respectively, all relating to share options granted and modifications to
existing options. All stock compensation expense is included in general and
administrative expense. There was no tax benefit from recording this non-cash
expense due to our income tax valuation allowance and due to a portion of the
options being incentive stock options. The compensation expense had a $0.01
impact on the loss per share for the nine months ended September 30, 2010. As of
September 30, 2010, $1,376,000 of total unrecognized compensation expense is
expected to be recognized over a period of approximately 24 months.
The
following table summarizes information about the Company’s stock
options:
Number of
Options
|
Weighted
Average
Exercise
Price
|
|||||||
Options
outstanding - December 31, 2009
|
15,643,500 | $ | 0.47 | |||||
Granted
|
— | — | ||||||
Canceled
or expired
|
(1,650,000 | ) | 0.48 | |||||
Voluntary
stand down of rights (1)
|
(3,000,000 | ) | 1.02 | |||||
Exercised
|
— | — | ||||||
Options
outstanding - September 30, 2010
|
10,993,500 | $ | 0.29 | |||||
Options
exercisable - September 30, 2010
|
9,726,834 | $ | 0.30 | |||||
Weighted
average fair value of options granted during the nine months ended
September 30, 2010
|
$ | — | ||||||
Weighted
average fair value of options granted during the nine months ended
September 30, 2009
|
$ | — |
(1) On
August 10, 2010, the Company entered into a letter agreement with Deborah King,
the spouse of Stephen D. King, our Chief Executive Officer, whereby Ms. King
agreed to a voluntary restriction of rights pertaining to an aggregate of
3,000,000 stock options held, all with an exercise price of $1.02 per share. Mr.
King originally transferred these employee stock options (issued out of the
Company’s 2007 Stock Incentive Plan) to Ms. King on March 12, 2007. These
options were all vested by March 9, 2010. Ms. King agreed that she would not
exercise those certain options, unless and until such time as the Company (i)
receives shareholder approval to increase its authorized capital stock or (ii)
takes other steps as are necessary to permit the exercise of the options within
the Company’s authorized capital stock taking account of shares reserved for
issuance (either event constituting a “Capital Action”). The Company
agreed that, in the event it completes a Capital Action, the exercisability of
the options shall be reinstated prior to any other uses of the Company’s
increased authorized capital stock.
23
The
following tables summarize information about stock options outstanding at
September 30, 2010:
Options Outstanding
|
|||||||||||||
Range of
Exercise Prices
|
Number
Outstanding
|
Weighted
Remaining
Contractual
Life
|
Weighted
Average
Exercise
Price
|
Aggregate
Intrinsic
Value(2)
|
|||||||||
$0.15
to $0.30
|
8,575,000 |
6.8
years
|
$ | 0.23 | $ | — | |||||||
$0.31
to $0.43
|
1,750,000 |
6.3
years
|
$ | 0.43 | $ | — | |||||||
$0.56
to $1.02
|
606,000 |
3.1
years
|
$ | 0.60 | $ | — | |||||||
$2.75
to $3.00
|
62,500 |
0.7
years
|
$ | 2.84 | $ | — | |||||||
$0.15
to $3.00
|
10,993,500 |
6.5
years
|
$ | 0.29 | $ | — |
Options Exercisable
|
|||||||||||||
Range of
Exercise Prices
|
Number
Exercisable
|
Weighted
Remaining
Contractual
Life
|
Weighted
Average
Exercise
Price
|
Aggregate
Intrinsic
Value(2)
|
|||||||||
$0.15
to $0.30
|
7,308,334 |
6.7
years
|
$ | 0.22 | $ | — | |||||||
$0.31
to $0.43
|
1,750,000 |
6.3
years
|
$ | 0.43 | $ | — | |||||||
$0.56
to $1.02
|
606,000 |
3.1
years
|
$ | 0.60 | $ | — | |||||||
$2.75
to $3.00
|
62,500 |
0.7
years
|
$ | 2.84 | $ | — | |||||||
$0.15
to $3.00
|
9,726,834 |
6.3
years
|
$ | 0.30 | $ | — |
(2) The
aggregate intrinsic value in the table represents the difference between the
closing stock price on September 30, 2010 and the exercise price, multiplied by
the number of in-the-money options that would have been received by the option
holders had all option holders exercised their options on September 30, 2010. No
options were exercised during the nine month periods ended September 30, 2010
and 2009.
Stock Purchase
Warrants
For
warrants granted to non-employees in exchange for services, we recorded the fair
value of the equity instrument using the Black-Scholes pricing model unless the
value of the services was more reliably measurable.
During
the three months ended September 30, 2010, we issued 3,666,667 three-year
warrants to purchase common stock at a price of $0.03 per share, in connection
with our private placement of 3,666,667 units. The total fair value of the
warrants was calculated to be $39,274.
24
The
following table summarizes information about the Company’s
warrants:
Number
|
Weighted
Average
Exercise
Price
|
Range of
Exercise Price
|
Weighted
Remaining
Contractual
Life
|
||||||||||
Outstanding
at December 31, 2009
|
78,046,403 | $ | 0.06 | $ | 0.01 – $0.35 | ||||||||
Granted
|
5,166,667 | 0.05 | 0.03 – 0.10 | ||||||||||
Cancelled
or expired
|
(1,610,000 | ) | 0.17 | 0.01 – 0.20 | |||||||||
Voluntary
stand down of rights (3)
|
(7,000,000 | ) | 0.01 | 0.01 | |||||||||
Exercised
|
— | — | — | ||||||||||
Outstanding
at September 30, 2010
|
74,603,070 | $ | 0.06 | $ | 0.01 – $0.35 |
3.4
years
|
|||||||
Warrants
exercisable at Sept. 30, 2010
|
74,603,070 | $ | 0.06 | $ | 0.01 – $0.35 |
(3) On
August 10, 2010, the Company entered into a letter agreement with a warrant
holder, whereby the holder agreed to a voluntary restriction of rights
pertaining to an aggregate of 7,000,000 stock purchase warrants owned, all with
an exercise price of $0.01 per share. The holder agreed that it would not
exercise those certain outstanding warrants, unless and until such time as the
Company (i) receives shareholder approval to increase its authorized capital
stock or (ii) takes other steps as are necessary to permit the exercise of the
warrants within the Company’s authorized capital stock taking account of shares
reserved for issuance (either event constituting a “Capital
Action”). The Company agreed that, in the event it completes a
Capital Action, the exercisability of the warrants shall be reinstated prior to
any other uses of the Company’s increased authorized capital
stock. Additionally, the Company agreed that, until such time as the
warrants become exercisable again, the Company shall obtain the written consent
prior to completing any additional capital raises of the Company.
NOTE 17 – CONTINGENCIES AND
COMMITMENTS
In order
for Standard Gold to enter into the Rex project option agreement on September 7,
2010, which required an initial $100,000 non-refundable fee to be made, Standard
Gold entered into three short-term promissory notes, of which two required a
personal guarantee and the issuance of net smelter return royalties (“NSR”).
Stephen D. King, the Chief Executive Officer of both Wits Basin and Standard
Gold, provided his personal guarantee by pledging 100,000 shares of stock owned
by him in LKA International Inc (LKAI on OTCBB) directly to the two lenders.
Furthermore, the Company provided a two percent (2%) NSR to be distributed
between Mr. King (who received one percent of the NSR) and the two note holders
will share in the other one percent (one note holder will receive 0.375% for a
$25,000 loan and the other will receive 0.625% for a $50,000 loan, see Note 11 –
Short-term Notes Payable).
The NSR
means the value for marketable minerals produced from the Rex project and
received by Standard Gold less the following deductions: (a) all charges made by
a smelter, mill or other purchaser including, without limiting the generality of
the foregoing, treatment, sampling and other charges, penalties and all other
deductions; (b) all costs of transportation and insurance of material from Rex
project to the purchaser or otherwise, as directed; (c) all excise
severance, sales and/or production taxes applicable for royalty payment; and (d)
any other customary out-of-pocket costs of forward sales of Rex project mineral
production. Unless and until Standard Gold sells the majority of its interest in
the Rex project, the amount NSR recipients can receive shall not be deemed to
exceed two percent (2%) of the actual cash flow earned by Standard Gold from the
Rex project.
25
NOTE 18 – EFFECT OF RECENTLY
ISSUED ACCOUNTING STANDARDS
In
January 2010, the FASB issued ASU 2010-6, “Improving Disclosures about Fair
Value Measurements.” This update requires additional disclosure within the roll
forward of activity for assets and liabilities measured at fair value on a
recurring basis, including transfers of assets and liabilities between Level 1
and Level 2 of the fair value hierarchy and the separate presentation of
purchases, sales, issuances and settlements of assets and liabilities within
Level 3 of the fair value hierarchy. In addition, the update requires enhanced
disclosures of the valuation techniques and inputs used in the fair value
measurements within Levels 2 and 3. The new disclosure requirements are
effective for interim and annual periods beginning after December 15, 2009,
except for the disclosure of purchases, sales, issuances and settlements of
Level 3 measurements. Those disclosures are effective for fiscal years beginning
after December 15, 2010. As ASU 2010-6 only requires enhanced disclosures,
the Company does not expect that the adoption of this update will have a
material effect on its financial statements.
26
Item
2. Management’s Discussion and Analysis of Financial
Condition
and Results of Operations
The
following management 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 the Company’s Form 10-K for the fiscal year ended
December 31, 2009.
OVERVIEW
As of
September 30, 2010, we hold (i) an equity interest of approximately 92% of
Standard Gold, Inc. (f/k/a Princeton Acquisitions, Inc.) which owns a past
producing gold mine in Colorado (Bates-Hunter Mine), (ii) a 50% equity interest
in China Global Mining Resources (BVI) Ltd., which owns a producing iron ore
mine and processing plant in the PRC, and (iii) a 35% equity interest in Kwagga
Gold (Barbados) Limited, which holds prospecting rights in South Africa (FSC
Project).
Bates-Hunter
Mine
On June
12, 2008, we transferred our right to purchase the Bates-Hunter Mine, a prior
producing gold mine located in Central City, Colorado, to a newly created wholly
owned subsidiary of ours, the Hunter Bates Mining Corporation (the “Hunter
Bates”). Concurrent with this transfer, Hunter Bates completed the acquisition
of the Bates-Hunter Mine. On September 29, 2009, Standard Gold, Inc., a Colorado
corporation (“Standard Gold”) (formerly known as Princeton Acquisitions, Inc., a
public shell corporation at the time) completed a reverse acquisition via a
share exchange with Hunter Bates and all of its shareholders, whereby the
holders of capital securities of Hunter Bates exchanged all of their capital
securities, on a share-for-share basis, into similar capital securities of
Standard Gold (the “Share Exchange”). Accordingly, the Share Exchange
represented a change in control (reverse merger) and Hunter Bates became a
wholly owned subsidiary of Standard Gold. We hold an aggregate of 21,513,544
shares of Standard Gold common stock (or approximately 92% of the issued and
outstanding shares of common stock) and thus, Standard Gold is a majority owned
subsidiary of ours. Standard Gold’s common stock is quoted on the OTCBB under
the symbol “SDGR.”
Through
August 2008, a total of approximately 12,000 feet of surface drilling has been
accomplished on the Bates-Hunter Mine properties, which provided detailed data,
which has been added to our existing 3-D map of the region. With the surface
drilling program completed in August 2008, no further exploration activities
will be conducted at the Bates-Hunter Mine until such time as sufficient funds
have been acquired to resume exploration activities.
Rex
Gold Mine Project
On
September 7, 2010, Standard Gold entered into an option agreement with US
American Exploration Inc., which specifies terms and conditions by which we may
acquire an interest in the Rex Gold Mine project (“Rex”) located in La Paz
County, Arizona. In order for Standard Gold to acquire an irrevocable ten
percent (10%) joint venture interest in the Rex, they paid an initial $100,000
non-refundable fee and must provide an additional $1,900,000 for exploration
expenditures that must begin within five months and be completed within 23
months.
China
Global Mining Resources (BVI) Ltd
On March
17, 2009, we entered into a joint venture with London Mining, Plc, a United
Kingdom corporation (“London Mining”) for the purpose of acquiring the
processing plant of Nanjing Sudan Mining Co. Ltd (“Sudan”) and the iron ore mine
of Xiaonanshan Mining Co. Ltd (“Xiaonanshan”) (the Sudan and Xiaonanshan
collectively are referred to as the “PRC Properties”). Pursuant to that certain
Amended and Restated Subscription Agreement, dated March 17, 2009 by and between
London Mining and the Company, London Mining purchased 100 ordinary A Shares of
China Global Mining Resources (BVI) Ltd, a British Virgin Islands corporation
and at the time a wholly owned subsidiary of ours (“CGMR (BVI)”) for $38.75
million, which A Shares constitute a 50% equity interest in CGMR (BVI). We hold
the remaining 50% equity interest in the form of 100 ordinary B Shares. The A
Shares carry a preference with respect to return of capital and distributions
until London Mining receives an aggregate of $44.5 million in return of capital
or distributions and certain other conditions are met. On March 17, 2009, CGMR
(BVI), through its wholly owned subsidiary China Global Mining Resources
Limited, a Hong Kong corporation (“CGMR HK”), acquired the PRC Properties. Due
to the disproportionate distributions stipulated in the joint venture agreement
and since the joint venture is struggling to have enough cash flow to make the
required payments to the seller under the original terms of the purchase
agreement, our proportional 1% interest has been impaired to $0 as of December
31, 2009. There were no transactions recorded during the nine months ended
September 30, 2010. As of September 30, 2010, no distributions have been made to
London Mining.
27
CGMR
(BVI)’s current activities relate to improving processes that will optimize the
extraction levels at the Xiaonanshan iron ore open mine and to increase
recoveries and concentrate grade at the Sudan processing plant. For the year
ended 2009, the joint venture mined over 1 million tonnes of ore (since April
2009) and produced approximately 273,000 tonnes of magnetite concentrate at an
average grade of 62% Fe. Furthermore, CGMR (BVI) has undertaken a program to
define the existing resource and to acquire further deep mining rights at
Xiaonanshan, to provide payments to the seller in accordance with the original
acquisition agreement and is investigating its options in order to raise the
funding necessary to assist in acquiring certain adjacent operations in order to
form the basis for future expansion plans.
Kwagga
Gold (Barbados) Limited
We hold a
35% equity interest in Kwagga Gold (Barbados) Limited (“Kwagga Barbados”),
which, through its wholly owned subsidiary Kwagga Gold (Proprietary) Limited, a
South African entity (“Kwagga Pty”), holds mineral exploration rights in South
Africa. This project is referred to as the “FSC Project” and is located adjacent
to the historic Witwatersrand Basin. From October 2003 through August 2005, we
completed only two range-finding drillholes (our $2,100,000 investment to
acquire the 35% equity was utilized to fund the drillholes) and we have not
performed any further exploration activities since. On December 12, 2007, we
entered into an agreement with AfriOre International (Barbados) Limited
(“AfriOre”), the holder of the other 65% of Kwagga Barbados, whereby we may
acquire all of AfriOre’s interest of Kwagga Barbados. We have submitted
documentation to obtain the consent of South Africa’s Minister of Minerals and
Energy, who oversees the Department of Minerals and Energy (the “DME”) to allow
for the sale of the controlling interest in Kwagga Pty to a U.S. company, which
is still under review. Other than limited maintenance, no other activities will
be conducted until consent is issued by the DME.
Summary
As of
September 30, 2010, we possess only a few pieces of equipment and we employ
insufficient numbers of personnel necessary to actually explore and/or mine for
minerals. Therefore, we are substantially dependent on the third party
contractors we engage to perform such operations. As of the date of this
Quarterly Report, we do not claim to have any mineral reserves at the
Bates-Hunter Mine or the FSC Project.
In the
future, we will continue to seek new areas for exploration and the rights that
would allow us to be either owners or participants. These rights may
take the form of direct ownership of mineral exploration or, like our interest
in Kwagga Barbados, these rights may take the form of ownership interests in
entities holding exploration rights. With the completion of the Share Exchange,
Standard Gold and Hunter Bates are operating as a separate gold-focused
consolidated entity. Previously, our main focus was only in gold exploration
projects. Future projects will also involve other minerals, such as our entry
into the Chinese iron ore properties.
Our
principal office is located at 900 IDS Center, 80 South Eighth Street,
Minneapolis, Minnesota 55402-8773. Our telephone number is (612) 349-5277 and
our Internet address is www.witsbasin.com. Our securities trade on the
Over-the-Counter Bulletin Board under the symbol “WITM.”
28
RESULTS
OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2010 COMPARED TO
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009.
Revenues
We had no
revenues from continuing operations for the three and nine months ended
September 30, 2010 and 2009. Furthermore, 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 allow us to report such results.
Operating
Expenses
General
and administrative expenses were $836,972 for the three months ended September
30, 2010 as compared to $1,263,905 for the same period in 2009. Of the $836,972
recorded for 2010, approximately $300,000 relates to non-cash charges for stock
based compensation and approximately $274,000 for consultant fees. Of the
$1,263,905 recorded for 2009, approximately $424,000 relates to non-cash charges
for stock based compensation, $408,000 relates to our Chinese mining activities
and $118,000 relates to public relations services. General and administrative
expenses were $3,069,779 for the nine months ended September 30, 2010 as
compared to $3,067,581 for the same period in 2009. Of the $3,069,779 expenses
recorded in 2010, approximately $1,351,000 relates to non-cash charges for stock
based compensation and approximately $759,000 for consultant fees. Of the
$3,067,581 expenses recorded in 2009, approximately $1,272,000 relates to
non-cash charges for stock based compensation, $739,000 relates to our Chinese
mining activities and $263,000 relates to public relations services. We
anticipate that our operating expenses will increase over the next fiscal year
due to our continued plans to develop or obtain additional exploration projects,
such as the Bates-Hunter and Rex.
Exploration
expenses were $135,473 for the three months ended September 30, 2010 as compared
to $24,044 for the same period in 2009. Exploration expenses were $293,156 for
the nine months ended September 30, 2010 as compared to $119,833 for the same
period in 2009. Part of this increase is due to the $100,000 non-refundable
option fee expense for the Rex project. Other exploration expenses for 2010
relate to the cash expenditures being reported for our maintenance work at the
Bates-Hunter project (the last drilling accomplished at the Bates-Hunter was in
August of 2008) and for due diligence on other gold projects. Exploration
expenses for 2009 relate to the Bates-Hunter Mine, other international projects
we were investigating and direct costs related to our prior attempt to sell the
65 percent of the FSC Project to Communications DVR Inc (“DVR”), a Canadian
capital pool company, which they terminated their intent in June 2009. Depending
upon our success in obtaining dedicated funds and the timeframe for receipt of
such funds, we anticipate the rate of spending for fiscal 2010 exploration
expenses to be greater than 2009 expenses.
Depreciation
and amortization expenses were $21,754 and $66,836 for the three and nine months
ended September 30, 2010, respectively as compared to $26,431 and $79,293 for
the same periods in 2009, which represents straight-line depreciation for the
fixed assets related to the Bates-Hunter Mine. Depreciation on allowable assets
is calculated on a straight-line method over the estimated useful life,
presently ranging from two to twenty years. We anticipate that depreciation
expense will remain at current levels over the next fiscal year.
Immediately
prior to the completion of the Share Exchange, dated September 29, 2009, by and
among certain shareholders of Standard Gold common stock (collectively, the
“Sellers”) and Wits Basin, Wits Basin purchased from the Sellers an aggregate of
1,383,544 shares of Standard Gold’s common stock for $262,500 and incurred
$28,669 in associated legal fees. For the period ended September 30, 2009, we
recorded an aggregate $291,169 as merger transaction costs since the purchase of
those 1,383,544 Standard Gold shares were required in order to effect the Hunter
Bates reverse acquisition with Standard Gold.
We
recorded $991 and $18,729 in losses from equity investments in partially-owned
affiliates for the three and nine months ended September 30, 2010, respectively
as compared to $6,142 and 7,906 for the same periods in 2009. The 2010 and 2009
losses relate to the FSC project.
29
Other Income and
Expenses
Interest
Expense
Interest
expense for the three months ended September 30, 2010 was $1,098,939 and
$1,400,294 for the same period in 2009, which includes non-cash charges for 2010
and 2009 of $688,045 and $755,779, respectively. Interest expense for the nine
months ended September 30, 2010 was $3,860,033 and $4,227,556 for the same
period in 2009, which includes non-cash charges for 2010 and 2009 of $2,681,936
and $3,149,573, respectively. The non-cash charges relate to the
amortization of debt issuance costs, amortization of original issue discounts,
amortization of discounts relating to warrants and beneficial conversion
features, extensions to debt agreements and additional rights granted to the
promissory note holders. We expect interest expense to continue to increase
during 2010, at amounts greater than previously recorded due to our existing
debt and our continued need for cash.
Deconsolidation
of CGMR
In
December 2008, we created a new British Virgin Islands corporation and wholly
owned subsidiary of ours, CGMR (BVI), to serve as the joint venture entity with
London Mining. On March 17, 2009, we entered into a subscription agreement and a
shareholders’ agreement with London Mining, whereby they acquired a 50% equity
interest in CGMR (BVI). We recorded a gain in the deconsolidation of CGMR (BVI)
for the nine months ended September 30, 2009 of $1,461,078. The gain is
comprised primarily of $1,073,578 in unpaid accrued liabilities assumed by the
joint venture.
Foreign
Currency
With the
consummation of the Bates-Hunter Mine acquisition in June 2008, we are recording
direct non-cash gains and losses due to foreign currency exchange fluctuations
in connection with the Cdn$6,750,000 limited recourse promissory note. We
recorded losses of $113,253 and $429,921 for the three months ended September
30, 2010 and 2009, respectively, due to fluctuations in the exchange rate
between the US Dollar and the Canadian Dollar. We recorded losses of $110,981
and $777,242 for the nine months ended September 30, 2010 and 2009,
respectively. We will continue to see gains and losses for foreign currency
exchange rate fluctuations in future periods as long as the promissory note is
outstanding.
Net Loss attributable to
Non-Controlling Interest (NCI)
On
January 1, 2009, the Company adopted guidance provided by the Financial
Accounting Standards Board with regards to accounting for the non-controlling
interest of a subsidiary. Such guidance establishes new accounting and reporting
standards for the non-controlling interest in a subsidiary and the accounting
for the deconsolidation of a subsidiary. The guidance also clarifies that
changes in a parent’s ownership interest in a subsidiary that do not result in
deconsolidation are equity transactions if the parent retains its controlling
financial interest and requires that a parent recognize a gain or loss in net
income when a subsidiary is deconsolidated. A loss of $78,147 and $178,575 was
attributed to the non-controlling interest for the three and nine months ended
September 30, 2010, respectively, relating to Standard Gold.
LIQUIDITY
AND CAPITAL RESOURCES
Liquidity
is a measure of an entity’s ability to secure enough cash to meet its
contractual and operating needs as they arise. We have funded our operations and
satisfied our capital requirements primarily through the sale of securities and
debt financing. We do not anticipate generating sufficient net positive cash
flows from our operations to fund the next twelve months. We had a working
capital deficit of $15,136,503 at September 30, 2010, compared to $8,656,847 at
December 31, 2009. Cash and equivalents were $14,783 at September 30, 2010,
representing a decrease of $1,094,761 from the cash and equivalents of
$1,109,544 at December 31, 2009.
In August
2010, we completed a private placement of 3,666,667 units of our securities,
each unit consisting of one share of common stock and a three-year warrant to
purchase one share of common stock at a price of $0.03 per share. The units were
sold at a price of $0.03 per unit, resulting in gross proceeds of
$110,000.
30
We
received net cash of $98,185 after agent commissions and other offering related
expenses.
Our cash
reserves are basically depleted at September 30, 2010. We need to raise
additional capital to pay for our basic operational needs, which is
approximately $300,000 per month. If we are not able to raise additional working
capital, we may have to cutback on operational expenditures or cease operations
altogether.
For the
nine months ended September 30, 2010 and 2009, we had net cash used in operating
activities of $1,535,273 and $1,839,915, respectively. During 2010, our primary
capital requirements have been wages and consulting fees. During 2009, our
primary capital requirement had been the funding of expenses related to our
entrance into Chinese business opportunities.
For the
nine months ended September 30, 2010 and 2009, we had net cash provided by
financing activities of $440,512 and $1,679,433, respectively. During 2010, cash
used in financing activities was primarily to repay $1,782,673 of debt. During
2009, we received cash proceeds of $6,860,000 from debt financing and repaid
$5,382,144 of debt.
The
following table summarizes the Company’s debt as of September 30,
2010:
Outstanding
Amount
|
Interest
Rate
|
Un-amortized
Discounts
|
Accrued
Interest
|
Maturity
Date
|
Type
|
||||||||||||
$ | 22,756 | 18 | % | $ | 2,244 | $ | 530 |
October
17, 2010 (1)
|
Conventional
|
||||||||
$ | 25,000 | 5 | % | $ | — | $ | 79 |
November
30, 2010
|
Conventional
|
||||||||
$ | 50,000 | 5 | % | $ | — | $ | 158 |
November
30, 2010
|
Conventional
|
||||||||
$ | 25,855 | 10.00 | % | $ | — | $ | 2,410 |
February
11, 2009 (2)
|
Convertible
(3)
|
||||||||
$ | 1,000,000 | 8.00 | % | $ | — | $ | 163,266 |
August
22, 2009(3)
|
Convertible
(4)
|
||||||||
$ | 117,391 | 10.00 | % | $ | — | $ | 35,509 |
February
15, 2010 (2)
|
Convertible
(5)
|
||||||||
$ | 110,000 | 10.00 | % | $ | — | $ | 17,118 |
February
15, 2010 (1)
|
Conventional
|
||||||||
$ | 6,153,322 | 12.25 | % | $ | — | $ | 622,074 |
February
15, 2010 (2)
|
Conventional
|
||||||||
$ | 110,000 | 10.00 | % | $ | — | $ | 33,201 |
February
26, 2010 (1)
|
Convertible
(6)
|
||||||||
$ | 100,000 | 12.25 | % | $ | — | $ | 21,526 |
February
26, 2010 (1)
|
Convertible
(7)
|
||||||||
$ | 50,000 | 10.00 | % | $ | — | $ | 5,501 |
June
30, 2010 (1)
|
Conventional
|
||||||||
$ | 75,000 | 10.00 | % | $ | — | $ | 6,936 |
November
10, 2010 (1)
|
Convertible
(8)
|
||||||||
$ | 4,364,732 | (9 | ) | $ | 635,268 | $ | — |
February
14, 2011
|
Conventional
|
||||||||
$ | 479,923 | 12.00 | % | $ | 31,667 | $ | 92,661 |
April
27, 2012
|
Convertible
(6)
|
||||||||
$ | 3,992,327 | (10 | ) | $ | — | $ | 154,470 |
January
31, 2014
|
Conventional
|
||||||||
$ | 6,303,700 | 6.00 | % | $ | — | $ | 281,548 |
December
31, 2015
|
Conventional
|
||||||||
$ | 30,000 | (11 | ) | $ | — | $ | — |
(12)
|
Conventional
|
|
1.
|
Past
due as of the date of this Quarterly Report; original terms apply in the
default period.
|
|
2.
|
Due
on demand after such date.
|
|
3.
|
Convertible
at the lesser of $0.18 per share or 85% of the lowest VWAP
(volume-weighted average price) for the 10 trading days preceding the
conversion notice date.
|
|
4.
|
Convertible
at $0.10 per share.
|
|
5.
|
Convertible
at the lesser of $0.18 per share or 85% of the lowest VWAP
(volume-weighted average price) for the 10 trading days preceding the
conversion notice date, with a floor of
$0.01.
|
|
6.
|
Convertible
at $0.20 per share.
|
|
7.
|
Convertible
at the greater of (i) the current Fair Market Value (the closing sale
price as reported on the date of conversion) and (ii) $0.05 per
share.
|
|
8.
|
Convertible
at the lesser of $0.08 per share or 85% of the lowest VWAP
(volume-weighted average price) for the 10 trading days preceding the
conversion notice date, with a floor of
$0.03.
|
|
9.
|
Promissory
note was issued with an initial $1,000,000
discount.
|
10.
|
Interest
at a rate equal to the prime rate plus 2% per annum (subject to a cap of
8%). As of September 30, 2010,
5.25%.
|
31
|
11.
|
Zero
percent interest with preferential repayment from any Chilean
projects.
|
|
12.
|
Preferential
repayment from any Chilean
projects.
|
Summary
Our
existing sources of liquidity will not provide enough cash to fund operations
for the next twelve months. As of the date of this Quarterly Report, we have
estimated our cash needs over the next twelve months to be approximately
$16,000,000 (which includes approximately $14,500,000 for repayment of debt and
interest, assuming some or all of such notes are not converted into equity prior
to maturity) and Standard Gold is required to provide $1,900,000 for exploration
activities for the Rex project. Additionally, should any projects or mergers be
completed during 2010, additional funds will be required. We will continue our
attempt to raise additional capital. Some of the possibilities available to us
are through private equity transactions, to develop a credit facility with a
lender or the exercise of options and warrants. However, such additional capital
may not be available to us at acceptable terms or at all. In the event that we
are unable to obtain additional capital, we would be forced to reduce operating
expenditures and/or cease operations altogether.
Off Balance Sheet
Arrangements
During
the nine months ended September 30, 2010, we did not engage in any off balance
sheet arrangements as defined in Item 303(a)(4) of Regulation S-K.
ITEM
4T. Controls and Procedures
Under the
supervision of, and the participation of, our management, including our Chief
Executive Officer and Chief Financial Officer, we have conducted an evaluation
of our disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities and Exchange Act of 1934, as amended (the
“Exchange Act”)) as of the end of the period covered by this Quarterly Report on
Form 10-Q to ensure that information required to be disclosed by us in the
reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the Securities and
Exchange Commission’s rules and forms, and is accumulated and communicated to
our management as appropriate to allow timely decisions regarding required
disclosure.
Based on
this evaluation and taking into account that certain material weaknesses existed
as of December 31, 2009, our Chief Executive Officer and Chief Financial Officer
have each concluded that our disclosure controls and procedures were not
effective. As a result of this conclusion, the financial statements
for the period covered by this Quarterly Report on Form 10-Q were prepared with
particular attention to the material weaknesses previously disclosed.
Notwithstanding the material weaknesses in internal controls that continue to
exist as of September 30, 2010, we have concluded that the financial statements
included in this Quarterly Report on Form 10-Q present fairly, the financial
position, results of operations and cash flows of the Company as required for
interim financial statements.
Due to
the small number of employees dealing with general administrative and financial
matters and the expenses associated with increases to remediate the disclosure
controls and procedures that have been identified, the Company continued to
operate without changes to its internal controls over financial reporting for
the period covered by this Quarterly Report on Form 10-Q while continuing to
seek the expertise it needs to remediate the material weaknesses at an
appropriate cost benefit basis.
32
PART
II. OTHER INFORMATION
Item
1. Legal Proceedings
None.
Item
1A. Risk Factors
The most
significant risk factors applicable to the Company are described in Part I Item
1A entitled “Risk Factors” of the Company’s Annual Report on Form 10-K for the
fiscal year ended December 31, 2009 (the “2009 Form 10-K”). There
have been no material changes to the risk factors previously disclosed in the
2009 Form 10-K. The risks described in the 2009 Form 10-K are not the
only risks facing the Company. Additional risks and uncertainties not
currently known to management may materially adversely affect the Company’s
business, financial condition, and/or operating results.
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
During
the three months ended September 30, 2010: (i) we received a notice to convert
$25,513 of principal and interest of the original Platinum Long Term Growth V,
LLC 10% Senior Secured Convertible Promissory Note and notes sold to secondary
lenders into 1,159,678 shares of our common stock at $0.022 per share; (ii) we
received a notice to convert the remaining $185,000 of principal of the Burnham
Convertible Note into 3,700,000 shares of our common stock; and (iii) the
Company accepted subscriptions from accredited investors for the sale of
3,666,667 shares of the Company’s common stock and three-year warrants to
purchase 3,666,667 shares of the Company’s common stock at an exercise price of
$0.03 per share for a unit price of $0.03, resulting in net cash of
approximately $98,185 after agent commissions and other offering related
expenses.
For these
issuances, the Company relied on the exemption from federal registration under
Section 4(2) of the Securities Act of 1933, and/or Rule 506 promulgated
thereunder. The Company relied on this exemption and/or the safe harbor
rule thereunder based on the fact that (i) that each investor had knowledge
and experience in financial and business matters such that they were
capable of evaluating the risks of the investment, and (ii) that each investor
has represented to the Company they are an accredited investor.
Item
3. Defaults Upon Senior Securities
None.
Item
5. Other Information
None.
Item
6. Exhibits
Exhibit
|
Description
|
|
4.1**
|
Form
of Common Stock Purchase Warrant issued in connection with private
placement.
|
|
10.1**
|
Form
of Common Stock Subscription Agreement.
|
|
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
|
** Filed
herewith electronically
33
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.
|
||
Date: November
15, 2010
|
||
By:
|
/s/ Stephen D.
King
|
|
Stephen
D. King
|
||
Chief
Executive Officer
|
||
By:
|
/s/ Mark D.
Dacko
|
|
Mark
D. Dacko
|
||
Chief
Financial Officer
|
34