UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended July 31, 2012

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: 000-54706

 

CALIFORNIA GOLD CORP.

(Exact Name of Registrant as Specified in its Charter)

 

Nevada	83-483725
(State of Incorporation)	(IRS Employer Identification No.)

 

4515 Ocean View Blvd., Suite 305, La Cañada, CA 91011

(818) 542-6891

(Address of principal executive offices and telephone number)

 

Indicate whether the registrant (1) filed all reports required to be filed by Section 13 or 15 (d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  x    No  ¨

 

Indicate 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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  x   No  ¨

 

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 a check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ¨    No  x

 

There were 115,201,260 shares of common stock issued and outstanding as of September 19, 2012.

 

 

CALIFORNIA GOLD CORP.

 

INDEX

 

			Page
Part I Financial Information
Item 1	Financial Statements		3
	Consolidated Balance Sheets (unaudited)		4
	Consolidated Statements of Expenses (unaudited)		5
	Consolidated Statements of Cash Flows (unaudited)		6
	Notes to the Financial Statements (unaudited)		8
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations		21
Item 3	Quantitative and Qualitative Disclosures About Market Risk		27
Item 4	Controls and Procedures		27
Part II Other Information
Item 1	Legal Proceedings		29
Item 1A	Risk Factors		29
Item 2	Unregistered Sale of Equity Securities and Use of Proceeds		29
Item 3	Defaults Upon Senior Securities		29
Item 4	Mine Safety Disclosures		30
Item 5	Other Information		30
Item 6	Exhibits		30
Signatures			32
Exhibit - Certification of Principal Executive Officer and Principal Financial Officer
Exhibit - Certification of Chief Executive Officer and Chief Financial Officer

 

 

PART I

FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

The financial statements of California Gold Corp. (the “Company”) required to be filed with this Quarterly Report on Form 10-Q were prepared by management and commence on the following page, together with the related Notes. In the opinion of management, these consolidated financial statements fairly present the financial condition of the Company, but should be read in conjunction with the financial statements of the Company for the period ended January 31, 2012, previously filed on Form 10-K with the Securities and Exchange Commission, File No. 333-134549.

 

 

 CALIFORNIA GOLD CORP.

(AN EXPLORATION STAGE COMPANY)

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

		July 31, 2012				January 31, 2012
ASSETS
Current assets:
Cash		$	537,979			$	828,181
Other receivables			-				5,907
Prepaid expenses			29,660				27,556
Total current assets			567,639				861,644
Property and equipment, net			6,984				7,865
Mining rights			47,500				47,500
Total assets		$	622,123			$	917,009
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable		$	83,395			$	50,333
Accounts payable – related party			68,146				-
Derivative liabilities			237,087				1,817,100
Other accrued liabilities – related party			29,500				2,500
Total current liabilities			418,128				1,869,933
Total liabilities			418,128				1,869,933
Stockholders' equity (deficit):
Preferred stock, par value $0.001 per share, 22,000,000 shares authorized; 22,000,000 shares issued and outstanding			22,000				22,000
Common stock, par value $0.001 per share, 300,000,000 shares authorized; 114,951,260 and 109,451,260 shares issued and outstanding at July 31, 2012 and January 31, 2012, respectively			114,951				109,451
Additional paid-in capital			2,381,093				2,037,546
Deficit accumulated during the exploration stage			(2,314,049	)			(3,121,921	)
Total stockholders' equity (deficit)			203,995				(952,924	)
Total liabilities and stockholders' equity (deficit)		$	622,123			$	917,009

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

 

CALIFORNIA GOLD CORP.

(AN EXPLORATION STAGE COMPANY)

CONSOLIDATED STATEMENTS OF EXPENSES

(Unaudited)

 

		Three Months Ended								Six Months Ended								April 19, 2004 (Inception)
		July 31,								July 31,								to July 31,
		2012				2011				2012				2011				2012
Expenses:
Mineral property expenses		$	119,882			$	64,234			$	182,885			$	130,408			$	616,640
Bad debt expense			-				-				-				-				559,483
Depreciation expense			441				63				881				63				1,825
General and administrative expenses			150,054				449,167				690,813				550,864				2,779,979
Total operating expenses			270,377				513,464				874,579				681,335				3,957,927
Loss from operations			(270,377	)			(513,464	)			(874,579	)			(681,335	)			(3,957,927	)
Other income (expenses):
Interest income			305				478				674				1,032				3,025
Interest expense			-				-				-				-				(1,763	)
Realized and unrealized gain   on derivatives, net			930,571				826,978				1,681,998				513,955				1,652,455
Amortization of debt discount			-				-				-				-				(9,618	)
Foreign currency exchange loss			-				-				(221	)			-				(221	)
Total other income (expenses)			930,876				827,456				1,682,451				514,987				1,643,878
Net income (loss)		$	660,499			$	313,992			$	807,872			$	(166,348	)		$	(2,314,049	)
Income (loss) per common share:
Income (loss) per common share - basic and diluted		$	0.01			$	0.00			$	0.01			$	(0.00	)
Weighted average number of common shares outstanding - basic and diluted			114,962,130				104,256,205				118,100,717				99,392,927

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

 

CALIFORNIA GOLD CORP.

(AN EXPLORATION STAGE COMPANY)

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

		Six Months Ended								April 19, 2004 (Inception)
		July 31,								to July 31,
		2012				2011				2012
Cash flows from operating activities:
Net income (loss)		$	807,872			$	(166,348	)		$	(2,314,049	)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation expense			881				63				1,825
Stock-based compensation			125,000				-				125,000
Stock-based compensation – related party			157,782				340,544				1,166,434
Amortization of debt discount			-				-				9,618
Unrealized and realized gain on derivatives, net			(1,681,998	)			(513,955	)			(1,652,455	)
Changes in operating assets and liabilities:
Other receivables			5,907				-				-
Prepaid expenses			(2,104	)			(34,250	)			(29,660	)
Prepaid expenses – related party			-				27,784				-
Accounts payable			33,062				(15,278	)			25,048
Accounts payable – related party			68,146				(46,250	)			225,811
Other accrued expenses – related party			27,000				(2,500	)			29,642
Interest accrued on notes payable from related party			-				-				1,621
Net cash used in operating activities			(458,452	)			(410,190	)			(2,411,165	)
Cash flows from investing activities:
Purchase of property and equipment			-				(8,809	)			(8,809	)
Acquisition of mining rights			-				-				(30,000	)
Net cash used in investing activities			-				(8,809	)			(38,809	)
Cash flows from financing activities:
Proceeds from related party loans			-				-				92,430
Proceeds from common and preferred stock issued, net of offering costs			168,250				396,500				2,958,523
Payments from cancellation of common stock			-				-				(63,000	)
Net cash provided by financing activities			168,250				396,500				2,987,953
Net increase (decrease) in cash			(290,202	)			(22,499	)			537,979
Cash - beginning of period			828,181				1,268,254				-
Cash - end of period		$	537,979			$	1,245,755			$	537,979
Noncash investing and financing activities:
Contributed capital - loss on extinguishment of debt owed to related party		$	-			$	-			$	374
Debt discount due to derivative liabilities		$	-			$	-			$	9,618
Contributed capital - payables settled by stockholder		$	-			$	-			$	157,665
Issuance of common stock for convertible notes		$	-			$	-			$	3,660
Re-class of derivatives related to convertible notes		$	-			$	-			$	91,365
Issuance of derivative warrant instruments		$	101,985			$	544,035			$	1,716,992
Related party note receivable write-off		$	-			$	-			$	557,927
Common stock cancellation		$	50,000			$	-			$	111,700
Issuance of common stock for acquisition of mining rights		$	-			$	-			$	17,500

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

 

CALIFORNIA GOLD CORP.

(AN EXPLORATION STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

NOTE 1 – GENERAL ORGANIZATION AND BUSINESS

 

California Gold Corp. (“California Gold” or the “Company”) is a Nevada corporation whose principal focus is the identification, acquisition, and development of rare and precious metals mining properties in the Americas. The Company is still in the exploration stage and has not generated any revenues from its mining properties to date.

 

The Company was incorporated on April 19, 2004 under the name of Arbutus Resources, Inc. On August 9, 2007, the Company changed its name to US Uranium, Inc. On March 9, 2009, the Company changed its name to California Gold Corp.

 

NOTE 2 – BASIS OF PRESENTATION

 

The accompanying unaudited interim consolidated financial statements as of July 31, 2012 and 2011 and for the three and six months then ended have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information, and pursuant to the instructions to Form 10-Q and Article 8 of Regulation S-X of the Securities and Exchange Commission and on the same basis as the annual audited consolidated financial statements. The consolidated financial statements as of and for the three and six months ended July 31, 2012 and 2011 are unaudited. In the opinion of management, these consolidated financial statements include all adjustments, which, unless otherwise disclosed, are of a normal recurring nature, necessary for a fair presentation of the financial position, results of operations, and cash flows for the periods presented. The results for interim periods are not necessarily indicative of results for the entire year. The balance sheet at January 31, 2012 has been derived from audited consolidated financial statements; however, the notes to the consolidated financial statements do not include all of the information and notes required by accounting principles generally accepted in the United States of America for complete financial statements. The accompanying unaudited interim consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended January 31, 2012 as filed with the SEC.

 

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Principles of Consolidation

 

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, CalGold de Mexico, S. de R.L. de C.V., formed to explore mining opportunities in Mexico. Equity investments in which we exercise significant influence, but do not control and are not the primary beneficiary, are accounted for using the equity method of accounting. Investments in which we do not exercise significant influence over the investee are accounted for using the cost method of accounting. All material intercompany balances and transactions have been eliminated.

 

 

CALIFORNIA GOLD CORP.

(AN EXPLORATION STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Acquisition-Related Costs

 

For the three and six months ended July 31, 2012, the Company incurred certain costs associated with efforts to search for and establish mineral reserves in the AuroTellurio property (as defined below in Note 4). Those costs included legal, valuation, travel, and other professional or consulting fees. The Company accounted for those acquisition-related costs under FASB ASC Topic 805, Business Combinations. The costs were recognized as mineral property expenses in the periods in which the costs were incurred and the services received. For the three months ended July 31, 2012 and 2011, the Company recorded $119,882 and $64,234 of mineral expenses, respectively. For the six months ended July 31, 2012 and 2011, the Company recorded $182,885 and $130,408 of mineral expenses, respectively.

 

Stock-Based Compensation

 

The Company accounts for its stock-based compensation in which the Company obtains employee services in share-based payment transactions under FASB ASC Topic 718, Compensation – Stock Compensation, which requires the Company to expense the cost of employee services received in exchange for an award of equity instruments based on the grant date fair value of such instruments over the vesting period.

 

The Company also adopted FASB ASC Topic 505-50, Equity-Based Payments to Non-Employees, to account for equity instruments issued to parties other than employees for acquiring goods or services. Such awards for services are recorded at either the fair value of the consideration received or the fair value of the instruments issued in exchange for such services, whichever is more reliably measurable.

 

For the three months ended July 31, 2012 and 2011, the Company recorded $25,285 and $329,989 in stock-based compensation, respectively. For the six months ended July 31, 2012 and 2011, the Company recorded $282,782 and $340,544 in stock-based compensation, respectively. The Company’s stock-based compensation was recorded as a component of general and administrative expenses.

 

New Accounting Pronouncements

 

The Company does not expect adoption of the new accounting pronouncements will have a material effect on the Company’s consolidated financial statements.

 

NOTE 4 – MINING RIGHTS

 

On February 11, 2011, the Company entered into a property option agreement (the “AuroTellurio Option Agreement”) with Mexivada Mining Corp. (“Mexivada”) to acquire up to an 80% interest in Mexivada’s concessions comprising its AuroTellurio tellurium-gold-silver property (the “La Viuda Concessions,” the “AuroTellurio Property” or the “Property”) in Mexico.

 

 

CALIFORNIA GOLD CORP.

(AN EXPLORATION STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Under the terms of the AuroTellurio Option Agreement, the Company will acquire up to an 80% legal and beneficial ownership interest in the AuroTellurio Property by making certain cash payments and share issuances to Mexivada and incurring certain exploration expenditures on the Property. See Note 10 for the Company’s commitments under the AuroTellurio Option Agreement.

 

Mexivada and its Mexican subsidiary hold only the mineral rights in the AuroTellurio Property, which rights were granted by the government of Mexico. Neither Mexivada nor its Mexican subsidiary owns the real property rights to the land underlying the La Viuda Concessions. Prior to the first closing under the AuroTellurio Option Agreement on August 4, 2011, the Company obtained a surface rights agreement with the landowner on whose property the La Viuda Concessions are located to conduct its mineral exploration program. The agreement became effective June 17, 2011, runs for a term of 12 months and may be extended for two additional years under the same terms. The Company will pay the land owner $14,400 for each year in which the Company carries out exploration work on this land. In June 2012, the agreement was extended for an additional year.

 

On August 4, 2011, the Company conducted the first closing under the AuroTellurio Option Agreement. The purchase price for the first closing was $30,000 in cash and 250,000 common shares, fair valued at $17,500 based on the market price on the date of issuance. The $30,000 in cash includes the $20,000 deposits paid to Mexivada in December 2010 in connection with signing the binding offer letter agreement, which provided the Company with additional time to perform its due diligence, raise financing, and prepare a definite purchase agreement. At the closing, the Company paid the remaining $10,000 cash and issued the 250,000 common shares.

 

In exchange, the Company received from Mexivada four fully executed title deeds, each transferring to the Company a twenty percent (20%) interest in the La Viuda Concessions comprising the AuroTellurio Property, to be held in escrow by the Company's counsel until fully vested in accordance with their terms. If the Company defaults on its commitments under the AuroTellurio Option Agreement or otherwise determines not to proceed with the acquisition of the AuroTellurio Property, all unvested interests and related title deeds in the AuroTellurio Property will be returned to Mexivada.

 

On the first anniversary of the closing, the first $750,000 requirement per year was reached by the Company and thus, Mexivada will grant the 20% vested interest in the AuroTellurio Property as soon as the Company pays $40,000 and issue 250,000 shares of its common stock to Mexivada, per the AuroTellurio Option Agreement (Note 10). The Company made a payment of $40,000 on August 10, 2012 and issued 250,000 shares on August 28, 2012, which were valued at $3,750, or $0.015 per share. Thus, having met all the required conditions, the first 20% interest in the La Viuda Concessions has vested in the Company as of August 28, 2012.

 

 

CALIFORNIA GOLD CORP.

(AN EXPLORATION STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 5 – RELATED PARTY TRANSACTIONS

 

Compensation of Officers and Directors

 

Officers and directors fees totaled $13,500 and $16,500 for the three months ended July 31, 2012 and 2011, respectively. Officers and directors fees totaled $27,000 and $36,500 for the six months ended July 31, 2012 and 2011, respectively. The total compensation of officers and directors was recorded as a component of general and administrative expenses.

 

As of July 31, 2012 and January 31, 2012, the Company owed its officers and directors $29,500 and $2,500, respectively, for January – July 2012 unpaid fees, which were recorded as other accrued liabilities – related party in its consolidated balance sheets.

 

Legal Fees

 

Effective December 1, 2010, the Company entered into a 12-month retainer agreement with a stockholder, pursuant to which the Company paid a monthly fee of $5,500 for providing legal services relating to SEC regulatory compliance and reporting requirements. After the agreement expired in November 2011, the stockholder continued to provide these legal services on a month-to-month basis. For the three and six months ended July 31, 2012, the Company incurred $18,500 and $40,500 in legal fees relating to these services, respectively. For the three and six months ended July 31, 2011, the Company incurred $16,500 and $33,000 in legal fees under this agreement, respectively.

 

Additionally, the Company agreed to pay a flat fee of $50,000 for legal representation relating to the acquisition of the AuroTellurio Property from Mexivada. The Company reached the maximum payment of $50,000 per the addendum as of July 31, 2011.

 

The Company also paid legal fees (calculated and billed on an hourly basis) up to a maximum of $50,000 for the preparation and filing of its resale registration statement of the Form S-1 covering the shares of the Company’s common stock underlying the warrants contained in the units sold in the 2010/2011 private placement offering. For the three and six months ended July 31, 2012, the Company incurred $12,337 and $38,777 in legal fees for preparation of its registration statements of the Form S-1, respectively. For the three and six months ended July 31, 2011, the Company incurred $0 and $7,600 in fees relating to these services, respectively.

 

For the three months ended July 31, 2012 and 2011, the Company’s total professional legal fees to a stockholder were $41,067 and $23,446, respectively. For the six months ended July 31, 2012 and 2011, the Company’s total professional legal fees were $105,646 and $80,106, respectively. The legal fees primarily related to SEC filings and other general corporate matters and were included as a component of general and administrative expenses and acquisition-related costs. A total of $65,646 outstanding payable for legal services provided was included in the Company’s consolidated balance sheets as of July 31, 2012, compared to $0 outstanding as of January 31, 2012.

 

 

CALIFORNIA GOLD CORP.

(AN EXPLORATION STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Consulting and Other Professional Fees

 

In January 2011, the Company entered into an administrative services agreement with Incorporated Communications Services (“ICS”), a California corporation. George Duggan, the Company’s Chief Operations Officer, is the Vice President of ICS. Pursuant to the agreement with ICS, ICS will make available its address in La Canada, California to serve as the Company’s corporate headquarters and communications office, and provide the Company with basic administrative services, including coordinating and routing incoming telephone calls, handling investor inquiries, assisting in the preparation of press releases, developing an informational website and coordinating with the auditors and financial statement preparers. The Company pays ICS a monthly fee of $6,000 for these services. This agreement with ICS became effective January 1, 2011, ran for 12 months and was extended for an additional 12 months beginning January 1, 2012. The Company incurred $18,000 and $36,000 for the three and six months ended July 31, 2012 and 2011, respectively, which were included as a component of general and administrative expenses. Additionally, the Company reimbursed ICS for the expenses related to the services provided of $3,346 and $9,139 for the three and six months ended July 31, 2012, respectively. The Company reimbursed ICS for the expenses related to the services provided of $2,620 and $6,353 for the three and six months ended July 31, 2011, respectively. As of July 31, 2012 and January 31, 2012, the Company had no outstanding payables to ICS.

 

On February 28, 2011, the Company issued 500,000 shares to a stockholder in consideration of consulting services rendered to the Company and recorded the $0 and $10,555 of stock-based compensation expense in the three and six months ended July 31, 2011. The stock-based compensation expense was included as a component of general and administrative expenses in the Company’s consolidated statements of expenses.

 

On June 6, 2011, the Company entered into a consulting agreement with another stockholder of the Company. The Company engaged the stockholder to provide certain consulting services related to the Company’s business for the period through June 5, 2013, for a monthly compensation fee of $6,000. Beginning February 6, 2012, the monthly consulting fee was reduced to $3,000 and then reversed back to $6,000 per month starting June 6, 2012. Additionally, in May 2012, the Company paid back the reduced fees for the months of March 2012 through May 2012 to the stockholder. The Company incurred $24,000 and $36,000 in consulting fees related to this agreement for the three and six months ended July 31, 2012, respectively, which were included as a component of general and administrative expenses. For the three and six months ended July 31, 2011, the Company recorded $12,000 in consulting fees to this stockholder. As of July 31, 2012 and January 31, 2011, the Company recorded payables to the stockholder in the amount of $2,500 and $0, respectively.

 

 

CALIFORNIA GOLD CORP.

(AN EXPLORATION STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 6 – DERIVATIVE LIABILITIES

 

Derivative Warrant Instruments

 

In the December 2010 and January 2011 Unit Offering, the Company incurred liabilities for the estimated fair value of derivative warrant instruments in the form of warrants. The estimated fair value of the derivative warrant instruments was calculated using the Black-Scholes option pricing model and amounted to $1,323,133 at the grant dates as of December 22, 2010 and January 13, 2011. These estimates were re-valued as being $137,866 and $1,383,475 at the balance sheet dates as of July 31, 2012 and January 31, 2012, respectively. The Company recorded a $710,567 and $1,245,609 change in value as unrealized gain in non-operating income for the three and six months ended July 31, 2012, respectively, and a $754,137 and $502,498 change in value as unrealized gain in non-operating expense for the three and six months ended July 31, 2011, respectively.

 

The fair value of each warrant granted in the private placement offering has been estimated on the dates of grant using the Black-Scholes option pricing model, under the following assumptions:

 

Common stock issuable upon exercise of warrants							30,739,129
Market price of the Company’s common stock on the measurement dates						$	0.05 and 0.09
Exercise price						$	0.125
Risk free interest rate (1)							0.475	%
Dividend yield							0.00	%
Volatility							257.95	%
Expected exercise term in years							1.5

 

(1)

The risk-free interest rate was determined by management using the average of 1- and 2-year Treasury Bill yield as of the grant dates.

 

In April 2011, the Company added to the Unit Offering an over-allotment option. As such, the Company incurred liabilities for the estimated fair value of derivative warrant instruments in the form of warrants. The estimated fair value of the derivative warrant instruments was calculated using the Black-Scholes option pricing model and amounted to $71,973, $131,077, and $88,824 at the grant dates of April 7, 2011, April 13, 2011, and April 30, 2011, respectively. The April 2011 grants were re-valued as being $36,993 and $211,117 at the balance sheet date of July 31, 2012 and January 31, 2012, respectively. The Company recorded an $84,482 and $174,124 change in value as unrealized gain in non-operating income for the three and six months ended July 31, 2012, respectively, and a $92,747 and $31,363 change in value as unrealized gain in non-operating expense for the three and six months ended July 31, 2011, respectively.

 

The fair value of each warrant granted in the private placement offering has been estimated on the dates of grant using the Black-Scholes option pricing model, under the following assumptions:

 

 

CALIFORNIA GOLD CORP.

(AN EXPLORATION STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Common stock issuable upon exercise of warrants							4,000,000
Market price of the Company’s common stock on the measurement dates						$	0.08 and 0.10
Exercise price						$	0.125
Risk free interest rate range (1)							0.61 – 0.81			%
Dividend yield							0.00	%
Volatility range							268.16 – 284.75			%
Expected exercise term in years							1.5

 

(1)

The risk-free interest rate was determined by management using the 2-year Treasury Bill yield as of the grant dates.

 

In June and July 2011, the Company closed its first and second over-allotment options. The Company incurred liabilities for the estimated fair value of derivative warrant instruments in the form of warrants. The estimated fair value of the derivative warrant instruments was calculated using the Black-Scholes option pricing model and amounted to $149,203 and $102,957 at the grant dates of June 15, 2011 and July 15, 2011, respectively. The grants were re-valued as being $38,930 and $222,508 at the balance sheet date of July 31, 2012 and January 31, 2012. The Company recorded an $86,968 and $183,578 change in value as unrealized gain in non-operating income for the three and six months ended July 31, 2012, respectively, and a $19,906 change in value as unrealized loss in non-operating expense for the three and six months ended July 31, 2011.

 

The fair value of each warrant granted in the private placement offering has been estimated on the dates of grant using the Black-Scholes option pricing model, under the following assumptions:

 

Common stock issuable upon exercise of warrants							4,000,000
Market price of the Company’s common stock on the measurement dates						$	0.07 and 0.08
Exercise price						$	0.125
Risk free interest rate range (1)							0.37 – 0.38			%
Dividend yield							0.00	%
Volatility range							257.60 – 259.63			%
Expected exercise term in years							1.5

 

(1)

The risk-free interest rate was determined by management using the 2-year Treasury Bill yield as of the grant dates.

 

As of February 1, 2012, the Company amended the terms of the warrants issued during the 2010/2011 private placement offerings (Note 8), such that (i) their term has been extended by six months and (ii) one-half of the warrants (19,369,565) retain the exercise price of $0.125 per share and the other one-half of the warrants (19,369,564) have an exercise price of $0.05 per share. The valuation of the warrants at July 31, 2012 reflects the new terms.

 

 

CALIFORNIA GOLD CORP.

(AN EXPLORATION STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

In March 2012, pursuant to a private placement offering, the Company issued 4,250,000 warrants to purchase 0.5 shares of common stock per unit. The Company recorded a derivative liability upon issuance of the warrants. The estimated fair value of the derivative warrant instruments was calculated using the Black-Scholes option pricing model and amounted to $101,985 at the grant date of March 16, 2012. The grants were re-valued as being $23,299 at the balance sheet date of July 31, 2012. The Company recorded a $48,553 change in value as unrealized gain in non-operating income for the three months ended July 31, 2012 and a $23,299 change in value as unrealized loss in non-operating income for the six months ended July 31, 2012.

 

The fair value of each warrant granted in the private placement offering has been estimated on the dates of grant using the Black-Scholes option pricing model, under the following assumptions:

 

Common stock issuable upon exercise of warrants			2,125,000
Market price of the Company’s common stock on the measurement date		$	0.05
Exercise price		$	0.06
Risk free interest rate (1)			0.37	%
Dividend yield			0.00	%
Volatility			295.28	%
Expected exercise term in years			2.0

 

(2)

The risk-free interest rate was determined by management using the 2-year Treasury Bill yield as of the grant dates.

  

The following is a summary of the assumptions used in the Black-Scholes option pricing model to estimate the fair value of the warrants as of balance sheet dates at July 31, 2012 and January 31, 2012, respectively:

 

		July 31, 2012				January 31, 2012
Common stock issuable upon exercise of warrants			40,864,129				38,739,129
Market price of the Company’s common stock on the measurement dates		$	0.012			$	0.064
Exercise price			$ 0.05 – 0.125			$	0.125
Risk free interest rate range (1)			0.14 - 0.23 %				0.08-0.13 %
Dividend yield			0.00	%			0.00	%
Volatility range			320.67 – 394.57 %				288.34	%
Expected exercise term in years			0.39-1.62				0.39-0.95

 

(1)

The risk-free interest rate was determined by management using the 6-month and 1- and 2-year Treasury Bill yield as July 31, 2012 and the 6-month and 1-year Treasury Bill as of January 31, 2012.

  

 

CALIFORNIA GOLD CORP.

(AN EXPLORATION STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 7 – FAIR VALUE MEASUREMENTS

 

As defined in FASB ASC Topic 820, fair value is the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. This Topic requires disclosure that establishes a framework for measuring fair value and expands disclosure about fair value measurements. The statement requires fair value measurements be classified and disclosed in one of the following categories:

 

Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. The Company considers active markets as those in which transactions for the assets or liabilities occur in sufficient frequency and volume to provide pricing information on an ongoing basis.

 

Level 2: Pricing inputs other than quoted market prices included in Level 1 that are based on observable market data and are directly or indirectly observable for substantially the full term of the asset or liability. These include quoted market prices for similar assets or liabilities, quoted market prices for identical or similar assets in markets that are not active, adjusted quoted market prices, inputs from observable data such as interest rate and yield curves, volatilities or default rates observable at commonly quoted intervals or inputs derived from observable market data by correlation or other means.

 

Level 3: Pricing inputs that are unobservable or less observable from objective sources. Unobservable inputs should only be used to the extent observable inputs are not available. These inputs maintain the concept of an exit price from the perspective of a market participant and should reflect assumptions of other market participants. An entity should consider all market participant assumptions that are available without unreasonable cost and effort. These are given the lowest priority and are generally used in internally developed methodologies to generate management's best estimate of the fair value when no observable market data is available.

 

Financial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of the fair value of assets and liabilities and their placement within the fair value hierarchy levels.

 

Certain assets and liabilities are reported at fair value on a recurring or nonrecurring basis in the Company’s balance sheet. The following methods and assumptions were used to estimate the fair values:

 

Cash, Other receivables, Prepaid expenses, Mining rights, Accounts payable, Accounts payable – related party, and Other accrued liabilities – related party

 

The carrying amounts approximate fair value because of the short-term nature or maturity of the instruments.

 

 

CALIFORNIA GOLD CORP.

(AN EXPLORATION STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Derivative liabilities

 

The Company’s determination of fair value of its derivative instruments incorporates various factors required under FASB Topic ASC 815. The fair values of the Company’s derivatives are valued using less observable data from objective sources as inputs into internal valuation models. Therefore, the Company considers the fair value of its derivatives to be Level 3 hierarchy. At July 31, 2012 and January 31, 2012, the aggregate Level 3 fair value of the derivative liabilities was $237,087 and $1,817,100, respectively.

 

The following table sets forth a reconciliation of changes in the fair value of financial liabilities classified as Level 3 in the fair value hierarchy:

 

		Significant Unobservable Inputs (Level 3)
		Three Months Ended								Six Months Ended
		July 31,								July 31,
		2012				2011				2012				2011
Balances as of April 30, 2012 and 2011 and January 31, 2012 and 2011		$	1,167,658			$	2,910,666			$	1,817,100			$	2,305,770
Change in fair value			(930,571	)			(826,978	)			(1,681,998	)			(513,955	)
Additions			-				252,160				101,985				544,034
Ending balances as of July 31, 2012 and 2011		$	237,087			$	2,335,848			$	237,087			$	2,335,849
Realized and unrealized gain (loss) on derivatives, net, included in earnings for the period ended  July31, 2012 and 2011		$	930,571			$	826,978			$	1,681,998			$	513,955

 

NOTE 8 – EQUITY

 

Private Placement Offering

 

In July 2011, the Company completed the final closing of the 2010/2011 Private Placement Offering, in which the Company sold an aggregate of 77,478,258 Units of its securities for gross proceeds of $1,936,956, at an offering price of $0.025 per Unit. The Company incurred closing costs of $19,000, resulting in net proceeds from the Offering of $1,917,956. 55,478,258 of the units consisted of one share of its common stock and an 18-month warrant to purchase one-half of one share of its common stock at an exercise price of $0.125 per whole share. The remaining 22,000,000 Units included the Company’s Series A Preferred Stock instead of its common stock and warrants exercisable for its common stock. Effective February 1, 2012, the terms of these warrants were amended such that (i) their term has been extended by six months and (ii) one half of them (19,369,565) retain the exercise price of $0.125 per share and one half (19,369,564) have an exercise price of $0.05 per share.

 

 

CALIFORNIA GOLD CORP.

(AN EXPLORATION STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

On March 16, 2012, the Company completed the closing of a private placement offering pursuant to which the Company sold to various accredited investors and non-U.S. persons 4,250,000 Units of its securities for gross proceeds of $170,000, at an offering price of $0.04 per unit. The Company incurred closing costs of $1,750, resulting in net proceeds from the Offering of $168,250. Each of these Units consisted of one share of the Company’s common stock and a warrant to purchase one-half share of the Company’s common stock at an exercise price of $0.06 per whole share. These warrants will be exercisable from issuance until twenty-four (24) months after the closing of this offering.

 

As of July 31, 2012, cumulatively, the Company has sold a total of 81,728,258 Units for a total price of $2,106,956. The Company incurred closing costs of $20,750, resulting in net proceeds from the Offering of $2,086,206. The Company plans to apply the net proceeds of the closings primarily towards the AuroTellurio Acquisition (Note 4) and for working capital purposes.

 

AuroTellurio Acquisition

 

On August 4, 2011, in connection with the First Closing under the AuroTellurio Option Agreement, the Company issued to Mexivada 250,000 shares of its restricted common stock, at $0.001 per share. The issued stock was fair valued at $17,500 based on the market price on the date of issuance.

 

On August 28, 2012, the Company issued to Mexivada an additional 250,000 shares of its restricted common stock, at $0.015 per share. The issued stock was fair valued at $3,750 based on the market price on the date of issuance.

 

NOTE 9 – STOCK-BASED COMPENSATION

 

Shares for Services

 

The Company recognized the total stock-based compensation expense for services of $125,000 during the six months ended July 31, 2012, and of $10,555 during the six months ended July 31, 2011.

 

On March 16, 2012, pursuant to the terms of an agreement between the Company and an unrelated party, the Company shall issue 1,000,000 common shares in exchange for investor and public relations consulting services. The shares were valued at $50,000, or $0.05 per share. The Company recorded $50,000 of stock-based compensation expense related to consulting services under this agreement. In July 2012, the Company reversed the non-cash issuance of 1,000,000 restricted shares of its common stock and a corresponding stock-based compensation expense of $50,000 due to an agreement cancellation.

 

 

 

CALIFORNIA GOLD CORP.

(AN EXPLORATION STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

On March 19, 2012, pursuant to the terms of an agreement between the Company and an unrelated party, the Company issued 1,250,000 shares in exchange for geological consulting services. The shares were valued at $125,000, or $0.10 per share. The Company recorded $125,000 of stock-based compensation expense related to consulting services under this agreement.

 

Pursuant to a Consulting Services Agreement as of January 18, 2011 between the Company and its stockholder, the Company agreed to issue 500,000 shares for future services relating to business development and corporate finance. The 500,000 shares were valued at $12,500, or $0.025 per share, $1,945 of which was recorded during the year ended January 31, 2011 and the difference of $10,555 was recorded in February 2011.

 

The Company valued the issued shares based on market value on the date of the agreements.

 

Stock Options

 

The Company has a stock-based compensation plan known as the 2007 Stock Option Plan (the “Plan”). The Plan provides for the granting of incentive and non-qualified stock options to acquire common shares in the capital of California Gold Corp. The number of shares authorized under the Plan is 16,000,000. As of July 31, 2012, 5,666,667 shares remain available for future grants under the Plan.

 

On July 27, 2011, the Company granted options to purchase 11,000,000 shares of its common stock to its employees and outside consultants. These options have a 10-year term and were granted with an exercise price of $0.09. One-third of these options, or 3,666,667, vested on the date of the grant, with the remaining two-thirds vesting on the first and second anniversaries of the date of grant. As of July 31, 2012, the total of 7,000,000 options vested, which included an additional 3,333,333 options vested on July 27, 2012, the first anniversary of the grant date. All vested options are exercisable, in full or in part, at any time after vesting, until termination.

 

On May 4, 2012, one of the Company’s directors resigned and therefore, all his 666,667 non-vested options terminated on that date and his vested but unexercised options of 333,333 will expire on August 4, 2012. The Company recorded the stock-based compensation expense – related party attributable to options of $75,284 and $157,782 during the three and six months ended July 31, 2012, respectively. The Company recorded the stock-based compensation expense – related party attributable to options of $329,989 during the three and six months ended July 31, 2011. As of July 31, 2012, there was approximately $299,990 of total unrecognized compensation cost related to non-vested stock options, which is expected to be recognized over the next year.

 

Outstanding options had $0 intrinsic value at July 31, 2012, due to the exercise price being greater than the value of the Company’s common stock at the reporting date.

 

 

CALIFORNIA GOLD CORP.

(AN EXPLORATION STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The fair value of options granted in July 2011 was measured at the date of grant using the Black-Scholes option pricing model with the following assumptions:

 

Market price of the Company’s common stock on grant date		$	0.09
Risk free interest rate (1)			3.01	%
Dividend yield			0.00	%
Volatility			259.13	%
Expected life			6 years
Expected forfeiture rate			0.0	%

 

(1)

The risk-free interest rate was determined by management using the 10-year Treasury Bill yield as of the grant date.

 

NOTE 10 – COMMITMENTS AND CONTINGENCIES

 

In addition to a $30,000 cash payment and 250,000 stock issuance made at the First Closing under the AuroTellurio Option Agreement on August 4, 2011 (Note 4), assuming the Company exercises its right to acquire each of the four, twenty percent (20%) interests in the AuroTellurio Property, the Company will make the following cash payments and share issuances to Mexivada: (i) $40,000 and 250,000 shares on the first anniversary of the Closing; (ii) $50,000 and 300,000 shares on the second anniversary of the Closing; (iii) $70,000 and 350,000 shares on the third anniversary of the Closing; and (iv) $100,000 and 500,000 shares on the fourth anniversary of the Closing. In connection with the AuroTellurio Option Agreement, the Company will pay an aggregate total of $290,000 in cash and 1,650,000 common shares.

 

Under the terms of the AuroTellurio Option Agreement, the Company is also committed to incur $3,000,000 in cumulative exploration expenditures on the Property over a four-year period at an investment rate of at least $750,000 per year. The Company will earn a 20% vested interest in the AuroTellurio Property in the first year of the AuroTellurio Option Agreement by investing $750,000 in an exploration program and up to an additional 60% interest in the Property, in blocks of 20% each, by investing an additional $750,000 in the exploration program in each of the following six years, or sooner, and meeting all of the other required terms of the AuroTellurio Option Agreement. Each 20% interest will vest earlier if each year’s cash and stock payments to Mexivada and $750,000 exploration expenditure investment are completed earlier than scheduled.

 

Under the terms of the Agreement, the Company will act as “Operator,” exclusively responsible, in consultation with Mexivada, for carrying out and administering exploration, development and mining work on the AuroTellurio Property. If costs of the exploration program exceed the agreed upon $3,000,000 investment, the Company will share additional costs with Mexivada on a proportionate share basis. Once the Company has earned its full 80% interest in the AuroTellurio Property, the Company will form a joint venture with Mexivada applicable to the further development and commercialization of the AuroTellurio Property.

 

 

CALIFORNIA GOLD CORP.

(AN EXPLORATION STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The Company obtained a surface rights agreement, with the landowner on whose property the La Viuda Concessions are located, to conduct its mineral exploration program, effective June 17, 2011. The Company will pay the land owner $14,400 for each year in which the Company carries out exploration work on this land. The Company has begun Phase 1 of its exploration program and has conducted mapping, trenching and sampling programs at the AuroTellurio Property as well as gravity and magnetic geophysical surveys, including a helicopter-borne magnetics and radiometric survey, in preparation for an initial 3,000-meter drilling program that is planned for implementation later in 2012.

 

As of July 31, 2012, the Company incurred $616,640 since inception in its exploration and development expenditures, which are expensed as incurred. In addition to the Company’s mineral exploration expenditures, Mexivada accepted certain other Company’s expenses towards its minimum requirement of $750,000 per year such as a percentage of its accounting, legal and consulting fees, compensation of its officers and directors, and management support services, which were included as a component of general and administrative expenses in the Company’s consolidated statements of expenses. Mexivada accepted approximately $1,039,807 of total expenses as of June 30, 2012 (the date of the Company’s expenses reviewed by Mexivada) and confirmed that the amounts over $750,000 will be applied towards the second year requirements. Mexivada also confirmed that it will grant the 20% interest in the AutoTellurio project to the Company, after the Company makes the $40,000 cash payment and issues 250,000 of its shares to Mexivada in connection with the AuroTellurio Option Agreement. The $40,000 payment was made on August 10, 2012 and the 250,000 shares were issued to Mexivada on August 28, 2012.

 

NOTE 11 – SUBSEQUENT EVENTS 

 

The Company made a payment to Mexivada of $40,000 on August 10, 2012 and issued 250,000 shares of its restricted common stock to Mexivada on August 28, 2012. Having met all the required conditions for the vesting of the first 20% interest in the La Viuda Concessions under the AuroTellurio Option Agreement, including the required exploration program expenditure of $750,000, the first 20% interest in the La Viuda Concessions vested in the Company as of August 28, 2012.

 

 

ITEM 2.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

This report contains forward-looking statements. All statements other than statements of historical facts included in this Quarterly Report on Form 10-Q, including without limitation, statements in this Management’s Discussion and Analysis of Financial Condition and Results of Operations regarding our financial position, estimated working capital, business strategy, the plans and objectives of our management for future operations and those statements preceded by, followed by or that otherwise include the words “believe”, “expects”, “anticipates”, “intends”, “estimates”, “projects”, “target”, “goal”, “plans”, “objective”, “should”, or similar expressions or variations on such expressions are forward-looking statements. We can give no assurances that the assumptions upon which the forward-looking statements are based will prove to be correct. Because forward-looking statements are subject to risks and uncertainties, actual results may differ materially from those expressed or implied by the forward-looking statements. There are a number of risks, uncertainties and other important factors that could cause our actual results to differ materially from the forward-looking statements, including, but not limited to, our ability to identify and successfully participate in any future acquisition, joint venture or other new business initiative.

 

OVERVIEW

 

California Gold is an exploration stage mining company whose principal focus is the identification, acquisition, and development of rare and precious metals mining properties in the Americas.

 

Our primary focus is on the exploration and development of the La Viuda Concessions south of Moctezuma, Sonora, Mexico, where, we believe, deposits of tellurium, gold and silver may exist in economically minable quantities. We are still in the exploration stage and have not generated any revenues from our mining properties in Mexico.

 

The Mexivada Property Option Agreement

 

On February 11, 2011, we entered into a property option agreement (the “AuroTellurio Option Agreement”) with Mexivada Mining Corp. (“Mexivada”) to acquire up to an 80% interest in Mexivada’s La Viuda and La Viuda-1 concessions comprising its AuroTellurio tellurium-gold-silver property (the “La Viuda Concessions,” the “AuroTellurio Property” or, the “Property”) south of Moctezuma, Sonora, Mexico.

 

Under the terms of the AuroTellurio Option Agreement, we will acquire up to an 80% legal and beneficial ownership interest in the AuroTellurio Property by, in addition to making certain cash payments and share issuances to Mexivada (as discussed above), incurring up to $3,000,000 in cumulative exploration expenditures on the Property over a four year period at an investment rate of at least $750,000 per year. We will earn a 20% vested interest in the AuroTellurio Property in the first year of the AuroTellurio Option Agreement by investing $750,000 in an exploration program (the “Exploration Program”) and up to an additional 60% interest in the Property, in blocks of 20% each, by investing an additional $750,000 in the exploration program in each of the following three years, or sooner, and meeting all of the other required terms of the AuroTellurio Option Agreement. Each 20% interest will vest earlier if each year’s cash and stock payments to Mexivada and $750,000 exploration expenditure investment are completed earlier than scheduled.

 

 

First Closing under the AuroTellurio Option Agreement

 

On August 4, 2011, we conducted the first closing (the “First Closing”) under the AuroTellurio Option Agreement.  Prior to the First Closing, we had made cash payments to Mexivada totaling $20,000.  On the date of the First Closing, we paid Mexivada an additional $10,000 in cash and issued to Mexivada 250,000 shares of our restricted common stock. In exchange, we received from Mexivada four fully executed title deeds, each transferring to us a twenty percent (20%) interest in the La Viuda Concessions comprising the AuroTellurio Property. We will hold these title deeds in escrow until we meet the terms of the AuroTellurio Option Agreement for the vesting of each twenty percent (20%) interest.  At that time, the relevant title deed will be released to us from escrow and filed with the Ministry of Mines in Mexico, to evidence our ownership in that specific twenty percent interest in the AuroTellurio Property. If we default on our commitments under the AuroTellurio Option Agreement or otherwise determine not to proceed with the acquisition of the AuroTellurio Property, all unvested interests and related title deeds in the AuroTellurio Property will be returned to Mexivada.

 

On August 10, 2012, we made a payment to Mexivada of $40,000 and on August 28, 2012 we issued to Mexivada 250,000 shares of our restricted common stock. Having met all the required conditions for the vesting of the first 20% interest in the La Viuda Concessions under the AuroTellurio Option Agreement, including the required exploration program expenditure of $750,000, the first 20% interest in the La Viuda Concessions vested in us as of August 28, 2012.

 

The La Viuda Concessions

 

The La Viuda Concessions, which cover approximately 18,840 acres (7,624 hectares) south of Moctezuma, Sonora Mexico, comprise two exploration concessions granted by the Mexican government to Compania Minera Mexivada, S.A. de C.V., a wholly owned subsidiary of Mexivada.

 

The La Viuda Concessions comprising the AuroTellurio Property is located less than a mile from the La Bambolla mine where gold-tellurium mineralization was discovered in the early 1900’s. The AuroTellurio Property surrounds the La Bambolla mine area to the east and south and covers potentially mineralized areas over extensive, adjoining areas to the east, south and west.

 

Historical data suggest that tellurium-gold mineralization at the La Bambolla mine occurs along a regional structural system with an average S 70° E trend where a swarm of relatively narrow, sub-parallel, silica-rich mineralized veins are present. At La Bambolla, these veins are either vertical, or have steep dips, and range from 0.14 to 2.60 meters in width.  Earlier this year, we acquired certain geological information as well as analytical results of more than 500 underground channel samples taken at La Bambolla in the 1980's. The average grades in the veins that were sampled, as indicated in the analytical results that we acquired, range from 0.01 to 3.26 % tellurium, and 0.03 to 4.90 oz/ton gold.

 

 

The AuroTellurio Property Exploration Program

 

Pursuant to the terms of the AuroTellurio Option Agreement, the annual exploration program expenditure requirement is calculated based on four 12 month periods beginning on the date of the First Closing. As such, we will be required to complete our first $750,000 annual exploration program investment by August 4, 2012.

 

On May 16, 2012, we renewed for an additional year our surface rights agreement with the land owner in Moctezuma, Sonora, Mexico where the La Viuda Concessions are located. In return for the easement for our exploration of the La Viuda Concessions, we are paying the land owner $14,400 for each year in which we conduct exploration work on this land.

 

We have begun Phase 1 of our exploration program and have conducted mapping, trenching and sampling programs at the AuroTellurio Property as well as gravity and magnetic geophysical surveys, including a helicopter-borne magnetics and radiometric survey, in preparation for an initial 3,000-meter drilling program that is planned for implementation later in 2012.

 

Geologic mapping and sampling on the AuroTellurio Property have thus far confirmed that the regional structure hosting the tellurium-gold vein system at La Bambolla extends east-southeasterly onto the AuroTellurio Property. Zones of fracture-controlled silicification, strikingly similar to those described at La Bambolla, have been mapped in our La Viuda 1 concession.  We believe that these features could be spatially located at a higher level than similar alteration-mineralization features found at La Bambolla.  This interpretation tends to support our initial geologic model where a series of essentially north-trending, post-mineral faults have down-dropped segments of the original mineralized system to the east.  Our current understanding, based on geological interpretation of the existing data, is that ore-grade tellurium-gold mineralization is highly likely to exist at depth within our La Viuda 1 concession. We are building a road to access and further evaluate this potentially mineralized area.

 

Through our geologic work on the AuroTellurio Property we have delineated three drilling targets within our mining concessions. In order of importance, they are: 1) Target 1, where tellurium-gold mineralization with similar characteristics as those present in the La Bambolla deposit is expected to be intercepted; 2) the La Viuda Target, where our objective is to find precious metal and tellurium mineralization in highly siliceous veins with abundant manganese oxides; and 3) a deep-seated mineralized target associated with an igneous intrusive detected by two separate geophysical surveys at estimated depths in the range of 400 meters.

 

Our principal target, Target 1, consists of gold-tellurium mineralization emplaced along the southeasterly extension of the mineralized vein system that exists at the La Bambolla mine. Target 1 is about 2 kilometers (1.8 miles) south east of the La Bambolla mine. Both the La Bambolla mine and Target 1 are located along one of several, sub-parallel regional structures that were delineated by airmagnetics-radiometric geophysical surveys within the AuroTellurio project area. This particular structure, which is known as the La Bambolla Linear, was first recognized through geologic field observations and was later confirmed by geophysical surveys. Geological features and sampling results of the exposures observed on the surface of the Target 1 area show strong fracturing, quartz veining and detectable tellurium. Two initial 400-meter core holes are programmed for this target; however, if the results warrant it, the emphasis of the drilling program will shift to pursue the extension and continuity of mineralization along the La Bambolla Linear to the northwest.

 

 

Two additional drill holes programmed for the La Viuda target area will test for precious metal mineralization, principally silver, and the possibility of gold-tellurium mineralization at depth. The presence of old workings, including an inclined shaft about 12 meters deep, shows that the area has been explored, and possible mined as a low-scale operation in the past. However, we found no evidence that the area was previously drilled.

 

Located at estimated depths in the 400-meter range, our third target is projected to be a large-tonnage, porphyry-type deposit associated with a potential intrusive at depth. This target, which we have named “Las Milpas,” is visualized to be a large mineral deposit associated with this deep-seated igneous intrusion. A geological exploration model was initially created to develop the presence of a blind intrusive in the project area. This intrusive was subsequently corroborated by separate gravity and helicopter-borne magnetics and radiometrics geophysical surveys carried out on the AuroTellurio project in 2011 by two different independent contractors. The gravity data delineated a potential intrusive at depth located within an area of approximately 800 x 1,400 meters (2,600 x 4,600 feet) in size. A second confirmation was provided by the results of a subsequent helicopter-borne magnetics-radiometrics survey. Both geophysical surveys outlined their respective anomalous responses on the same location and with strong correlation. In addition, the radiometrics survey outlined anomalous potassium suggesting the presence of unmapped hydrothermal alteration on the surface. The depth to the top of the intrusive is projected to be 400 meters (1,300 feet). Two 700-meter (2,300 feet) drill holes, separated by a distance of about one kilometer (0.6 miles), have been programmed to test this deep target.

 

Of the three drilling targets that we defined on a geological basis, two of them, the southeasterly extension of the La Bambolla vein system and the deep-seated intrusive target area, respectively, are being further investigated using geophysical methods in order to better define the configuration of these targets at depth. 

 

In both instances, a high resolution resistivity imaging technique, CSAMI (Controlled Source Audio-Frequency Magneto Telluric), is being used to model lithologic contacts and structures. This methodology is being supplemented with CSIP (a similar technique to gradient Induced Polarization) in order to detect sulfide mineralization associated with both the intrusive contact and the structural features. 

 

The results of these additional surveys are intended to assist us in selecting drill targets and specific drill sites more effectively.

 

We have completed the field work for this survey and we are currently evaluating the data. We expect to have this analysis completed and reach a decision as to the timing of the launch of our drilling program by the end of our third fiscal quarter.

 

 

RESULTS OF OPERATIONS

 

Three Months Ended July 31, 2012 and 2011

 

We are still in our exploration stage and have generated no revenues to date.

 

We incurred total operating expenses of $270,377 and $513,464 for the three months ended July 31, 2012 and 2011, respectively. These expenses decreased during the three months ended July 31, 2012 by $243,087 or 47.3%, due to lower general and administrative expenses we incurred during the three months ended July 31, 2012, which amounted to $150,054 compared to $449,167 incurred during the three months ended July 31, 2011. The $299,113 decrease in overall general and administrative expenses was primarily attributable to the $304,705 decrease in stock-based compensation expense; $25,284 for the three months ended July 31, 2012 when compared to $329,989 for the three months ended July 31, 2011. We also incurred lower accounting and consulting fees during the three months ended July 31, 2012, partially offset by higher legal fees incurred for the preparation and filing of our resale registration statement of the Form S-1 and the overall increased level of activity relating to our exploration activities in the AuroTellurio Property in 2012.

 

In the three months ended July 31, 2012, we had non-operating income of $930,876, compared to non-operating income of $827,456 in the three months ended July 31, 2011. The overall increase of $103,420 from the prior comparative period was primarily due to a $930,571 realized and unrealized gain on derivative instruments relating to the issuance of the warrants as a result of the private placement offerings completed in December 2010 and January 2011, and the over-allotments in April, June and July 2011, as well as the March 2012 private placement offering. In the three months ended July 31, 2011, we reported an $826,978 realized and unrealized gain on derivative warrant instruments.

 

We had net income of $660,499 for the three months ended July 31, 2012, compared to net income of $313,992 for the same period in 2011. The $346,507 increase in net income over the same period in the prior year mainly resulted from the $299,113 decrease in general and administrative expenses discussed above.

 

We have generated no operating revenues and our net loss from inception through July 31, 2012 was $2,314,049.

 

Six Months Ended July 31, 2012 and 2011

 

We incurred total operating expenses of $874,579 and $681,335 for the six months ended July 31, 2012 and 2011, respectively. The $193,244 increase over the prior year was primarily due to increased general and administrative expenses. General and administrative expenses increased from $550,864 for the six months ended July 31, 2011 to $690,813 for the six months ended July 31, 2012, primarily due to higher legal fees and consulting expenses resulting from the overall increased level of activity relating to our exploration activities in the AuroTellurio Property in 2012. Accordingly, we incurred higher mineral property expenses relating to the AuroTellurio project during the six months ended July 31, 2012, compared to the same period last year. Our total mineral property expenses were $182,885 and $130,408 for the six months ended July 31, 2012 and 2011, respectively.

 

 

We also reported non-operating income of $1,682,451 for the six months ended July 31, 2012, compared to non-operating income of $514,987 for the six months ended July 31, 2011. The increase of $1,167,464 over the prior year was primarily due to a $1,168,043 increase in unrealized gain on derivative warrants instruments, partially offset by a $221 foreign currency exchange loss incurred during the six months ended July 31, 2012 and a $358 decrease in interest income over the prior year.

 

Our net income for the six months ended July 31, 2012 was $807,872, compared to net loss of $166,348 for the six months ended July 31, 2011.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Our cash and cash equivalents balance as of July 31, 2012 was $537,979, compared to $828,181 as of January 31, 2012.

 

In July 2011, we completed the final closing of the 2010/2011 Private Placement, in which we sold an aggregate of 77,478,258 Units of our securities for gross proceeds of $1,936,956, at an offering price of $0.025 per Unit. 55,478,258 of the Units consisted of one share of our common stock and an 18-month warrant to purchase one-half of one share of our common stock at an exercise price of $0.125 per whole share. As of February 1, 2012, we amended the terms of these warrants such that (i) their term has been extended by six months and (ii) one half of them (19,369,565) retain the exercise price of $0.125 per share and one half (19,369,564) have an exercise price of $0.05 per share. The remaining 22,000,000 Units included our Series A Preferred Stock instead of our common stock and warrants exercisable for our common stock.

 

On March 16, 2012, we completed the closing of a private placement offering pursuant to which we sold to various accredited investors and non-U.S. persons 4,250,000 Units of our securities (the “2012 Units”) for gross proceeds of $170,000, at an offering price of $0.04 per Unit. Each of these Units consisted of one share of our common stock and a warrant to purchase one-half share of our common stock at an exercise price of $0.06 per whole share. These warrants will be exercisable from issuance until twenty four (24) months after the closing of this offering. We raised these funds for general working capital purposes separate from our first year exploration program commitments under the AuroTellurio Agreement.

 

Due to our brief history and historical operating losses, our operations have not been a source of liquidity, and our sources of liquidity primarily have been debt and proceeds from the sale of units in our 2010/2011 Private Placement and in our March 2012 offering. Although we have begun the acquisition of the AuroTellurio Property, this property will require exploration and development that could take years to complete before it begins to generate revenues. There can be no assurances that the AuroTellurio Property will be successfully developed to the revenue producing stage. If we are not successful in our proposed rare and precious metals mining operations, our business, results of operations, liquidity and financial condition will suffer materially.

 

 

As a result of the 2010/2011 Private Placement, we have sufficient funds to meet our first year requirements under the AuroTellurio Agreement, including the requirement that we invest $750,000 in the exploration program by August 4, 2012.  If we determine to proceed with the exploration of the AuroTellurio Property after the first year, we will be required under the terms of the AuroTellurio Agreement to invest an additional $750,000 in the exploration program per year for each of the following three years. We will also be required to pay Mexivada $40,000 upon the first anniversary of the First Closing, which amount we have already paid, $50,000 upon the second anniversary of the First Closing, $70,000 upon the third anniversary of the First Closing, and $100,000 upon the fourth anniversary of the First Closing, for a total of $290,000. We will also need additional funds for working capital purposes. We do not have this capital at this time and we will have to raise these amounts, plus additional amounts for general working capital purposes, in the capital markets. We plan to seek to raise such capital through additional sales of our equity or debt securities. There can be no assurance, however, that such financing will be available to us or, if it is available, that it will be available on terms acceptable to us and that it will be sufficient to fund our expected needs. If we are unable to obtain sufficient financing, we may not be able to proceed with our exploration and development plans for the AuroTellurio Property after the first year of our exploration program or meet our ongoing operational working capital needs.

 

OFF-BALANCE SHEET ARRANGEMENTS

 

We have no off-balance sheet arrangements.

 

SIGNIFICANT ACCOUNTING POLICIES

 

It is suggested that these financial statements be read in conjunction with our January 31, 2012, audited financial statements and notes thereto, which can be found in our Form 10-K filing on the SEC website at www.sec.gov under our SEC File Number 333-134549.

 

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not applicable.

 

ITEM 4.

CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. This information is accumulated and communicated to the issuer's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. It should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.

 

 

The management of California Gold Corp. is responsible for establishing and maintaining an adequate system of internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act. Under the supervision and with the participation of our senior management, consisting of James D. Davidson, our chief executive officer and chief financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act as of the end of the period covered by this report (the “Evaluation Date”). Based on this evaluation, our chief executive officer and chief financial officer concluded, as of the Evaluation Date, that our disclosure controls and procedures were not effective because of the identification of what might be deemed a material weakness in our internal control over financial reporting which is identified below.

 

Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes of accounting principles generally accepted in the United States. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance of achieving their control objectives. In evaluating the effectiveness of our internal control over financial reporting, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on this evaluation, our sole officer concluded that, during the period covered by this quarterly report, our internal controls over financial reporting were not operating effectively. Management did not identify any material weaknesses in our internal control over financial reporting as of July 31, 2012; however, it has identified the following deficiencies that, when aggregated, may possibly be viewed as a material weakness in our internal control over financial reporting as of that date:

 

1.	We do not have an audit committee. While we are not currently obligated to have an audit committee, including a member who is an “audit committee financial expert,” as defined in Item 407 of Regulation S-K, under applicable regulations or listing standards; however, it is management’s view that such a committee is an important internal control over financial reporting, the lack of which may result in ineffective oversight in the establishment and monitoring of internal controls and procedures.
2.	We did not maintain proper segregation of duties for the preparation of our financial statements. We currently only have one officer overseeing all transactions. This has resulted in several deficiencies including the lack of control over preparation of financial statements, and proper application of accounting policies.

 

 

Management believes that the material weaknesses set forth the two items above did not have an effect on our financial results. However, management believes that the lack of a functioning audit committee and the lack of a majority of outside directors on our board of directors results in ineffective oversight in the establishment and monitoring of required internal controls and procedures, which could result in a material misstatement in our financial statements in future periods.

 

Management's Remediation Initiatives

 

In an effort to remediate the identified material weaknesses and other deficiencies and enhance our internal controls, we plan to initiate the following series of measures once we have raised sufficient capital to do so.

 

We will create a position to segregate duties consistent with control objectives and will increase our personnel resources and technical accounting expertise within the accounting function when funds are available to us. And, we plan to appoint one or more outside directors to our board of directors who shall be appointed to an audit committee resulting in a fully functioning audit committee who will undertake the oversight in the establishment and monitoring of required internal controls and procedures such as reviewing and approving estimates and assumptions made by management when funds are available to us.

 

Management believes that the appointment of one or more outside directors, who shall be appointed to a fully functioning audit committee, would remedy the lack of a functioning audit committee and a lack of a majority of outside directors on our Board.

 

Changes in Internal Controls over Financial Reporting

 

There was no change in our internal controls over financial reporting that occurred during the period covered by this report, which has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

 

PART II

OTHER INFORMATION

 

ITEM 1.

LEGAL PROCEEDINGS

 

None.

 

ITEM 1.A.

RISK FACTORS

 

There have been no material changes from the risk factors disclosed in our 2012 Form 10-K under Part I, Item 1A, therein.

 

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

None.

 

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

 

 

Not applicable.

 

ITEM 4.

MINE SAGETY DISCLOSURES

 

Not applicable.

 

ITEM 5.

OTHER INFORMATION

 

None.

 

ITEM 6.

EXHIBITS

 

The following exhibits are included with this quarterly report.

 

 

Exhibit
Number		Description
31.1/31.2		Certification of Principal Executive and Principal Financial Officer, pursuant to SEC Rules 13a-14(a) and 15d-14(a), adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1/32/2		Certification of Chief Executive and Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*

 

 * This certification is being furnished and shall not be deemed “filed” with the SEC for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the Registrant specifically incorporates it by reference.

 

 

SIGNATURES

 

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

Date:   September 19, 2012	California Gold Corp.
	By	/s/ James D. Davidson
		James D. Davidson
		President, Treasurer, Principal
		Executive Officer, Principal
		Financial Officer