1. Interim Financial Statements

 

The Company is a mining company that has focused on exploration of mineralized material and recently entered into production of gold.

 

The accompanying interim unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In our opinion, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine month periods ended September 30, 2012, are not necessarily indicative of the results that may be expected for the year ending December 31, 2012. For further information, refer to the financial statements and footnotes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011.

 

The accompanying condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America which contemplate continuation of the Company as a going concern. The Company has recurring net losses from operations, an accumulated deficit of $152.1 million as of September 30, 2012, and has had no significant mining revenues since 2006. For the nine months ended September 30, 2012, the Company incurred a net loss of $25.3 million and used cash in operations of $17.8 million. As of September 30, 2012, the Company had cash, cash equivalents and available-for-sale securities on hand of $3.9 million, and negative working capital (i.e. current liabilities in excess of current assets) of $10.7 million. The Company's operating expenses have significantly increased during transition from initial start-up mode to production. In addition, the Company will need to continue to fund debt service requirements associated with existing credit facilities. During the quarter ended September 30, 2012, the Company commenced gold production. During September and October 2012, the Company shipped approximately 1,259 ounces of gold resulting in a sales price of approximately $2.5 million through October 29, 2012. With the planned future production and revenue, the Company believes that it will have sufficient liquidity to fund operations for the next twelve months through the use of current cash resources and cash generated through operations. However, in the event that production or other factors impacting future operating results fall below management's expectations, the Company would be required to obtain additional debt or equity financing to sustain operations, and the availability of such financing on acceptable terms, if at all, cannot be assured.

 

Inventories, Stockpiles and Mineralized Material on Leach Pads

 

Inventories, including stockpiles and mineralized material on leach pads are carried at the lower of cost or net realizable value. Cost is comprised of production costs for mineralized material produced and processed. Production costs include the costs of materials, costs of processing, direct labor, mine site and processing facility overhead costs, stock-based compensation, and depreciation, depletion and amortization.

 

Stockpiles - Stockpiles represent mineralized material that has been extracted from the mine and is available for further processing. Stockpiles are measured by estimating the number of tons added and removed from the stockpile. Stockpile tonnages are verified by periodic surveys. Costs are allocated to stockpiles based on relative values of material stockpiled and processed using current mining costs incurred up to the point of stockpiling the material, including applicable overhead, depreciation, and depletion relating to mining operations, and removed at each stockpile's average cost per ton.

 

Mineralized Material on Leach Pads - The Company utilizes a heap leaching process to recover gold from its mineralized material. Under this method, the mineralized material is placed on leach pads where it is treated with a chemical solution, which dissolves the gold contained in the material. The resulting gold-bearing solution is further processed in a facility where the gold is recovered. The costs of mineralized material on leach pads are current mining costs, including applicable depreciation relating to mining operations. The costs are removed from mineralized material on leach pads as ounces are recovered based on the average cost per estimated recoverable ounce of gold on the leach pad.

 

The estimates of recoverable gold on the leach pads are calculated from the quantities of material placed on the leach pads (measured tons added to the leach pads), the grade of material placed on the leach pads (based on assay data) and a recovery percentage.

 

Although the quantities of recoverable gold placed on the leach pads are reconciled by comparing the quantities and grades of material placed on leach pads to the quantities and grades quantities of gold actually recovered (metallurgical balancing), the nature of the leaching process inherently limits the ability to precisely monitor inventory levels. As a result, the metallurgical balancing process will be constantly monitored and estimates will be refined based on actual results over time. Variations between actual and estimated quantities resulting from changes in assumptions and estimates that do not result in write-downs to net realizable value are accounted for on a prospective basis.

 

In-process Inventories - In-process inventories represent mineralized materials that are currently in the process of being converted to a saleable product through the Merrill-Crowe process. The value of in-process material is measured based on assays of the material fed into the process and the projected recoveries of material. In-process inventories are valued at the average cost of the material fed into the process attributable to the source material coming from the mines, stockpiles and/or leach pads plus the in-process conversion costs, including applicable depreciation relating to the process facilities incurred to that point in the process.

 

Finished Goods Inventories - Finished goods inventories include gold that has been processed through the Company's Merrill-Crowe facility and are valued at the average cost of its production.

 

Revenue Recognition

 

Revenue is recognized from sales when persuasive evidence of an arrangement exists, the price is determinable, the product has been delivered, the title has been transferred to the customer and collection of the sales price is reasonably assured. Revenue from by-product sales (such as silver) are credited to costs applicable to mining revenue as a by-product credit. The agreement the Company had with its customer prior to September 30, 2012 indicated that title of gold sold was transferred to the customer upon collection of the sales price. Prior to September 30, 2012, the Company shipped 316 ounces of gold and 3,299 ounces of silver to a customer which represented $558,574 of revenue and a $115,920 reduction to costs applicable to mining revenue in the fourth quarter of 2012. Subsequent to September 30, 2012, the Company amended this agreement such that title of gold sold will be transferred to the customer upon shipment of the gold.

 

 

There were no components of comprehensive loss other than net loss for the three and nine months ended September 30, 2012 and 2011.

 

In May 2011, the Financial Accounting Standards Board ("FASB") issued authoritative guidance related to disclosures around fair value accounting. The updated guidance clarifies different components of fair value accounting including the application of the highest and best use and valuation premise concepts, measuring the fair value of an instrument classified in a reporting entity's shareholders' equity and disclosing quantitative information about the unobservable inputs used in fair value measurements that are categorized in Level 3 of the fair value hierarchy. The Company's January 1, 2012 adoption of the updated guidance had no impact on the Company's consolidated financial position, results of operations or cash flows.

 

In June 2011, the FASB issued authoritative guidance on the presentation of comprehensive income. This guidance specifies that an entity can present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. As we do not have any components of other comprehensive income the adoption of this guidance has no effect on our consolidated financial statements.