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Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
The
following discussion provides information that management believes is
relevant to an assessment and understanding of the financial condition and results
of operations of Colorado Goldfields Inc. (the "Company").
This discussion addresses matters we consider important for an understanding
of our financial condition and results of operations as of and for the two
years ended August 31, 2010, as well as our future results. It consists of
the following subsections:
� "Introduction and Plan of
Operation" which provides a brief summary of our consolidated results
and financial position and the primary factors affecting those results, as
well as a summary of our expectations for fiscal 2011;
� "Liquidity and Capital Resources," which
contains a discussion of our cash flows and liquidity, investing activities
and financing activities, contractual obligations, and critical obligations;
� "Results of Operations and
Comparison"," which sets forth an analysis of the operating results
for the last two years;
� "Critical Accounting Policies," which
provides an analysis of the accounting policies we consider critical because
of their effect on the reported amounts of assets, liabilities, income and/or
expenses in our consolidated financial statements and/or because they require
difficult, subjective or complex judgments by our management;
� "Recent Accounting Pronouncements and
Developments," which summarizes recently published authoritative
accounting guidance, how it might apply to us and how it might affect our
future results.
This item
should be read in conjunction with our financial statements and the notes
thereto included in this annual report. Introduction and Plan of Operation
The following discussion updates our plan of operation for the foreseeable
future. The discussion also summarizes the results of our operations for the
year ended August 31, 2010 and compares those results to the year ended August
31, 2009.
During fiscal 2010 we continued to
experience the negative effects of the financial markets upheaval, which made
capital acquisition extremely difficult. The litigation commenced by our
former president, Todd C. Hennis necessarily caused all work relating to the
Gold King Mine to be suspended, including the N.I. 43-101 report which was
originally expected to be completed in the spring of 2009. We have determined
that we will not pursue any further involvement with the Gold King Mine.
Therefore, in fiscal 2010 we focused primarily on re-activation of the Pride
of the West Mill, securing agreements for "custom" or
"toll" milling, and seeking out new properties to explore and
develop. In that regard, we were generally successful. We entered into two
new lease/option agreements for properties located near our Mill facility,
and completed several milestones regarding mill re-activation.
In 2007, our former management predicted profitability by end of calendar
year 2009. Last year we predicted operational revenue to begin in November
2010. Given the events described above, and a longer than expected permit
amendment process related to the mill, we are now targeting profits from
operations by August 2011.
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Weather conditions in San Juan County, Colorado vary by
season. During the winter season our activities are concentrated on analysis,
planning, and development of properties in more temperate climates. Surface
drilling and property exploration in San Juan County can reasonably take
place between May and late October. Of course underground operations continue
year-round. Our plan of operation for fiscal 2011 is to continue seeking
funding for our operations and mining exploration program, complete all
necessary permitting requirements, bring the Pride of the West Mill into
operation, and commence custom/toll milling of ore from the companies that
have entered into preliminary purchase with us.
Liquidity and Capital Resources
We were formed in early 2004 and have primarily had limited activity until
our acquisition of the option to acquire interests in the San Juan
Properties. Since we have received no revenue from the production of gold or
other metals, we have relied on funds received in connection with our equity
and debt offerings to finance our ongoing operations. We have experienced net
losses since inception, and we expect we will continue to incur losses for
the next year. As of the date of this filing, we do not have any available
external source of funds. We require additional capital in the near term to
maintain our current operations. Although we are actively seeking additional
equity and debt financing, such financing may not be available on acceptable
terms, if at all.
Our financial statements have been prepared assuming that we will continue as
a going concern. Since our inception in February 2004, we have not generated
revenue and have incurred net losses. We have a working capital deficit of
$2,114,107 at August 31, 2010, incurred net losses of $3,660,418 and
$5,281,857 for the years ended August 31, 2010 and 2009 respectively, and have
a deficit accumulated during the exploration stage of $13,040,854 for the
period from February 11, 2004 (inception) through August 31, 2010.
Accordingly, we have not generated cash flow from operations and have
primarily relied upon loans from officers, promissory notes and advances from
unrelated parties, sale of assets, and equity financing to fund our
operations. These conditions (as indicated in the 2010 audit report of our
Independent Registered Public Accounting Firm), raise substantial doubt about
the Company's ability to continue as a going concern.
We currently have minimal cash on hand. Accordingly, we do not have
sufficient cash resources or current assets to pay our obligations, and we
have been meeting many of our obligations through the issuance of our common
stock to our employees, consultants and advisors as payment for goods and
services. Considering the foregoing, we are dependent on additional financing
to continue our operations and exploration efforts and, if warranted, to
develop and commence mining operations. Our significant capital requirements
for the foreseeable future include exploration commitments of $650,000 on our
mining property options, payment on a $650,000 promissory note which is
collateralized by the Pride of the West Mill and related accrued interest of
$157,896, payment on notes payable including accrued interest to related
parties totaling $312,579, re-activation expenses for the mill, and our
corporate overhead expenses.
We are actively seeking additional equity or debt financing. However, there
can be no assurance that funds required during the next twelve months or
thereafter will be available from external sources. The lack of additional
capital resulting from the inability to generate cash flow from operations or
to raise capital from external sources would force us to substantially
curtail or cease operations and would, therefore, have a material adverse
effect on our business. Further, there can be no assurance that any such
required funds, if available, will be available on attractive terms or that
they will not have a significantly dilutive effect on our existing
shareholders. All of these factors have been exacerbated by the extremely
unsettled credit and capital markets presently existing.
As of August 31, 2010, we had cash of approximately $20,000, and other
current assets of approximately $18,000 and current liabilities of
approximately $2,153,000, resulting a working capital deficit of $2,114,000.
We used cash and cash equivalents of $296,000 in operating activities for the
year ended August 31, 2010. Investing activities for the year ended August
31, 2010 of $15,000 consisted of the sale of property, plant and equipment.
Financing activities consisted of cash proceeds from loans made by private
investors and officers during the year, net of repayments, of $301,000.
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Results of Operations
We are presently in the exploration stage of our business and have not earned
any revenues to date, and we do not anticipate earning revenues until we
acquire and develop mining properties with proven reserves or perform milling
for other mining companies.
Year Ended August 31, 2010 Compared to Year Ended August 31, 2009 For the
year ended August 31, 2010, we incurred a net loss of approximately
$3,660,000 compared to a net loss of approximately $5,282,000 for the year
ended August 31, 2009.
For the years ended August 31, 2010 and 2009, overall mineral property and
exploration costs were comparable year over year of approximately $568,000
and $602,000, respectively. Professional fees primarily relate to the
re-activation of the Pride of the West Mill and increased to $270,000 from
$252,000 from 2009 to 2010.
General and administrative costs were approximately $2,620,000 and $4,390,000
for the years ended August 31, 2010 and 2009, respectively; a 40 percent
decrease of $1,770,000. The decrease is due to the specific reasons presented
below.
Consulting expenses were $1,053,000 and $2,127,000 for the years ended August
31, 2010 and 2009, respectively, a 51% decrease of $1,075,000. These expenses
are in the form of stock based compensation. The decrease is due to suspended
geological and engineering analysis of potential mining property
acquisitions, environmental consulting, corporate communications, research
and development of international opportunities in favor of focusing on the
Pride of the West Mill re-activation. Furthermore, the decrease partially reflects
a lower valuation of stock based compensation.
Salaries and related payroll liabilities were $453,000 and $604,000 for the
years ended August 31, 2010 and 2009, respectively, a $151,000 decrease. The
decrease is due to no renewal bonuses being paid pursuant to our executive
compensation agreements with our Chief Executive Officer and Chief Financial
Officer in fiscal 2010. All salaries are paid in the form of stock awards in
lieu of cash exempt under Rule 16b-3.
Travel and related costs were $14,000 and $9,000 for the years ended August
31, 2010 and 2009, respectively, an increase of $5,000. The increase in
travel during the 2010 fiscal year was due to a higher level of management's
physical presence at the operations site in Silverton, Colorado.
Website costs were $55,000 and $224,000 for the years ended August 31, 2010
and 2009, respectively, a decrease of $169,000. The decrease was due to less
redesign activities related to our website; focusing mainly on maintenance
and smaller enhancements in fiscal 2010.
Investor relations expenses were $511,000 and $168,000 for the years ended
August 31, 2010 and 2009, respectively, an increase of $343,000. The increase
is due to the use of a much higher caliber of media resources to keep our
shareholders informed of the Company's progress.
Interest expense was $241,000 and $107,000 for the years ended August 31,
2010 and 2009 respectively, an increase of $134,000. Interest expenses are
related to the mortgage on the mill which was purchased in June 2007, the
issuance of convertible promissory notes in 2010, (including amortization of
debt discount and deferred financing fees), and legal settlement interest.
See Item 3. Legal Proceedings for additional details.
Other income was $28,000 and $69,000 during the years ended August 31, 2010
and 2009 respectively, a decrease of $41,000 due primarily to reduced gains
on the sale of assets that are not immediately needed for operations.
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Legal
settlement costs of $245,000 are included in operating expenses in 2010. This
was due to recording a potential liability to our former president Todd C.
Hennis who, as result of litigation, may have a claim against the Company if
we are not successful in the Colorado Court of Appeals. See Item 3. Legal
Proceedings for additional details.
Critical Accounting Policies
We have identified the following critical accounting policies which were used
in the preparation of our financial statements.
Exploration and Development Costs: Costs of exploration and development costs
are expensed as incurred unless proven and probable reserves exist and the
property is a commercially minable property. When it has been determined that
a mineral property can be economically developed as a result of established
proven and probable reserves, the costs to develop such property will be
capitalized. Costs of abandoned projects will
be charged to operations upon abandonment. Long-lived Assets: We periodically
evaluate the carrying value of property, plant and equipment costs, to
determine if these costs are in excess of their net realizable value and if a
permanent impairment needs to be recorded. The periodic evaluation of
carrying value of capitalized costs and any related property, plant and
equipment costs are based upon expected future cash flows expected to result
from the use and the eventual disposal of the asset, as well as specific
appraisal in certain circumstances.
Property Retirement Obligation: Asset retirement costs are capitalized as
part of the carrying amount of certain long-lived assets. Accretion expense
is recorded in each subsequent period to recognize the changes in the
liability resulting from the passage of time. Changes resulting from
revisions to the original fair value of the liability are recognized as an
increase or decrease in the carrying amount of the liability and the related
asset retirement costs capitalized as part of the carrying amount of the
related long-lived asset. Stock- Based Compensation: We utilize the
Black-Scholes option-pricing model to determine fair value of options and
warrants granted as stock-based compensation, which requires us to make
judgments relating to the inputs required to be included in the model. In
this regard, the expected volatility is based on the historical price
volatility of the Company's common stock. The dividend yield represents the
Company's anticipated cash dividend on common stock over the expected life of
the stock options. The U.S. Treasury bill rate for the expected life of the
stock options is utilized to determine the risk-free interest rate. The
expected term of stock options represents the period of time the stock
options granted are expected to be outstanding. Mining Rights: The Company
has determined that its mining rights meet the definition of mineral rights
and are tangible assets. As a result, the costs of mining rights are
initially capitalized as tangible assets when purchased. If proven and
probable reserves are established for a property and it has been determined
that a mineral property can be economically developed, costs will be
amortized using the units-of-production method over the estimated life of the
probable reserves. For mining rights in which proven and probable reserves
have not yet been established, the Company assesses the carrying value for
impairment at the end of each reporting period. Mining rights are stated at
cost less accumulated amortization and any impairment losses. Mining rights
for which probable reserves have been established will be amortized based on
actual units of production over the estimated reserves of the mines.
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Recent Accounting Pronouncements
In January 2010, the Financial Accounting Standards Board ("FASB")
issued Accounting Standards Update ("ASU") 2010-06, "Improving
Disclosures about Fair Value Measurements" (ASU 2010-06). 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
(September 1, 2011 for the Company). As ASU 2010-06 only requires enhanced
disclosures, the Company does not expect that the adoption of this update
will have a material effect on its financial statements. In August 2009, the
FASB issued authoritative guidance clarifying the measurement of the fair
value of liabilities. The amendments reduce potential ambiguity in financial
reporting when measuring the fair value of liabilities and help to improve
consistency in the application of authoritative guidance. This update is
effective for the first reporting period, including interim periods,
beginning after issuance, which for the Company was September 1, 2009. The
adoption of this guidance did not have an impact on the Company's results of
operations, financial position or cash flows.
In June 2009, the FASB issued a new accounting standard which provides
guidance that, among other things, requires a qualitative rather than
quantitative analysis to determine the primary beneficiary of a variable
interest entity ("VIE"), which amends previous guidance for
consideration of related party relationships in the determination of the
primary beneficiary of a VIE, amends certain guidance for determining whether
an entity is a VIE, requires continuous assessments of whether an enterprise
is the primary beneficiary of a VIE, and requires enhanced disclosures about
an enterprise's involvement with a VIE. The adoption of this guidance
(effective for the Company on September 1, 2010), is not expected to have a
material impact on the Company's financial statements. In May 2009, the FASB
established general standards for accounting and disclosure of events that
occur after the balance sheet date but before the financial statements are
issued or are available to be issued. The pronouncement required the disclosure
of the date through which an entity has evaluated subsequent events and the
basis for that date, whether that date represents the date the financial
statements were issued or were available to be issued. In February 2010, the
FASB amended this standard. As a result, the Company is no longer required to
disclose in the financial statements that the Company has evaluated
subsequent events or disclose the date through which subsequent events have
been evaluated.
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