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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The
following discussion should be read in conjunction with the Financial Statements
of the Company and notes thereto included elsewhere in the Annual Report. See
"Item 8. Financial Statements" below.
Readers
are cautioned that the following discussion contains certain forward-looking
statements that involve risks, uncertainties and assumptions and should be
read in conjunction with the "Cautionary Statement on Forward-Looking
Statements" appearing at Page 4 of this Annual Report.
Overview
of Business
We are an
exploration stage company that has owned interests in several properties
located in the southwestern United States in the past. We are principally
engaged in the exploration of precious metals and other minerals. At this
time, we are not engaged in any revenue producing operations.
We are
concentrating on the exploration of the El Capitan property. After completing
further testing to determine the existence and concentration of commercially
extractable precious metals or other minerals at this property site, and if
the results of such testing are positive, we anticipate formalizing plans for
the development of the asset by either selling to or joint venturing with a
producing mining company.
For
complete details regarding the business of the Company, see "Item 1.
Business" and "Item 2. Properties," above.
Results of
Operations - Fiscal year ended September 30, 2010 compared to fiscal year
ended September 30, 2009.
We have
not yet realized any revenue from operations, nor do we expect to realize
potential revenues in our fiscal year 2011, if ever. We realized a net increase
in operating expenses of $325,550 from $953,699 for the year ended September
30, 2009 to $1,279,249 for the year ended September 30, 2010. The increase is
comprised mainly of increases in professional fees of $114,035, exploration
expenses of $110,112, reduction in a gain on asset dispositions of $19,626,
and administrative consulting fees of $420,621 net of prior year officer
compensation expense of $315,000. These increases were mainly offset by
decreases in legal and accounting fees of $30,067, non-cash warrant and
option expenses of $249,759 and recognition of a write-off of accounts
payable and accrued interest of $56,364. The current period administrative
consulting fees consist of $649,310 non-cash stock compensation to the
directors, officers and chief financial officer of the Company for services
rendered and cash compensation aggregating $131,946. The increase exploration
expenses relates to increased research activity on recovery processes for
precious metals on our El Capitan ore. The
Company did not issue any new stock options or warrants during the fiscal
year ended September 30, 2010.
Our net loss increased for the fiscal year ended September
30, 2010 by $323,028, from $953,501 for the fiscal year ended September 30,
2009, to $1,276,529 for the current fiscal year ended September 30, 2010. The
decrease in the net loss is mainly attributable to the net increase in
operating expenses in the current fiscal year, as detailed above.
Liquidity and Capital Resources
On May 19,
2010, the Board of Directors authorized a private placement of 3.2 Million
shares of restricted Rule 144 common stock at $0.35 per share. On July 23, 2010, the Board of Directors authorized an
increase in the private placement to 4.3 Million shares at $0.35 per share. As
of November 11, 2010, we have placed 4,300,000 shares of the private
placement and received cash proceeds net of wire fees aggregating $1,504,986.
The working capital funds will be utilized for payments for the continued
implementation of our business strategies, necessary corporate personnel, and
related general and administrative expenses.
Table of Contents
Index to Financial Statements
To fund operational expenses in the fiscal years ended
September 30, 2010 and 2009, we relied on proceeds from the exercise of
warrants aggregating $36,250 during 2009, cost reimbursements on the El
Capitan project from G&M aggregating $77,487 during 2009 and 2010, and
the above-referenced private placement of common stock in fiscal year 2010 of
$1,489,366.
During the fiscal year ended September 30, 2009, the
Company modified the terms of 725,000 warrants previously granted. The
exercise price of the warrants was reduced from $0.50 to $0.05. The
modifications resulted in an additional warrant expense of $15,457 for the
fiscal year ended September 30, 2009.
As of September 30, 2010, we had cash on hand aggregating
$955,023 and an accumulated deficit of $19,239,497. Based upon our budgeted
burn rate including litigation costs against the two former officers of the
Company, the completed private placement proceeds should provide adequate
working capital for approximately 12 to 14 months. We continually evaluate
business opportunities such as joint venture processing agreements with the
objective of creating cash flow to sustain the Company and provide a source
of funds for growth and continued exploration of the El Capitan deposit. If
management's plans are not successful, operations and liquidity may be
adversely impacted. Historically have relied on equity and debt financings to
finance our ongoing operations. We are dependent on obtaining additional
financing or equity placements to continue our exploration, metallurgical and
recovery program efforts on the El Capitan project. At this time we have no
current plans or arrangements for additional capital requirements, and there
is no assurance that such funding will be available when needed, or if
available, that its terms will be favorable or acceptable to us. We
anticipate that we will seek the additional financing scenarios during the
third calendar quarter of 2011. In the event that we are unable to obtain
additional working capital, we may be forced to reduce our operating expenditures
or to cease development and operations altogether.
Factors Affecting Future Operating Results
We have generated no revenues, other than interest income,
since inception. As a result, we have only a limited operating history upon
which to evaluate our future potential performance. Our potential must be
considered by evaluation of all risks and difficulties encountered by
exploration companies which have not yet established business operations.
The price of gold has experienced an increase in value
over the past three years. Any significant drop in the price of gold, other
precious metals or iron ore prices may have a materially adverse affect on
the future results of potential operations. Unless we are able to offset such
a price drop by substantially decreasing precious metals recovery costs, it
may affect our ability to market the sale El Capitan property.
Off-Balance Sheet Arrangements
During the year ended September 30, 2010, we did not
engage in any off balance sheet arrangements as defined in Item 303(c) of the
SEC's Regulation S-B.
Critical Accounting Policies
Our consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United
States of America, which require us to make estimates and judgments that
significantly affect the reported amounts of assets, liabilities, revenues
and expenses, and related disclosure of contingent assets and liabilities at
the date of the consolidated financial statements. Note 1, "Business,
Basis of Presentation and Significant Accounting Policies" in the Notes
to the Consolidated Financial Statements for the year ended September 30,
2010, describes our significant accounting policies which are reviewed by
management on a regular basis.
Table of Contents
Index to Financial Statements
New Accounting Pronouncements
In April 2010, the FASB issued Accounting Standards Update
2010-13, "Compensation-Stock Compensation (Topic 718): Effect of
Denominating the Exercise Price of a Share-Based Payment Award in the
Currency of the Market in Which the Underlying Equity Security Trades,"
or ASU 2010-13. ASU 2010-13 provides amendments to Topic 718 to clarify that
an employee share-based payment award with an exercise price denominated in
currency of a market in which a substantial portion of the entity's equity
securities trades should not be considered to contain a condition that is not
a market, performance, or service condition. Therefore, an entity would not
classify such an award as liability if it otherwise qualifies as equity. The
amendments in this Update are effective for fiscal years, and interim periods
within those fiscal years, beginning on or after December 15, 2010. The
Company does not expect the adoption of this ASU to have a material impact on
the Company's consolidated financial statements.
In January 2010, the ASC guidance for fair value
measurements and disclosure was updated to require additional disclosures
related to: i) transfers in and out of level 1 and 2 fair value measurements
and ii) enhanced detail in the level 3 reconciliation. The guidance was amended
to provide clarity about: i) the level of disaggregation required for assets
and liabilities and ii) the disclosures required for inputs and valuation
techniques used to measure fair value for both recurring and nonrecurring
measurements that fall in either level 2 or level 3. The updated guidance was
effective for the Company's interim reporting beginning February 1, 2010,
with the exception of the level 3 disaggregation, which is effective for the
Company's fiscal year beginning October 1, 2011. The Company has determined
the adoption of this disclosure does not have a material impact on its
financial statements.
Other recent accounting pronouncements issued by the FASB
(including its Emerging Issues Task Force), the AICPA, and the SEC did not,
or are not believed by management to, have a material impact on El Capitan's
present or future consolidated financial statements.
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