Form 10KSB for GOLDEN PHOENIX MINERALS INC /MN/
16-Apr-2007
Annual Report
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Forward Looking Statements
Except for historical information, the following Management's Discussion and Analysis contains forward-looking statements based upon current expectations that involve certain risks and uncertainties. Such forward-looking statements include statements regarding, among other things, (a) our estimates of mineral reserves and mineralized material, (b) our projected sales and profitability,
(c) our growth strategies, (d) anticipated trends in our industry, (e) our future financing plans, (f) our anticipated needs for working capital, (g) our lack of operational experience and (h) the benefits related to ownership of our common stock. Forward-looking statements, which
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involve assumptions and describe our future plans, strategies, and expectations, are generally identifiable by use of the words "may," "will," "should," "expect," "anticipate," "estimate," "believe," "intend," or "project" or the negative of these words or other variations on these words or comparable terminology. This information may involve known and unknown risks, uncertainties, and other factors that may cause our actual results, performance, or achievements to be materially different from the future results, performance, or achievements expressed or implied by any forward-looking statements. These statements may be found under "Management's Discussion and Analysis or Plan of Operations" and "Business," as well as in this Form 10-KSB generally. Actual events or results may differ materially from those discussed in forward-looking statements as a result of various factors, including, without limitation, the risks outlined under "Risk Factors" and matters described in this Form 10-KSB generally. In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained in this Form 10-KSB will in fact occur as projected.
Overview
Golden Phoenix Minerals, Inc. is a mineral exploration, development and production company, formed in Minnesota on June 2, 1997, specializing in acquiring and consolidating mineral properties with potential production and future growth through exploration discoveries. Acquisition emphasis is focused on properties containing gold, silver, and other strategic minerals that present low political and financial risk and exceptional upside potential. Our main focus remains in Nevada where the political and geologic profile consistently ranks at the top of the Fraser Institute's worldwide mineral analysis, but we are committed to creating value wherever opportunity lies.
Presently our primary mining property assets are the Ashdown molybdenum/gold project operated by the Ashdown LLC, of which we currently own 60%, and the
(idled) Mineral Ridge gold mine (Figure 1). On December 23, 2004, we terminated the Joint Venture Agreement with Enexco dated as of January 28, 1998 (the "Enexco Agreement") and the Exploration License and Option to Purchase with F.W. Lewis, Inc. ("Lewis") dated as of July 10, 1998, as amended on February 19, 2003, and as further amended on May 7, 2003 (collectively, the "Lewis Agreement") relating to an interest in the Contact Property. We retained six
(6) claims at the Contact Property, which were sold outright to Enexco on June 27, 2006. We currently hold no further direct interest at the Contact Property. On January 31, 2006, we received the final payment for our Borealis project from Borealis Mining Company pursuant to the purchase contract entered into on January 31, 2005 and retain no further interest at Borealis. On April 18, 2006, we entered into a purchase agreement with Robert R. Robitaille, Douglas Lalonde, Sheldon Davis and Ronald E. Dockweiler for the Northern Champion molybdenum property located in Ontario, Canada (Figure 2).
As discussed previously, we currently own a 60% interest in the Ashdown LLC and function as manager and operator of the project. Because of the 60% ownership, the consolidated financial statements of the Company as of and for the year ended December 31, 2006 include the accounts of the Ashdown LLC, and include the operations and cash flows of the Ashdown LLC from October 1, 2006, the date operations commenced. All significant inter-company balances and transactions have been eliminated. As of December 31, 2006, the minority interest balance reported in our consolidated balance sheet represents the portion of the member's equity in the Ashdown LLC not owned by us. In our consolidated statement of operations, the operating loss of the Ashdown LLC for the year ended December 31, 2006 was allocated to Win-Eldrich Gold, Inc., the minority member, based on its equity ownership percentage, thereby reducing the Company's net loss included in our consolidated results of operations.
We have a history of operating losses, and we expect to continue to incur operating losses in the near future as we initiate mining operations at our mines in 2007. We have funded our operations primarily through sales of our common stock, including most recently the Common Stock Purchase Agreement with Fusion Capital Fund II, LLC ("Fusion Capital"), the Production Payment Purchase Agreement with Ashdown Milling Co, LLC, a financing agreement with William D. and Candida Schnack, and loans from officers and shareholders. We intend to develop and mine existing reserves and to further delineate additional, identified mineral deposits at our mines. We also intend to explore for undiscovered deposits on these properties and to acquire and explore new properties, all with the view to enhancing the value of such properties. We will continue to entertain possible joint ventures with other mining company partners. We currently have one active joint venture pursuant to the terms of that certain Operating Agreement dated September 28, 2006 entered into with Win-Eldrich Gold, Inc. for the Ashdown project. We serve as the initial Manager of the Ashdown LLC until such a time that the Management Committee determines that the Ashdown LLC should either retain us as the Manager for an additional period of time, or manage the Ashdown LLC
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itself, with the Mine General Manager and the other officers of the Ashdown LLC being responsible for the day-to-day operations of the Ashdown LLC. Pursuant to the terms of the Contribution Agreement we entered into with the Ashdown LLC on September 28, 2006, we agreed with the Ashdown LLC that value of our contribution was $5,000,000, which resulted in a sixty percent (60%) ownership interest in the Ashdown LLC.
Our ability to satisfy the cash requirements of our mining development and exploration operations will be dependent upon future financing, utilization of the Fusion Capital equity vehicle, and production from the Ashdown LLC, which commenced in December 2006. No assurance can be made that that additional financing will be obtained.
Going Concern
Our independent auditors have added an explanatory paragraph to their audit opinion issued in connection with the financial statements for the years ended December 31, 2006 and 2005 with respect to their doubt about our ability to continue as a going concern due to our recurring losses from operations and our accumulated deficit of $35,215,285 and working capital deficit of $5,438,902. Our ability to continue as a going concern will be determined by our ability to commence and maintain successful operations and to continue to raise capital from debt, equity and other sources. Our financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make a wide variety of estimates and assumptions that affect: (1) the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements, and (2) the reported amounts of revenues and expenses during the reporting periods covered by the financial statements. Our management routinely makes judgments and estimates about the effect of matters that are inherently uncertain. As the number of variables and assumptions affecting the future resolution of the uncertainties increases, these judgments become even more subjective and complex. We have identified certain accounting policies that are most important to the portrayal of our current financial condition and results of operations. Our significant accounting policies are disclosed in Note 1 of the Notes to the Consolidated Financial Statements, and several of those critical accounting policies are as follows:
Marketable Securities. Marketable securities consist of shares of International Enexco Ltd. common stock received in the sale of mineral properties. The Company intends on holding these shares for the foreseeable future, and accordingly, the shares are accounted for as securities held-for-sale in accordance with Statement of Financial Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity Securities. The marketable securities are stated at fair value based on market quotes. Unrealized gains and losses are recorded as other comprehensive income, a component of stockholders' deficit in our consolidated balance sheet. The total net unrealized gain on this investment for the year ended December 31, 2006 was $43,902.
Property and Equipment. Property and equipment are stated at cost. Depreciation and amortization are calculated using the straight-line method over the respective estimated useful lives of the assets.
Mine development costs are capitalized after proven and probable reserves have been identified. Amortization of mine development costs will be calculated using the units-of-production method over the expected life of the operation based on the estimated proven and probable reserves. As of December 31, 2006, the Company had no proven or probable reserves. Accordingly, mining equipment and buildings are currently being depreciated on a straight-line basis over their estimated economic useful life rather than on a units-of-production method.
Property Acquisition and Deferred Mineral Property Development Costs. Mineral property acquisition and deferred mineral property development costs are recorded at cost and will be capitalized once determination has been made that a mineral property has proven or probable reserves that can be produced profitably. On the commencement of profitable commercial production, depletion of each mineral property acquisition and associated deferred property development costs will be computed on the units of production basis using estimated proven and probable reserves.
Exploration Properties. Mineral exploration expenditures are expensed as incurred. Property acquisition costs relating to exploration properties are also expensed until the economic viability of the project is determined
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and proven and probable reserves quantified. Costs associated with economically viable projects are depreciated and amortized in accordance with the policies described above.
Stripping Costs. On March 30, 2005, the Financial Accounting Standards Board (FASB) ratified the consensus of the Emerging Issues Task Force (EITF) Issue 04-06 that stripping costs incurred during the production phase of a mine are variable costs that should be included in the costs of the inventory produced during the period that the stripping costs are incurred. The Company will utilize this accounting policy for stripping costs incurred in its mining operations where applicable.
Closure, Reclamation and Remediation Costs. Current laws and regulations require certain closure, reclamation and remediation work to be done on mineral properties as a result of exploration, development and operating activities. The Company periodically reviews the activities performed on its mineral properties and makes estimates of closure, reclamation and remediation work that will need to be performed as required by those laws and regulations and makes estimates of amounts that are expected to be incurred when the closure, reclamation and remediation work is expected to be performed. Future closure, reclamation and environmental related expenditures are difficult to estimate in many circumstances due to the early stages of investigation, uncertainties associated with defining the nature and extent of environmental contamination, the uncertainties relating to specific reclamation and remediation methods and costs, application and changing of environmental laws, regulations and interpretation by regulatory authorities and the possible participation of other potentially responsible parties.
The Company has estimated costs associated with closure, reclamation and environmental reclamation of the Mineral Ridge and Ashdown properties which are reflected in its consolidated financial statements in accordance with generally accepted accounting principles, including the adoption of SFAS 143, Accounting for Asset Retirement Obligations, which the Company adopted effective January 1, 2003. Because we were unable to operate the Mineral Ridge mine profitably in accordance with the feasibility study completed in 2003 and have idled the project, we wrote off the Mineral Ridge reclamation asset recorded pursuant to the requirements of SFAS No. 143, resulting in an expense of $1,826,140 in the year ended December 31, 2006.
Property Evaluations and Impairment of Long-Lived Assets. The Company reviews and evaluates the carrying amounts of its mining properties and related buildings and equipment, and other long-lived assets when events or changes in circumstances indicate that the carrying amount may not be recoverable. Estimated future net cash flows, on an undiscounted basis, from a property or asset are calculated using estimated recoverable minerals (considering current proven and probable reserves and mineralization expected to be classified as reserves where applicable); estimated future mineral price realization (considering historical and current prices, price trends and related factors); and operating, capital and reclamation costs. Reduction in the carrying value of property, plant and equipment, or other long-lived assets, with a corresponding charge to earnings, are recorded to the extent that the estimated future net cash flows are less than the carrying value.
Estimates of future cash flows are subject to risks and uncertainties. It is reasonably possible that changes in circumstances could occur which may affect the recoverability of the Company's properties and long-lived assets.
Revenue Recognition. Revenue from the sale of molybdenite concentrates and precious metals is recognized when title and risk of ownership passes to the buyer and the collection of sales proceeds is assured. Molybdenite concentrates from the LLC are currently sold FOB mine site pursuant to the terms of a long-term agreement with a buyer. Title transfers upon the buyer's acceptance of each twelve (12) sack lot when the material is loaded onto the buyer's transport.
Income Taxes. The Company recognizes a liability or asset for deferred tax consequences of all temporary differences between the tax bases of assets and liabilities and their reported amounts in the consolidated financial statements that will result in taxable or deductible amounts in future years when the reported amounts of the assets and liabilities are recovered or settled. Deferred tax items mainly relate to net operating loss carryforwards and accrued expenses. These deferred tax assets or liabilities are measured using the enacted tax rates that will be in effect when the differences are expected to reverse. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred tax assets are reviewed periodically for recoverability, and valuation allowances are provided when it is more likely than not that some or all of the deferred tax assets may not be realized. As of December 31, 2006, the Company had reduced its deferred tax assets by recording a valuation allowance of $9,486,785.
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Stock-Based Compensation and Equity Transactions. The Company has a stock-based compensation plans, which are described more fully in Note 15 to our consolidated financial statements. On January 1, 2006, the Company adopted SFAS No. 123R, Share-Based Payment, an amendment of FASB Statements 123 and 95, which requires the Company to measure the compensation cost of stock options and other stock-based awards to employees and directors at fair value at the grant date and recognize compensation expense over the requisite service period for awards expected to vest. Prior to January 1, 2006, as permitted under SFAS No. 123, the Company accounted for its stock option awards to employees and directors following the recognition and measurement principles of Accounting Principles Board (APB) No. 25, Accounting for Stock Issued to Employees, and related interpretations. Accordingly, no stock-based compensation expense for employee and director stock options was reflected in the Company's consolidated statements of operations as all options granted generally had an exercise price equal to or greater than the market value of the underlying common stock on the date of grant and the related number of shares granted was fixed at that time. The Company reported proforma disclosures of net loss and loss per share as if the fair value method of valuing stock options had been applied.
Except for transactions with employees and directors that are within the scope of SFAS 123R or APB Opinion 25, all transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. Additionally, in accordance with EITF 96-18, the Company has determined that the dates used to value the transaction are either: (1) the date at which a commitment for performance by the counter party to earn the equity instruments is established; or (2) the date at which the counter party's performance is complete.
New Accounting Pronouncements
The FASB has issued Financial Interpretation No. 48, Accounting for Uncertainty in Income Taxes - An Interpretation of FASB Statement No. 109 (FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. FIN 48 also prescribes a recognition threshold and measurement standard for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. In addition, FIN 48 provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Company adopted FIN 48 on January 1, 2007, and the provisions of FIN 48 will be applied to all tax positions upon initial adoption of this standard. Only tax positions that meet the more-likely-than-not recognition threshold at the effective date may be recognized or continue to be recognized upon adoption of FIN 48. The cumulative effect of applying the provisions of FIN 48, if any, will be reported as an adjustment to the opening balance of retained earnings for the year ending December 31, 2007. The Company has not yet determined the financial statement impact of adopting FIN 48.
The FASB has issued SFAS Statement No. 158, Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans. This new standard will require employers to fully recognize the obligations associated with single-employer defined benefit pension, retiree healthcare and other postretirement plans in their financial statements. The new standard was effective as of the end of fiscal years ending after December 15, 2006 for companies with publicly traded securities. The Company adopted SFAS No. 158 on December 31, 2006, with no material impact on the consolidated financial statements of the Company since the Company currently does not sponsor defined benefit pension or postretirement plans within the scope of the standard.
The FASB has issued SFAS Statement No. 157, Fair Value Measurements. This new standard provides enhanced guidance for using fair value to measure assets and liabilities, and requires expanded information about the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value, and the effect of fair value measurements on earnings. The standard applies whenever other standards require (or permit) assets or liabilities to be measured at fair value. Under the new standard, fair value refers to the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the market in which the reporting entity transacts. The standard clarifies the principle that fair value should be based on the assumptions market participants would use when pricing the asset or liability. The new standard is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Early adoption is permitted. The Company anticipates adopting SFAS No. 157 on
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January 1, 2008, but is currently unable to determine the impact of the adoption of the standard on its consolidated financial statements.
The FASB has issued SFAS Statement No. 154, Accounting Changes and Error Corrections. This new standard replaces APB Opinion No. 20, Accounting Changes, and FASB Statement No. 3, Reporting Accounting Changes in Interim Financial Statements. Among other changes, SFAS 154 requires that a voluntary change in accounting principle be applied retrospectively with all prior period financial statements presented on the new accounting principle, unless it is impracticable to do so. SFAS 154 also provides that (1) a change in method of depreciating or amortizing a long-lived non-financial asset be accounted for as a change in estimate (prospectively) that was effected by a change in accounting principle, and (2) correction of errors in previously issued financial statements should be termed a "restatement." The new standard is effective for accounting changes and correction of errors made in fiscal years beginning after December 15, 2005. Early adoption of this standard is permitted for accounting changes and correction of errors made in fiscal years beginning after June 1, 2005. The adoption of SFAS No. 154 by the Company on January 1, 2006 did not have an impact on the consolidated financial statements of the Company for the year ended December 31, 2006.
Results Of Operations
Results Of Operations For The Fiscal Year Ended December 31, 2006 Compared To Fiscal Year Ended December 31, 2005.
Sales
We generated sales of $176,777 for the year ended December 31, 2006 compared to $746,040 for the year ended December 31, 2005. Sales decreased as a result of the suspension of operations at Mineral Ridge. The sales for 2006 consist of the first sale of molybdenite concentrates produced by the Ashdown LLC in December 2006. The sale consisted of more than 14,000 pounds of concentrates, containing over 8,000 pounds of elemental molybdenum, and was made to Derek Raphael and Company, London, England. The sales for 2005 consist of the sale of precious metals from the operations at Mineral Ridge. We have temporarily idled the Mineral Ridge mine pending a re-engineering study designed to maximize gold recoveries through the addition of a milling and vat leaching circuit.
Operating Costs and Expenses
Cost of mining operations for the years ended December 31, 2006 and 2005 were $1,593,607 and $1,207,754, respectively. The cost of mining operations for 2005 consisted of expenditures to maintain the Mineral Ridge project on standby status and to produce the amount of sales of precious metals described above.. The costs at Mineral Ridge decreased during the current year as only security operations were conducted, and no sales of precious metals occurred. The decrease in the cost of mining operations at Mineral Ridge in 2006 was offset by the cost of mining operations incurred by the Ashdown LLC during the last three months of the year in preparing the mine and mill for production, which commenced in December 2006.
Exploration, development and mineral property lease expenses were $2,909,404 and $3,271,550 for the years ended December 31, 2006 and 2005, respectively. In May 2006, we exceeded the $5,000,000 benchmark for development expenditures at Ashdown and earned in our 60% ownership interest in the Ashdown LLC. Subsequent to this earn in, our joint venture partner was required to fund 40% of the expenditures on the Ashdown Project during the year. In addition, as discussed above, efforts at the Ashdown project were devoted substantially to preparing the mine and mill for production, which commenced in December 2006. Therefore, substantially all costs incurred at the Ashdown Project since the formation of the Ashdown LLC have been reported as costs of mining operations. The decrease in exploration, development and mineral property lease expenses in 2006 as compared to 2005 was partially offset by $521,278 of exploration expenses recorded for the Northern Champion property in 2006, including the acquisition cost of the property of $498,380.
General and administrative expenses were $2,431,518 and $1,496,124 for the years ended December 31, 2006 and 2005, respectively. General and administrative expenses include investor relations, salaries and wages of officers and office personnel, and stock-based compensation recorded pursuant to the adoption of FAS 123R. This increase is primarily the result of the valuation of employment contracts expensed in the current year on executives that were put under contract in 2006, severance obligations and $483,160 in stock-based compensation expense.
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Because we were unable to operate the Mineral Ridge mine profitably in accordance with the feasibility study completed in 2003 and have idled the project, we wrote off the reclamation asset recorded pursuant to the requirements of SFAS No. 143, resulting in an expense of $1,826,140 in the year ended December 31, 2006. We had no similar write down of reclamation costs in 2005.
Accretion expense and depreciation and amortization expense for 2006 did not vary materially from amounts reported for 2005.
Other Income (Expense)
During the year ended December 31, 2006, interest expense decreased $591,277 to $1,152,607 from $1,743,884 for the year ended December 31, 2005. This decrease resulted from two factors. First, of the $2,000,000 premium obligation recorded as interest expense in the Schnack financing agreement, $1,470,000 was expensed in 2005 and $530,000 was expensed in 2006. In addition, during 2006, $583,441 in debt, much of which was interest bearing, was extinguished with the issuance of 3,318,515 shares of our common stock.
During the year ended December 31, 2006 and subsequently during the first three months of 2007, we have continued our efforts to settle and extinguish certain obligations related to the Contact Mine, the Mineral Ridge property and amounts payable to related parties. We have reached agreement with various parties pursuant to which a total of $6,143,692 of debt has been extinguished. Net of a . . . |
