UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM 10-KSB
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For
the fiscal year ended December 31, 2006
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o
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TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
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For
the transition period from
to
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Commission
file number 333-129321
GOLD
RESOURCE CORPORATION
(Name
of
small business issuer in its charter)
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Colorado
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84-1473173
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(State
or other jurisdiction of
incorporation
or organization)
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(I.R.S.
Employer
Identification
No.)
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222
Milwaukee Street, Suite 301, Denver, CO
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80206
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(Address
of principal executive offices)
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(Zip
Code)
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(303)
320-7708
(Issuer’s
telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act:
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None
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N/A
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Title
of each class
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Name
of each exchange on which
registered
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Securities
registered pursuant to Section 12(g) of the Act:
Common
Stock, $0.001 par value
(Title
of
class)
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the
Act Yes o No ý.
Indicate
by check mark whether the issuer (1) filed all reports required to be filed
by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the
past 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. ý Yes o No
Check
if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained,
to
the best of registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB ý.
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). o Yes ý No
State
issuer’s revenues for its most recent fiscal year: Nil.
The
aggregate market value (at the last trade price of $3.04 per share) of the
Common Stock of Gold Resource Corporation held by non-affiliates as of
March 30, 2007 was approximately $63,053,269. As of March 30, 2007,
there were 28,169,552 shares of Common Stock outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE:
None.
Transitional
Small Business Disclosure Format (check one):
o Yes ý No
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1
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TABLE
OF CONTENTS
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PART I
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ITEM
1:
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DESCRIPTION
OF BUSINESS
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3
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ITEM
2:
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DESCRIPTION
OF PROPERTIES
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5
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ITEM
3:
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LEGAL
PROCEEDINGS
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12
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ITEM
4:
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SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
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12
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PART II
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ITEM
5:
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MARKET
FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
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12
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ITEM
6:
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MANAGEMENT’S
DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
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14
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ITEM
7:
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FINANCIAL
STATEMENTS
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24
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ITEM
8:
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CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
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38
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ITEM
8A:
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CONTROL
AND PROCEDURES
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38
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PART III
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ITEM
9:
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DIRECTORS,
EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH
SECTION 16(A) OF THE EXCHANGE ACT
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38
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ITEM
10:
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EXECUTIVE
AND DIRECTOR COMPENSATION
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40
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ITEM
11:
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SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
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42
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ITEM
12:
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CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
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44
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ITEM
13:
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EXHIBITS
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45
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ITEM
14:
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PRINCIPAL
ACCOUNTANT FEES AND SERVICES
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45
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SIGNATURES
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46
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ADDITIONAL
INFORMATION
Descriptions
of agreements or other documents contained in this report are intended as
summaries and are not necessarily complete. Please refer to the agreements
or
other documents filed or incorporated herein by reference as exhibits. Please
see the exhibit index at the end of this report for a complete list of
those exhibits.
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
Please
see the note under “Item 6. Management’s Discussion and Analysis or Plan of
Operation,” for a description of special factors potentially affecting
forward-looking statements included in this report.
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2
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Overview
We
are an
exploration stage company organized in Colorado on August 24, 1998 to search
for
gold and silver. We currently have an interest in four properties located in
Oaxaca, Mexico. Our exploration efforts are currently focused on the
El
Aguila project,
which is comprised of parcels we refer to as the El
Aguila
property
and the Las
Margaritas
property. We also have an interest in a propect known as the El
Rey property
and we recently acquired an interest in a prospect known as the Solaga
property.
In
October 2002, we leased a 100% interest in mineral claims covering approximately
1,896 hectares (4,685 acres)1 and located in the historic
San
Jose de Gracia
mining
district in the State of Oaxaca, which we call the El
Aguila
project.
Since acquiring that interest, we have drilled approximately 10,400 meters
(34,120 feet) of test holes in one section of the property and have encountered
gold and silver mineralized material. We are continuing our exploration efforts
on this property and recently commenced additional drilling on a section of
the
property.
In
2005,
we obtained some additional mineral claims in the Mexican State of Oaxaca which
we call the El
Rey property.
In February 2007, we leased a 100% interest in a property we refer to as the
Solaga
property. We have conducted very limited exploration of these properties to
date.
As
an
exploration stage mining company, our activities include, at various times
and
to various degrees, exploration, land acquisition, geological evaluation and
feasibility studies of properties, and where warranted, efforts to develop
and
construct mining and processing facilities and to mine and process gold, silver
and other metals and by-products.
Our
operations in Mexico are conducted through our wholly-owned Mexican
subsidiaries, Don David Gold, S.A. de C.V. and Golden Trump S.A. de C.V. All
references to us or our company in this report include our
subsidiaries.
Our
principal executive offices are located at 222 Milwaukee Street, Suite 301,
Denver, Colorado 80206, and our telephone number is (303) 320-7708. We maintain
a website at www.goldresourcecorp.com.
Recent
Events
On
August
17, 2006, we closed our initial public offering (“IPO”), from which we received
net proceeds of $4,351,200. These proceeds enabled us to begin the third stage
of our exploration program at the El
Aguila
project.
In October 2006, we signed a contract for a minimum of 3,333 meters (10,935
feet) of additional core drilling which commenced in November 2006, and expect
to contract for additional drilling up to a total of 10,000 meters (32,808
feet). In September 2006, our stock began trading on the over the counter
Bulletin Board under the symbol “GORO.”
On
December 7, 2006, we completed a private placement of 4,322,000 shares of our
common stock for $1.20 per share (“Private Placement”), from which we received
$4,928,700 in net proceeds. In connection with the Private Placement, we paid
cash of $257,700 and issued 257,700 shares of our common stock as finders’ fees.
See
“Item
6.
Management’s Discussion and Analysis” for additional information regarding this
offering.
____________________
1 Please
see the Glossary appearing in the section titled "Item 2. Description of
Properties" for a description of certain terms used in this report, including
conversion of metric units.
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3
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Competitive
Business Conditions
The
exploration for, and the acquisition of gold and silver properties are subject
to intense competition. Due to our recent organization, limited capital and
personnel, we may be at a competitive disadvantage compared to other companies
with regard to exploration and, if warranted, development. In general,
properties with a higher grade of recoverable material or which are more readily
minable afford the owner a competitive advantage. Our present limited funding
means that our ability to compete for properties to be explored and developed
is
limited. We believe that competition for acquiring mineral prospects will
continue to be intense in the future.
The
availability of funds for exploration is sometimes limited, and we may find
it
difficult to compete with larger and more well-known companies for capital.
Even
though we have the right to any minerals on our claims, there is no guarantee
we
will be able to raise sufficient funds in the future to maintain our mineral
claims in good standing. Therefore, if we do not have sufficient funds for
exploration, our claims might lapse and be staked by other mining interests.
We
might be forced to seek a joint venture partner to assist in the exploration
of
our mineral claims. In this case, there is the possibility that we might not
be
able to pay our proportionate share of the exploration costs and might be
diluted to an insignificant carried interest. Our inability to develop our
mining properties due to lack of funding, even if warranted, could have a
material adverse effect on our operation and financial position.
General
Government Regulations
In
connection with mining, milling and exploration activities, we are subject
to
extensive Mexican federal, state and local laws and regulations governing the
protection of the environment, including laws and regulations relating to
protection of air and water quality, hazardous waste management and mine
reclamation as well as the protection of endangered or threatened species.
The
department responsible for environmental protection in Mexico is SEMARNAT,
which
is similar to the United States Environmental Protection Agency. SEMARNAT has
broad authority to shut down and/or levy fines against facilities that do not
comply with its environmental regulations or standards. Potential areas of
environmental consideration for mining companies, including ours if we are
successful in commencing mining operations, include acid rock drainage, cyanide
containment and handling, contamination of water courses, dust and noise.
Prior
to
the commencement of any mining operations at the El
Aguila
property, if any, we will have to secure various regulatory permits from
federal, state and local agencies. These governmental and regulatory permits
generally govern the processes being used to operate, the stipulations
concerning air quality and water issues, and the plans and obligations for
reclamation of the properties at the conclusion of operations. Regulations
require that an environmental impact statement, known in Mexico as a
Manifiestacion de Impacto Ambiental ("MIA"), be prepared by a third-party
contractor for submission to SEMARNAT. Studies required to support the MIA
include a detailed analysis of these areas, among others: soil, water,
vegetation, wildlife, cultural resources and socio-economic impacts. Although
the regulatory process in Mexico has a public review component, proof of local
community support for a project is required to gain final MIA approval. A lack
of support from the local community may make obtaining an MIA difficult. A
risk
analysis must also be prepared in conjunction with the MIA for approval by
SEMARNAT.
The
most
significant other approvals that might be necessary for our operations would
be
permits to extract water from the Totolapam River and an explosives permit,
issued by the Mexican army, to purchase, store and use explosives. In Mexico,
water rights are managed by the Comision Nacional del Agua ("CNA"). According
to
Mexican water law, all users must pay for the right to use national waters
regardless of how the rights were obtained, with the rates being determined
by
the availability of water and the method of extraction.
We
have
obtained, or will obtain at the appropriate time, environmental permits,
licenses or approvals required for potential operations, if any. We are not
aware of any material violations of environmental permits, licenses or approvals
issued with respect to our operations.
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4
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Employees
We
currently have three full-time employees, two of whom serve as our executive
officers. These individuals devote all of their business time to our affairs.
We
also engage two consultants, one to oversee our property and activities in
Mexico and one to assist with our administrative and financial affairs. Our
consultant in Mexico serves on a full-time basis and the other as his services
are necessary. We engage independent contractors in connection with the
exploration of our mining properties.
We
currently have an interest in four properties, the El
Aguila
property
and the Las
Margaritas property
which we combine as part of the El
Aguila project,
the El
Rey
property
and the Solaga
property. We lease claims comprising the El
Aguila
project
from an individual who serves as our consultant in Mexico and the Solaga
property
from an entity partially owned by our consultant in Mexico. We own mining
concessions for the El
Rey
property. All of these properties are in the exploration stage and have no
proven or probable reserves.
The
El
Aguila Project
Background.
Effective October 14, 2002, we leased a prospective gold/silver property
comprised of three concessions, El
Aguila,
El
Aire
and
La
Tehuana,
from
Jose Perez Reynoso, a consultant to our company. The lease agreement is subject
to a 4% net smelter return royalty where production is sold in the form of
gold/silver dore and 5% for production sold in concentrate form. We have made
periodic advance royalty payments under the lease totaling $260,000 and no
further advance royalty payments are due.
Under
Mexican mining laws, rights to minerals are obtained by filing concessions
and
fees are paid to the federal government for the privilege of holding these
concessions. The fees are based on the size of the concession, calculated at
the
rate of approximately $4 per hectare every six months, based on the exchange
rate at March 26, 2006. Based on the size of our concessions at the El
Aguila
project,
this amounts to approximately $7,600 every six months.
The
table
below summarizes the concessions that we have leased and that give us the right
to explore and mine the properties and the ensuing map shows their general
location. The mineral concessions making up the El
Aguila
project
are located within the San
Pedro Totolapam Ejido.
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Concession
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Type
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Expediente/
Titulo
No.
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Hectares
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Acres
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El
Aire
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Exploitation
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158272
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72.00
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177.92
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El
Aguila
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Exploitation
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222844
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899.00
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2,221.47
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La
Tehuana
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Exploration
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210029
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925.00
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2,285.72
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Total
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1,896.00
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4,685.11
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5
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Location
Map for the El
Aguila
and El
Rey
Projects
Location
and Access. The
El
Aguila
project
is located in the Sierra
Madre del Sur
of
southern Mexico, in the central part of the State of Oaxaca. Access to the
property is by way of the Pan American Highway (Highway # 190), approximately
120 kilometers (75 miles) southeast of Oaxaca City, the state’s capital city. At
the village of San
Jose de Gracia,
a
gravel road goes approximately four kilometers northwest to the
property.
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6
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The
climate of the El
Aguila
area is
dry and warm to very warm with most rainfall occurring in the summer and annual
precipitation averaging only 423.7 mm (17 inches). The average yearly
temperature is 26.6 degrees centigrade (80° F). The area is very rocky with
scarce vegetation. Subsistence farming occurs and the main agricultural crop
is
agave cactus that is cultivated for the production of mescal.
Exploration
Activities.
The
early history of activity at the El
Aguila
property, as known by us, is prospecting and limited mining for gold and silver
from the early 1900's to the mid 1960's. In 1998, Mr. Perez Reynoso acquired
the
concessions and leased them to Apex Silver Corporation of Denver, Colorado.
Apex
carried out an exploration program involving geologic mapping, surface sampling
and an 11-hole drilling program (1,242 meters, or 4,074 feet). The results
did
not meet Apex's expectations so it cancelled its lease on the property in 2002.
We leased the property from Mr. Perez Reynoso in October 2002.
In
August
2003, we entered into an exploration agreement with Canyon Resources Corporation
pertaining to our interest in the El
Aguila
property
whereby Canyon loaned us $500,000 for exploration costs, and subsequently
converted its note into 1,200,000 shares of our common stock in 2004. The
drilling program was completed in 2004 and included approximately 3,900 meters
(12,795 feet) of drilling in 69 holes focused on one target area of the
property. This exploration drilling encountered some gold intercepts which
required additional exploratory drilling in order to fully evaluate. Through
the
year ended December 31, 2006, we have spent or incurred approximately $1,978,200
in acquisition, exploration and related costs for the El
Aguila
project,
of which approximately $628,851 was spent during 2006.
We
have
carried out exploration on the project that has included geologic mapping,
surface sampling, geochemical sampling and two rounds of exploratory drilling.
We recently commenced a third round of exploratory drilling and have drilled
approximately 3,700 meters (12,100 feet). We anticipate drilling an additional
6,300 meters (20,790 feet) during spring 2007 for a total of 10,000 meters
(32,800 feet) of core drilling. We expect to undertake a feasibility study
in
the near future. We have contracted for an additional drill rig to accelerate
our current exploration program.
The
following table illustrates the results of our exploration program that were
available to us through January 2007:
[Space
intentionally blank]
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7
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EL
AGUILA PROJECT SELECTED DRILL HOLE
INTERCEPTS
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Interval
Starting
At
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Interval
Starting
At
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Interval
Length
|
Interval
Length
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Gold
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Gold
|
Silver
|
Silver
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Hole
No.
|
Drill
Type
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(Meters)
|
(Feet)
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(Meters)
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(Feet)
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g/t
|
oz./ton
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g/t
|
oz./ton
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|
301
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RC
|
40
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131.2
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16
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52.5
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6.56
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0.19
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23
|
0.67
|
|
302
|
RC
|
30
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98.4
|
6
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19.7
|
16.65
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0.49
|
112
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3.27
|
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303
|
RC
|
22
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72.2
|
6
|
19.7
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18.79
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0.55
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133
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3.88
|
|
306
|
RC
|
4
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13.1
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4
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13.1
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14.58
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0.43
|
74
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2.16
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and
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24
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78.7
|
6
|
19.7
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8.99
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0.26
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76
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2.22
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|
|
307
|
RC
|
18
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59
|
4
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13.1
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3.91
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0.11
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84
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2.45
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and
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26
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85.3
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2
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6.6
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3.69
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0.11
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70
|
2.04
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|
|
309
|
RC
|
56
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183.7
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2
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6.6
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3.79
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0.11
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37
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1.08
|
|
311
|
RC
|
16
|
52.5
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2
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6.6
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4.53
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0.13
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25
|
0.73
|
|
314
|
RC
|
6
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19.7
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2
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6.6
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6.89
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0.2
|
69
|
2.01
|
|
326
|
RC
|
2
|
6.6
|
4
|
13.1
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3.84
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0.11
|
83
|
2.42
|
|
327
|
RC
|
8
|
26.2
|
8
|
26.2
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3.54
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0.1
|
136
|
3.97
|
|
327A
|
RC
|
12
|
39.4
|
8
|
26.2
|
3.97
|
0.12
|
78
|
2.28
|
|
330
|
RC
|
6
|
19.7
|
6
|
19.7
|
8.46
|
0.25
|
111
|
3.24
|
|
331
|
RC
|
50
|
164
|
4
|
13.1
|
54.71
|
1.6
|
701
|
20.47
|
|
332
|
RC
|
16
|
52.5
|
8
|
26.2
|
6.07
|
0.18
|
18
|
0.53
|
|
333
|
RC
|
2
|
6.6
|
2
|
6.6
|
3.67
|
0.11
|
63
|
1.84
|
|
and
|
8
|
26.2
|
6
|
19.7
|
15.69
|
0.46
|
101
|
2.95
|
|
|
334
|
RC
|
6
|
19.7
|
6
|
19.7
|
9.4
|
0.27
|
25
|
0.73
|
|
338
|
RC
|
20
|
65.6
|
10
|
32.8
|
3.71
|
0.11
|
65
|
1.9
|
|
343
|
RC
|
60
|
196.8
|
14
|
45.9
|
6.89
|
0.2
|
40
|
1.17
|
|
349
|
RC
|
34
|
111.5
|
6
|
19.7
|
7.5
|
0.22
|
78
|
2.28
|
|
354
|
RC
|
34
|
111.5
|
4
|
13.1
|
7.5
|
0.22
|
68
|
1.99
|
|
363
|
RC
|
4
|
13.1
|
6
|
19.7
|
11.63
|
0.34
|
100
|
2.92
|
|
365
|
RC
|
0
|
0
|
4
|
13.1
|
5.73
|
0.17
|
10
|
0.29
|
|
366
|
RC
|
0
|
0
|
4
|
13.1
|
3.74
|
0.11
|
100
|
2.92
|
|
509
|
CORE
|
20
|
65.6
|
6
|
19.7
|
10.38
|
0.3
|
329
|
9.61
|
|
511
|
CORE
|
40
|
131.2
|
12
|
39.4
|
10.18
|
0.3
|
20
|
0.58
|
|
512
|
CORE
|
34.6
|
113.5
|
12
|
39.4
|
4.67
|
0.14
|
74
|
2.16
|
|
523
|
CORE
|
1.5
|
4.9
|
1
|
3.3
|
7.7
|
0.22
|
918
|
26.81
|
|
and
|
6.4
|
21
|
8.1
|
26.6
|
1.39
|
0.04
|
146
|
4.26
|
|
|
530
|
CORE
|
24
|
78.7
|
10
|
32.8
|
0.96
|
0.03
|
387
|
11.3
|
|
601
|
CORE
|
31
|
101.7
|
5
|
16.4
|
0.82
|
0.02
|
72.2
|
2.11
|
|
602
|
CORE
|
27
|
88.6
|
1
|
3.3
|
1.22
|
0.04
|
20.2
|
0.59
|
|
603
|
CORE
|
38
|
124.7
|
3
|
9.8
|
1.22
|
0.04
|
34.6
|
1.01
|
|
603
|
CORE
|
45
|
147.6
|
6
|
19.7
|
3.65
|
0.11
|
231.7
|
6.75
|
|
and
|
47
|
154.2
|
3
|
9.8
|
5.54
|
0.16
|
404.3
|
11.79
|
|
|
604
|
CORE
|
29
|
95.1
|
2
|
6.6
|
5.49
|
0.16
|
180.3
|
5.26
|
|
605
|
CORE
|
35
|
114.8
|
6
|
19.7
|
0.81
|
0.02
|
90.1
|
2.63
|
|
606
|
CORE
|
21
|
68.9
|
15
|
49.2
|
5.6
|
0.16
|
59.7
|
1.74
|
|
607
|
CORE
|
40
|
131.2
|
3
|
9.8
|
5.5
|
0.16
|
41.1
|
1.2
|
|
608
|
CORE
|
46
|
150.9
|
2
|
6.6
|
3.8
|
0.11
|
33.6
|
0.98
|
|
609
|
CORE
|
55
|
180.4
|
1
|
3.3
|
0.75
|
0.02
|
17.4
|
0.51
|
|
610
|
CORE
|
Assays
Pending
|
|||||||
|
611
|
CORE
|
47
|
154.2
|
19
|
62.3
|
1.45
|
0.04
|
22.2
|
0.65
|
|
and
|
|
47
|
154.2
|
4
|
3.9
|
0.11
|
77.5
|
2.26
|
|
|
612
|
CORE
|
69
|
226.4
|
2
|
13.1
|
3.55
|
0.1
|
45.6
|
1.33
|
|
612
|
CORE
|
78
|
255.9
|
1
|
3.3
|
0.04
|
0
|
354.0
|
10.32
|
|
613
|
CORE
|
89
|
292
|
1
|
3.3
|
0.05
|
0
|
97.4
|
2.84
|
|
RC:
Reverse Circulation Drilling
|
|||||||||
|
CORE:
Diamond Core Drilling
|
|||||||||
-
8
-
Facilities.
The
El
Aguila
project
does not have any plant or equipment at this time. Rudimentary access roads
have
been developed to various parts of the project for exploration activities.
The
federal power grid is located along the Pan American Highway and could be
utilized in operations, if any. Water would be available from the Totolapam
River and would require pumping to any facilities. Water rights are owned by
the
Mexican nation and administered by the CNA, an agency of the federal government.
The CNA has granted water concessions to private parties throughout the defined
Oaxaca Hydrologic Basin and water concessions for development and operation
of
the El
Aguila
project,
if any, are expected to be available.
Geology
and Mineralization. The
El
Aguila
project
is located in the San
Jose de Gracia
Mining
District in the Sierra
Madre del Sur of
southern Mexico. Multiple volcanic domes of various scales, and probably
non-vented intrusive domes, dominate the district geology. These volcanogenic
features are imposed on a pre-volcanic basement of sedimentary rocks. Gold
and
silver mineralization in this district is related to the manifestations of
this
classic volcanogenic system and is considered epithermal in character. This
geology suggests the presence of mineralization which our exploration program
is
designed to test and define.
The
deposits on the El
Aguila
property
are primarily hosted in a quartz rich, stratiform zone (manto). There appear
to
be several manto units on the property, one main manto and one or more lower
mantos. The main manto is conformable with the sedimentary and volcanic rock
above and below the manto. It varies in thickness from less than two meters
(6.6
feet) to more than 30 meters (98.4 feet).
Surface
sampling yielded anomalous gold and silver values from early district-wide
exploration where silicified zones were encountered. In addition, a small,
shallow adit and winze provided limited sampling underground, yielding
indications of gold values in a silicified, sub-horizontal manto. Based on
these
early anomalous exploration samples, a limited drilling program was carried
out
by us that in fact resulted in defining a central zone of continuous, shallow,
sub-horizontal mineralization. The fact that the mineralization is relatively
shallow would make mining less difficult and less expensive from an open pit
mine compared to an underground mine, if we determine to develop and mine the
property.
The
graphic image below depicts an underground cross section of the property in
which several holes have been drilled and an estimated area of mineralized
material which resulted from the drilling. It illustrates the outline of an
area
within the cross section estimated to contain at least one gram of gold per
ton.
Higher grade intercepts within the outline are separately indicated. Underground
workings are also depicted.
[Space
intentionally blank]
-
9
-
-
10
-
The
El
Rey
Property and Solaga
Property
We
have
acquired claims in another area of the Sierra
Madre del Sur
region
by filing concessions under the Mexican mining laws, referred to by us as the
El
Rey
property. Additionally, in February 2007, we leased a 100% interest in a
property known as the Solaga
property. We have conducted minimal exploration on these properties to
date.
The
El
Rey
project
is an exploration stage property with no known reserves and is also located
in
the Sierra
Madre del Sur
region
of southern Mexico, approximately 64.4 kilometers (40 miles) from the
El
Aguila
property. There is no plant or equipment on the El
Rey property.
If exploration is successful, any mining would probably require an underground
mine but any mineralized material could be processed at the El
Aguila
project
mill if one was to be built in the future.
The
Solaga
property
consists of a 400 hectare property, located approximately 120 kilometers (75
miles) from the El
Aguila
project.
A dormant silver mine is located on the Solaga
property
which was in production as recently as the 1980’s, however, we cannot estimate
if or when we will reopen the mine. The lease is subject to a 4% net smelter
return royalty on any production.
Mineral
Concessions
Mineral
rights in Mexico belong to the Mexican government and are administered pursuant
to Article 27 of the Mexican Constitution. Exploration and exploitation
concessions may be granted or transferred to Mexican citizens and corporations.
Our leases or concessions are held by our Mexican subsidiaries. Exploration
concessions are granted for a term of six years, with the right to convert
to an
exploitation concession with a term of 50 years. Concessions grant the holder
the right to explore and exploit all minerals found in the ground. Maintenance
of concessions requires the semi-annual payment of mining duties (due in January
and July) and the performance of assessment work, on a calendar year basis,
with
assessment work reports required to be filed in the month of May for the
preceding calendar year. The amount of mining duties and annual assessment
are
set by regulation and may increase over the life of the concession (if the
concession changes from exploration to exploitation) and include periodic
adjustments for inflation. Mining concessions are registered at the Public
Registry of Mining in Mexico City and in regional offices in Mexico.
Ejido
Lands and Surface Right Acquisitions
Surface
lands in the El
Aguila
property
area are Ejido
lands
(agrarian cooperative lands granted by the federal government to groups of
Campesinos
pursuant
to Article 27 of the Mexican Constitution of 1917). Prior to January 1, 1994,
Ejidos
could
not transfer Ejido
lands
into private ownership. Amendments to Article 27 of the Mexican Constitution
in
1994 now allow individual property ownership within Ejidos
and
allow Ejidos
to enter
into commercial ventures with individuals or entities, including foreign
corporations. We have an agreement with the local San
Pedro Totolapam Ejido
allowing
exploration of the El
Aguila
property. In order to begin mining at the property, we will have to secure
surface rights agreements for all lands to be disturbed by, or adjacent to,
any
such proposed operation.
Mexican
law recognizes mining as a land use generally superior to agricultural. However,
the law also recognizes the rights of the Ejidos
to
compensation in the event mining activity interrupts or discontinues their
use
of the agricultural lands. Compensation is typically made in the form of a
cash
payment to the holder of the agricultural rights. The amount of such
compensation is generally related to the perceived value of the agricultural
rights as negotiated in the first instance between the Ejidos
and the
owner of the mineral rights. If the parties are unable to reach agreement on
the
amount of the compensation, the decision will be referred to the government.
At
this
time, due to the absence of any specific development plan, it is impossible
to
determine the potential amount of compensation that might be required to obtain
surface rights necessary to mine our property. However, we expect such amount
to
be low in relation to other anticipated cost of commencing operations.
Office
Facilities
Effective
October 1, 2005, we leased approximately 1,000 square feet of office space
under
a three year agreement with an independent third party. Monthly rent equals
$1,428 the first year, $1,469 the second year and $1,490 the third year, plus
our share of operating expense escalations. We believe this space is adequate
for our needs for the foreseeable future.
-
11
-
Glossary
|
Adit:
|
A
more or less horizontal drive (walk-in mine) into a hill that is
usually
driven for the purpose of intersecting or mining an ore body. An
adit may
also be driven into a hill to intersect or connect a shaft for the
purpose
of dewatering. Adits were commonly driven on a slight incline to
enable
loaded mine trucks to have the advantage of a downhill run out, while
the
empty (lighter) truck was pushed uphill back into the hill. The incline
also allows water to drain out of the adit. An adit only becomes
a tunnel
if it comes out again on the hill somewhere, like a train
tunnel.
|
|
Andesite:
|
A
gray to black volcanic rock with between about 52 to 63 weight percent
silica (SiO2).
Andesite magma commonly erupts from stratovolcanoes as thick lava
flows,
some reaching several km in length.
|
|
Cretaceous
period:
|
Flowering
plants appeared and dinosaurs were at their height during the Cretaceous
period. 146-65 million years ago. There was a mass extinction (the
K-T
extinction) at the end of the Cretaceous, marking the end of the
dinosaurs
and many other species.
|
|
Doré:
|
Unrefined
gold and silver bars usually containing more than 90% precious
metal.
|
|
Epithermal:
|
Used
to describe gold deposits found on or just below the surface close
to
vents or volcanoes, formed at low temperature and
pressure.
|
|
Felsic:
|
The
minerals feldspar and quartz or an igneous rock or metamorphic rock
made
predominantly of feldspar and quartz; poor in iron and magnesium.
Light-colored.
|
|
Gram:
|
A
metric unit of weight and mass, equal to 1/1000th
of
a kilogram. One gram equals .035 ounces. One ounce equals 31.103
grams.
|
|
Hectare:
|
Another
metric unit of measurement, for surface area. One hectare equals
1/200th
of
a square kilometer, 10,000 square meters, or 2.47 acres. A hectare
is
approximately the size of a soccer field.
|
|
Horst-graben:
|
Horst
and graben are formed by widespread block faults giving rise to a
mountain
and valley topography that owes its origin in part at least to regional
block faulting.
|
|
Kilometer:
|
Another
metric unit of measurement, for distance. The prefix "kilo" means
1000, so
one kilometer equals 1,000 meters, one kilometer equals 3,280.84
feet,
which equals 1,093.6 yards, which equals 0.6214 miles.
|
|
Manto:
|
A
mineralogy term meaning a layer or stratum.
|
|
Minerals
or Mineralized Material:
|
Any
mass of host rock in which minerals of potential commercial value
occur.
|
|
Net
Smelter Return Royalty:
|
A
share of the net revenue generated from the sale of metal produced
by the
mine.
|
|
Ore
or Ore Deposit:
|
Rocks
that contain economic amounts of minerals in them and that are expected
to
be profitably mined.
|
|
Rhyolite:
|
A
type of volcanic lava or rock that is usually light in color: it
contains
greater than 68% silica, by weight, and is high in potassium and
sodium.
|
|
Silicified:
|
Is
combined or impregnated with silicon or silica.
|
|
Tertiary
period:
|
This
period lasted from 65 to 1.8 million years ago. It followed the Cretaceous
period (the end of the Mesozoic Era) and the K-T extinction. Many
mammals
developed then, including primitive whales, rodents, pigs, cats,
rhinos,
etc.
|
|
Tonne:
|
A
metric ton. One tonne equals 1000 kg. It
is approximately equal to 2,204.62 pounds.
|
|
Volcanogenic:
|
Of
volcanic origin.
|
|
Volcanic
domes:
|
These
are mounds that form when viscous lava is erupted slowly and piles
up over
the vent, rather than moving away as lava flow. The sides of most
domes
are very steep and typically are mantled with unstable rock debris
formed
during or shortly after dome emplacement. Most domes are composed
of
silica-rich lava which may contain enough pressurized gas to cause
explosions during dome extrusion.
|
|
Winze:
|
Secondary
or tertiary vertical or near-vertical opening sunk from a point inside
a
mine for the purpose of connecting with a lower level or of exploring
the
ground for a limited depth below a level.
|
|
Conversion
Table
|
|
|
Metric
System
|
Imperial
System
|
|
1
metre (m)
|
3.2808
feet (ft)
|
|
1
kilometer (km)
|
0.6214
mile (mi)
|
|
1
square kilometer (km2)
|
0.3861
square mile (mi2)
|
|
1
square kilometer (km2)
|
100
hectares (has)
|
|
1
hectare (ha)
|
2.471
acres (ac)
|
|
1
gram (g)
|
0.0322
troy ounce (oz)
|
|
1
kilogram (kg)
|
2.2046
pounds (lbs)
|
|
1
tonne (t)
|
1.1023
tons (t)
|
|
1
gram/tonne (g/t)
|
0.0292
ounce/ton (oz/t)
|
We
are
not currently subject to any legal proceedings, and to the best of our
knowledge, no such proceeding is threatened, the results of which would have
a
material impact on our properties, results
of operation, or financial condition. Nor, to the best of our knowledge, are
any
of our officers or directors involved in any legal proceedings in which we
are
an adverse party.
None.
Market
Information
Effective
September 14, 2006, our common stock began trading over the counter and is
quoted on the OTCBB under the symbol “GORO.” The table below sets forth the high
and low bid prices for our common stock as reflected on the OTCBB as reported
by
the Nasdaq Stock Market, Inc. for the period commencing September 14, 2006
to
date. Quotations represent prices between dealers, do not include retail
markups, markdowns or commissions, and do not necessarily represent prices
at
which actual transactions were effected.
|
Year Ending
|
|
High
|
|
Low
|
|
||
|
December
31, 2007
|
|
|
|
|
|
||
|
First
Quarter (to March 30)
|
|
$
|
3.97
|
|
$
|
1.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2006
|
|
|
|
|
|
|
|
|
Third
Quarter (commencing September 14)
|
|
$
|
1.15
|
|
$
|
0.90
|
|
|
Fourth
Quarter
|
|
|
1.90
|
|
|
1.00
|
|
On
March
30, 2007 the high and low sales price of our common stock on the OTCBB were
$3.05 and $2.97, respectively, and we had approximately 90 holders of
record of our common stock.
-
12
-
Penny
Stock Rules
Due
to
the price of our common stock, as well as the fact that we are not listed on
Nasdaq or a national securities exchange, our stock is characterized as "penny
stocks" under applicable securities regulations. Our stock will therefore be
subject to rules adopted by the Securities and Exchange Commission (“SEC”)
regulating broker-dealer practices in connection with transactions in penny
stocks. The broker or dealer proposing to effect a transaction in a penny stock
must furnish his customer a document containing information prescribed by the
SEC and obtain from the customer an executed acknowledgment of receipt of that
document. The broker or dealer must also provide the customer with pricing
information regarding the security prior to the transaction and with the written
confirmation of the transaction. The broker or dealer must also disclose the
aggregate amount of any compensation received or receivable by him in connection
with such transaction prior to consummating the transaction and with the written
confirmation of the trade. The broker or dealer must also send an account
statement to each customer for which he has executed a transaction in a penny
stock each month in which such security is held for the customer's account.
The
existence of these rules may have an effect on the price of our stock, and
the
willingness of certain brokers to effect transactions in our stock.
Transfer
Agent
We
have
appointed Corporate Stock Transfer, Inc. (“CST”) as the transfer agent for our
common stock. The principal office of CST is located at 3200 Cherry Creek Drive
South, Suite 430, Denver, CO 80209 and its telephone number is (303)
282-4800.
Dividend
Policy
We
have
never declared or paid dividends on our common stock. Payment of future
dividends, if any, will be at the discretion of our Board of Directors after
taking into account various factors, including the terms of any credit
arrangements, our financial condition, operating results, current and
anticipated cash needs and plans for expansion. At the present time, we are
not
party to any agreement that would limit our ability to pay dividends.
Recent
Sales of Unregistered Securities; Use of Proceeds From Unregistered
Securities
During
the period covered by this report, we issued an aggregate of 4,959,700 shares
of
our common stock and 1,200,000 options without registering those securities
under the Securities Act of 1933, as amended (“Securities Act”). The following
information describes the transactions not previously reported in which those
securities were issued:
On
October 12, 2006, we issued 250,000 shares of our common stock to an investor
relations firm for services rendered to our company valued at $250,000, or
$1.00
per share. We also granted options to acquire 100,000 shares of common stock,
50,000 of which were immediately vested, for $1.00 per share to a public
relations consultant. The remaining 50,000 options vest upon our mutual
agreement with this consultant to extend our contract for public relations
services for an additional six months beyond its expiration in April 2007.
We
relied on the exemption provided by Section 4(2) of the Securities Act for
each
of these transactions.
In
November 2006, we issued 30,000 shares of our common stock to a consultant
performing investor relations work on our behalf. We agreed to issue 30,000
shares of our common stock each quarter to this consultant for one year. We
relied on the exemption provided by Section 4(2) of the Securities
Act.
In
each
case where we relied on the exemption provided by Section 4(2) of the Securities
Act, we had a preexisting relationship with the investor and the offering was
made to a very limited number of individuals or entities. We also took steps
to
insure that the investors had available the same type of information that would
be included in a registration statement. Finally, each of certificates
representing shares issued pursuant to that exemption has been inscribed by
the
restrictive legend required by Rule 144.
-
13
-
Use
of Proceeds
Our
registration statement on Form SB-2, file number 333-129321, was declared
effective by the SEC on May 15, 2006. Pursuant to this registration statement,
we registered 7,000,000 shares of our common stock for sale by us for an
aggregate price of $7,000,000 and 8,910,707 shares of common stock for sale
by
certain selling shareholders. We sold a total of 4,600,000 shares for proceeds
net of expenses of $4,351,200 before the termination of the offering. The
remainder of the shares registered for our account were deregistered and are
no
longer available for sale.
During
the fourth quarter of 2006, we spent $473,513 of the proceeds of the public
offering on a combination of exploration activities and general and
administrative expenses.
Introduction
The
following discussion updates our plan of operation for the foreseeable future.
Additional information about our exploration plans can be found in the section
titled “Item 2. Description of Properties.”
This
discussion also analyzes our financial condition at December 31, 2006 and
compares it to our financial condition at December 31, 2005. This
discussion summarizes the results of our operations for the year ended December
31, 2006 and compares those results to the year ended December 31, 2005.
On
February 21, 2005, we effected a two-for-one split of our outstanding common
stock. All of the financial information included in this discussion and in
the
financial statements appearing in this report has been adjusted to reflect
the
results of that stock split.
In
August
2006, we closed our IPO, from which we received net proceeds of $4,351,200
and
in December 2006, we completed the Private Placement of our common stock for
net
proceeds of $4,928,700. We expect to use $4,000,000 of the proceeds from the
offerings for exploration purposes. In October 2006, we contracted with
Servicios de Perforacion Insemin S.A. de C.V., a Mexican subsidiary of R&R
Incorporated and commenced the third stage of our drilling program at the
El
Aguila project.
We believe the program will ultimately cover 10,000 meters (32,808 feet) of
core
drilling. We will be testing geological targets including areas which we believe
have yielded favorable results during a recent geochemical survey. This drilling
program is expected to be complete in May 2007.
On
December 7, 2006, we completed a Private Placement of 4,322,000 shares of our
common stock for $1.20 per share, from which we received net cash proceeds
of
$4,928,700. The shares were issued to United States holders pursuant to an
exemption from registration under Section 4(2) and to offshore holders in
accordance with Regulation S of the Securities Act. In connection with the
Private Placement, we issued 257,700 shares of our common stock and paid a
total
of $257,700 to the finders.
Plan
of Operation
Our
plan
of operation is to continue exploration of the El
Aguila
property
until we discover sufficient mineralization to justify placing the property
into
production or alternatively, determine to abandon the lease. We also intend
to
undertake exploration of the El
Rey
property, a property that is in an earlier stage of exploration. In 2007, we
leased a 100% interest in property we refer to as the Solaga
property. Our ultimate objective is to become a producer of gold and other
precious metals. We are unable at this time to predict when, if ever, that
objective will be achieved.
Exploration.
Exploration carried out by us to date at the El
Aguila
project
has included 143 drill holes totaling approximately 10,400 meters (34,120 feet).
The results so far suggest the presence of mineralized material in sufficient
grade and quantity to justify continued exploration.
-
14
-
Exploration
at the El
Aguila
project
will continue to be the central focus of our activities for the foreseeable
future. We have budgeted $3,000,000 of the public offering proceeds and
$1,000,000 from the Private Placement proceeds for continued exploration of
the
El
Aguila
property. We completed a geochemical survey of a portion of the property and
expect to conduct additional geological studies in the future. In response
to
what we perceived as positive results from the geochemical survey, we signed
a
drilling contract in October 2006 for a minimum of 3,333 meters (10,935 feet)
of
additional core drilling. We have the option to expand the drilling up to 10,000
meters (approximately 33,000 feet). This contract represents a minimum financial
commitment of $300,000 and a maximum financial commitment of $1,000,000 over
the
term of the agreement. There are numerous exploration targets that will now
be
tested with the objective of delineating and expanding the previously identified
mineralization. Some new targets were developed and some old targets were
amplified by the recent geochemical survey.
We
believe our exploration results have been positive enough to warrant conducting
a feasibility study for the mineralization we have identified. This study is
designed to determine the economic feasibility of placing the property into
production and producing gold and silver. It would analyze the estimated
quantity and quality of the mineralization discovered during the exploration
stage, present estimates of the cost of mining and processing the material
and
compare the estimated sales price of the finished product. We expect that this
study would be conducted by one or more independent engineering firms on our
behalf, for which we estimate a cost of approximately $1,000,000. Proceeds
from
the Private Placement will likely fund this feasibility study. If the results
of
the feasibility study are positive, and assuming the availability of necessary
capital, a decision will be made to place the property into production. The
timing of any production would be primarily a function of the timing of
acceptable exploration results, the availability of working capital and the
timing of required regulatory permits.
In
addition to our efforts at the El
Aguila
project,
we will begin limited exploration at our El
Rey
property. The program will be staged, whereby limited funds will be initially
spent to evaluate the property with increasing amounts spent if the results
are
positive.
Capital
Investment.
In
addition to expenses of exploration, we also anticipate making infrastructure
improvements at the El
Aguila
project.
Foremost among these expenses would be the construction of an improved road
to
the proposed mill site and camp improvements. We estimate costs of approximately
$1,000,000 to complete these improvements, and we would likely attempt to
acquire the surface rights to our property prior to making capital improvements.
We currently do not have any agreements in place regarding acquisition of the
surface rights of either property and do not know when, if ever, such
arrangement will be made available to us.
If
a
decision is made to commence mining, we would incur significant capital costs
in
constructing a mill and acquiring necessary equipment. At present, our cash
position is not sufficient to fund these capital requirements and we would
anticipate obtaining such funding through additional equity financing, although
we have no specific plans at this time. Only after a mine and a mill are
constructed and operational could we expect any revenue.
Corporate
Overhead.
Included in our plan of operation are the expenses of overseeing our business
and paying other general and administrative expenses. These expenses primarily
include salaries and consulting fees, rent, travel and professional fees. We
currently estimate these expenses at $90,000 per month based on existing
commitments and expectations. We expect these expenses will be paid from our
cash position and future equity offerings, if necessary, until such time, if
ever, we are successful in placing one or more of our properties in production.
Liquidity
and Capital Resources
As
discussed in the Introduction, we completed two sales of common stock during
2006. Cash proceeds from these sales significantly improved our liquidity and
financial position. We received cash from financing activities of $9,339,900
during 2006, compared to net proceeds of $1,407,500 during 2005. As a result,
our working capital position at December 31, 2006 was $7,415,207. This
represents an improvement of $7,257,655 when compared to our working capital
balance of $157,552 as of December 31, 2005.
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15
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We
expect
that the proceeds from the financing activities will be used to fund our
exploration and operating expenses. At present, we have allocated approximately
$4,000,000 to future exploration. We do not anticipate the need to raise more
funding in the next 12 months unless a decision is made to commence mining
operations. The most significant of our future operating expenses include (i)
the amount of $4,000,000 in connection with our current exploration program;
(ii) approximately $90,000 per month for salaries and other corporate overhead;
and (iii) legal and accounting fees associated with our status as a publicly
traded company.
We
have
never received revenue from our operations. We have historically relied on
equity financings or loans from our officers to continue funding our operations.
We experienced net losses for the years ended December 31, 2006 and 2005 of
$(2,686,762) and $(1,217,911), respectively. We do not believe that we are
a
candidate for conventional debt financing and we have not made arrangements
to
borrow funds for working capital requirements. We will be dependent on
additional financing to expand our exploration efforts beyond current plans
and
to fund construction of gold processing facilities.
Due
to
our lack of proved or probable reserves at this time, all of our investment
in
mining properties has been expensed, and does not appear as an asset on our
balance sheet. Since inception, our spending on acquisition, exploration and
evaluation of various mineral properties has totaled $2,770,662. The total
amount of expenses incurred during 2006 was $628,851, compared to $843,118
in
2005. Substantially all of our expenses in 2006 and 2005 were spent on the
El
Aguila
project.
As
of
December 31, 2006, our working capital of $7,415,207 was comprised of current
assets of $7,866,370 and current liabilities of $451,163. Our current assets
consist primarily of cash which is deposited in short term interest bearing
accounts. Current assets also include a refund of value added taxes that have
been paid in Mexico.
Net
cash
used in operating activities was $1,795,858 during 2006, compared to $1,179,278
during 2005. As more fully explained in our plan of operation, we are using
the
proceeds from our equity financings to increase our exploration and corporate
efforts and we expect that our future expenditures will increase commensurate
with the increase in exploration of the El
Aguila
property.
Net
cash
used in investing activities was $59,966 in 2006 compared to $61,600 in 2005.
Consistent with our operating activity, we increased our purchases of office
furniture, computer equipment, trucks and other exploration equipment.
Net
cash
provided by financing activities was $9,339,900 in 2006 compared to $1,407,500
in 2005. In both years, all of the activities represent proceeds from the sale
of common stock and the exercise of stock options.
Results
of Operations - Year Ended December 31, 2006 Compared to Year Ended December
31,
2005
During
the year ended December 31, 2006, we reported a net loss of $(2,686,762), or
$(0.13) per share, compared to a net loss of $(1,217,911), or $(0.08) per share,
for 2005. In neither year did we report any revenue except interest income.
We
expect to incur losses until such time, if ever, as we begin generating revenue
from operations.
We
are
considered an exploration stage company for accounting purposes, since we have
not received any revenue from operations. We are unable to predict with any
degree of accuracy when that classification will change. Since we have not
identified any proved or probable mineral reserves on our property, all of
our
exploration costs are currently expensed, contributing to our reported losses
in
2006 and 2005.
Total
costs and expenses were $2,743,851 in 2006 compared to $1,224,085 in 2005,
an
increase of $1,519,766 or 124%. Mineral property acquisition costs approximated
$100,000 in each year. Mineral property exploration and evaluation costs
decreased by $210,719, from $739,570 in 2005 to $528,851 in 2006. We decreased
our rate of spending during the first half of 2006 pending completion of our
initial public offering. During the latter part of 2006, we began to increase
our exploration spending and committed to an exploratory drilling contract
for
$300,000, with options to expand drilling up to $1,000,000. We expect to further
increase exploration costs in 2007.
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16
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General
and administrative expense increased in 2006 compared to 2005. Total general
and
administrative expense was $1,470,061 in 2006 and $286,219 in 2005, an increase
of $1,183,842, or 414%. The main components of the increase were salaries and
benefits, an increase of $710,056 from $140,434 to $850,490. The increase
reflects the impact of the employment contracts with our corporate officers
that
went into effect on January 1, 2006, and the impact of additional personnel.
Our
legal and accounting expense increased $132,609, from $73,856 to $206,465,
primarily representing the work required to prepare and audit our financial
information for investors and to prepare the registration statements required
to
sell our common stock. Similarly, investor relations expenses increased from
$11,038 to $130,583 as we disseminated information to potential investors.
Travel expenses increased from $22,393 to $103,241. Some of the increase
represents meetings with potential investors in the United States, Canada and
Europe, and the remainder represents increased travel to the mineral property
in
Mexico.
Our
stock
compensation expense increased by $392,350, from $87,500 in 2005 to $479,850
in
2006. We issued 100,000 restricted shares of common stock valued at $1.00 per
share to a director as partial compensation for his service to the Board of
Directors. We issued 35,000 shares of common stock valued at $1.71 to two
employees for their services. We issued 250,000 restricted shares of common
stock valued at $1.10 to a firm that provided investor relation services and
we
issued 30,000 shares of restricted common stock valued at $1.45 to a consultant
who provided investor relation services.
Effective
January 1, 2006, we implemented Statement of Financial Accounting Standards
(“SFAS”) No. 123(R), “Accounting for Stock-Based Compensation,” which requires
us to record an expense for the grant of stock options. We granted stock options
to purchase 1,200,000 shares of common stock, of which 1,150,000 vested in
2006,
at an exercise price of $1.00 per share. We used an option pricing model to
value these options at $147,050 and recorded an expense of $147,050 during
2006. There were no options granted during 2005.
Interest
income increased to $57,089 in 2006 compared to $6,174 in 2005, an increase
of
$50,915, or 825%. Proceeds from our 2006 financing have been deposited in short
term interest bearing accounts. Monthly interest earnings from invested cash
is
expected to decline in future months as we utilize the cash balances for
operating and exploration activities.
Critical
Accounting Policies
We
believe the following more critical accounting policies are used in the
preparation of our consolidated financial statements:
Exploration
and Development Costs.
Mineral
property acquisition, exploration and related costs are expensed as incurred
unless proven and probable reserves exist and the property is a commercially
minable property. If it is determined that a mineral property can be
economically developed, the costs incurred to develop such property, including
costs to further delineate the ore body and develop the property for production,
may be capitalized. In addition, we may capitalize previously expensed
acquisition and exploration costs if it is later determined that the property
can economically be developed. Interest costs, if any, allocable to the cost
of
developing mining properties and constructing new facilities would be
capitalized until operations commence. Mine development costs incurred either
to
develop new ore deposits, expand the capacity of operating mines, or to develop
mine areas substantially in advance of current production would also be
capitalized.
All
such
capitalized costs, and estimated future development costs, if any, are then
amortized using the units-of-production method over the estimated life of the
ore body. Costs incurred to maintain current production or to maintain assets
on
a standby basis are charged to operations. Costs of abandoned projects are
charged to operations upon abandonment. We evaluate, at least quarterly, the
carrying value of capitalized mining costs and related property, plant and
equipment costs, if any, 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
and/or estimated salvage value in accordance with SFAS No. 144, "Accounting
for
Impairment or Disposal of Long-Lived Assets."
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17
-
Property
Retirement Obligation.
We
implemented SFAS No. 143, "Accounting for Asset Retirement Obligations,"
effective January 1, 2003. SFAS No. 143 requires the fair value of a liability
for an asset retirement obligation to be recognized in the period that it is
incurred if a reasonable estimate of fair value can be made. The associated
asset retirement costs are capitalized as part of the carrying amount of the
long-lived asset. We have determined that we have no property retirement
obligations as of December 31, 2006.
Stock
Compensation. Effective
January 1, 2006, we implemented SFAS No. 123(R), “Accounting for Stock-Based
Compensation,” which requires us to provide compensation costs for our stock
option plans determined in accordance with the fair value based method
prescribed in SFAS No. 123(R). We estimate the fair value of each stock option
at the grant date by using the Black-Scholes option-pricing model and provides
for expense recognition over the service period, if any, of the stock
option.
Prior
to
January 1, 2006, we applied APB Opinion 25, “Accounting for Stock Issued to
Employees,” and related interpretations in accounting for all stock option
plans. Under APB Opinion 25, no compensation cost was recognized for stock
options issued to employees as the exercise price of the stock options we
granted equaled or exceeded the market price of the underlying common stock
on
the date of grant.
Foreign
Operations.
Our
present activities are in Mexico. As with all types of international business
operations, currency fluctuations, exchange controls, restrictions on foreign
investment, changes to tax regimes, political action and political instability
could impair the value of our company's investments.
Foreign
Currency Translation.
The
local currency is the functional currency for our subsidiaries. Assets and
liabilities are translated using the exchange rate in effect at the balance
sheet date. Income and expenses are translated at the average exchange rate
for
the year. Translation adjustments are reported as a separate component of
stockholders' equity.
Estimates.
The
preparation of our consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires us to make estimates and assumptions that affect the amount of assets
and liabilities, the disclosure of contingent assets and liabilities at the
date
of the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Recent
Accounting Pronouncements
The
FASB
has issued FSP EITF 00-19-2. This FSP states that the contingent obligation
to
make future payments or other transfers of consideration under a registration
payment arrangement, issued as a separate agreement or included as a part of
a
financial instrument or other agreement, should be separately recognized and
measured in accordance with SFAS No. 5. Also, a financial instrument subject
to
a registration payment arrangement should be accounted for in accordance with
other applicable GAAP without regard to the contingent obligation to transfer
consideration pursuant to the registration payment arrangement. This FSP was
adopted on October 1, 2006.
In
September 2006, the FASB issued Statement No. 157, “Fair Value
Measurements” (SFAS
No.
157). SFAS No. 157 defines fair value, establishes a framework for measuring
fair value in generally accepted accounting principles, and expands disclosures
about fair value measurements. The provisions of SFAS No. 157 are effective
for
our fiscal year beginning January 1, 2008. We are currently determining the
effect of this statement on our financial reporting .
In
June
2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes” (FIN 48). This interpretation prescribes a recognition threshold
and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return. FIN
48 requires that we recognize in our financial statements the impact of a tax
position if that position is more likely that not of being sustained upon
examination based on the technical merits of the position. This interpretation
also includes guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure, and transition. The provisions of
FIN
48 are effective January 1, 2007 with the cumulative effect reported as an
adjustment to the opening balance of retained earnings for the fiscal year.
We
are currently determining the effect of this interpretation on our financial
reporting.
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18
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Risk
Factors
This
report, including management’s discussion and analysis or plan of operation,
contains forward looking statements that may be materially affected by
several risk factors, including those summarized below:
Risks
Relating to Our Company
Since
we are a new business with no operating history, investors have no basis to
evaluate our ability to operate profitably. We
were
organized in 1998 but have had no revenue from operations since our inception.
Our activities to date have been limited to organizational efforts, raising
financing, acquiring mining properties and conducting limited exploration.
We
face all of the risks commonly encountered by other new businesses, including
the lack of an established operating history, need for additional capital and
personnel, and intense competition. There is no assurance that our business
plan
will be successful.
We have no proved or probable reserves and the probability of an individual
prospect having reserves is extremely remote. Therefore, in all likelihood,
our
properties do not contain any reserves, and any funds spent by us on exploration
will probably be lost.
In order
to demonstrate the existence of proved or probable reserves, it will first
be
necessary for us to continue exploration to demonstrate the existence of
sufficient mineralized material followed by a positive feasibility study.
Exploration is inherently risky, with few properties ultimately proving
economically successful. A “reserve,” as defined by regulation of the SEC, is
that part of a mineral deposit which could be economically and legally extracted
or produced at the time of the reserve determination.
A
reserve
requires a feasibility study demonstrating with reasonable certainty that the
deposit can be economically extracted and produced. We have not carried out
any
feasibility study with regard to all or a portion of any of our properties.
Statistically, most mineral prospects do not contain reserves which can be
economically extracted. For this reason, it is unlikely that our properties
contain any reserves. The funds we have spent on exploration, as well as funds
which we might spend in the future, will probably be lost.
We
are dependent upon receipt of additional working capital to fund our business
plan. We
may
require additional capital for exploration of our existing properties, or
acquisition of additional properties. If our exploration program proves
successful, we will require significant additional capital to fund development
of the El
Aguila
project
and to construct a mill in order to place it into production. In addition,
we
will require additional working capital to fund operations pending sale of
any
gold or other precious metals.
At
the present time, we are totally dependent upon production of gold or other
precious metals from four properties, raising the risk if any of those
properties should prove unproductive.
Since we
have never produced gold or other precious metals from either of our properties,
and since we have no proved or probable reserves, there is no assurance that
gold or other precious metals can be economically produced under existing and
future costs and expenses. If we are unable to economically produce gold from
either or both of these properties, we would be forced to identify and invest
substantial sums in one or more additional properties, and there is no assurance
that such properties would be available on terms favorable to us.
Our
properties are located in Mexico and are subject to changes in political
conditions and regulations in that country. Our
existing properties are located in Mexico. In the past, Mexico has been subject
to political instability, changes and uncertainties which may cause changes
to
existing government regulations affecting mineral exploration and mining
activities. Civil or political unrest could disrupt our operations at any time.
Our mineral exploration and mining activities in Mexico may be adversely
affected in varying degrees by changing governmental regulations relating to
the
mining industry or shifts in political conditions that increase the costs
related to our activities or maintaining our properties. Finally, Mexico's
status as a developing country may make it more difficult for us to obtain
required financing for our project.
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19
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Our
ability to continue exploration and extract any minerals that we discover is
subject to payment of concession fees and if we fail to make these payments,
we
may lose our interest in the properties.
Mining
concessions in Mexico are subject to payment of concession fees to the federal
government or lease payments to the owner of the concessions. The payments
are
based on the size of the property we are exploring. Our failure or inability
to
pay the concession fees to the government may cause us to lose our interest
in
one or both of our properties.
Our
primary exploration target is subject to a lease in favor of a third party
which
provides for royalties on production.
We lease
our El
Aguila
property
from a third party. Our lease for the El
Aguila
property
is
subject to a net smelter return royalty of 4% where production is sold in the
form of gold/silver doré and 5% where
production is sold in concentrate form. The requirement to pay royalties to
the
owner of the lease at our El
Aguila
property
will reduce our profitability if we commence commercial production of gold
or
other precious metals.
Our
ability to develop our property, even if warranted by exploration results,
is
subject to the rights of the Ejido (local inhabitants) to surface use for
agricultural purposes. If
we are
successful in discovering sufficient amounts of mineralized material to warrant
production, our ability to mine minerals is subject to making satisfactory
arrangements with the Ejido
for
access and surface disturbances. Ejidos
are
groups of local inhabitants who were granted rights to conduct agricultural
activities on the property. We must negotiate a satisfactory arrangement with
these inhabitants in order to disturb or discontinue their rights to farm.
Our
inability to successfully negotiate such agreements could impair or impede
our
ability to successfully mine the properties.
The
volatility of the price of gold could adversely affect our future operations
and, if warranted, our ability to develop our properties.
The
commercial feasibility of our properties and our ability to raise funding to
conduct continued exploration and development if warranted, is dependent on
the
price of gold and other precious metals. The price of gold may also have a
significant influence on the market price of our common stock and the value
of
our properties. Our decision to put a mine into production and to commit the
funds necessary for that purpose must be made long before the first revenue
from
production would be received. A decrease in the price of gold may prevent our
property from being economically mined or result in the writeoff of assets
whose
value is impaired as a result of lower gold prices. The price of gold is
affected by numerous factors beyond our control, including inflation,
fluctuation of the United States Dollar and foreign currencies, global and
regional demand, the sale of gold by central banks, and the political and
economic conditions of major gold producing countries throughout the world.
During the last five years, the average annual market price of gold has
fluctuated between $310 per ounce and $604 per ounce, as shown in the table
below. Although it is possible for us to protect some price fluctuations by
hedging in certain circumstances, the volatility of mineral prices represents
a
substantial risk, which no amount of planning or technical expertise can
eliminate.
|
2002
|
2003
|
2004
|
2005
|
2006
|
|
$310
|
$364
|
$406
|
$445
|
$
604
|
Competition
in the mining industry is intense, and we have limited financial and personnel
resources with which to compete.
Competition in the mining industry for desirable properties, investment capital
and personnel is intense. Numerous companies headquartered in the United States,
Canada and elsewhere throughout the world compete for properties on a global
basis. We are an insignificant participant in the gold mining industry due
to
our limited financial and personnel resources. We may be unable to attract
the
necessary investment capital to fully explore and if warranted, develop our
properties and unable to acquire other desirable properties.
An
adequate supply of water may not be available to complete desired development
of
our property.
If we
make a discovery sufficient to warrant putting our property into production,
we
will require additional amounts of water for our operations. We would be
required to pump water from the Totolapan River to any facility we may construct
on our property. Water rights are owned by the Mexican nation and are
administered by a Mexican government agency. This agency has granted water
concessions to private parties throughout the area defined as the Oaxaca
Hydrologic Basin, however there is no assurance that we will be granted such
concessions. Accordingly, we may not have access to the amount of water needed
to operate a mine at the property.
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20
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Since
most of our expenses are paid in Mexican pesos, and we anticipate selling any
production from our properties in United States dollars, we are subject to
adverse changes in currency values that will be difficult to prevent.
Our
operations in the future could be affected by changes in the value of the
Mexican peso against the United States dollar. At the present time, since we
have no production, we have no plans or policies to utilize forward sales
contracts or currency options to minimize this exposure. If and when these
measures are implemented, there is no assurance they will be cost effective
or
be able to fully offset the effect of any currency fluctuations.
Our
activities in Mexico are subject to significant environmental regulations,
which
could raise the cost of doing business.
Mining
operations are subject to environmental regulation by SEMARNAT, the
environmental protection agency of Mexico. Regulations require that an
environmental impact statement, known in Mexico as a Manifiestacion
de Impacto Ambiental,
be
prepared by a third party contractor for submission to SEMARNAT. Studies
required to support this impact statement include a detailed analysis of many
subject areas, including soil, water, vegetation, wildlife, cultural resources
and socio-economic impacts. We may also be required to submit proof of local
community support for a project to obtain final approval. Significant
environmental legislation exists in Mexico, including fines and penalties for
spills, release of emissions into the air, seepage and other environmental
damage.
The
nature of mineral exploration and production activities involves a high degree
of risk and the possibility of uninsured losses. Exploration
for minerals is highly speculative and involves greater risk than many other
businesses. Our operations are subject to all of the operating hazards and
risks
normally incident to exploring for mineral properties, such as, but not limited
to:
|
|
•
|
|
encountering
unusual or unexpected formations;
|
|
|
•
|
|
environmental
pollution;
|
|
|
•
|
|
personal
injury, flooding and landslides;
|
|
|
•
|
|
variations
in grades of ore;
|
|
|
•
|
|
labor
disputes; and
|
|
|
•
|
|
decrease
in reserves due to a lower gold
price.
|
We
currently have no insurance to guard against any of these risks. If we determine
that capitalized costs associated with any of our mineral interests are not
likely to be recovered, we would incur a writedown on our investment in such
property interest. All of these factors may result in losses in relation to
amounts spent which are not recoverable.
We
depend upon a limited number of personnel and the loss of any of these
individuals could adversely affect our business.
If any
of our current employees or our principal consultant in Mexico were to die,
become disabled or leave the company, we would be forced to identify and retain
individuals to replace them. Messrs. William, David and Jason Reid are our
only
employees at this time. Jose Perez Reynoso is our consultant in Mexico who
oversees our properties and operations. There is no assurance that we can find
suitable individuals to replace them or to add to our employee base if that
becomes necessary. We are entirely dependent on these individuals as our only
personnel at this time. We have no life insurance on any individual at this
time, and we may be unable to hire a suitable replacement for them on favorable
terms, should that become necessary.
In
the event of a dispute regarding title to our property or any facet of our
operations, it will likely be necessary for us to resolve the dispute in Mexico,
where we would be faced with unfamiliar laws and procedures.
The
resolution of disputes in foreign countries can be costly and time consuming,
similar to the situation in the United States. However, in a foreign country,
we
face the additional burden of understanding unfamiliar laws and procedures.
We
may not be entitled to a jury trial, as we might be in the United States.
Further, to litigate in any foreign country, we would be faced with the
necessity of hiring lawyers and other professionals who are familiar with the
foreign laws. For these reasons, we may incur unforeseen losses if we are forced
to resolve a dispute in Mexico or any other foreign country.
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21
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While
we believe we have adequate internal controls over financial reporting, we
will
be required to evaluate our internal controls under Section 404 of the
Sarbanes-Oxley Act of 2002 and any adverse results from such evaluation could
result in a loss of investor confidence in our financial reports and have a
material adverse effect on the price of our common stock.
Pursuant
to Section 404 of the Sarbanes-Oxley Act of 2002, we expect that we will be
required to furnish a report by our management on internal controls for the
fiscal year ending December 2007. Such a report must contain, among other
matters, an assessment of the effectiveness of our internal controls over
financial reporting, including a statement as to whether or not our internal
controls are effective. This assessment must include disclosure of any material
weaknesses in our internal controls over financial reporting identified by
our
management. Such a report must also contain a statement that our auditors have
issued an attestation report on our management’s assessment of such internal
controls. While we believe our internal controls over financial reporting are
effective, we are still constructing the system, processing documentation and
performing the evaluations needed to comply with Section 404, which is both
costly and challenging. We may not be able to complete our evaluation, testing
and any required remediation in a timely fashion. If we are unable to assert
that our internal controls over financial reporting are effective, or if we
disclose significant deficiencies or material weaknesses in our internal
controls, investors could lose confidence in the accuracy and completeness
of
our financial reports, which would have a material adverse effect on our stock
price.
The
laws of the State of Colorado and our Articles of Incorporation may protect
our
directors from certain types of lawsuits. The
laws
of the State of Colorado provide that our directors will not be liable to us
or
our shareholders for monetary damages for all but certain types of conduct
as
directors of the company. Our Articles of Incorporation permit us to indemnify
our directors and officers against all damages incurred in connection with
our
business to the fullest extent provided or allowed by law. The exculpation
provisions may have the effect of preventing shareholders from recovering
damages against our directors caused by their negligence, poor judgment or
other
circumstances. The indemnification provisions may require us to use our limited
assets to defend our directors and officers against claims, including claims
arising out of their negligence, poor judgment, or other circumstances.
Risks
Related to Our Common Stock
The
sale of a substantial number of shares of our common stock may cause the price
of our common stock to decline.
We filed
a registration statement with the SEC that was declared effective in May 2006
to
qualify the resale of approximately 8,900,000 shares of common stock from time
to time in addition to completing an IPO during which we sold 4,600,000 shares.
A second registration statement declared effective in February 2007 qualified
approximately 5,900,000 additional shares for resale. It is likely that market
sales of large amounts of common stock (or the potential for those sales even
if
they do not actually occur) may cause the market price of our common stock
to
decline, which may make it difficult to sell our common stock in the future
at a
time and price which we deem reasonable or appropriate and may also cause you
to
lose all or a part of your investment.
Since
there is presently a limited trading market for our common stock, purchasers
of
our common stock may have difficulty selling their shares, should they desire
to
do so.
Due to
a number of factors, including the lack of listing of our common stock on a
national securities exchange, the trading volume in our common stock is limited.
Since we were approved for trading on the OTCBB on September 14, 2006, our
trading volume has averaged approximately 100,000 shares per day. As a result,
the sale of a significant amount of common stock by the selling shareholders
may
depress the price of our common stock and you may lose all or a portion of
your
investment.
A
small number of existing shareholders own a significant amount of our common
stock, which could limit your ability to influence the outcome of any
shareholder vote. Our
executive officers and directors beneficially own approximately 31.0% of our
common stock as of the date of this report. Under our Articles of Incorporation
and Colorado law, the vote of a majority of the shares outstanding is generally
required to approve most shareholder action. As a result, these individuals
will
be able to influence the outcome of shareholder votes for the foreseeable
future, including votes concerning the election of directors, amendments to
our
Articles of Incorporation or proposed mergers or other significant corporate
transactions. We have no existing agreements or plans for mergers or other
corporate transactions that would require a shareholder vote at this time.
However, shareholders should be aware that they may have limited ability to
influence the outcome of any vote in the future.
-
22
-
A
contract right allowing one of our largest shareholders the first opportunity
to
purchase any common stock offered by us in the future may result in a change
in
control.
Under
the terms of an agreement entered into with one of our largest shareholders,
we
are obligated to offer this entity the first right to purchase our common stock
in any future offering until August 2008. The holder of this right is Heemskirk
Consolidated Limited. If Heemskirk exercises this right in connection with
any
future offering of our common stock, the percentage interest in our company
owned by it could increase. This may result in a change in control and could
allow Heemskirk the ability to influence the management or policies of our
company. For example, if Heemskirk acquires enough stock to become the holder
of
a majority of our outstanding voting stock, it could elect the entire Board
of
Directors. Even if it does not acquire an absolute majority of our stock but
increases its voting interest in the company, it could wage a proxy battle
and
influence who our Board of Directors nominates as directors in the future.
These
and other events could have the effect of changing the way that our company
is
operated.
Our
stock price may be volatile and as a result you could lose all or part of your
investment.
In
addition to volatility associated with over the counter securities in general,
the value of your investment could decline due to the impact of any of the
following factors upon the market price of our common stock:
|
·
|
Changes
in the worldwide price for gold;
|
|
·
|
Disappointing
results from our exploration
efforts;
|
|
·
|
Failure
to meet our revenue or profit goals or operating
budget;
|
|
·
|
Decline
in demand for our common stock;
|
|
·
|
Downward
revisions in securities analysts' estimates or changes in general
market
conditions;
|
|
·
|
Technological
innovations by competitors or in competing
technologies;
|
|
·
|
Investor
perception of our industry or our prospects; and
|
|
·
|
General
economic trends
|
In
addition, stock markets have experienced extreme price and volume fluctuations
and the market prices of securities have been highly volatile. These
fluctuations are often unrelated to operating performance and may adversely
affect the market price of our common stock. As a result, investors may be
unable to resell their shares at a fair price.
Issuances
of our stock in the future could dilute existing shareholders and adversely
affect the market price of our common stock.
We have
the authority to issue up to 60,000,000 shares of common stock, 5,000,000 shares
of preferred stock, and to issue options and warrants to purchase shares of
our
common stock without stockholder approval. Because our common stock is not
currently quoted in Nasdaq or listed on an exchange, we are not required to
solicit shareholder approval prior to issuing large blocks of our stock. These
future issuances could be at values substantially below the price paid for
our
common stock by our current shareholders. In addition, we could issue large
blocks of our common stock to fend off unwanted tender offers or hostile
takeovers without further stockholder approval. Because we believe that trading
in our common stock will initially be limited, the issuance of our stock may
have a disproportionately large impact on its price compared to larger
companies.
We
have never paid dividends on our common stock and we do not anticipate paying
any in the foreseeable future.
We have
not paid dividends on our common stock to date, and we may not be in a position
to pay dividends for the foreseeable future. Our ability to pay dividends will
depend on our ability to successfully develop one or more properties and
generate revenue from operations. Further, our initial earnings, if any, will
likely be retained to finance our operations. Any future dividends will depend
upon our earnings, our then-existing financial requirements and other factors,
and will be at the discretion of our Board of Directors.
-
23
-
Forward-Looking
Statements
This
report contains or incorporates by reference forward-looking statements within
the meaning of the United States Private Securities Litigation Reform Act of
1995 concerning our future business plans and strategies, the proposed
exploration and development of our property, the receipt of working capital,
future revenues and other statements that are not historical in nature. In
this
report, forward-looking statements are often identified by the words
“anticipate,” “plan,” “believe,” “expect,” “estimate,” and the like. These
forward-looking statements reflect our current beliefs, expectations and
opinions with respect to future events, and involve future risks and
uncertainties which could cause actual results to differ materially from those
expressed or implied.
In
addition to the specific factors identified under “RISK FACTORS” above, other
uncertainties that could affect the accuracy of forward-looking statements
include:
•
decisions
of foreign countries and banks within those countries;
•
technological
changes in the mining industry;
•
our
costs;
•
the
level
of demand for our products;
•
changes
in our business strategy;
•
interpretation
of drill hole results and the geology, grade and continuity of
mineralization;
•
the
uncertainty of reserve estimates and timing of development expenditures;
and
•
commodity
price fluctuations.
This
list, together with the factors identified under “RISK FACTORS,” is not
exhaustive of the factors that may affect any of our forward-looking statements.
You should read this report completely and with the understanding that our
actual future results may be materially different from what we expect. These
forward-looking statements represent our beliefs, expectations and opinions
only
as of the date of this report. We do not intend to update these forward looking
statements except as required by law. We qualify all of our forward-looking
statements by these cautionary statements.
Prospective
investors are urged not to put undue reliance on forward-looking
statements.
Index
to Financial Statements
|
|
|
|
|
|
|
Report
of Independent Registered Public Accounting Firm
|
25
|
|
|
|
|
Consolidated
Balance Sheet at December 31, 2006
|
26
|
|
|
|
|
Consolidated
Statements of Operations for the years ended December 31, 2006 and
2005,
and for the period from Inception (August 24, 1998) to December 31,
2006
|
27
|
|
|
|
|
Consolidated
Statements of Changes in Shareholders’ Equity for the years ended December
31, 2006 and 2005,
and for the period from Inception (August 24, 1998) to December 31,
2006
|
28
|
|
|
|
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2006 and
2005,
and for the period from Inception (August 24, 1998) to December 31,
2006
|
29
|
|
|
|
|
Notes
to Consolidated Financial Statements
|
30
|
-
24
-
Board
of
Directors and Shareholders
Gold
Resource Corporation
Denver,
Colorado
We
have
audited the accompanying consolidated balance sheet of Gold Resource Corporation
as of December 31, 2006 and the related consolidated statements of operations,
changes in shareholders’ equity and cash flows for the years ended December 31,
2006 and 2005. These consolidated financial statements are the responsibility
of
the Company’s management. Our responsibility is to express an opinion on these
consolidated financial statements based upon our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.
In
our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Gold Resource Corporation
as
of December 31, 2006, and the results of its operations and its cash flows
for
the years ended December 31, 2006 and 2005, in conformity with accounting
principles generally accepted in the United States of America.
|
/s/
Stark Winter Schenkein & Co., LLP
|
|
|
March
27, 2007
|
|
|
Denver,
Colorado
|
|
-
25
-
GOLD
RESOURCE CORPORATION AND SUBSIDIARIES
(An
Exploration Stage Company)
CONSOLIDATED
BALANCE SHEET
As
of December 31, 2006
|
ASSETS
|
|||||||
|
Current
assets:
|
|||||||
|
Cash
and cash equivalents
|
$
|
7,660,258
|
|||||
|
Refundable
tax payments
|
193,271
|
||||||
|
Other
current assets
|
12,841
|
||||||
|
Total
current assets
|
7,866,370
|
||||||
|
Investment
in mineral properties
|
-
|
||||||
|
Property
and equipment, net
|
96,279
|
||||||
|
Other
assets
|
1,469
|
||||||
|
Total
assets
|
$
|
7,964,118
|
|||||
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|||||||
|
Current
liabilities:
|
|||||||
|
Accounts
payable and accrued expenses
|
$
|
451,163
|
|||||
|
Total
current liabilities
|
451,163
|
||||||
|
Shareholders'
equity:
|
|||||||
|
Preferred
stock - $0.001 par value, 5,000,000 shares authorized:
|
|||||||
|
No
shares issued or outstanding
|
-
|
||||||
|
Common
stock - $0.001 par value, 60,000,000 shares authorized:
|
|||||||
|
28,139,552
shares issued and outstanding
|
28,139
|
||||||
|
Additional
paid-in capital
|
14,062,002
|
||||||
|
Accumulated
(deficit) during the exploration stage
|
(6,596,869
|
)
|
|||||
|
Other
comprehensive income:
|
|||||||
|
Currency
translation adjustment
|
19,683
|
||||||
|
Total
shareholders' equity
|
7,512,955
|
||||||
|
Total
liabilities and shareholders' equity
|
$
|
7,964,118
|
|||||
The
accompanying notes are an integral part of these consolidated financial
statements.
-
26
-
GOLD
RESOURCE CORPORATION AND SUBSIDIARIES
(An
Exploration Stage Company)
CONSOLIDATED
STATEMENTS OF OPERATIONS
For
the years ended December 31, 2006 and 2005
and
for the period from Inception (August 24, 1998) to December 31,
2006
|
Inception
|
||||||||||
|
(August
24, 1998) to
|
||||||||||
|
2006
|
2005
|
December
31, 2006
|
||||||||
|
Revenues:
|
||||||||||
|
Gold
sales
|
$
|
-
|
$
|
-
|
$
|
-
|
||||
|
Costs
and Expenses:
|
||||||||||
|
Property
exploration and evaluation
|
528,851
|
739,570
|
2,311,991
|
|||||||
|
Property
acquisition
|
100,000
|
103,548
|
458,681
|
|||||||
|
Management
contract - U. S. Gold, related party
|
-
|
-
|
752,191
|
|||||||
|
General
and administrative
|
||||||||||
|
Salaries
and benefits
|
850,490
|
140,434
|
990,924
|
|||||||
|
Legal
and accounting
|
206,465
|
73,856
|
318,551
|
|||||||
|
Investor
relations
|
130,583
|
11,038
|
152,985
|
|||||||
|
Travel
related
|
103,241
|
22,393
|
178,005
|
|||||||
|
All
other general and administrative
|
179,282
|
38,498
|
258,902
|
|||||||
|
Stock
Based Compensation
|
||||||||||
|
Stock
awards
|
479,850
|
87,500
|
1,067,350
|
|||||||
|
Grant
of stock options
|
147,050
|
-
|
147,050
|
|||||||
|
Depreciation
|
18,039
|
7,248
|
25,287
|
|||||||
|
Total
costs and expenses
|
2,743,851
|
1,224,085
|
6,661,917
|
|||||||
|
Operating
(loss)
|
(2,743,851
|
)
|
(1,224,085
|
)
|
(6,661,917
|
)
|
||||
|
Other
income:
|
||||||||||
|
Interest
income
|
57,089
|
6,174
|
65,048
|
|||||||
|
(Loss)
before income taxes
|
(2,686,762
|
)
|
(1,217,911
|
)
|
(6,596,869
|
)
|
||||
|
Provision
for income taxes
|
-
|
-
|
-
|
|||||||
|
Net
(loss)
|
(2,686,762
|
)
|
(1,217,911
|
)
|
(6,596,869
|
)
|
||||
|
Other
comprehensive income:
|
||||||||||
|
Currency
translation gain (loss)
|
19,544
|
200
|
19,683
|
|||||||
|
Net
comprehensive (loss)
|
$
|
(2,667,218
|
)
|
$
|
(1,217,711
|
)
|
$
|
(6,577,186
|
)
|
|
|
Net
(loss) per common share:
|
||||||||||
|
Basic
and Diluted
|
$
|
(0.13
|
)
|
$
|
(0.08
|
)
|
||||
|
Weighted
average shares outstanding:
|
||||||||||
|
Basic
and Diluted
|
20,218,659
|
16,164,715
|
||||||||
The accompanying notes are an integral part of these consolidated financial statements.
-
27
-
GOLD
RESOURCE CORPORATION AND SUBSIDIARIES
(An
Exploration Stage Company)
For
the period from Inception (August 24, 1998) to December 31, 2006
|
Number
of
|
Par
Value of
|
Additional
|
Comprehensive
|
Total
|
|||||||||||||||
|
Common
|
Common
|
Paid
- in
|
Accumulated
|
Income
|
Shareholders'
|
||||||||||||||
|
Shares
|
Shares
|
Capital
|
(Deficit)
|
(Loss)
|
Equity
(Deficit)
|
||||||||||||||
|
Balance
at Inception, August 24, 1998
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
||||||||
|
Shares
for contributed capital at
|
|||||||||||||||||||
|
$0.005
per share - related parties
|
2,800,000
|
2,800
|
(1,400
|
)
|
-
|
-
|
1,400
|
||||||||||||
|
Net
(loss)
|
-
|
-
|
-
|
(1,657
|
)
|
-
|
(1,657
|
)
|
|||||||||||
|
Balance,
December 31, 1998
|
2,800,000
|
2,800
|
(1,400
|
)
|
(1,657
|
)
|
-
|
(257
|
)
|
||||||||||
|
Shares
for contributed capital at
|
|||||||||||||||||||
|
$0.005
per share - related parties
|
1,000,000
|
1,000
|
(500
|
)
|
-
|
-
|
500
|
||||||||||||
|
Net
(loss)
|
-
|
-
|
-
|
(663
|
)
|
-
|
(663
|
)
|
|||||||||||
|
Balance,
December 31, 1999
|
3,800,000
|
3,800
|
(1,900
|
)
|
(2,320
|
)
|
-
|
(420
|
)
|
||||||||||
|
Shares
issued for management contract
|
|||||||||||||||||||
|
at
$0.17 per share - related party
|
1,226,666
|
1,226
|
202,578
|
-
|
-
|
203,804
|
|||||||||||||
|
Net
(loss)
|
-
|
-
|
-
|
(205,110
|
)
|
-
|
(205,110
|
)
|
|||||||||||
|
Balance,
December 31, 2000
|
5,026,666
|
5,026
|
200,678
|
(207,430
|
)
|
-
|
(1,726
|
)
|
|||||||||||
|
Shares
issued for management contract
|
|||||||||||||||||||
|
at
$0.14 per share - related party
|
1,333,334
|
1,334
|
187,053
|
-
|
-
|
188,387
|
|||||||||||||
|
Conversion
of debentures at
|
|||||||||||||||||||
|
$0.25
per share - related parties
|
200,000
|
200
|
49,800
|
-
|
-
|
50,000
|
|||||||||||||
|
Sale
of shares for cash at $0.25 per share
|
820,000
|
820
|
204,180
|
-
|
-
|
205,000
|
|||||||||||||
|
Net
(loss)
|
-
|
-
|
-
|
(346,498
|
)
|
-
|
(346,498
|
)
|
|||||||||||
|
Balance,
December 31, 2001
|
7,380,000
|
7,380
|
641,711
|
(553,928
|
)
|
-
|
95,163
|
||||||||||||
|
Shares
issued for cash at $0.25 per share
|
392,000
|
392
|
97,608
|
-
|
-
|
98,000
|
|||||||||||||
|
Shares
issued for cash at $0.17 per share
|
1,351,352
|
1,351
|
223,322
|
-
|
-
|
224,673
|
|||||||||||||
|
Net
(loss)
|
-
|
-
|
-
|
(788,629
|
)
|
(17
|
)
|
(788,646
|
)
|
||||||||||
|
Balance,
December 31, 2002
|
9,123,352
|
9,123
|
962,641
|
(1,342,557
|
)
|
(17
|
)
|
(370,810
|
)
|
||||||||||
|
Shares
issued for cash at $0.25 per share
|
577,000
|
577
|
143,673
|
-
|
-
|
144,250
|
|||||||||||||
|
Share
issuance costs forgiven
|
-
|
-
|
25,327
|
-
|
-
|
25,327
|
|||||||||||||
|
Net
(loss)
|
-
|
-
|
-
|
(496,046
|
)
|
29
|
(496,017
|
)
|
|||||||||||
|
Balance,
December 31, 2003
|
9,700,352
|
9,700
|
1,131,641
|
(1,838,603
|
)
|
12
|
(697,250
|
)
|
|||||||||||
|
Shares
issued for cash at $0.25 per share
|
608,000
|
608
|
151,392
|
-
|
-
|
152,000
|
|||||||||||||
|
Shares
issued in repayment of loan related
|
|||||||||||||||||||
|
to
exploration agreement at
|
|||||||||||||||||||
|
$0.42
per share
|
1,200,000
|
1,200
|
498,800
|
-
|
-
|
500,000
|
|||||||||||||
|
Shares
issued as stock grant at
|
|||||||||||||||||||
|
$0.25
per share
|
600,000
|
600
|
149,400
|
-
|
-
|
150,000
|
|||||||||||||
|
Net
(loss)
|
-
|
-
|
-
|
(853,593
|
)
|
(73
|
)
|
(853,666
|
)
|
||||||||||
|
Balance,
December 31, 2004
|
12,108,352
|
12,108
|
1,931,233
|
(2,692,196
|
)
|
(61
|
)
|
(748,916
|
)
|
||||||||||
|
Stock
grant at $0.25 per share
|
1,750,000
|
1,750
|
435,750
|
-
|
-
|
437,500
|
|||||||||||||
|
Stock
option exercised at $0.25 per share
|
10,000
|
10
|
2,490
|
-
|
-
|
2,500
|
|||||||||||||
|
Stock
issued for cash at $0.25 per share
|
276,000
|
276
|
68,724
|
-
|
-
|
69,000
|
|||||||||||||
|
Stock
issued for satisfaction of payables
|
|||||||||||||||||||
|
at
$0.25 per share
|
1,280,000
|
1,280
|
318,720
|
-
|
-
|
320,000
|
|||||||||||||
|
Shares
issued for cash at $0.47 per share
|
2,728,500
|
2,729
|
1,272,271
|
-
|
-
|
1,275,000
|
|||||||||||||
|
Shares
issued for cash at $0.50 per share
|
122,000
|
122
|
60,878
|
-
|
-
|
61,000
|
|||||||||||||
|
Shares
issued for cash at $0.50 per share
|
30,000
|
30
|
14,970
|
-
|
-
|
15,000
|
|||||||||||||
|
Net
(loss)
|
-
|
-
|
-
|
(1,217,911
|
)
|
200
|
(1,217,711
|
)
|
|||||||||||
|
Balance,
December 31, 2005
|
18,304,852
|
18,305
|
4,105,036
|
(3,910,107
|
)
|
139
|
213,373
|
||||||||||||
|
Stock
options exercised at $0.25 per share
|
240,000
|
240
|
59,760
|
-
|
-
|
60,000
|
|||||||||||||
|
Stock
options granted
|
-
|
-
|
147,050
|
-
|
-
|
147,050
|
|||||||||||||
|
Director
stock grant at $1.00 per share
|
100,000
|
100
|
99,900
|
-
|
-
|
100,000
|
|||||||||||||
|
Shares
issued for cash at $1.00 per share,
|
|||||||||||||||||||
|
net
of issuance costs
|
4,600,000
|
4,600
|
4,346,600
|
-
|
-
|
4,351,200
|
|||||||||||||
|
Shares
issued for investor relations
|
|||||||||||||||||||
|
services
at $1.14 per share
|
280,000
|
280
|
319,720
|
-
|
-
|
320,000
|
|||||||||||||
|
Shares
issued for cash at $1.20 per share,
|
-
|
-
|
|||||||||||||||||
|
net
of issuance costs
|
4,322,000
|
4,322
|
4,924,378
|
-
|
-
|
4,928,700
|
|||||||||||||
|
Shares
issued for investment banking
|
-
|
||||||||||||||||||
|
services
at $1.20 per share
|
257,700
|
257
|
(257
|
)
|
-
|
-
|
-
|
||||||||||||
|
Employee
stock grants at $1.71 per share
|
35,000
|
35
|
59,815
|
-
|
-
|
59,850
|
|||||||||||||
|
Net
(loss)
|
-
|
-
|
-
|
(2,686,762
|
)
|
19,544
|
(2,667,218
|
)
|
|||||||||||
|
Balance,
December 31, 2006
|
28,139,552
|
$
|
28,139
|
$
|
14,062,002
|
$
|
(6,596,869
|
)
|
$
|
19,683
|
$
|
7,512,955
|
|||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
-
28
-
GOLD
RESOURCE CORPORATION AND SUBSIDIARIES
(An
Exploration Stage Company)
For
the years ended December 31, 2006 and 2005
and
for the period from Inception (August 24, 1998) to December 31,
2006
|
Inception
|
||||||||||
|
(August
24, 1998) to
|
||||||||||
|
2006
|
|
2005
|
|
December
31, 2006
|
||||||
|
Cash
flows from operating activities:
|
||||||||||
|
Net
(loss)
|
$
|
(2,686,762
|
)
|
$
|
(1,217,911
|
)
|
$
|
(6,596,869
|
)
|
|
|
Adjustments
to reconcile net (loss) to net cash
|
||||||||||
|
used
by operating activities:
|
||||||||||
|
Depreciation
|
18,039
|
7,248
|
25,287
|
|||||||
|
Stock
compensation
|
626,900
|
87,500
|
1,214,400
|
|||||||
|
Management
fee paid in stock
|
-
|
-
|
392,191
|
|||||||
|
Related
party payable paid in stock
|
-
|
320,000
|
320,000
|
|||||||
|
Foreign
currency translation adjustment
|
19,544
|
200
|
19,683
|
|||||||
|
Issuance
cost forgiven
|
-
|
-
|
25,327
|
|||||||
|
Changes
in operating assets and liabilities:
|
||||||||||
|
Operating
assets
|
(191,135
|
)
|
(11,446
|
)
|
(206,112
|
)
|
||||
|
Accounts
payable and accrued liabilites
|
426,326
|
20,093
|
451,163
|
|||||||
|
Other
liabilities - related parties
|
(8,770
|
)
|
(384,962
|
)
|
-
|
|||||
|
Other
|
-
|
-
|
(4,569
|
)
|
||||||
|
Total
adjustments
|
890,904
|
38,633
|
2,237,370
|
|||||||
|
Net
cash (used in) operating activities
|
(1,795,858
|
)
|
(1,179,278
|
)
|
(4,359,499
|
)
|
||||
|
Cash
flows from investing activities:
|
||||||||||
|
Capital
expenditures
|
(59,966
|
)
|
(61,600
|
)
|
(121,566
|
)
|
||||
|
Net
cash (used in) investing activities
|
(59,966
|
)
|
(61,600
|
)
|
(121,566
|
)
|
||||
|
Cash
flows from financing activities:
|
||||||||||
|
Cash
proceeds from initial public stock offering
|
4,351,200
|
-
|
4,351,200
|
|||||||
|
Cash
proceeds from other sales of stock
|
4,928,700
|
1,405,000
|
7,177,623
|
|||||||
|
Cash
proceeds from exercise of options
|
60,000
|
2,500
|
62,500
|
|||||||
|
Proceeds
from debentures - founders
|
-
|
-
|
50,000
|
|||||||
|
Proceeds
from exploration funding agreement - Canyon Resources
|
-
|
-
|
500,000
|
|||||||
|
Net
cash provided by financing activities
|
9,339,900
|
1,407,500
|
12,141,323
|
|||||||
|
Net
increase in cash and equivalents
|
7,484,076
|
166,622
|
7,660,258
|
|||||||
|
Cash
and equivalents at beginning of year
|
176,182
|
9,560
|
-
|
|||||||
|
Cash
and equivalents at end of year
|
$
|
7,660,258
|
$
|
176,182
|
$
|
7,660,258
|
||||
|
Supplemental
Cash Flow Information
|
||||||||||
|
Interest
paid
|
$
|
-
|
$
|
-
|
$
|
-
|
||||
|
Income
taxes paid
|
$
|
-
|
$
|
-
|
$
|
-
|
||||
|
Non-cash
investing and financing activities:
|
||||||||||
|
Conversion
of Canyon Resources funding into
|
||||||||||
|
common
stock
|
$
|
-
|
$
|
-
|
$
|
500,000
|
||||
|
Conversion
of founders debentures into
|
||||||||||
|
common
stock
|
$
|
-
|
$
|
-
|
$
|
50,000
|
||||
The
accompanying notes are an integral part of these consolidated financial
statements.
-
29
-
GOLD
RESOURCE CORPORATION AND SUBSIDIARIES
(An
Exploration Stage Company)
December
31, 2006
1. Summary
of Significant Accounting Policies
Basis
of Presentation: Gold
Resource Corporation (the “Company”) was organized under the laws of the State
of Colorado on August 24, 1998. The Company has been engaged in the
exploration for precious and base metals, primarily in Mexico, as an exploration
stage company. The Company has not generated any revenues from operations.
The
consolidated financial statements included herein are expressed in United States
dollars, the Company's functional currency.
Basis
of Consolidation: The
consolidated financial statements include the accounts of the Company and its
wholly owned Mexican corporation subsidiaries, Don David Gold S.A. de C.V.
and
Golden Trump S.A. de C.V. The expenditures of Don David Gold and Golden Trump
are generally incurred in Mexican pesos. Significant intercompany accounts
and
transactions have been eliminated.
Statements
of Cash Flows: The
Company considers cash in banks, deposits in transit, and highly liquid debt
instruments purchased with original maturities of three months or less to be
cash and cash equivalents.
Exploration
and Development Costs: Mineral
property acquisition, exploration and related 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, the costs incurred to develop such property, including
costs to further delineate the ore body and develop the property for production,
may be capitalized. In addition, the Company may capitalize previously expensed
acquisition and exploration costs if it is later determined that the property
can economically be developed. Interest costs, if any, allocable to the cost
of
developing mining properties and to constructing new facilities are capitalized
until operations commence. Mine development costs incurred either to develop
new
ore deposits, expand the capacity of operating mines, or to develop mine areas
substantially in advance of current production are also capitalized. All such
capitalized costs, and estimated future development costs, are then amortized
using the units-of-production method over the estimated life of the ore body.
Costs incurred to maintain current production or to maintain assets on a standby
basis are charged to operations. Costs of abandoned projects are charged to
operations upon abandonment. The Company evaluates, at least quarterly, the
carrying value of capitalized mining costs and related property, plant and
equipment costs, if any, 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
and/or estimated salvage value in accordance with Statement of Financial
Accounting Standards (SFAS) No. 144, "Accounting for Impairment or Disposal
of Long-Lived Assets."
Property
and Equipment: All
items of property and equipment are carried at cost not in excess of their
estimated net realizable value. Normal maintenance and repairs are charged
to
earnings while expenditures for major maintenance and betterments are
capitalized. Gains or losses on disposition are recognized in operations.
Depreciation: Depreciation
of property and equipment is computed using straight-line methods over the
estimated economic lives, as follows:
|
Trucks
and autos
|
4
to 5 years
|
|
Office
furniture and equipment
|
5
to 10 years
|
|
Computer
hardware and software
|
3
years
|
|
Exploration
equipment
|
6
to 8 years
|
-
30
-
GOLD
RESOURCE CORPORATION AND SUBSIDIARIES
(An
Exploration Stage Company)
December
31, 2006
Property
Retirement Obligation: The
Company implemented SFAS 143, "Accounting for Asset Retirement
Obligations," effective January 1, 2003. SFAS 143 requires the fair
value of a liability for an asset retirement obligation to be recognized in
the
period that it is incurred if a reasonable estimate of fair value can be made.
The
associated asset retirement costs are capitalized as part of the carrying amount
of the long-lived asset. The Company has determined that it has no property
retirement obligations as of December 31, 2006.
Stock
Option Plans: Effective
January 1, 2006, the Company implemented SFAS 123, “Accounting for Stock-Based
Compensation,” requiring the Company to provide compensation costs for the
Company’s stock option plans determined in accordance with the fair value based
method prescribed in SFAS 123, as amended. The Company estimates the fair value
of each stock option at the grant date by using the Black-Scholes option-pricing
model and provides for expense recognition over the service period, if any,
of
the stock option.
Prior
to
January 1, 2006, the Company applied APB Opinion 25, “Accounting for Stock
Issued to Employees,” and related interpretations in accounting for all stock
option plans. Under APB Opinion 25, no compensation cost was recognized for
stock options issued to employees as the exercise price of the Company's stock
options granted equaled or exceeded the market price of the underlying common
stock on the date of grant.
Per
Share Amounts: SFAS 128,
"Earnings Per Share," provides for the calculation of "Basic" and "Diluted"
earnings per share. Basic earnings per share includes no dilution and is
computed by dividing income available to common shareholders by the
weighted-average number of shares outstanding during the period (20,218,659
for
2006 and 16,164,715 for 2005) . Diluted earnings per share reflect the potential
dilution of securities that could share in the earnings of the Company, similar
to fully diluted earnings per share. As of December 31, 2006 and 2005,
stock options are not considered in the computation of diluted earnings per
share as their inclusion would be antidilutive.
Income
Taxes: The
Company accounts for income taxes under SFAS 109, "Accounting for Income
Taxes". Temporary differences are differences between the tax basis of assets
and liabilities and their reported amounts in the financial statements that
will
result in taxable or deductible amounts in future years.
Use
of Estimates: The
preparation of the Company's consolidated financial statements in conformity
with generally accepted accounting principles requires the Company's management
to make estimates and assumptions that affect the amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date
of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Business
Risks: The
Company continually reviews the mining and political risks it encounters in
its
operations. It mitigates the likelihood and potential severity of these risks
through the application of high operating standards. The Company's operations
have been and in the future may be, affected to various degrees by changes
in
environmental regulations, including those for future site restoration and
reclamation costs. The Company's business is subject to extensive licensing,
permitting, governmental legislation, control and regulations. The Company
endeavors to be in compliance with these regulations at all times.
Fair
Value of Financial Instruments: SFAS 107,
"Disclosures About Fair Value of Financial Instruments," requires disclosure
of
fair value information about financial instruments. Fair value estimates
discussed herein are based upon certain market assumptions and pertinent
information available to management as of December 31, 2006.
The
respective carrying value of certain on-balance-sheet financial instruments
approximate their fair values. These financial instruments include cash, cash
equivalents, refundable tax payments, accounts payable and accrued liabilities.
Fair values were assumed to approximate carrying values for these financial
instruments since they are short term in nature and their carrying amounts
approximate fair value, or they are receivable or payable on demand.
Concentration
of Credit Risk: The
Company's operating cash balances are maintained in two primary financial
institutions and periodically exceed federally insured limits. The Company
believes that the financial strength of these institutions mitigates the
underlying risk of loss. To date, these concentrations of credit risk have
not
had a significant impact on the Company’s financial position or results of
operations.
-
31
-
GOLD
RESOURCE CORPORATION AND SUBSIDIARIES
(An
Exploration Stage Company)
December
31, 2006
Foreign
Operations: The
Company's present activities are in Mexico. As with all types of international
business operations, currency fluctuations, exchange controls, restrictions
on
foreign investment, changes to tax regimes, political action and political
instability could impair the value of the Company's investments.
Foreign
Currency Translation: The
local currency, the Mexican peso, is the functional currency for the Company's
subsidiaries. Current assets and current liabilities are translated using the
exchange rate in effect at the balance sheet date. Other assets and liabilities
are translated using historical exchange rates. Revenues and expenses are
translated at the average exchange rate for the year. Translation adjustments
are reported as a separate component of stockholders' equity.
Recent
Pronouncements: The
FASB has issued FSP EITF 00-19-2. This FSP states that the contingent obligation
to make future payments or other transfers of consideration under a registration
payment arrangement, issued as a separate agreement or included as a part of
a
financial instrument or other agreement, should be separately recognized and
measured in accordance with SFAS 5. Also, a financial instrument subject to
a
registration payment arrangement should be accounted for in accordance with
other applicable GAAP without regard to the contingent obligation to transfer
consideration pursuant to the registration payment arrangement. This FSP was
adopted on October 1, 2006.
In
September 2006, the FASB issued Statement No. 157, “Fair Value
Measurements” (SFAS
157). SFAS 157 defines fair value, establishes a framework for measuring fair
value in generally accepted accounting principles, and expands disclosures
about
fair value measurements. The provisions of SFAS 157 are effective for the
Company’s fiscal year beginning January 1, 2008. We are currently determining
the effect of this statement on our financial reporting
In
June 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes” (FIN 48). This interpretation prescribes a recognition threshold
and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return.
FIN
48 requires that the Company recognize in its financial statements the impact
of
a tax position if that position is more likely that not of being sustained
upon
examination based on the technical merits of the position. This interpretation
also includes guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure, and transition. The provisions of
FIN
48 are effective January 1, 2007 with the cumulative effect reported as an
adjustment to the opening balance of retained earnings for the fiscal year.
We
are currently determining the effect of this interpretation on our financial
reporting.
2. Mineral
Properties
El
Aguila
Effective
November 1, 2002, the Company, through its subsidiary, Don David Gold S.A.
de C.V. leased a prospective gold/silver property located in the state of
Oaxaca, Mexico, designated the "El Aguila" property, from Jose Perez
Reynoso, a consultant to the Company. The El Aguila property is an
exploration stage property and incorporates approximately 4,685 acres as of
December 31, 2006. The lease agreement for El Aguila is subject to a
4% net smelter return royalty to the lessor where production is sold in the
form
of gold/silver dore and 5% for production sold in concentrate form. The lease
agreement required the Company to make periodic advance royalty payments at
various times through October, 2006. Aggregate advance royalties paid under
this
lease were $260,000 through December 31, 2006.
Through
December 31, 2006, the Company has spent or incurred approximately
$1,978,000 in acquisition, exploration and related costs for El Aguila of which
approximately $629,000 was spent in 2006.
-
32
-
GOLD
RESOURCE CORPORATION AND SUBSIDIARIES
(An
Exploration Stage Company)
December
31, 2006
3. Property
and Equipment
At
December 31, 2006, property and equipment consisted of the following:
|
Trucks
and autos
|
$
|
60,203
|
||
|
Office
furniture and equipment
|
50,693
|
|||
|
Exploration
equipment
|
10,670
|
|||
|
Subtotal
|
121,566
|
|||
|
Accumulated
depreciation
|
(25,287
|
)
|
||
|
Total
|
$
|
96,279
|
4. Income
Taxes
At
December 31, 2006, the Company has tax loss carryforwards approximating
$5,800,000 that expire at various dates through 2026. The principal difference
between the net loss for book purposes and the net loss for income tax purposes
relates to the $320,000 payment in shares to US Gold Corporation ("US Gold")
which is deductible for tax purposes when recognized as income by US Gold,
and
non cash compensation expense recorded for grants in the form of common stock
shares or options to purchase common stock shares. The non-deductible amount
of
such compensation was $1,523,000.
The
tax effects of temporary differences that give rise to significant portions
of
the deferred tax assets and deferred tax liabilities at December 31, 2006,
are presented below:
|
Deferred
tax assets:
|
||||
|
Net
operating loss carryforwards
|
$
|
1,972,000
|
||
|
Less
valuation allowance
|
(1,972,000
|
)
|
||
|
Net
deferred tax asset
|
$
|
-
|
||
At
this time, the company is unable to determine if it will be able to benefit
from
its deferred tax asset. There are limitations on the utilization of net
operating loss carryforwards, including a requirement that losses be offset
against future taxable income, if any. In addition, there are limitations
imposed by certain transactions which are deemed to be ownership changes.
Accordingly, a valuation allowance has been established for the entire deferred
tax asset. The change in the valuation allowance was approximately $900,000
during 2006.
|
2006
|
2005
|
||||||
|
Tax
at statutory rates
|
$
|
(914,000
|
)
|
$
|
(421,000
|
)
|
|
|
Book
to tax adjustments:
|
|||||||
|
Stock
and option grants
|
217,000
|
30,000
|
|||||
|
Net
operating loss
|
697,000
|
391,000
|
|||||
|
Tax
provision
|
$
|
-
|
$
|
-
|
|||
-
33
-
GOLD
RESOURCE CORPORATION AND SUBSIDIARIES
(An
Exploration Stage Company)
December
31, 2006
5. Shareholders'
Equity (Deficit)
Effective
February 21, 2005, the Company declared and effected a 100% forward stock
split where one additional share of common stock, par value $.001, was issued
for each common share outstanding as of that date. All of the financial
information in this report has been adjusted to reflect the effect of this
two-for-one stock split and the increase in authorized shares.
The
Company was formed August 24, 1998 by William W. Reid and David C. Reid
(the "Founders"). During 1998 and 1999, the Founders received 3,800,000 shares
of common stock valued at $1,900 for administrative and organization expenses.
The Company remained generally inactive through 1999.
Commencing
July 1, 2000, the Company and US Gold, a publicly traded Colorado
corporation, entered into a management contract whereby US Gold provided general
management of the business activities of the Company through December 31,
2001. Under this management contract, US Gold was issued 2,560,000 shares of
common stock of the Company. The 2,560,000 shares were valued at $392,191 or
approximately $.15 per share. Through this arrangement the Company benefited
from experienced management without the need to raise cash funding for the
related cost of such management and administration. The Company was, however,
responsible for all additional funding needed.
During
2001, the Founders made convertible debenture loans to the Company and then
converted $50,000 in convertible debentures into 200,000 shares of common stock
of the Company at a conversion price of $.25 per share.
In
September 2001, the Company commenced the sale of its common shares under
exemptions offered by federal and state securities regulations. During 2001
the
Company sold 820,000 shares at $.25 per share to various parties, and as noted
above, Founders converted debenture debt of $50,000 into 200,000 shares at
$.25
per share.
During
2002, the Company sold 392,000 shares at $.25 per share ($98,000) to various
parties and 1,351,352 shares at approximately $.17 per share ($224,673) to
an
institutional investor, RMB International (Dublin) Limited ("RMB").
During
2003, the Company sold 577,000 shares at $.25 per share raising net proceeds
of
$144,250. Effective September 30, 2003, US Gold acquired the RMB shares in
exchange for US Gold shares, and terminated the obligation of the Company to
pay
RMB approximately $25,327 in transaction costs, which was added back into
paid-in-capital.
In
August 2003, the Company entered into an exploration agreement with Canyon
Resources Corporation, a public company with shares traded on the American
Stock
Exchange under symbol "CAU" ("Canyon"), whereby Canyon had the right to earn
a
50% interest in the El Aguila property from the Company in exchange for funding
$3.5 million in exploration and development costs at the El Aguila
property, or alternatively, Canyon could receive 1,200,000 shares of the common
stock of the Company for funding $500,000 for exploration drilling at El Aguila.
The $500,000 funding from Canyon was structured as a non-interest bearing loan.
The drilling programs were completed in 2003 and included approximately 12,939
feet of drilling focused on one target area of the property. This exploration
drilling encountered some mineralization which will require additional
exploration drilling in order to fully evaluate. Effective September 1,
2004, Canyon elected to convert its loan of $500,000 into 1,200,000 shares
of
common stock of the Company.
Also,
during 2004, the Company sold 608,000 shares at $.25 per share raising net
proceeds of $152,000. Additionally, the Company made a stock grant of 600,000
shares at $.25 per share or $150,000 to a consultant of the Company, Jose Perez
Reynoso.
Effective
January 2, 2005, the Company made common stock awards to its two executive
officers and a consultant of an aggregate 1,750,000 shares for services
performed during 2004 and 2005. The shares were valued at $437,500 (or $0.25
per
share) which was recorded as stock based compensation expense of $350,000 in
2004 and $87,500 in 2005. In this distribution of common stock, William W.
Reid
received 1,000,000 shares, David C. Reid received 500,000 shares and
William F. Pass received 250,000 shares. Also effective January 2, 2005, a
stock option agreement with William F. Pass covering 400,000 shares of
common stock at exercise price of $.25 per share was reduced by 250,000 shares
leaving 150,000 shares remaining subject to option.
-
34
-
GOLD
RESOURCE CORPORATION AND SUBSIDIARIES
(An
Exploration Stage Company)
December
31, 2006
During
2005 an individual exercised stock options for 10,000 shares for $2,500. In
June
2005, the Company issued 1,280,000 shares to US Gold Corporation in satisfaction
of $320,000 owed for a prior year management contract.
During
2005, the Company sold 428,000 shares to individual investors for cash proceeds
of $145,000 (276,000 shares at $0.25 per share and 152,000 shares at $0.50
per
share).
In
addition, during July and August 2005, the Company closed transactions under
a
Subscription Agreement and Stock Purchase Option Agreement with Heemskirk
Consolidated Limited ("Heemskirk"), an Australian global mining house, whereby
Heemskirk purchased 2,000,000 shares of common stock of the Company at $0.50
per
share. A finder’s fee of 140,000 shares was paid to a third party (resulting a
net value of $0.47 per share). Heemskirk had previously purchased (in April,
2005) 150,000 shares of common stock at $0.50 per share and the Company had
paid
a finder’s fee of 10,500 shares. The Company agreed to give Heemskirk a first
right of offer for any financings, including sale of equity, the Company may
pursue, subject to the prior rights of Canyon discussed above. In a similar
transaction during August 2005, the Company sold 400,000 shares to another
investor raising $200,000 and paid a finder’s fee to a third party of 28,000
shares. These transactions resulted in the issuance of 2,728,500 shares for
net
cash proceeds of $1,275,000 ($0.47 per share).
During
2006, the Company sold 4,600,000 shares of common stock at $1.00 per share
in a
public offering under a Form SB-2 registration statement that was declared
effective on May 15, 2006. The Company received cash proceeds of $4,351,200
(net
of finders’ fees of $248,800).
During
2006, the Company completed a private placement of 4,322,000 shares of common
stock at $1.20 per share, and received net cash proceeds of $4,928,700, after
deducting finders’ fees of $257,700. The Company also issued 257,700 shares of
common stock as finders’ fees in connection with this private placement.
During
2006, the Company received cash proceeds of $60,000 pursuant to the exercise
of
options to purchase 240,000 shares at $0.25 per share.
In
May, 2006, the Company made a common stock award of 100,000 shares to a
director. These shares were valued at $100,000. In December, 2006, the Company
made a common stock award of 35,000 shares to two employees. These shares were
valued at fair market value of $59,850. In October, 2006, the Company issued
250,000 shares of restricted common stock in exchange for investor relations
services. These shares were valued at fair market value of $275,000. The Company
entered into an investor relations contract that required the issuance of 30,000
shares of restricted common stock during 2006. These shares were valued at
fair
market value of $45,000.
The
Company may continue to raise capital through the sale of its common shares
and
may also seek other funding or corporate transactions to achieve its business
objectives.
As
of December 31, 2006, the Founders beneficially own a total of 8,131,145
shares or approximately 29% of the outstanding shares.
The
Company has a non-qualified stock option and stock grant plan under which stock
options and stock grants may be granted to key employees, directors and others
(the "Plan"). Options to purchase shares under the Plan must be granted at
fair
value as of the date of the grant. A total of 6,000,000 common shares have
been
reserved under the Plan.
Effective
January 1, 2006, the Company implemented the rules of SFAS 123(R), “Accounting
for Stock-Based Compensation,” which requires the Company to expense as
compensation the value of grants and options under the Company's stock option
plan as determined in accordance with the fair value based method prescribed
in
SFAS 123(R). The Company estimates the fair value of each stock option at the
grant date by using the Black-Scholes option-pricing model.
-
35
-
GOLD
RESOURCE CORPORATION AND SUBSIDIARIES
(An
Exploration Stage Company)
December
31, 2006
During
the year ended December 31, 2006, stock options were granted to purchase
1,200,000 shares of common stock. Grants covering 1,100,000 shares were issued
to an employee and a director at an exercise price of $1.00 and a term of
thirty-three months. All options vested in 2006. Stock option compensation
expense of $141,350 was recorded based upon a fair value calculation using
the
following assumptions: expected life of 2.75 years, stock price of $1.00 at
date
of grant, dividend yield of 0%, and interest rate of 5%. Grants covering 100,000
shares were issed to a service provider with an exercise price of $1.00 per
share and a term of twenty-four months. Options covering 50,000 shares vested
in
2006 and options covering 50,000 shares are expected to vest in 2007. Stock
option compensation expense of $5,700 was recorded based upon a fair value
calculation using the following assumptions: expected life of two years, stock
price of $1.00 at date of grant, dividend yield of 0%, and interest rate of
5%.
Prior
to Juanuary 1, 2006, the Company applied APB Opinion 25, “Accounting for Stock
Issued to Employees”, and disclosed pro-forma information regarding net income
and earnings per share as if stock based compensation cost had been determined
using a fair value based method. No stock options were granted in 2005, thus
pro-forma net (loss) and (loss) per share were the same as the actual amounts
repted.
|
|
|
2006
|
|
2005
|
|
||||||||
|
|
|
Shares
|
|
Weighted
Average
Exercise
Prices
|
|
Shares
|
|
Weighted
Average
Exercise
Prices
|
|
||||
|
Outstanding,
beginning of year
|
|
|
1,640,000
|
|
$
|
.25
|
|
|
1,900,000
|
|
$
|
.25
|
|
|
Granted
|
|
|
1,200,000
|
|
$
|
1.00
|
|
|
---
|
|
$
|
---
|
|
|
Terminated
|
|
|
---
|
$
|
---
|
|
|
(250,000
|
)
|
$
|
.25
|
|
|
|
Exercised
|
|
|
(240,000
|
)
|
|
.25
|
|
|
(10,000
|
)
|
|
.25
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Outstanding,
end of year
|
|
|
2,600,000
|
|
$
|
.60
|
|
|
1,640,000
|
|
$
|
.25
|
|
|
Options
exercisable, end of year
|
|
|
2,550,000
|
|
$
|
.59
|
|
|
1,640,000
|
|
$
|
.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average fair value of Option granted during year
|
|
$
|
.13
|
|
|
|
$
|
---
|
|
|
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
||
6. Rental
Expense and Commitment and Contingencies
In
September 2005, the Company entered into a 3 year lease on office space in
Denver, Colorado. Required payments approximate $1,500 per month. Remaining
minimum lease obligations for future calendar years will be $17,700 in 2007
and
$13,400 in 2008. Rent expense for 2006 was $17,000.
Effective
January 1, 2006, the Company entered into employment agreements with its
executive officers which extend for a three-year term. Pursuant to the terms
of
those agreements, William Reid is being paid $240,000 and David Reid is being
paid $170,000 annually. Each individual also participates in health and other
insurance programs that the Company maintains. The employment agreements are
automatically renewable for one-year terms unless either party gives notice
to
the other that they do not wish to renew the agreement, not less than
120 days prior to expiration.
Pursuant
to the terms of the employment agreements, the employee would be entitled to
certain payments in the event his employment is terminated under certain
circumstances. If the Company terminates the agreement without cause, or either
executive officer terminates the agreement "with good reason," the Company
would
be obligated to pay two years of compensation in accordance with its regular
pay
periods. Termination by an executive officer with good reason includes a change
in control.
-
36
-
GOLD
RESOURCE CORPORATION AND SUBSIDIARIES
(An
Exploration Stage Company)
December
31, 2006
We
signed a drilling contract in October 2006 for a minimum of 11,000 feet of
additional core drilling. We have the option to expand the drilling up to 10,000
meters (approximately 33,000 feet). This contract represents a minimum financial
commitment of $300,000 and a maximum financial commitment of $1,000,000 over
the
term of the agreement. There are numerous exploration targets that will now
be
tested with the objective of delineating and expanding the previously identified
mineralization.
7. Related
Party Transactions:
US
Gold—
Effective
July 1, 2000, the Company and US Gold entered into a management contract
whereby US Gold provided general management of the business activities of the
Company through December 31, 2001 in exchange for 2,560,000 shares of
common stock of the Company valued at $392,191 or approximately $.15 per share,
representing the actual allocated internal costs recorded by US Gold in its
performance of the contract. Effective January 1, 2002, the Company and US
Gold entered into a second Management Contract with a duration of one year
(the
"2002 Management Contract"). Under the 2002 Management Contract, US Gold
provided general management of the business activities of the Company through
December 31, 2002 in exchange for payment of $30,000 per month to US Gold.
The Company paid US Gold $30,000 under the 2002 Management Contract and owed
US
Gold $330,000 at December 31, 2004. In June 2005, the Company paid
$10,000 and issued 1,280,000 shares to US Gold Corporation in satisfaction
of
$320,000 owed.
In
July 2005, in connection with a change in control of US Gold, the
employment agreements of Messrs. William Reid, David Reid and William Pass
with that entity were terminated. In partial payment of the obligations of
US
Gold under those agreements, that entity transferred all its shares in the
company to the two former US Gold employees and Mr. Pass and US Gold no
longer owns an interest in our Company.
Jose
Perez Reynoso—
The
Company has certain contractual business arrangements with Jose Perez Reynoso,
a
Mexican national and consultant to the Company. Mr. Reynoso has been
retained as a full-time consultant to the Company at $7,000 per month during
2005 and increased to $9,000 per month effective November 2006 under a
month-to-month arrangement. The Company also leased the El Aguila Property
from Mr. Reynoso, paying him $5,000 advance royalty during 2002, $25,000 in
2003, $20,000 in 2004, $105,000 in 2005, and $100,000 in 2006. Also as noted
in
Footnote 5 above, Mr. Reynoso was granted a stock bonus of 600,000 common
shares valued at $.25 per share for $150,000 during 2004.
During
2005, the executive officers and Mr. Reynoso made certain cash advances to
the Company to allow payment of certain obligations. The net amount of such
advances was $8,770 as of December 31, 2005, all of which was repaid during
2006.
During
2006, Messrs. William Reid and David Reid each loaned $160,000 to the Company.
The loans were non-interest bearing and due on demand. These loans were paid
in
full during September, 2006.
8. Subsequent
Events—
Subsequent
to December 31, 2006, we issued 30,000 shares of our common stock to a
consultant performing investor relations work on our behalf.
In
February 2007, the Company leased a 100% interest in the Solaga property,
subject to a 4% net smelter return royalty on any production.
-
37
-
There
have been no changes in our accountants during the last two fiscal years, and
we
have not had any disagreements with our existing accountants during that
time.
We
maintain a system of controls and procedures designed to ensure that information
required to be disclosed by us in reports that we file or submit under the
Securities Exchange Act of 1934, as amended, is recorded, processed, summarized
and reported, within time periods specified in the SEC’s rules and forms and to
ensure that information required to be disclosed by us in the reports that
we
file or submit under the Securities Exchange Act of 1934, as amended, is
accumulated and communicated to our management, including our Chief Executive
Officer and Principal Financial Officer, as appropriate to allow timely
decisions regarding required disclosure. As of December 31, 2006, under the
supervision and with the participation of our Chief Executive Officer and
Principal Financial Officer, management has evaluated the effectiveness of
the
design and operation of our disclosure controls and procedures. Based on that
evaluation, the Chief Executive Officer and Principal Financial Officer
concluded that our disclosure controls and procedures were
effective.
There
were no changes in our internal control over financial reporting during the
quarter ended December 31, 2006, that materially affected, or is reasonably
likely to materially affect, our internal controls over financial
reporting.
Directors
and Executive Officers
The
following individuals presently serve as our officers and
directors:
|
|
|
|
|
|
|
Board
|
|
Name
and
|
|
|
|
|
|
Position
|
|
Municipality
of Residence
|
|
Age
|
|
Positions
With the Company
|
|
Held
Since
|
|
|
|
|
|
|
|
|
|
William
W. Reid
Denver,
Colorado
|
|
58
|
|
President,
Chief Executive Officer and Director
|
|
1998
|
|
|
|
|
|
|
|
|
|
David
C. Reid
Denver,
Colorado
|
|
57
|
|
Vice
President, Secretary, Treasurer and Director
|
|
1998
|
|
Bill
M. Conrad
Colorado
Springs, Colorado
|
|
50
|
|
Director
|
|
2006
|
|
|
|
|
|
|
|
|
|
Frank
L. Jennings
Longmont,
Colorado
|
|
56
|
|
Chief
Financial Officer,
|
|
N/A
|
Each
of
our directors is serving a term which expires at the next annual meeting of
shareholders and until his or her successor is elected and qualified or until
he
or she resigns or is removed. Our officers serve at the will of our Board of
Directors.
-
38
-
Messrs.
William and David Reid should be considered founders of our company, as each
has
taken initiative in the organization of our business. William Reid and David
Reid are brothers.
The
following information summarizes the business experience of each of our officers
and directors for at least the last five years:
William
W. Reid.
Mr.
Reid has served as a director and our President and Chief Executive Officer
since our inception in 1998. Since August 2005, Mr. Reid has devoted all of
his
business time to our affairs, averaging 40 hours per week. Mr. Reid received
a
Bachelor of Science in physics in 1970 and a Master's in Economic Geology in
1972 from Purdue University. From 1977 to August 18, 2005, he served as the
President, Chief Executive Officer and Chairman of the Board of Directors of
US
Gold Corporation, a Colorado corporation engaged in the exploration of gold
mining properties. During his tenure with US Gold, that entity acquired,
developed and produced gold from five different mines, but has not produced
any
revenue since 1990.
David
C. Reid.
Mr.
David Reid has served as a director and our Vice President since our inception
in 1998. Since August 2005, he has devoted all of his time to our business
and
affairs, also averaging 40 hours per week. From 1977 to August 18, 2005, he
was
the Vice President and a director of US Gold during the time that it acquired,
developed and produced gold. Mr. Reid received a Bachelor of Science degree
in
geology from Ball State University in 1972.
Bill
M. Conrad.
Mr.
Conrad was elected to the Board of Directors on June 1, 2006. Mr. Conrad is
presently the vice-president, secretary and a director of Blue Star Energy,
Inc., a private Colorado corporation engaged in the energy industry. Prior
to
that, he served as president and a director of Wyoming Oil & Minerals, Inc.,
a publicly traded Wyoming corporation, and New Frontier Energy, Inc., a publicly
traded Colorado corporation, both engaged in the oil and gas industry. The
securities of Wyoming Oil & Mineral and New Frontier Energy are quoted on
the OTCBB.
Frank
L. Jennings.
Mr.
Jennings was appointed to serve as our principal financial officer to replace
William F. Pass, who resigned from that position effective June 1, 2006. Mr.
Jennings serves our company on a part-time basis as his services are deemed
necessary. Since 2001, Mr. Jennings has been a financial consultant and provides
management and financial consulting services primarily to smaller public
companies. From 2000 to 2005, he served as the chief financial officer and
a
director of Global Casinos, Inc., a publicly traded Utah corporation, and from
2001 to 2005, he served as the chief financial officer and a director of
OnSource Corporaton, now known as Ceragenix Pharmaceuticals, Inc., a publicly
traded Delaware corporation. During his tenure with Global Casinos and Ceragenix
Pharmaceuticals, each company was engaged in the gaming industry and each had
common stock quoted on the OTC Bulletin Board.
Other
Significant Employees or Consultants
In
addition to our officers and directors, we also utilize the services of the
following significant consultant:
Jose
Perez Reynoso.
Mr.
Reynoso, a Mexican national, has served our company as a full time consultant
since 2002. In that capacity, he oversees all our operations in Mexico, and
provides advice in relations with the Mexican Government. From 1995 to 2002,
he
was a consulting geologist for mining companies operating in Mexico. Mr. Reynoso
received an undergraduate degree in geology and engineering in 1974 and a
master's degree in economic geology in 1979 from the National University of
Mexico. We leased the El
Aguila
property
from Mr. Reynoso in 2002.
Board
Committees
Our
Board
of Directors established a standing Audit, Compensation and Nominating Committee
during 2006.
Audit
Committee.
The
Audit Committee, comprised of Bill Conrad as chairman and William Reid,
recommends the selection and appointment of our independent accountants to
the
Board of Directors and reviews the proposed scope, content and results of the
audit performed by the accountants and any reports and recommendations made
by
them. Only Mr. Conrad meets the definition of “independent” as defined in Rule
4200(a)(15) of the Marketplace Rules of the NASDAQ Stock Market, Inc.
(“Marketplace Rules”), since William Reid also serves as our Chairman and Chief
Executive Officer. As of the date of this report, the Audit Committee has not
adopted a formal charter, however the committee expects to do so in the near
future.
-
39
-
Our
Board
of Directors has determined that Bill Conrad, the chairman of the Audit
Committee, qualifies as an audit committee financial expert in that he has
(i)
an understanding of generally accepted accounting principles and financial
statements; (ii) the ability to assess the general application of such
principles in connection with the accounting for estimates, accruals and
reserves; (iii) experience preparing, auditing, analyzing or evaluating
financial statements that present a breadth and level of complexity of
accounting issues that are generally comparable to the breadth and complexity
of
issues that can reasonably be expected to be raised by our financial statements,
or experience actively supervising one or more persons engaged in such
activities; (iv) an understanding of internal controls over financial reporting;
and (v) an understanding of the audit committee functions. Mr. Conrad acquired
these attributes through experience in analyzing financial statements of
companies, and through his experience as an executive officer of other publicly
traded companies.
Nominating
Committee. The
Nominating Committee is responsible for identifying potential candidates for
the
Board of Directors. The committee will establish qualifications for candidacy,
assess potential candidates and make recommendations to the board, based upon
the committee’s assessment of the candidate’s past business and management
experience, their special expertise in an area of strategic interest to our
business, the candidate’s ability to devote sufficient time and attention to our
business, and their willingness to serve and actively contribute to our
business. The Nominating Committee is comprised of two members, being David
Reid
as chairman, and William Reid. None of the members of the Nominating Committee
are independent within the meaning of Rule 4200(a)(15) of the Marketplace Rules
since both members are also our executive officers.
Compensation
Committee. The
Compensation Committee, comprised of Bill Conrad as chairman and David Reid,
is
responsible for reviewing the compensation of our executive officers and
directors on an ongoing basis. In performing this function, the Compensation
Committee may consider, among other things, the types of compensation and
amounts paid to executives and directors of public companies of equivalent
size,
stage of development in the industry and activity levels. The findings of this
compensation review are used to determine an appropriate level of compensation
for the executives and directors, reflecting the need to maintain
competitiveness and recruit and retain qualified personnel within the context
of
our financial and other resources. Mr. Conrad qualifies as independent under
Rule 4200(a)(15) of the Marketplace Rules.
Section
16(a) Beneficial Ownership Reporting Compliance
We
are
not registered under the Securities Exchange Act of 1934, as amended, and are
not subject to the reporting requirements of Section 16(a).
Code
of Ethics
We
have
not yet adopted a written Code of Ethics, however, we believe our executive
officers conduct themselves honestly and ethically with respect to our business
affairs. As the company is still in the process of putting its formal corporate
governance structure into place, we plan to adopt a formal Code of Ethics in
the
near future.
ITEM
10. EXECUTIVE AND DIRECTOR COMPENSATION
The
following table summarizes the total compensation for the last two years of
all
persons who served as our chief executive officer during 2006 and the other
executive officer who was serving at fiscal year end December 31, 2006 (“Named
Executive Officers”) for the periods indicated. Our company did not award cash
bonuses, stock awards, stock options or non-equity incentive plan compensation
to any Named Executive Officer during the past two fiscal years, thus these
items are omitted from the table below:
-
40
-
Summary
Compensation Table
|
Name and
Principal Position
|
Year
|
Salary
|
All
Other
Compensation
|
Total
|
|||||||||
|
William
W. Reid
|
2006
|
$
|
240,000
|
$
|
—
|
$
|
240,000
|
||||||
|
Chairman,
C.E.O.
|
2005
|
$
|
60,000
|
$
|
9,600(2)
|
|
$
|
69,600
|
|||||
|
and
President(1)
|
|
|
|
|
|||||||||
|
|
|
|
|
|
|||||||||
|
David
C. Reid,
|
2006
|
$
|
170,000
|
$
|
—
|
$
|
170,000
|
||||||
|
Vice
President and
|
2005
|
$
|
42,500
|
$
|
9,600(2)
|
|
$
|
52,100
|
|||||
|
Director(1)
|
|
|
|
|
|||||||||
__________________
(1) The
executive officer was not paid any additional compensation for his service
as a
director of our company.
(2) The
executive officer was paid this amount as a consultant during the year.
Effective
January 1, 2006, we entered into employment agreements with our executive
officers which extend for a three-year term. Pursuant to the terms of those
agreements, William Reid receives $240,000 and David Reid receives $170,000
annually as salary. Each individual also participates in health and other
insurance programs that we maintain. The employment agreements are automatically
renewable for one-year terms on each anniversary of the effective date unless
either party gives notice to the other that they do not wish to renew the
agreement, not less than 120 days prior to expiration.
Pursuant
to the terms of the employment agreements, the employee would be entitled to
certain payments in the event their employment is terminated under certain
circumstances. If we terminate the agreement without cause, or either executive
officer terminates the agreement “with good reason,” we would be obligated to
pay two years of compensation in accordance with our regular pay periods.
Termination by an executive officer with good reason includes termination after
a “change in control.”
In
addition to our executive officers, we engage two consultants on a regular
basis. Jose Perez Reynoso is the manager of our operations in Mexico and is
paid
at the rate of $9,000 per month. Frank Jennings, our financial consultant,
is
paid on an hourly basis, which we expect will not exceed $3,000 per month in
the
aggregate. We do not have a written agreement with either consultant.
In
June
2006, we retained Bill Conrad to serve on our Board of Directors. Mr. Conrad
is
independent under the definition set forth in Rule 4200(a)(15) of the
Marketplace Rules. In return for his service on our Board and its
committees, Mr.
Conrad receives cash compensation in the amount of $3,000 per month and also
received a stock grant of 100,000 shares of our common stock, valued at $1.00
per share and options to acquire up to 500,000 shares of stock on or before
March 9, 2009 for $1.00 per share. The table below summarizes the compensation
of our only director who is not also one of our executive officers and whose
compensation is not disclosed in the Summary Compensation Table, for the fiscal
year ended December 31, 2006:
Director
Compensation Table
|
Name
|
|
Fees
Earned or
Paid
in Cash
|
|
|
Stock
Awards
|
|
Option
Awards
|
|
All
Other
Compensation
|
|
Total
|
||||
|
Bill
M. Conrad
|
|
$
21,000
|
|
|
$
100,000
|
|
$
64,250(1)
|
$
—
|
|
|
$
185,250
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
_________________
(1) Calculated
in accordance with SFAS 123(R).
-
41
-
All
officers and directors are reimbursed for reasonable and necessary expenses
incurred in their capacities as such. Our company presently does not maintain
a
non-equity incentive compensation plan, thus such item has been omitted from
the
table above.
Outstanding
Equity Awards at Fiscal Year-End
The
following table summarizes the amount of our Named Executive Officers’
equity-based compensation outstanding at the year ended December 31, 2006.
Our
company did not issue stock awards to our Named Executive Officers during the
past two fiscal years, thus the information is omitted in the table below:
|
|
|
Option
Awards
|
|
||||||||
|
Name
|
|
|
|
Equity
Incentive Plan Awards: Number of Securities Underlying Unexercised
Unearned Options
|
|
Option
Exercise Price
|
|
Option
Expiration Date
|
|
||
|
Number
of Securities Underlying Unexercised Options
(Exercisable)
|
Number
of Securities Underlying Unexercised Options
(Unexercisable)
|
||||||||||
|
|
|
(#)
|
|
(#)
|
|
(#)
|
|
($)
|
|
|
|
|
William
W. Reid
|
|
400,000
|
|
0
|
|
0
|
|
$0.25
|
|
10/9/2013
|
|
|
William
W. Reid
|
|
400,000
|
|
0
|
|
0
|
|
$0.25
|
|
4/22/2014
|
|
|
David
C. Reid
|
|
400,000
|
|
0
|
|
0
|
|
$0.25
|
|
10/9/2013
|
|
|
David
C. Reid
|
|
200,000
|
|
0
|
|
0
|
|
$0.25
|
|
4/22/2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We
did
not grant any options to our executive officers during 2006 or 2005. During
the
year ended December 31, 2004, we granted options to acquire a total of 700,000
shares of our common stock to our officers and a consultant, which represented
100% of the options we granted to our employees in that year. Our executive
officers did not exercise any stock options awarded in prior years during
2006.
As
of
March 26, 2007, there are a total of 28,169,552 shares of our common stock
outstanding, our only class of voting securities currently outstanding. The
following table describes the ownership of our voting securities by: (i) each
of
our officers and directors; (ii) all of our officers and directors as a group;
and (iii) each shareholder known to us to own beneficially more than 5% of
our
common stock. Unless otherwise stated, the address of each of the individuals
is
our address, 222 Milwaukee Street, Suite 301, Denver, Colorado 80206. All
ownership is direct, unless otherwise stated.
In
calculating the percentage ownership for each shareholder, we assumed that
any
options owned by an individual and exercisable within 60 days are exercised,
but
not the options owned by any other individual.
-
42
-
|
Name
and Address of
|
Shares
Beneficially Owned
|
|
|
Beneficial
Owner
|
Number
|
Percentage
(%)
|
|
William
W. Reid(1)
|
4,559,806(4)(5)
|
15.7%
|
|
|
|
|
|
David
C. Reid(1)
|
4,191,539(6)
|
14.6%
|
|
|
|
|
|
Bill
M. Conrad(2)
|
577,000(7)
|
2.0%
|
|
|
|
|
|
Frank
Jennings
(3)
|
0
|
0.0%
|
|
|
|
|
|
Beth
Reid
|
4,559,806(8)
|
15.7%
|
|
25
Downing Street, #1-501
|
|
|
|
Denver,
CO 80218
|
|
|
|
|
|
|
|
All
officers and directors as a group
|
|
|
|
(4
persons)
|
9,328,345(4)(5)(6)(7)
|
31.0%
|
____________________
(1) Officer
and director.
(2) Director.
(3) Officer.
(4)
Includes options to purchase 800,000 shares which are currently
exercisable.
(5)
Includes 1,540,200 shares owned by the reporting person's spouse, of which
he
disclaims beneficial ownership.
(6)
Includes options to purchase 600,000 shares which are currently
exercisable.
(7)
Includes options to purchase 500,000 shares which are currently
exercisable.
(8)
Includes 3,019,606 shares owned by the reporting person's spouse, of which
she
disclaims beneficial ownership.
Changes
in Control
One
of
our shareholders, Heemskirk Consolidated Limited, holds the first right to
acquire any stock offered by us until August 2008. While we presently have
no
plans to issue additional stock, to the extent we do and this entity exercises
its right to acquire all or a portion of that stock, its percentage ownership
interest in our company may increase. This may result in a change in
control.
Equity
Incentive Plan
Our
Non-Qualified Stock Option and Stock Grant Plan (also as referred to as the
"Plan") was adopted by us effective March 4, 1999. The Plan terminates by its
terms on March 3, 2009. Under the Plan, as approved by shareholders on March
4,
2005, a total of 6,000,000 shares of common stock are reserved for issuance
thereunder. Set forth in the table below is information as of December 31,
2006
with respect to compensation plans (including individual compensation
arrangements) under which our equity securities are authorized for issuance.
During 2006, we issued 135,000 shares of common stock and 1,100,000 options
pursuant to the Plan.
-
43
-
Non-Qualified
Stock Option and Stock Grant Plan Information
|
Plan Category
|
|
Number of
securities to be
issued upon
exercise of
outstanding
options, warrants
and rights
(a)
|
|
Weighted-
average exercise
price of
outstanding
options,
warrants and
rights
(b)
|
|
Number of
securities remaining
available for future
issuance under
equity compensation
plans (excluding
securities reflected
in column (a))
(c)
|
|
||||
|
Equity
compensation plans
approved
by shareholders
|
|
|
2,500,000
|
|
|
$0.58
per share
|
|
|
3,115,000
|
|
|
|
Equity
compensation plans
not
approved by shareholders
|
|
|
0
|
|
|
—
|
|
|
0
|
|
|
|
TOTAL
|
|
|
2,500,000
|
|
|
|
|
|
3,115,000
|
|
|
Under
the
Plan, non-qualified stock options and/or grants of our common stock may be
issued to key persons. Key persons include officers, directors, employees,
consultants and others providing service to us. The Plan was established to
advance the interests of our company and our stockholders by affording key
persons, upon whose judgment, initiative and efforts we may rely for the
successful conduct of our businesses, an opportunity for investment in our
company and the incentive advantages inherent in stock ownership in our company.
This Plan gives our Board of Directors broad authority to grant options and
make
stock grants to key persons selected by the Board while considering criteria
such as employment position or other relationship with us, duties and
responsibilities, ability, productivity, length of service or association,
morale, interest in us, recommendations by supervisors, and other matters,
and
to set the option price, term of option, and other broad authorities. Options
may not be granted at less than the fair market value at the date of grant
and
may not have a term in excess of 10 years.
Options
granted under the Plan do not generally give rise to taxable income to the
recipient or any tax consequence to us, since the Plan requires that the options
be issued at a price not less than the fair market value of the common stock
on
the date of grant. However, when an option is exercised, the holder is subject
to tax on the difference between the exercise price of the option and the fair
market value of the stock on the date of exercise. We receive a corresponding
deduction for income tax purposes. Recipients of stock grants are subject to
tax
on the fair market value of the stock on the date of grant and we receive a
corresponding deduction. The foregoing is intended as a summary of the income
tax consequences to an individual recipient of an option or stock grant, and
should not be construed as tax advice. Holders of stock options or common stock
should consult their own tax advisors.
Shares
issued upon exercise of options or upon stock grants under the Plan are
"restricted securities" as defined under the Securities Act, unless a
registration statement covering such shares is effective. Restricted shares
cannot be freely sold and must be sold pursuant to an exemption from
registration (such as Rule 144) which exemptions typically impose conditions
on
the sale of the shares.
During
2005 and 2006, William Reid and David Reid each advanced money to us to meet
short-term working capital requirements. The loans were represented by
promissory notes totaling $160,000, which were non-interest bearing and due
on
demand. We used the proceeds of the IPO to repay the notes in 2006.
-
44
-
ITEM
13. EXHIBITS
The
following exhibits are filed with or incorporated by referenced in this
report:
|
3.1
|
Articles
of Incorporation of the Company as filed with the Colorado Secretary
of
State on August 24, 1998 (incorporated by reference from our registration
statement on Form SB-2 filed on October 28, 2005, Exhibit 3.1, File
No.
333-129321).
|
|
3.1.1
|
Articles
of Amendment to the Articles of Incorporation as filed with the Colorado
Secretary of State on September 16, 2005 (incorporated by reference
from
our registration statement on Form SB-2 filed on October 28, 2005,
Exhibit
3.1.1, File No. 333-129321).
|
|
3.2
|
Bylaws
of the Company dated August 28, 1998 (incorporated by reference from
our
registration statement on Form SB-2 filed on October 28, 2005, Exhibit
3.2, File No. 333-129321).
|
|
4
|
Specimen
stock certificate (incorporated by reference from our amended registration
statement on Form SB-2/A filed on March 27, 2006, Exhibit 4, File
No.
333-129321).
|
|
10.1
|
Exploitation
and Exploration Agreement between the Company and Jose Perez Reynoso
dated
October 14, 2002 (incorporated by reference from our registration
statement on Form SB-2 filed on October 28, 2005, Exhibit 10.1, File
No.
333-129321).
|
|
10.2
|
Non-Qualified
Stock Option and Stock Grant Plan (incorporated by reference from
our
registration statement on Form SB-2 filed on October 28, 2005, Exhibit
10.2, File No. 333-129321).
|
|
10.3
|
Form
of Stock Option Agreement (incorporated by reference from our registration
statement on Form SB-2 filed on October 28, 2005, Exhibit 10.3, File
No.
333-129321).
|
|
10.4
|
Lease
Agreement dated September 2005 (incorporated by reference from our
registration statement on Form SB-2 filed on October 28, 2005, Exhibit
10.4, File No. 333-129321).
|
|
10.5
|
Agreement
dated July 28, 2003 between the Company and Canyon Resources Corporation
(incorporated by reference from our registration statement on Form
SB-2
filed on October 28, 2005, Exhibit 10.5, File No. 333-129321).
|
|
10.6
|
Agreement
dated August 2, 2005 between the Company and Heemskirk Consolidated
Limited (incorporated by reference from our registration statement
on Form
SB-2 filed on October 28, 2005, Exhibit 10.6, File No.
333-129321).
|
|
10.7
|
Agreement
dated August 15, 2005 by and between the Company and Heemskirk
Consolidated Limited (incorporated by reference from our registration
statement on Form SB-2 filed on October 28, 2005, Exhibit 10.7, File
No.
333-129321).
|
|
10.8
|
Employment
Agreement between the Company and William W. Reid (incorporated by
reference from our amended registration statement on Form SB-2/A
filed on
March 27, 2006, Exhibit 10.8, File No.
333-129321).
|
|
10.9
|
Employment
Agreement between the Company and David C. Reid (incorporated by
reference
from our amended registration statement on Form SB-2/A filed on March
27,
2006, Exhibit 10.9, File No.
333-129321).
|
|
10.10
|
Promissory
Note in favor of David C. Reid (incorporated by reference from our
amended
registration statement on Form SB-2/A filed on May 1, 2006, Exhibit
10.10,
File No. 333-129321).
|
|
10.11
|
Promissory
Note in favor of William W. Reid (incorporated by reference from
our
amended registration statement on Form SB-2/A filed on May 1, 2006,
Exhibit 10.11, File No. 333-129321).
|
|
10.12
|
Form
of Subscription Agreement between the Company and investors in the
November 2006 private placement (incorporated by reference from our
report
on Form 8-K dated December 7, 2006, Exhibit 10.1, File No.
333-129321).
|
|
21
|
Subsidiaries
of the Company (incorporated by reference from our amended registration
statement on Form SB-2/A filed on January 20, 2006, Exhibit 21, File
No.
333-129321).
|
|
31.1
|
Certification
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for William
W.
Reid.
|
|
31.2
|
Certification
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for Frank
L.
Jennings.
|
|
32
|
Certification
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for William
W.
Reid and Frank L. Jennings.
|
The
following table sets forth fees paid to (or accrued to) our principal accounting
firm of Stark Winter Schenkein & Co., LLP in last two years ended
December 31, 2006:
|
|
|
2006
|
|
2005
|
|
||
|
Audit
Fees
|
|
$
|
28,675
|
|
$
|
16,000
|
|
|
Audit
Related Fees
|
|
0
|
|
0
|
|
||
|
Tax
Fees
|
$
|
1,500
|
|
0
|
|
||
|
All
Other Fees
|
|
0
|
|
0
|
|
||
|
Total
Fees
|
|
$
|
30,175
|
|
$
|
16,000
|
|
It
is the
policy of the Audit Committee of our Board of Directors to engage the principal
accounting firm selected to conduct the financial audit for our company and
to
confirm, prior to such engagement, that such principal accounting firm is
independent of our company. All services of the principal accounting firm
reflected above were approved by the Audit Committee.
-
45
-
In
accordance with Section 13 or 15(d) of the Exchange Act of 1934, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly
authorized.
|
|
|
GOLD
RESOURCE CORPORATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/
William W. Reid
|
||
|
Dated:
March 28, 2007
|
By:
William W. Reid, Chairman of the Board,
President
and Chief Executive Officer
|
||
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Frank L. Jennings
|
||
|
Dated:
March 30, 2007
|
By:
Frank L. Jennings, Chief Financial Officer,
|
||
|
|
Principal
Accounting Officer
|
||
In
accordance with the Exchange Act, this Report has been signed below by the
following persons on behalf of the Company and in the capacities and on the
dates indicated.
|
/s/
William W. Reid
|
|
Chairman
of the Board,
|
March 28,
2007
|
||||
|
William
W. Reid
|
President
and
|
|
|||||
|
|
Chief
Executive Officer
|
|
|||||
|
|
|
|
|||||
|
/s/
Frank L. Jennings
|
|
Chief
Financial
|
March 30,
2007
|
||||
|
Frank
L. Jennings
|
Officer
and Principal
|
|
|||||
|
|
Accounting
Officer
|
|
|||||
|
|
|
|
|||||
|
/s/
Bill M. Conrad
|
|
Director
|
March 30,
2007
|
||||
|
Bill
M. Conrad
|
|
|
|||||
-
46
-