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| GYPH.OB > SEC Filings for GYPH.OB > Form 10-Q on 13-Aug-2008 | All Recent SEC Filings |
13-Aug-2008
Quarterly Report
Forward-Looking Statements
The information in this quarterly report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements involve risks and uncertainties, including statements regarding our capital needs, business plans and expectations. Such forward-looking statements involve risks and uncertainties regarding the market price of metals, commodities and precious metals, availability of funds, government regulations, common share prices, operating costs, capital costs, outcomes of ore reserve exploration and other factors. Forward-looking statements are made, without limitation, in relation to operating plans, property exploration, availability of funds, environmental reclamation, operating costs and permit acquisition. Any statements contained herein that are not statements of historical facts may be deemed to be forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as "may", "will", "should", "expect", "plan", "intend", "anticipate", "believe", "estimate", "predict", "potential" or "continue", the negative of such terms or other comparable terminology. Actual events or results may differ materially. In evaluating these statements, you should consider various factors, including the risks outlined below, and, from time to time, in other reports we file with the Securities and Exchange Commission ("SEC"). These factors may cause our actual results to differ materially from any forward-looking statement. We disclaim any obligation to publicly update these statements, or disclose any difference between our actual results and those reflected in these statements. The information constitutes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Given these uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.
Cautionary Note Regarding Management's Discussion and Analysis
This discussion and analysis should be read in conjunction with the accompanying Consolidated Financial Statements and related notes. The discussion and analysis of the financial condition and results of operations are based upon the consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the company to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of any contingent liabilities at the financial statement date and reported amounts of revenue and expenses during the reporting period. On an on-going basis the company reviews its estimates and assumptions. The estimates were based on historical experience and other assumptions that the company believes to be reasonable under the circumstances. Actual results are likely to differ from those estimates under different assumptions or conditions, but the company does not believe such differences will materially affect our financial position or results of operations. Critical accounting policies, the policies the company believes are most important to the presentation of its financial statements and require the most difficult, subjective and complex judgments, are outlined below in "Critical Accounting Policies," and have not changed significantly.
Overview:
We were established as a private company in April 2003 to acquire and develop gold properties in the United States. Our objective is to establish a producing gold company through the development and extraction of gold deposits. In December of 2005 we completed our initial public offering.
In July 2003, through our wholly owned subsidiary Borealis Mining, we acquired from Golden Phoenix an option to earn up to a 70% joint venture interest in the mining lease for the Borealis Property and in January of 2006 completed the acquisition of all of the Golden Phoenix interest in the Borealis Property. We now control, subject to a lease and royalty agreement, approximately 23 square miles of claims located on land administered by the Bureau of Land Management and Forest Service near Hawthorne Nevada.
We funded our early exploration activity and property acquisition through a series of private placements and the proceeds received from our initial public offering.
On February 9, 2007 we completed a private placement of 5.0 million units at a price of Cdn$0.90 per unit for gross proceeds of Cdn$4.5 million. Each unit consisted of one common share and one full purchase warrant. The two year warrants are exercisable at a price of Cdn$1.10 if exercised within twelve months of the closing and at a price of Cdn$1.35 if exercised after the first anniversary but prior to expiry. We paid qualified registered dealers a 7% cash commission in the amount of Cdn$77,175 and issued compensation options to acquire 85,050 common shares (at a price of Cdn$0.90 per share for a period of 12 months from closing) in respect of the 1.225 million units placed by them. The shares, warrants and underlying shares were not qualified by prospectus and were not registered under U.S. securities laws. We granted registration rights to the investors in this private placement and used commercially reasonable efforts to prepare and file a registration statement with the SEC. The proceeds of this offering were applied to fund the continuation of our exploration and development program on the Borealis Property.
On July 4, 2007, we entered into a membership interest purchase agreement with Gerald W. Baughman and Fabiola Baughman, as sellers, and Nevada Eagle, under which we agreed to purchase all of the outstanding limited liability company interests of Nevada Eagle. Upon closing of the membership interest purchase agreement on August 21, 2007, we acquired Nevada Eagle from the sellers for the following consideration:
(a) 2,500,000 in cash;
(b) four million five hundred thousand (4,500,000) shares of our common stock; and
(c) a 5% convertible note in the principal amount of $5,000,000.
The convertible note, due March 30, 2010, bears interest at the annual rate of 5% and is convertible at the option of the holder into common shares at an initial conversion price of $1.00 per share during first the twelve month period following the closing date, $1.25 per share during the second twelve month period following the closing date, $1.50 per share thereafter and $1.75 per share if converted on March 30, 2010. The interest payments are due on a semi-annual basis beginning on January 1, 2008. In addition to the purchase consideration, the Baughmans were entitled to all revenues of Nevada Eagle (payable in cash, stock, or other consideration) calculated to be received and received on the assets and properties of Nevada Eagle from January 1, 2007 through midnight on December 31, 2007.
In addition, we granted the sellers registration rights under which we agreed to file (within the later of (i) 90 days of the closing date or (ii) any date in which we are required to file a registration statement for a third-party in connection with a financing or acquisition, but no later than 120 days of the closing date) a resale registration statement to register the common shares issuable at closing and issuable upon exercise of the convertible note under the Securities Act of 1933, as amended. We filed a registration statement to register the securities.
We executed the following agreements at closing:
(a) A Lock-up Agreement, dated August 21, 2007, under which the Sellers agreed that for a period of three months following the Closing Date not to sell Common Shares issued or issuable under the Purchase Agreement and Convertible Note and, thereafter, to limit the sale of such Common Shares to 20% of the aggregate Common Shares issued under the Purchase Agreement and Convertible Note each quarter (with unsold Common Shares aggregating each quarter thereafter);
(b) An Employment Agreement between us and Mr. Baughman for a term of one year, renewable by the parties, to serve as our Vice President of Corporate Development; and
On August 7, 2007, we closed a private placement of 5.0 million units at a price of Cdn. $0.80 per unit for gross proceeds of Cdn. $4.0 million. Each unit consisted of one common share and one full purchase warrant. The two year warrants are exercisable at a price of Cdn$1.00 if exercised within twelve months of the closing and at a price Cdn$1.25 if exercised after the first anniversary but prior to expiry. We paid qualified registered dealers cash commissions in the amount of Cdn$152,040 and issued warrants to acquire 265,050 common shares (at a price of Cdn$0.83 for a period of up to 9 months from closing). The shares, warrants and underlying shares were not qualified by prospectus, were not registered under U.S. securities laws and were subject to resale restrictions. The Company has granted registration rights to the investors in this private placement and used commercially reasonable efforts to prepare and file a registration statement with the SEC. Such registration was filed. The proceeds of this offering were applied to fund the continuation of our exploration and development programs.
On December 14, 2007 we completed a private placement of 4,486,500 units at Cdn$0.80 for gross proceeds of approximately Cdn$3,589,200. The private placement closed in three tranches on November 22, November 27 and December 14, 2007. Each unit consisted of one common share and one series I warrant. Each series I warrant entitles the holder to purchase a common share at a price of Cdn$1.00 per share during the first 12 months after closing and Cdn$1.25 per share during the second 12 months after closing and until expiry. We paid qualified registered dealers a 7% cash commission in the amount of Cdn$71,624 and issued compensation warrants (series J) to acquire 89,530 common shares (at a price of Cdn$0.80 per share for a period of 9 months from closing) in respect of the 1,204,000 units placed by them (14,000 of the compensation warrants were later rejected and cancelled by one of the registered dealers). We have a right to force warrant holders to exercise warrants, if the price of our common stock remains equal to or greater than, Cdn$1.85 per common share, for a period of twenty consecutive days. The shares, warrants and underlying shares were not qualified by prospectus, have not been registered under U.S. securities laws, and are subject to resale restrictions. We granted registration rights to the investors in this private placement and will use commercially reasonable efforts to prepare and file with the SEC a registration statement under the Securities Act and to cause such statement to be declared effective. The proceeds of this offering will be applied to fund the continuation of our exploration and development program on the Borealis Property.
In the calendar year 2007, we continued extension drilling, focused on the expansion of the Graben deposit and exploration drilling for a new gold deposit within the two newly identified potentially gold-bearing hydrothermal systems in the pediments. This drilling program consisted of a series of Graben deposit expansion drilling and extension drilling north and west of the successful G3 - G13 fence of holes. The drilling of the Graben deposit alternated with follow up exploration drilling in the Central and Western Pediments where 10 holes have intersected two distinct hydrothermal systems hidden beneath the pediments.
In April of 2008 we completed a CIM compliant, NI 43-101 resource report that included all drilling results to date. We are currently analyzing those results and incorporating them in a Preliminary Assessment report ("PA") examining the engineering and economic feasibility of placing the oxide resources into production. The PA is expected to be completed and analyzed in September 2008.
We are currently performing exploration on the Borealis Property for the purpose of identifying additional potential gold resources. During calendar 2008 we expect to prepare a Preliminary Assessment report on the previously mined area of the Borealis Property to further delineate the gold mineralization available for the operation of a mine, design the open pit mine, heap leach pads and gold recovery plant and to estimate the capital and operating costs of the proposed mining scenario. Metallurgical test work completed to date indicates the oxide material is amenable to conventional heap-leach recovery methods. If we complete a PA during 2008 and, if warranted have made a decision to begin development, we intend to develop our Borealis Property and place it into production, assuming adequate additional capital is available.
We expect that over the remainder of fiscal 2009 we will perform exploration drilling in the pediment areas and certain of the previously mined oxide areas, complete a Preliminary Assessment report examining the economic viability of an oxide heap leach mine, and take steps as necessary to ensure the permits under the existing Plan of Operation remain in place. We also expect to complete a Scoping Study covering the possibility of mining the Graben sulphide deposit along with sulphide resources located near the previously mined Freedom Flats and Borealis open pits.
With respect to Nevada Eagle Resources, we expect to stake additional properties and to continue to actively lease or joint venture properties to third party exploration companies.
Events subsequent to June 30, 2008
In July 2008 we announced the appointment of John L. Key as President and CEO, replacing Mr. Tony Ker. Mr. Key is a mining engineer with over 30 years experience and has run, in succession, the Magmont, Polaris and Red Dog mines in the Teck Cominco organization. Mr. Key had been acting as our Chief Operating Officer for the past six months, and his primary focus has been overseeing the completion the Preliminary Assessment on the Borealis heap leach mine and advancing the project towards production.
Mr. Key's employment contract provides for the granting of 350,000 stock options.
Mr. Ker entered into a Transition Agreement (TA) with us in August 2008, under which, Mr. Ker will cease to be an employee effective August 31, 2008 and cease to be a director of the Company upon the election of directors at our Annual General Meeting September 5, 2008. Mr. Ker will receive monthly payments of $12,500 and certain incidental expenses for 12 monthly beginning September 2008. The Company will record a charge to expense during the quarter ended September 30, 2008 to accrue the cost of the agreement. Mr. Ker has entered into a consulting agreement with the Company that becomes effect September 2008. Under the agreement, he is eligible for 200,000 stock options and a success fee of 0.67% of any financing initiated during the term of this agreement.
Effective August 5, 2008, we entered into an option agreement with Gerald W. Baughman and Fabiola Baughman to amend the $5 million face value note payable to them at a cost of $35,000. The option period is twelve months and extendable for another six months for an additional $35,000. At the time the option is exercised, the note payable will be reduced by $2.5 million by a payment of $500,000 in cash and 4,000,000 common shares. Upon exercise of the option, the conversion rate of the remaining $2.5 million note payable would be amended to $0.70 per common share until March 30, 2009, $0.80 per common share until March 30, 2010, and the maturity date would be extended from March 30, 2010 to March 30, 2012 and secured by certain exploration properties. We may exercise the option if the royalty on the Borealis property has been fixed at 5% or lower, and there is an arrangement to merge the Company or the financing of a mine on the Borealis property has been completed.
Our plan is to focus on moving the Borealis property into production through the development of an oxide heap leach mine, produce a Scoping Study on the Graben sulphide deposit, and continue exploration in the pediment areas of the Borealis property.
During September 2008, we plan to release an independent Preliminary Assessment ("PA") on the development of an oxide heap leach mine. Depending on the results of the PA, we may perform more drilling to expand the oxide base and take other steps as necessary to advance the potential oxide heap leach mine. We will also consider extension drilling, focused on the expansion of the Graben deposit and exploration drilling for new gold deposits within the two newly identified potentially gold-bearing hydrothermal systems in the pediments.
The following activities are planned for the duration of fiscal 2009:
º Complete the PA covering the development of the Borealis heap leach mine, and take further steps to continue development of the potential mine.
º Take steps as necessary to ensure all existing permits for construction and operation of an oxide heap leach mine remain intact.
º Produce a Scoping Study covering the potential development of the Graben resource along with certain other nearby sulphide resources,
º Continue exploration drilling at both the Central Pediment and Western Pediment, which are northwest of the Graben sulphide deposit. Drilling will be guided by the results of the geological and geophysical exploration model.
º Continue to stake and lease or joint venture out Nevada Eagle properties.
Results of Operations
We are in an exploration stage and currently have no producing mineral properties and thus we had no revenues during all reporting periods. Property payments we received under lease or joint venture arrangements were recorded as a reduction in the carrying value of the property.
Three months ended June 30, 2008 compared to three months ended June 30, 2007
For the three months ended June 30, 2008, we had a net loss of $1,438,906 or $0.02 per share compared to a net loss of $2,226,553 or $0.05 per share in the same period in the prior year, as spending on our exploration program, management salaries and general and administrative costs decreased significantly.
Exploration expenses during the quarter ended June 30, 2008 were $686,668 or 48% of our total expenses compared to $1,478,472 or 64% of total expenses in the prior year. Most of the activity in the current quarter was related to the completion of the Preliminary Assessment and the construction of a water well. No exploration drilling was completed during the quarter ended June 30, 2008. During the prior year's comparable quarter, we drilled a total of 16 reverse circulation holes (totaling 18,890 feet) on the Borealis property.
Management salaries and consulting fees in the quarter ended June 30, 2008 were $328,026 compared to $438,363 incurred in the quarter ended June 30, 2007. Total non-cash compensation expense was $103,051 in the quarter ended June 30, 2008 compared to the prior years fiscal first quarter of $213, 032. Salary costs decreased from prior years because fewer management personnel were employed. Consulting fees during the quarter decreased due to reduced spending on investor relations and related activities. General and administration costs decreased compared to the prior year because of reduced expenditures on investor relations activities. Legal and audit fees for the period were $89,090, which is an increase compared to the prior years quarter ended June 30, 2007 of $71,297. These costs increased to the additional audit work related to Nevada Eagle Resources. Travel and accommodation during the quarter ended June 30, 200 was $27,935, compared to $52,652 expended on travel in the prior year's comparable quarter. The decrease in travel and entertainment is mainly due to decreased investor relations activity.
Liquidity and Capital Resources
Our principal source of liquidity is cash that is raised by way of sale of common stock from treasury and other equity securities.
At June 30, 2008, we had working capital of $2,675,506. Current assets consisted of $2,637,991 in cash, $116,411 in securities held for trading, $98,116 in accounts receivable and $112,429 in prepaid expenses. We had $289,441 in accounts payable at June 30, 2008.
During the quarter ended June 30, 2008, we used cash in operating activities of $1,530,761 which included our net loss during the quarter of $1,438,906, off-set by depreciation of $16,882, non-cash compensation of $103,051, non-cash interest expense of $67,203, unrealized loss on securities held for trading of $33,439 and changes in non-cash working capital of a $6,012 increase in accounts receivable, a $335,709 decrease in accounts payable and a $30,111 decrease in pre-paid expenses. We used cash in investing activities of $14,942, including $13,801 for reclamation deposits, $33,139 for equipment purchases, $36,002 for mineral properties, and we received $68,000 in cash payments from the leasing of exploration properties. Financing activities used cash of $12,700, which included $9,246 in miscellaneous legal costs related to the issuance of shares, and by capital lease principal payments of $3,454. Cash decreased during the period by $1,558,403 to $2,637,991 as at June 30, 2008.
On July 4, 2007, we entered into a membership interest purchase agreement with Gerald W. Baughman and Fabiola Baughman, as sellers, and Nevada Eagle, under which we agreed to purchase all of the outstanding limited liability company interests of Nevada Eagle. Upon closing of the membership interest purchase agreement on August 21, 2007, we acquired Nevada Eagle from the sellers for the following consideration:
(a) 2,500,000 in cash;
(b) four million five hundred thousand (4,500,000) shares of our common stock; and
(c) a 5% convertible note in the principal amount of $5,000,000.
The convertible note, due March 30, 2010, bears interest at the annual rate of
5% and is convertible at the option of the holder into common shares at an
initial conversion price of $1.00 per share during first the twelve month period
following the closing date, $1.25 per share during the second twelve month
period following the closing date, $1.50 per share thereafter and $1.75 per
share if converted on March 30, 2010. The interest payments are due on a
semi-annual basis beginning on January 1, 2008 and due each January 1 and June
1. In addition to the purchase consideration, the Baughman's were entitled to
all revenues of Nevada Eagle (payable in cash, stock, or other consideration)
calculated to be received and received on the assets and properties of Nevada
Eagle from January 1, 2007 through midnight on December 31, 2007.
In addition, we granted the sellers registration rights.
(a) A Lock-up Agreement, dated August 21, 2007, under which the Sellers agreed that for a period of three months following the Closing Date not to sell Common Shares issued or issuable under the Purchase Agreement and Convertible Note and, thereafter, to limit the sale of such Common Shares to 20% of the aggregate Common Shares issued under the Purchase Agreement and Convertible Note each quarter (with unsold Common Shares aggregating each quarter thereafter);
(b) An Employment Agreement between Mr. Baughman and us for a term of one year, renewable by the parties, to serve as our Vice President of Corporate Development;
(c) A Non-Competition Agreement under which the Sellers have agreed not to compete with the Registrant for the latter of (i) twelve (12) months following the Closing Date, or (ii) twelve (12) months following the termination of the Company's employment of Gerald Baughman. The scope of the non-competition obligation relates to the business of acquiring and/or holding base metal and precious metal mineral assets located in the state of Nevada within the Area of Interest and to properties that have been examined by the Registrant or Mr. Baughman during the course of his employment by the Registrant, in any manner or capacity. "Area of Interest" is defined as any property owned by the Registrant, Nevada Eagle, or any affiliate of the Registrant or Nevada Eagle on the latter of (i) Closing Date or (ii) the termination date of Gerald Baughman's employment by the Registrant, if any, together with any adjacent areas within one kilometer of the exterior boundary of such properties.
Updated share capital as of August 13, 2008:
Basic Common Stock Issued and Outstanding 61,977,065 . . .
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