Unassociated Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

FORM 10-Q

x  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 2009

OR

o  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from               to

Commission File Number:  0-13078

CAPITAL GOLD CORPORATION 

(Exact name of registrant as specified in its charter)

DELAWARE
 
13-3180530
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)

76 Beaver Street, 14th floor, New York, NY 10005
(Address of principal executive offices)

Registrant’s telephone number, including area code:  (212) 344-2785
 
 

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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.
Yes   x          No   ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes   ¨          No   ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):

Large accelerated filer  
¨
Accelerated filer   x
       
Non-accelerated filer
¨
Smaller reporting company  
¨
(do not check if smaller reporting company)
   

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨  No  x

Indicate the number of shares outstanding of each of the issuer's classes of common equity as of the latest practicable date.

Class
 
Outstanding at June  1, 2009
     
Common Stock, par value $.0001 per share
 
193,399,826
 
 
 

 

PART I.  FINANCIAL INFORMATION

Item 1. Financial Statements

The accompanying financial statements are unaudited for the interim periods, but include all adjustments (consisting only of normal recurring adjustments), which we consider necessary for the fair presentation of results for the three and nine months ended April 30, 2009.

Moreover, these financial statements do not purport to contain complete disclosure in conformity with U.S. generally accepted accounting principles and should be read in conjunction with our audited financial statements at, and for the fiscal year ended July 31, 2008.

The results reflected for the three and nine months ended April 30, 2009 are not necessarily indicative of the results for the entire fiscal year ending July 31, 2009.

 
-2-

 

CAPITAL GOLD CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(in thousands, except for share and per share amounts)

   
April 30,
2009
(unaudited)
   
July 31,
2008
 
ASSETS
           
Current Assets:
           
Cash and Cash Equivalents
  $ 7,187     $ 10,992  
Accounts Receivable
    2,004       1,477  
Stockpiles and Ore on Leach Pads (Note 4)
    16,208       12,176  
Material and Supply Inventories
    1,326       937  
Deposits
    83       9  
Marketable Securities  (Note 3)
    70       65  
Prepaid Expenses
    312       219  
Loans Receivable – Affiliate (Note 9 and13)
    34       39  
Other Current Assets (Note 5)
    451       490  
Total Current Assets
    27,675       26,404  
                 
Mining Concessions (Note 8)
    52       59  
Property & Equipment – net (Note 6)
    22,886       20,918  
Intangible Assets – net (Note 7)
    329       181  
Other Assets:
               
Deferred Financing Costs
    470       599  
Mining Reclamation Bonds
    82       82  
Deferred Tax Asset (Note 17)
    797       573  
Security Deposits
    100       63  
Total Other Assets
    1,449       1,317  
Total Assets
  $ 52,391     $ 48,879  
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current Liabilities:
               
Accounts Payable
  $ 969     $ 789  
Accrued Expenses (Note 10)
    3,869       2,673  
Derivative Contracts (Note 16)
    228       930  
Deferred Tax Liability (Note 17)
    2,586       2,063  
Current Portion of Long-term Debt (Note 15)
    3,825       4,125  
Total Current Liabilities
    11,477       10,580  
                 
Reclamation and Remediation Liabilities (Note 11)
    1,268       1,666  
Other liabilities
    45       62  
Long-term Debt (Note 15)
    5,300       8,375  
Total Long-term Liabilities
    6,613       10,103  
                 
Commitments and Contingencies
    -       -  
                 
Stockholders’ Equity:
               
Common Stock, Par Value $.0001 Per Share; Authorized 300,000,000 shares; Issued and Outstanding 193,399,826 and 192,777,326 shares, respectively
    19       19  
Additional Paid-In Capital
    63,844       63,074  
Accumulated Deficit
    (24,810 )     (32,497 )
Deferred Financing Costs
    (2,008 )     (2,611 )
Deferred Compensation
    (377 )     (549 )
Accumulated Other Comprehensive Income (Note 12)
    (2,367 )     760  
Total Stockholders’ Equity
    34,301       28,196  
Total Liabilities and Stockholders’ Equity
  $ 52,391     $ 48,879  

The accompanying notes are an integral part of the financial statements.

 
-3-

 

CAPITAL GOLD CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
(in thousands, except for share and per share amounts)

   
For The Three Months Ended
 
   
April 30,
 
   
2009
   
2008
 
Revenues
           
Sales – Gold, net
  $ 12,395     $ 8,730  
Costs and Expenses:
               
Costs Applicable to Sales
    3,698       2,717  
Depreciation and Amortization
    811       800  
General and Administrative
    1,361       1,086  
Exploration
    329       19  
Total Costs and Expenses
    6,199       4,622  
Income (Loss) from Operations
    6,196       4,108  
                 
Other Income (Expense):
               
Interest Income
    7       12  
Interest Expense
    (103 )     (377 )
Other Income (Expense)
    (40 )     (25 )
Loss on change in fair value of derivative
    (1,391 )     (337 )
Total Other Expense
    (1,527 )     (727 )
                 
Income before Income Taxes
    4,669       3,381  
                 
Income Tax Expense
    (2,115 )     (641 )
                 
Net Income
  $ 2,554     $ 2,740  
                 
Income Per Common Share
               
Basic
  $ 0.01     $ 0.02  
Diluted
  $ 0.01     $ 0.01  
                 
Basic Weighted Average Common Shares Outstanding
    193,362,747       175,645,465  
Diluted Weighted Average Common Shares Outstanding
    200,826,903       197,238,688  
 
The accompanying notes are an integral part of the financial statements.

 
-4-

 
 
CAPITAL GOLD CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
(in thousands, except for share and per share amounts)

   
For The Nine Months Ended
 
   
April 30,
 
   
2009
   
2008
 
Revenues
           
Sales – Gold, net
  $ 32,939     $ 23,299  
Costs and Expenses:
               
Costs Applicable to Sales
    10,395       7,343  
Depreciation and Amortization
    2,269       2,630  
General and Administrative
    3,800       3,308  
Exploration
    1,224       650  
Total Costs and Expenses
    17,688       13,931  
Income from Operations
    15,251       9,368  
                 
Other Income (Expense):
               
Interest Income
    32       63  
Interest Expense
    (530 )     (945 )
Other Expense
    (273 )     (30 )
Loss on change in fair value of derivative
    (1,969 )     (1,037 )
Total Other Expense
    (2,740 )     (1,949 )
                 
Income before Income Taxes
    12,511       7,419  
                 
Income Tax Expense
    (4,824 )     (806 )
                 
Net Income
  $ 7,687     $ 6,613  
                 
Income Per Common Share
               
Basic
  $ 0.04     $ 0.04  
Diluted
  $ 0.04     $ 0.03  
                 
Basic Weighted Average Common Shares Outstanding
    193,131,703       173,722,564  
Diluted Weighted Average Common Shares Outstanding
    199,207,507       194,869,746  
 
The accompanying notes are an integral part of the financial statements.

 
-5-

 

CAPITAL GOLD CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(UNAUDITED)
(in thousands, except for share and per share amounts)

                           
Accumulated
                   
               
Additional
         
Other
   
Deferred
         
Total
 
   
Common Stock
   
paid-in-
   
Accumulated
   
Comprehensive
   
Financing
   
Deferred
   
Stockholders’
 
   
Shares
   
Amount
   
capital
   
Deficit
   
Income/(Loss)
   
Costs
   
Compensation
   
Equity
 
                                                                 
Balance at July 31, 2008
    192,777,326     $ 19     $ 63,074     $ (32,497 )   $ 760     $ (2,611 )   $ (549 )   $ 28,196  
Amortization of deferred finance costs
    -       -       -       -       -       603       -       603  
Equity based compensation
    -       -       512       -       -       -       172       684  
Common stock issued upon the exercising of options and warrants
    400,000       -       144                               -       144  
Issuance of restricted common stock
    222,500       -       114                               -       114  
Net income for the nine months ended April 30, 2009
    -       -       -       7,687       -               -       7,687  
Change in fair value on interest rate swaps
    -       -       -       -       (12 )     -       -       (12 )
Unrealized loss on marketable securities
    -       -       -       -       5       -       -       5  
Equity adjustment from foreign currency translation
    -       -       -       -       (3,120 )     -       -       (3,120 )
Total comprehensive income
    -       -       -       -       -       -       -       4,560  
Balance at April 30, 2009
    193,399,826     $ 19     $ 63,844     $ (24,810 )   $ (2,367 )   $ (2,008 )   $ (377 )   $ 34,301  

The accompanying notes are an integral part of the financial statements.

 
-6-

 

CAPITAL GOLD CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(in thousands, except for share and per share amounts)

   
For The
 
   
Nine Months Ended
 
   
April 30,
 
   
2009
   
2008
 
Cash Flow From Operating Activities:
           
Net Income
  $ 7,687     $ 6,613  
Adjustments to Reconcile Net Income to
               
Net Cash Provided by (Used in) Operating Activities:
               
Depreciation and Amortization
    2,269       2,611  
Accretion of Reclamation and Remediation
    113       121  
Loss on change in fair value of derivative
    1,969       1,040  
Equity Based Compensation
    798       535  
Changes in Operating Assets and Liabilities:
               
Increase in Accounts Receivable
    (527 )     (1,143 )
Increase in Prepaid Expenses
    (93 )     (937 )
Increase in Inventory
    (3,298 )     (6,309 )
Decrease in Other Current Assets
    40       434  
(Increase) Decrease in Other Deposits
    (74 )     832  
Increase in Mining Reclamation Bond
    -       (46 )
Increase in Security Deposits
    (36 )     -  
Increase in Deferred Tax Asset
    (224 )     -  
(Decrease) Increase in Accounts Payable
    180       (8 )
Decrease in Derivative Liability
    (2,684 )     (869 )
Decrease in Other Liability
    (17 )     -  
Decrease in Reclamation and Remediation
    (511 )     -  
Increase in Deferred Tax Liability
    523       -  
Increase in Accrued Expenses
    1,196       1,944  
Net Cash Provided By Operating Activities
    7,311       4,818  
                 
Cash Flow From Investing Activities:
               
Purchase of Mining, Milling and Other Property and Equipment
    (4,590 )     (4,601 )
Purchase of Intangibles
    (180 )     (90 )
Net Cash Used in Investing Activities
    (4,770 )     (4,691 )

The accompanying notes are an integral part of the financial statements.

 
7

 

CAPITAL GOLD CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS – CONTINUED
(UNAUDITED)
(in thousands, except for share and per share amounts)

   
For The
 
   
Nine Months Ended
 
   
April 30,
 
   
2009
   
2008
 
             
Cash Flow From Financing Activities:
           
Repayments from Affiliate, net
    5       7  
Repayments on Notes Payable
    (3,375 )     -  
Proceeds From Issuance of Common Stock
    144       2,277  
Net Cash (Used in) Provided By Financing Activities
    (3,226 )     2,284  
Effect of Exchange Rate Changes
    (3,120 )     300  
(Decrease) Increase In Cash and Cash Equivalents
    (3,805 )     2,711  
Cash and Cash Equivalents - Beginning
    10,992       2,225  
Cash and Cash Equivalents – Ending
  $ 7,187     $ 4,936  
                 
Supplemental Cash Flow Information:
               
Cash Paid For Interest
  $ 465     $ 973  
Cash Paid For Income Taxes
  $ 2,572     $ 806  
Non-Cash Financing Activities:
               
Change in Fair Value of Derivative Instrument
  $ 12     $ 209  

The accompanying notes are an integral part of the financial statements.

8


CAPITAL GOLD CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
(in thousands, except for per share and ounce amounts)

NOTE 1 - Basis of Presentation

Capital Gold Corporation ("Capital Gold", the “Company", "we" or "us") owns rights to property located in the State of Sonora, Mexico. The Company is engaged in the production of gold and other minerals from its properties in Mexico as well as exploration for additional mineral properties. All of the Company's mining activities are being performed in Mexico.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of the Company's management, the accompanying condensed consolidated financial statements reflect all adjustments (which include only normal recurring adjustments) necessary to present fairly the condensed consolidated financial position and results of operations and cash flows for the periods presented. They include the accounts of Capital Gold Corporation and its wholly owned and majority owned subsidiaries, Leadville Mining and Milling Holding Corporation, Minera Santa Rita, S.A de R.L. de C.V.(“MSR”) and Oro de Altar S. de R. L. de C.V. (“Oro”) as well as the accounts within Caborca Industrial S.A. de C.V. (“Caborca Industrial”), a Mexican corporation that is 100% owned by two of the Company’s officers and directors for mining support services. These services include, but are not limited to, the payment of mining salaries and related costs. Caborca Industrial bills the Company for these services at slightly above cost.  This entity is considered a variable interest entity under accounting rules provided under FIN 46, “Consolidation of Variable Interest Entities”.

All significant intercompany accounts and transactions are eliminated in consolidation.  Certain items in these financial statements have been reclassified to conform to the current period presentation. These reclassifications had no impact on the Company’s results of operations, stockholders’ equity or cash flows.

The notes to the consolidated financial statements contained in the Annual Report on Form 10-K, as amended, for the year ended July 31, 2008 should be read in conjunction with these consolidated financial statements.  Results of operations for interim periods are not necessarily indicative of the results of operations for a full year.

NOTE 2 - Equity Based Compensation

In connection with offers of employment to the Company’s executives as well as in consideration for agreements with certain consultants, the Company issues options and warrants to acquire its common stock. Employee and non-employee awards are made at the discretion of the Board of Directors.

Such options and warrants may be exercisable at varying exercise prices currently ranging from $0.35 to $0.85 per share of common stock with certain of these grants becoming exercisable immediately upon grant. Certain grants have vested or are vesting over a period of five years.

 
9

 

The Company adopted the provisions of Statement of Financial Accounting Standards No. 123(revised 2004) “Share Based Payments” (“SFAS 123R”). Under SFAS 123R, share-based compensation cost is measured at the grant date, based on the estimated fair value of the award, and is recognized as expense over the requisite service period. The Company adopted the provisions of SFAS 123R using a modified prospective application. Under this method, compensation cost is recognized for all share-based payments granted, modified or settled after the date of adoption, as well as for any unvested awards that were granted prior to the date of adoption. Prior periods are not revised for comparative purposes. Because the Company previously adopted only the pro forma disclosure provisions of SFAS 123R, it will recognize compensation cost relating to the unvested portion of awards granted prior to the date of adoption, using the same estimate of the grant-date fair value and the same attribution method used to determine the pro forma disclosures under SFAS 123, except that forfeitures rates will be estimated for all options, as required by SFAS 123R.

The cumulative effect of applying the forfeiture rates is not material. SFAS 123R requires that excess tax benefits related to stock option exercises be reflected as financing cash inflows instead of operating cash inflows.

The fair value of each option award is estimated on the date of grant using a Black-Scholes option valuation model. Expected volatility is based on the historical volatility of the price of the Company stock. The risk-free interest rate is based on U.S. Treasury issues with a term equal to the expected life of the option. The Company uses historical data to estimate expected dividend yield, expected life and forfeiture rates. The estimated per share weighted average grant-date fair values of stock options and warrants granted during the nine months ended April 30, 2009 and 2008 were $0.28 and $0.31, respectively. The fair values of the options and warrants granted were estimated based on the following weighted average assumptions:

   
Nine months ended April 30,
 
   
2009
   
2008
 
             
Expected volatility
   
69.98 – 79.72%
     
47.60 – 58.69%
 
Risk-free interest rate
   
0.86 – 1.56%
     
3.74%
 
Expected dividend yield
   
-
     
-
 
Expected life
 
2.0 – 5.0 years
   
6.3 years
 

Stock option activity for employees during the year ended July 31, 2008, and nine months ended April 30, 2009 is as follows (all tables in thousands, except for option, price and term data):

 
10

 
 
   
Number of
Options
   
Weighted
Average
exercise
price
   
Weighted
average
remaining
contracted
term (years)
   
Aggregate
intrinsic
value
 
                         
Options outstanding at July 31, 2007
    2,500,000     $ .34       1.20     $ 255  
Granted
    2,500,000       .63                  
Exercised
    (1,450,000 )     .32       -       -  
Expired
    -       -       -       -  
Options outstanding at July 31, 2008
    3,550,000     $ .55       4.00     $ 334  
                                 
Granted
    1,000,000     $ .49       -       -  
Exercised
    ( 250,000 )     .34       -       -  
                                 
Expired
    ( 300,000 )     .35       -       -  
Options outstanding at April 30, 2009
    4,000,000     $ .56       4.90     $ -  
Options exercisable at April 30, 2009
    2,041,630     $ .54       2.20     $ -  
 
Unvested stock option balances for employees at April 30, 2009 are as follows:

   
Number of
Options
   
Weighted
Average
Exercise
price
   
Weighted
average
remaining
contracted
term (years)
   
Aggregate
Intrinsic value
 
                         
Unvested options outstanding at July 31, 2007
    150,000     $ .32       0.67     $ 18  
Granted
    2,500,000     $ .63       -       -  
Vested
    (900,000 )   $ .58       -       -  
                                 
Unvested Options outstanding at July 31, 2008
    1,750,000     $ .63       4.49     $ 8  
                                 
Granted
    1,000,000     $ .49       -       -  
Vested
    (791,630 )     .56       -       -  
Unvested Options outstanding at April 30, 2009
    1,958,370     $ .59       5.52     $ -  
 
 
11

 
 
Stock option and warrant activity for non-employees during the year ended July 31, 2008, and  nine months ended April 30, 2009 is as follows:

   
Number of Options
   
Weighted
Average
Exercise
price
   
Weighted
average
remaining
contracted
term (years)
   
Aggregate
Intrinsic
value
 
                         
Warrants and options outstanding at July 31, 2007
    22,535,542     $ .33       1.48     $ 2,578  
Granted
    1,715,000       .66       -       -  
Exercised
    (21,555,542 )     .33       -       -  
Expired
    ( 680,000 )     .30       -       -  
Warrants and options outstanding at July 31, 2008
    2,015,000     $ .62       3.54     $ 54  
                                 
Granted
    1,400,000     $ .50       -       -  
Exercised
    (150,000 )     .39       -       -  
Expired
    (150,000 )     .39       -           
Warrants and options outstanding at April 30, 2009
    3,115,000     $ .59       3.89     $ -  
Warrants and options exercisable at April 30, 2009
    2,013,703     $ .61       1.84     $ -  
 
Unvested stock option balances for non-employees at April 30, 2009 are as follows:
 
   
Number of
Options
   
Weighted
Average
Exercise
price
   
Weighted
average
remaining
contracted
term (years)
   
Aggregate
Intrinsic
value
 
                         
Unvested stock options outstanding at July 31, 2007
    -       -       -       -  
Granted
    650,000     $ .63       -       -  
Vested
    (195,000 )   $ .63       -       -  
Unvested Options outstanding at July 31, 2008
    455,000     $ .63       4.49     $ 3  
                                 
Options granted
    1,275,000     $ .49       -       -  
Options vested
    (628,703 )     .51       -       -  
Unvested Options outstanding at April 30, 2009
    1,101,297     $ .54       5.13     $ 5  
 
 
12

 
 
The impact on the Company’s results of operations of recording equity based compensation for the nine months ended April 30, 2009 and 2008 for employees and non-employees was approximately $798 and $535 and reduced earnings per share by $0.00 and $0.00 per basic and diluted share, respectively.
 
As of April 30, 2009, there was approximately $830 of unrecognized equity based compensation cost related to options granted to executives and employees which have not yet vested.

NOTE 3 - Marketable Securities

Marketable securities are classified as current assets and are summarized as follows:

   
(in thousands)
 
   
April 30,
2009
   
July 31,
2008
 
Marketable equity securities, at cost
  $ 50     $ 50  
Marketable equity securities, at fair value (See Notes 9 & 13)
  $ 70     $ 65  
 
NOTE 4 - Ore on Leach Pads and Inventories (“In-Process Inventory”)

   
(in thousands)
 
   
April 30,
2009
   
July 31,
2008
 
Ore on leach pads
  $ 16,208     $ 12,176  
Total
  $ 16,208     $ 12,176  
 
Costs that are incurred in or benefit the productive process are accumulated as ore on leach pads and inventories.  Ore on leach pads and inventories are carried at the lower of average cost or market.  The current portion of ore on leach pads and inventories is determined based on the amounts to be processed within the next 12 months.

NOTE 5 – Other Current Assets

Other current assets consist of the following:

   
(in thousands)
 
   
April 30,
2009
   
July 31,
2008
 
Value added tax to be refunded                                                                    
  $ 449     $ 425  
Other
    2       65  
Total Other Current Assets
  $ 451     $ 490  
 
 
13

 

NOTE 6 – Property and Equipment

Property and Equipment consist of the following:

   
(in thousands)
 
   
April 30,
2009
   
July 31,
2008
 
Process equipment and facilities
  $ 25,015     $ 21,693  
Mining equipment
    2,248       974  
Mineral properties
    141       141  
Construction in progress
    1,193       1,277  
Computer and office equipment
    355       316  
Improvements
    16       16  
Furniture
    47       38  
Total
    29,015       24,455  
Less: accumulated depreciation
    (6,129 )     (3,537 )
Property and equipment, net
  $ 22,886     $ 20,918  
 
Expenditures for new facilities or equipment and expenditures that extend the useful lives of existing facilities or equipment are capitalized and depreciated using the Units of Production (“UOP”) and straight-line method at rates sufficient to depreciate such costs over the estimated productive lives, which do not exceed the related estimated mine lives, of such facilities based on proven and probable reserves.
 
Mineral exploration costs are expensed as incurred. When it has been determined that a mineral property can be economically developed as a result of establishing proven and probable reserves, costs incurred prospectively to develop the property are capitalized as incurred and are amortized using the UOP method over the estimated life of the ore body based on estimated recoverable ounces or pounds in proven and probable reserves.

The Company paid $674 towards the procurement of new secondary crusher for the El Chanate mine.  The total cost for this piece of equipment is approximately $1,012 (See Note 19).

Depreciation expense for the nine months ended April 30, 2009 and 2008 was approximately $2,269 and $2,630, respectively.

NOTE 7 - Intangible Assets

Intangible assets consist of the following:

   
(in thousands)
 
   
April 30,
2009
   
July 31,
2008
 
Repurchase of Net Profits Interest
  $ 500     $ 500  
Water Rights
    241       134  
Mobilization Payment to Mineral Contractor
    70       70  
Reforestation fee
    73       -  
Investment in Right of Way
    18       18  
Total
    902       722  
Accumulated Amortization
    (573 )     (541 )
Intangible assets, net
  $ 329     $ 181  
 
 
14

 

Purchased intangible assets consisting of rights of way, water rights, easements and net profit interests are carried at cost less accumulated amortization.  Amortization is computed using the straight-line method over the economic lives of the respective assets, generally five years or using the UOP method.  It is the Company’s policy to assess periodically the carrying amount of its purchased intangible assets to determine if there has been an impairment to their carrying value. Impairments of other intangible assets are determined in accordance with SFAS 144.  There was no impairment at April 30, 2009.

Amortization expense for the nine months ended April 30, 2009 and 2008 was approximately $33 and $521, respectively.  The Repurchase of Net Profits Interest was fully amortized as of April 30, 2008.

NOTE 8 - Mining Concessions

Mining concessions consist of the following:

   
(in thousands)
 
   
April 30,
2009
   
July 31,
2008
 
El Chanate
  $ 45     $ 45  
El Charro                            
    25       25  
Total
    70       70  
Less: accumulated amortization
    (18 )     (11 )
Total
  $ 52     $ 59  

The El Chanate concessions are carried at historical cost and are being amortized using the UOP method. They were acquired in connection with the purchase of the stock of Minera Chanate.

MSR acquired an additional mining concession, El Charro, in 2005. El Charro lies within the current El Chanate property boundaries. MSR is required to pay 1.5% net smelter royalty in connection with the El Charro concession.

Amortization expense for the nine months ended April 30, 2009 and 2008 was approximately $6 and $6, respectively.

NOTE 9 - Loans Receivable - Affiliate

Loans receivable - affiliate consist of expense reimbursements due from a publicly owned corporation in which the Company has an investment.  The Company's president and chairman of the board of directors was an officer and director of that corporation until March 10, 2008.  These loans are non-interest bearing and due on demand (see Notes 3 & 13).

 
15

 
 
NOTE 10 – Accrued Expenses

Accrued expenses consist of the following:

   
(in thousands)
 
   
April 30,
2009
   
July 31,
2008
 
             
Net profit interest
  $ -     $ 753  
Net smelter return
    240       189  
Mining contractor
    183       193  
Income tax payable
    2,246       777  
Utilities
    102       110  
Interest
    28       72  
Salaries, wages and employee benefits
    907       334  
Other liabilities
    163       245  
    $ 3,869     $ 2,673  
 
NOTE 11 - Reclamations and Remediation Liabilities (“Asset Retirement Obligations”)
 
Reclamation costs are allocated to expense over the life of the related assets and are periodically adjusted to reflect changes in the estimated present value resulting from the passage of time and revisions to the estimates of either the timing or amount of the reclamation and closure costs.  The Asset Retirement Obligation is based on when the spending for the reclamation for an existing environmental disturbance and activity to date will occur. The Company reviews, on an annual basis, unless otherwise deemed necessary, the Asset Retirement Obligation at each mine site.  The Company reviewed the estimated present value of the El Chanate mine reclamation and closure costs as of July 31, 2008.  This review resulted in an increase in the Asset Retirement Obligation by approximately $293.  As of April 30, 2009, approximately $1,331 was accrued for reclamation obligations relating to mineral properties in accordance with SFAS No. 143, “Accounting for Asset Retirement Obligations.” For the nine months ended April 30, 2009, the Company reclaimed certain areas at its El Chanate mine representing approximately $54.  Accretion expense for the nine months ended April 30, 2009 and 2008 was approximately $113 and $121, respectively.
 
   
(in thousands)
 
Balance as of July 31, 2008
  $ 1,666  
Additions, changes in estimates and other (foreign currency translation adjustment)
    (457 )
Liabilities settled
    (54 )
Accretion expense
    113  
Balance as of April 30, 2009
  $ 1,268  
 
16

 
NOTE 12 – Accumulated Other Comprehensive Income

Accumulated other comprehensive income (loss) consists of foreign translation gains and losses, unrealized gains and losses on marketable securities and fair value changes on derivative instruments and is summarized as follows:

   
Foreign 
currency items
   
Unrealized gain
(loss) on securities
   
Change in fair
value on interest
rate swaps
   
Accumulated other
comprehensive
income
 
                                 
Balance as of July 31, 2008
  $ 681     $ 15     $ 64     $ 760  
Income (loss)
    (3,120 )     5       (12 )     (3,127 )
Balance as of April 30, 2009
  $ (2,439 )   $ 20     $ 52     $ (2,367 )

The Company has not recognized any income tax benefit or expense associated with other comprehensive income items for the year ended July 31, 2008 and the nine months ended April 30, 2009.

NOTE 13 - Related Party Transactions

In August 2002, the Company purchased marketable equity securities of a related company. The Company also recorded approximately $5 and $5 in net expense reimbursements including office rent from this entity for the nine months ended April 30, 2009 and 2008, respectively (see Notes 3 and 9).

The Company utilizes Caborca Industrial, a Mexican corporation that is 100% owned by Gifford A. Dieterle, the Company’s Chief Executive Officer, and Jeffrey W. Pritchard, the Company’s Executive Vice President, for mining support services. These services include but are not limited to the payment of mining salaries and related costs. Caborca Industrial bills the Company for these services at slightly above cost. Mining expenses charged by Caborca Industrial and eliminated upon consolidation amounted to approximately $3,561 and $2,525 for the nine months ended April 30, 2009 and 2008, respectively.

The Company incurred approximately $15 during the nine months ended April 30, 2009, for services provided related to marketing materials.  The firm providing the services is owned and operated by relatives of the Company’s Chief Operating Officer, John Brownlie.

At the recommendation of the Compensation Committee and upon approval by the Board of Directors, on January 20, 2009, effective as of January 1, 2009, the Company entered into (i) amended and restated employment agreements with Gifford Dieterle, President and Treasurer, and Jeffrey Pritchard, Executive Vice President and (ii) amended and restated engagement agreements with Christopher Chipman, Chief Financial Officer, John Brownlie, Chief Operating Officer, and Scott Hazlitt, Vice President of Mine Development (collectively, the “Amended Agreements”).

Each of the Amended Agreements modify the previous employment agreement or engagement agreement in three ways.  First, the Company removed a provision from the Agreement Regarding Change in Control, which is attached as an exhibit to each of the Amended Agreements, that provided that, upon a change in control of the Company, the exercise price of all issued and outstanding options would decrease to $0.01. Second, the Company made the terms of each of the Amended Agreements consistent so that each Amended Agreement expires on December 31, 2011.  Finally, the Amended Agreements incorporate amendments made in December 2008 to the employment agreements and engagement agreements to bring such agreements into documentary compliance with Section 409A of the Internal Revenue Code of 1986, as amended, and the rules and regulations promulgated thereunder.
 
17

 
NOTE 14 - Stockholders' Equity

Common Stock

At various stages in the Company’s development, shares of the Company’s common stock have been issued at fair market value in exchange for services or property received with a corresponding charge to operations, property and equipment or additional paid-in capital depending on the nature of services provided or property received.

During the nine months ended April 30, 2009, the Company issued 222,500 restricted shares to employees  under its 2006 Equity Incentive Plan. The restricted shares granted vested immediately.  The fair value of the Company’s stock ranged from $0.34 to $0.52 on the date of grant resulting in the Company recording approximately $113 in equity compensation expense.

The Company received proceeds of approximately $144 during the nine months ended April 30, 2009 from the exercising of an aggregate of 400,000 options issued to officers and directors.

During the nine months ended April 30, 2009 and 2008, the Company recorded approximately $675 and $569 in equity compensation expense related to the vesting of restricted stock grants and stock options, respectively.

2006 Equity Incentive Plan

The 2006 Equity Incentive Plan (the “Plan”), approved by stockholders on February 21, 2007, is intended to attract and retain individuals of experience and ability, to provide incentive to the Company’s employees, consultants, and non-employee directors, to encourage employee and director proprietary interests in the Company, and to encourage employees to remain in the Company’s employ.

The Plan authorizes the grant of non-qualified and incentive stock options, stock appreciation rights and restricted stock awards (each, an “Award”).  A maximum of 10,000,000 shares of common stock are reserved for potential issuance pursuant to Awards under the Plan.  Unless sooner terminated, the Plan will continue in effect for a period of ten years from its effective date.

The Plan is administered by the Company’s Board of Directors which has delegated the administration to the Company’s Compensation Committee.  The Plan provides for Awards to be made to  the Company’s employees, directors and consultants and its affiliates as the Board may select.

Stock options awarded under the Plan may vest and be exercisable at such times (not later than 10 years after the date of grant) and at such exercise prices (not less than Fair Market Value at the date of grant) as the Board may determine.  Unless otherwise determined by the Board, stock options shall not be transferable except by will or by the laws of descent and distribution.  The Board may provide for options to become immediately exercisable upon a "change in control," as defined in the Plan.

The exercise price of an option must be paid in cash.  No options may be granted under the Plan after the tenth anniversary of its effective date.  Unless the Board determines otherwise, there are certain continuous service requirements and the options are not transferable.
 
18

 
The Plan provides the Board with the general power to amend the Plan, or any portion thereof at any time in any respect without the approval of the Company’s stockholders, provided however, that the stockholders must approve any amendment which increases the fixed maximum percentage of shares of common stock issuable pursuant to the Plan, reduces the exercise price of an Award held by a director, officer or ten percent stockholder or extends the term of an Award held by a director, officer or ten percent stockholder.  Notwithstanding the foregoing, stockholder approval may still be necessary to satisfy the requirements of Section 422 of the Code, Rule 16b-3 of the Securities Exchange Act of 1934, as amended or any applicable stock exchange listing requirements. The Board may amend the Plan in any respect it deems necessary or advisable to provide eligible employees with the maximum benefits provided or to be provided under the provisions of the Code and the regulations promulgated thereunder relating to Incentive Stock Options and/or to bring the Plan and/or Incentive Stock Options granted under it into compliance therewith.  Rights under any Award granted before amendment of the Plan cannot be impaired by any amendment of the Plan unless the Participant consents in writing.  The Board is empowered to amend the terms of any one or more Awards; provided, however, that the rights under any Award shall not be impaired by any such amendment unless the applicable Participant consents in writing and further provided that the Board cannot amend the exercise price of an option, the Fair Market Value of an Award or extend the term of an option or Award without obtaining the approval of the stockholders if required by the rules of the TSX or any stock exchange upon which the common stock is listed.

On November 1, 2008, the Company issued stock options with a two year term to purchase the Company’s common stock at an exercise price of $0.65 per share to an investor relations firm for services provided.  These options are for the purchase of 100,000 shares.  The Company utilized the Black-Scholes Method to fair value the 100,000 options received by this firm and recorded approximately $6 as equity based compensation expense.  The grant date fair value of each stock option was $0.06.

On December 3, 2008, the Company issued stock options with a two year term to purchase the Company’s common stock at an exercise price of $0.35 per share to its then SEC counsel.  These options are for the purchase of 25,000 shares.  The Company utilized the Black-Scholes Method to fair value the 25,000 options received by these individuals and recorded approximately $4 as equity based compensation expense.  The grant date fair value of each stock option was $0.16.

On January 20, 2009, at the recommendation of the Compensation Committee and on the approval by the Board of Directors, the Company’s executive officers and directors were granted 2,275,000 stock options under our 2006 Equity Incentive Plan as incentive compensation. The stock options were awarded as follows:  Gifford Dieterle – 500,000, John Brownlie – 500,000, Jeffrey Pritchard – 500,000, Christopher Chipman – 250,000, Scott Hazlitt – 250,000, Ian Shaw – 75,000, John Postle – 50,000, Mark T. Nesbitt – 50,000, Roger Newell -50,000 and Robert Roningen – 50,000.  The stock options have a term of five years and vest as follows: one-third vested upon issuance and the balance vest on a one-third basis annually thereafter. The exercise price of the stock options is $0.49 per share (per the Plan, the closing price on the Toronto Stock Exchange on the trading day immediately prior to the day of determination converted to U.S. Dollars). In the event of a termination of continuous service (other than as a result of a change of control, as defined in the Plan, unvested stock options shall terminate and, with regard to vested stock options, the exercise period shall be the lesser of the original expiration date or one year from the date continuous service terminates. Upon the happening of a change of control, all unvested stock options and unvested restricted stock grants immediately vest.  The Company utilized the Black-Scholes method to fair value the 2,275,000 options received by these individuals totaling $647.  The grant date fair value of each stock option was $0.29.

19


NOTE 15 - Debt

Long term debt consists of the following:
 
(in thousands)
 
   
April 30,
2009
   
July 31,
2008
 
             
Total debt
  $ 9,125     $ 12,500  
                 
Less current portion
    3,825       4,125  
                 
Long-term debt
  $ 5,300     $ 8,375  

In September 2008, the Company entered into an Amended and Restated Credit Agreement (the “Credit Agreement”) involving our wholly owned Mexican subsidiaries MSR and Oro, as borrowers (“Borrowers”), the Company, as guarantor, and Standard Bank PLC (“Standard Bank”), as the lender. The Credit Agreement amends and restates the prior credit agreement between the parties dated August 15, 2006 (the “Original Agreement”).  Under the Original Agreement, MSR and Oro borrowed money in an aggregate principal amount of up to US$12,500 (the “Term Loan”) for the purpose of constructing, developing and operating the El Chanate gold mining project in Sonora State, Mexico.  The Company guaranteed the repayment of the Term Loan and the performance of the obligations under the Credit Agreement.  As of April 30, 2009, the outstanding amount on the term note was $9,125 and accrued interest on this facility was approximately $28.

The Credit Agreement also established a new senior secured revolving credit facility that permits the Borrowers to borrow up to $5,000 during the one year period after the closing of the Credit Agreement.  Term Loan principal shall be repaid quarterly commencing on September 30, 2008 and consists of four payments in the amount of $1,125, followed by eight payments in the amount of $900 and two final payments in the amount of $400.  There is no prepayment fee.  There was no amount outstanding on the revolving credit facility as of April 30, 2009.  Principal under the Term Loan and the credit facility shall bear interest at a rate per annum equal to the LIBO Rate plus 2.5% and 2.0% per annum, respectively.

The Credit Facility contains covenants customary for a term note, including but not limited to restrictions (subject to certain exceptions) on incurring additional debt, creating liens on its property, disposing of any assets, merging with other companies and making any investments.  The Company is required to meet and maintain certain financial covenants, including (i) a ratio of current assets to current liabilities at all times greater than or equal to 1.20:1.00, (ii) a quarterly minimum tangible net worth at all times of at least U.S.$15,000, and (iii) a quarterly average minimum liquidity of U.S.$500.

In connection with the amendment of the Company’s credit arrangement proceedings in September 2008, MSR, as a condition precedent to closing, obtained a six month waiver letter from the Lender of any default or event of default as a result of not being in compliance with regulations of Mexican federal law with regard to certain filing and environmental bonding issues in connection with the operation of mining the El Chanate concessions as well as certain insurance requirements.  MSR is currently compliant with these regulations.

As of April 30, 2009, the Company and its related entities were in compliance with all debt covenants and default provisions.

The Term Loan and credit facility is secured by all of the tangible and intangible assets and property owned by MSR and Oro.  As additional collateral for the Loan, the Company, together with its subsidiary, Leadville Mining & Milling Holding Corporation, has pledged all of its ownership interest in MSR and Oro.
 
20

 
In March 2006, the Company entered into a gold price protection arrangement to protect it against future fluctuations in the price of gold and interest rate swap agreements in October 2006 in accordance with the terms of the credit arrangements with Standard Bank (See Note 16 for more details on these transactions).
 
NOTE 16 - Sales Contracts, Commodity and Financial Instruments

Gold Price Protection Agreement

In March 2006, in conjunction with the Company’s credit facility, the Company entered into two identically structured derivative contracts with Standard Bank (See Note 15).  Both derivatives consisted of a series of forward sales of gold and a purchase gold cap.  Under these contracts, the Company agreed to sell a total volume of 121,927 ounces of gold forward to Standard Bank at a price of $500 per ounce on a quarterly basis during the period from March 2007 to September 2010.  The Company also agreed to purchase gold caps.  The caps allow the Company to buy gold at a price of $535 per ounce covering the same volume and horizon as the forward sales.  This combination of forward sales with purchased call options synthesizes a put position, which, in turn, serves to put a floor on the Company’s sales price.

On February 24, 2009, the Company settled with Standard Bank, Plc., the remaining 58,233 ounces of gold under the original Gold Price Protection arrangements entered into in March 2006. The purpose of these arrangements at the time was to protect the Company in the event the gold price dropped below $500 per ounce. Total remuneration to unwind these arrangements was approximately $1,906. In conjunction with the settlement of the gold price protection agreement, the Company incurred an Other Expense of approximately $1,391 during the fiscal quarter ended April 30, 2009.

The volume of these derivative positions represented about 66% and 90% of sales during the nine months ended April 30, 2009 and 2008, respectively, such that these derivative positions mitigate the Company’s gold price risk, rather than eliminate or reverse the natural exposure of the Company.

Under FASB Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"), these contracts must be carried on the balance sheet at their fair value.  The Company records these changes in fair value and any cash settlements within Other Income or Expense. The contracts were not designated as hedging derivatives, and therefore special hedge accounting is not applied.

Since inception, the Company has paid Standard Bank an aggregate of approximately $4,135 on the full settlement of 121,927 ounces.  These expenses were incurred concurrently with sales revenues that reflected actual sales of physical gold at market prices well above the option strike price of $535 per ounce.

Rather than modifying the original Gold Price Protection agreement with Standard Bank to satisfy these forward sale obligations, the Company opted for a net cash settlement between the call option purchase price of $535 and the forward sale price of $500, or $35.00 per oz.
 
21


Interest Rate Swap Agreement

On October 11, 2006, prior to our initial draw on the Credit Facility, the Company entered into an interest rate swap agreement covering about 75% of the expected variable rate debt exposure.  Only 50% coverage is required under the Credit Facility.  The termination date on this swap position is December 31, 2010.  However, the Company intends to use discretion in managing this risk as market conditions vary over time, allowing for the possibility of adjusting the degree of hedge coverage as it deems appropriate.  In any case, the Company’s use of interest rate derivatives will be restricted to use for risk management purposes.
 
The Company uses variable-rate debt to finance a portion of the El Chanate Project.  Variable-rate debt obligations expose the Company to variability in interest payments due to changes in interest rates.  As a result of these arrangements, the Company will continuously monitor changes in interest rate exposures and evaluate hedging opportunities.  The Company’s risk management policy permits it to use any combination of interest rate swaps, futures, options, caps and similar instruments, for the purpose of fixing interest rates on all or a portion of variable rate debt, establishing caps or maximum effective interest rates, or otherwise constraining interest expenses to minimize the variability of these effects.
 
The interest rate swap agreements are accounted for as cash flow hedges, whereby “effective” hedge gains or losses are initially recorded in other comprehensive income (“OCI”) and later reclassified to the interest expense component of earnings coincidently with the earnings impact of the interest expenses being hedged.  “Ineffective” hedge results are immediately recorded in earnings also under interest expense.  No component of hedge results will be excluded from the assessment of hedge effectiveness.  The amount expected to be reclassified from other comprehensive income to earnings during the year ending July 31, 2009 from these two swaps was determined to be immaterial.

The following is a reconciliation of the derivative contract regarding the Company’s Interest Rate Swap agreement:
 
   
(in thousands)
 
Liability balance as of July 31, 2008
  $ 192  
Change in fair value of derivative
    111  
Interest expense (income)
    50  
Net cash settlements
    (125 )
Liability balance as of April 30, 2009
  $ 228  
 
The Company is exposed to credit losses in the event of non-performance by counterparties to these interest rate swap agreements, but the Company does not expect any of the counterparties to fail to meet their obligations. To manage credit risks, the Company selects counterparties based on credit ratings, limits its exposure to a single counterparty under defined guidelines, and monitors the market position with each counterparty as required by SFAS 133.
 
22

 
The Effect of Derivative Instruments on the Statement of Financial Performance (in thousands):
 
Quarter
Ended
 
Derivatives in Cash
Flow Hedging
Relationships
 
Effective
Results
Recognized
in OCI
 
Location of Results
Reclassified from AOCI
to Earnings
 
Amount
Reclassified
from AOCI
to Income
   
Ineffective
Results
Recognized
in Earnings
   
Location
of
Ineffective
Results
 
7/31/08
 
Interest Rate contracts
  $ 19  
Interest Income (Expense)
    (49 )     -       N/A  
10/31/08
 
Interest Rate contracts
  $ (38 )
Interest Income (Expense)
    (38 )     -       N/A  
1/31/09
 
Interest Rate contracts
  $ (95 )
Interest Income (Expense)
    (35 )     -       N/A  
4/30/09
 
Interest Rate contracts
  $ (16 )
Interest Income (Expense)
    (55 )     -       N/A  
 
Fair Value of Derivative Instruments in a Statement of Financial Position and the Effect of Derivative Instruments on the Statement of Financial Performance (in thousands):
 
   
Liability Derivatives
 
July 31, 2008
 
Balance Sheet Location
 
Fair Values
 
Derivatives designated as hedging instruments
         
Interest rate derivatives
 
Current Liabilities
  $ 192  
Derivatives designated as non-hedging instruments
           
Gold derivatives
 
Current Liabilities
  $ 738  
             
   
Liability Derivatives
 
October 31, 2008
 
Balance Sheet Location
 
Fair Values
 
Derivatives designated as hedging instruments
           
Interest rate derivatives
 
Current Liabilities
  $ 199  
Derivatives designated as non-hedging instruments
           
Gold derivatives
 
Current Liabilities
  $ 734  
             
   
Liability Derivatives
 
January 31, 2009
 
Balance Sheet Location
 
Fair Values
 
Derivatives designated as hedging instruments
           
Interest rate derivatives
 
Current Liabilities
  $ 268  
Derivatives designated as non-hedging instruments
           
Gold derivatives
 
Current Liabilities
  $ 719  
             
   
Liability Derivatives
 
April 30, 2009
 
Balance Sheet Location
 
Fair Values
 
Derivatives designated as hedging instruments
           
Interest rate derivatives
 
Current Liabilities
  $ 228  

23

 
NOTE 17 – Income Taxes

The Company’s Income tax (expense) benefit for the nine months ended consisted of the following:

   
(in thousands)
 
   
April 30,
2009
   
April 30,
2008
 
Current:
           
    United States
  $ -     $ -  
    Foreign
    (4,078 )     (806 )
      (4,078 )     (806 )
Deferred:
               
    United States
    -       -  
    Foreign
    (746 )     -  
      (746     -  
Total
  $ (4,824 )   $ (806 )

The Company’s Income (loss) from operations before income tax for the nine months ended consisted of the following:

   
(in thousands)
 
   
April 30,
2009
   
April 30,
2008
 
             
    United States
  $ (4,602 )   $ (3,790 )
    Foreign
    17,113       11,209  
Total
  $ 12,511     $ 7,419  

The Company’s current intent is to permanently reinvest its foreign affiliate’s earnings; accordingly, no U.S. income taxes have been provided for the unremitted earnings of the Company’s foreign affiliate.

The Company adopted the provisions of FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" ("FIN 48") effective January 1, 2007.  The purpose of FIN 48 is to clarify and set forth consistent rules for accounting for uncertain tax positions in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes".  The cumulative effect of applying the provisions of this interpretation are required to be reported separately as an adjustment to the opening balance of retained earnings in the year of adoption.  The adoption of this standard did not have an impact on the financial condition or the results of the Company’s operations.
 
On October 1, 2007, the Mexican Government enacted legislation which introduces certain tax reforms as well as a new minimum flat tax system.  This new flat tax system integrates with the regular income tax system and is based on cash-basis net income that includes only certain receipts and expenditures.  The flat tax is set at 17.5% of cash-basis net income as determined, with transitional rates of 16.5% and 17.0% in 2008 and 2009, respectively.  If the flat tax is positive, it is reduced by the regular income tax and any excess is paid as a supplement to the regular income tax.  If the flat tax is negative, it may serve to reduce the regular income tax payable in that year or can be carried forward for a period of up to ten years to reduce any future flat tax.
 
Companies are required to prepay income taxes on a monthly basis based on the greater of the flat tax or regular income tax as calculated for each monthly period.  There is the possibility of implementation amendments by the Mexican Government and the estimated future income tax liability recorded at the balance sheet date may change.
 
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Deferred income tax assets and liabilities are determined based on differences between the financial statement reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws in effect when the differences are expected to reverse. The measurement of deferred income tax assets is reduced, if necessary, by a valuation allowance for any tax benefits, which are, on a more likely than not basis, not expected to be realized. Net deferred tax benefits related to the U.S. operations have been fully reserved. The effect on deferred income tax assets and liabilities of a change in tax rates is recognized in the period that such tax rate changes are enacted.

NOTE 18 – Recently Issued Accounting Pronouncements

Fair Value Accounting

In September 2006, the FASB issued FASB Statement No. 157, “Fair Value Measurements” (“FAS 157”). FAS 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 FAS 157 were adopted January 1, 2009. In February 2008, the FASB staff issued FSP No. 157-2 “Effective Date of FASB Statement No. 157” (“FSP FAS 157-2”). FSP FAS 157-2 delayed the effective date of FAS 157 for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The provisions of FSP FAS 157-2 are effective for Companies beginning January 1, 2009, and are not expected to have a significant impact on the Company.

In October 2008, the FASB issued FSP No. FAS 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active” (“FSP FAS 157-3”), which clarifies the application of FAS 157 in an inactive market. The intent of this FSP is to provide guidance on how the fair value of a financial asset is to be determined when the market for that financial asset is inactive. FSP FAS 157-3 states that determining fair value in an inactive market depends on the facts and circumstances, requires the use of significant judgment and in some cases, observable inputs may require significant adjustment based on unobservable data. Regardless of the valuation technique used, an entity must include appropriate risk adjustments that market participants would make for nonperformance and liquidity risks when determining fair value of an asset in an inactive market. FSP FAS 157-3 was effective upon issuance. The Company has incorporated the principles of FSP FAS 157-3 in determining the fair value of financial assets when the market for those assets is not active.

FAS 157 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under FAS 157 are described below:
 
 
Level 1     
Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
     
 
Level 2     
Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability;
     
 
Level 3     
Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by little or no market activity).
 
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The following table sets forth the Company’s financial assets and liabilities measured at fair value by level within the fair value hierarchy. As required by FAS 157, assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

   
Fair Value at April 30, 2009
(in thousands)
 
 
 
Total
   
Level 1
   
Level 2
   
Level 3
 
Assets:
                               
Cash equivalents
  $ 3,838     $ 3,838     $ -     $ -  
Marketable securities
    70       70       -       -  
    $ 3,908     $ 3,908     $ -     $ -  
Liabilities:
                               
Interest rate swap
    228       -       228       -  
    $ 228     $ -     $ 228     $ -  
 
The Company’s cash equivalent instruments are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices. The cash instruments that are valued based on quoted market prices in active markets are primarily money market securities.
 
The Company’s marketable equity securities are valued using quoted market prices in active markets and as such are classified within Level 1 of the fair value hierarchy. The fair value of the marketable equity securities is calculated as the quoted market price of the marketable equity security multiplied by the quantity of shares held by the Company.

The Company has an interest rate swap contract to hedge a portion of the interest rate risk exposure on its outstanding loan balance. The hedged portion of the Company’s debt is valued using pricing models which require inputs, including risk-free interest rates and credit spreads. Because the inputs are derived from observable market data, the hedged portion of the debt is classified within Level 2 of the fair value hierarchy.

In April 2009, the FASB issued Staff Position No. FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” (“FSP FAS 157-4”), which provides additional guidance on determining fair value when the volume and level of activity for an asset or liability have significantly decreased and includes guidance on identifying circumstances that indicate when a transaction is not orderly. In April 2009, the FASB issued Staff Position No. FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments” (“FSP FAS 115-2 and FAS 124-2”), which: 1) clarifies the interaction of the factors that should be considered when determining whether a debt security is other than temporarily impaired, 2) provides guidance on the amount of an other-than-temporary impairment recognized in earnings and other comprehensive income and 3) expands the disclosures required for other-than-temporary impairments for debt and equity securities. Also in April 2009, the FASB issued Staff Position No. 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments” (“FSP FAS 107-1 and APB 28-1”), which requires disclosures about the fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. Adoption of these Staff Positions is required for the Company’s interim reporting period beginning April 1, 2009 with early adoption permitted. The Company adopted the provisions of FSP FAS 157-4, FSP FAS 115-2 and FAS 124-2, and FSP FAS 107-1 and APB 28-1 for the interim period ended April 30, 2009. The adoption of this standard did not have a material impact on the financial condition or the results of the Company’s operations.
 
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Fair Value Option

In February 2007, the FASB issued FASB Statement No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“FAS 159”). FAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value, with the objective of improving financial reporting by mitigating volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. The provisions of FAS 159 were adopted January 1, 2009. The Company did not elect the Fair Value Option for any of its financial assets or liabilities, and therefore, the adoption of FAS 159 had no impact on the Company’s consolidated financial position, results of operations or cash flows.

Derivative Instruments

In March 2008, the FASB issued FASB Statement No. 161, “Disclosure about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133” (“FAS 161”) which provides revised guidance for enhanced disclosures about how and why an entity uses derivative instruments, how derivative instruments and the related hedged items are accounted for under FAS 133, and how derivative instruments and the related hedged items affect an entity’s financial position, financial performance and cash flows. FAS 161 is effective and was adopted for the Company’s fiscal year ended July 31, 2008.

Accounting for the Useful Life of Intangibles
 
In April 2008, the FASB issued FSP No. FAS 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP 142-3”) which amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, “Goodwill and Other Intangible Assets” (“FAS 142”).  The intent of this FSP is to improve the consistency between the useful life of a recognized intangible asset under FAS 142 and the period of expected cash flows used to measure the fair value of the asset under FASB Statement No. 141, “Business Combinations” (“FAS 141”). FSP 142-3 is effective for the Company’s fiscal year beginning August 1, 2009 and will be applied prospectively to intangible assets acquired after the effective date. The Company does not expect the adoption of FSP 142-3 to have a material impact on the Company’s consolidated financial position, results of operations or cash flows.
 
Business Combinations

In April 2009, the FASB issued FSP No. FAS 141(R)-1, “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies” (“FSP FAS 141(R)-1”), which amends and clarifies FAS 141(R). The intent of FSP FAS 141(R)-1 is to address application issues on initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies in a business combination. This FSP is effective for assets or liabilities arising from contingencies in business combinations for which the acquisition date is on or after January 1, 2009. The Company will apply the provisions of FSP FAS 141(R)-1 to all future business combinations.

Equity Method Investment
 
In November 2008, the Emerging Issues Task Force (“EITF”) reached consensus on Issue No. 08-6, “Equity Method Investment Accounting Considerations” (“EITF 08-6”), which clarifies the accounting for certain transactions and impairment considerations involving equity method investments. The intent of EITF 08-6 is to provide guidance on (i) determining the initial measurement of an equity method investment, (ii) recognizing other-than-temporary impairments of an equity method investment and (iii) accounting for an equity method investee’s issuance of shares. EITF 08-6 was effective for the Company’s fiscal year beginning August 1, 2009 and has been applied prospectively. The adoption of EITF 08-6 had no impact on the Company’s consolidated financial position or results of operations.
 
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Equity-linked Financial Instruments
 
In June 2008, the EITF reached consensus on Issue No. 07-5, “Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock” (“EITF 07-5”). EITF 07-5 clarifies the determination of whether an instrument (or an embedded feature) is indexed to an entity’s own stock, which would qualify as a scope exception under FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“FAS 133”). EITF 07-5 was effective for the Company’s fiscal year beginning August 1, 2009. The adoption of EITF 07-5 had no impact on the Company’s consolidated financial position or results of operations.

NOTE 19 – Subsequent Events

The Company completed the procurement and installation of its new secondary crusher and tunnel conveyor in May 2009.  The total capital expenditure for this equipment was approximately $1,012.

Item 2.                      Management's Discussion and Analysis of Financial Condition and Results of Operations.
(in thousands, except for per share and ounce amounts)

Cautionary Statement on Forward-Looking Statements

Certain statements in this report constitute “forwarding-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”). Certain of such forward-looking statements can be identified by the use of forward-looking terminology such as “believes,” “expects,” “may,” “will,” “should,” or “anticipates” or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy that involve risks and uncertainties.  All statements other than statements of historical fact, included in this report regarding our financial position, business and plans or objectives for future operations are forward-looking statements.  Without limiting the broader description of forward-looking statements above, we specifically note that statements regarding exploration, costs, grade, production and recovery rates, permitting, financing needs and the availability of financing on acceptable terms or other sources of funding are all forward-looking in nature.

Such forward-looking statements involve known and unknown risks, uncertainties and other factors, including but not limited to, the factors discussed below in Part II; Item 1A. “Risk Factors,” which may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements and other factors referenced in this report.  We do not undertake and specifically decline any obligation to publicly release the results of any revisions which may be made to any forward-looking statement to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.
 
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We utilize certain Non-GAAP performance measures and ratios in managing the business and may provide users of this financial information with additional meaningful comparisons between current results and results in prior operating periods. Non-GAAP financial measures should be viewed in addition to, and not as an alternative to, the reported operating results or cash flow from operations or any other measure of performance prepared in accordance with accounting principles generally accepted in the United States. In addition, the presentation of these measures may not be comparable to similarly titled measures other companies use.

General

Through wholly owned subsidiaries, Capital Gold Corporation (the “Company” or “we”) owns 100% of 16 mining concessions located in the Municipality of Altar, State of Sonora, Republic of Mexico totaling approximately 3,544 hectares (8,756 acres or 13.7 square miles).  We commenced mining operations on two of these concessions in late March 2007 and achieved gold production and revenue from operations in early August 2007.  We sometimes refer to the operations on these two concessions as the El Chanate Project.

On August 30, 2007, Independent Mining Consultants, Inc. (“IMC”) of Tucson, AZ delivered to us an updated resource block model and an updated mine plan and mine production schedule (the “2007 Report”).  According to the 2007 Report, our proven and probable reserve tonnage increased by approximately 98% from 19.9 million to 39.5 million metric tonnes with a gold grade of 0.66 grams per tonne (43.5 million US short tons at 0.019 ounces per ton).  The open pit stripping ratio is 0.6:1 (0.6 tonnes of waste to one tonne of ore).  The updated pit design for the revised plan in the 2007 Report is based on a plant recovery of gold that varies by rock types, but is expected to average 66.8%. A gold price of US$550 (three year average as of July 31, 2007 as determined by IMC) per ounce was used to re-estimate the reserves compared with a gold price of $450 per ounce used in the previous estimate.

The following production summary estimate has been extracted from the 2007 Report.  Please note that the reserves as stated are an estimate of what can be economically and legally recovered from the mine and, as such, incorporate losses for dilution and mining recovery.  The 832,280 ounces of contained gold represent ounces of gold contained in ore in the ground, and therefore do not reflect losses in the recovery process.  Total gold produced is estimated to be 555,960 ounces, or approximately 66.8% of the contained gold.  The gold recovery rate is expected to average approximately 66.8% for the entire ore body.  Individual portions of the ore body may experience varying recovery rates ranging from about 73% to 48%.  Oxidized and sandstone ore types may have recoveries of about 73%; fault zone ore type recoveries may be about 64%; siltstone ore type recoveries may be about 48% and latite intrusive ore type recoveries may be about 50%.
 
29

 
<
   
Metric
 
U.S.
 
           
Materials
         
Reserves
         
Proven
 
26.7 Million Tonnes @   0.68   g/t*
 
29.4 Million Tons @ 0.0198 opt*
 
Probable
 
12.8 Million Tonnes  @  0.61   g/t*
 
14.1 Million Tons0.0179 opt*
 
Total Reserves
 
39.5 Million Tonnes  @  0.66   g/t*
 
43.5 Million Tons @ 0.0192 opt*
 
Waste
 
24.1 Million Tonnes
 
26.6 Million Tons
 
Total
 
63.6 Million Tonnes
 
70.1 Million tons