10-Q/A 1 v011161_10qa.htm

U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

AMENDMENT NO. 1 TO
FORM 10-Q/A


|X|  QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2003

OR

|_|  TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______ to _______

 
Commission file number 1-12401


WITS BASIN PRECIOUS MINERALS INC.
(Exact Name of Registrant as specified in Its Charter)
 

Minnesota
  
84-1236619
(State or Other Jurisdiction of
  
(I.R.S. Employer Identification No.)
Incorporation or Organization)
    
 

 
80 South 8th Street, Suite 900, Minneapolis, MN 55402
(Address of Principal Executive Offices)

(612) 349-5527
(Issuer’s Telephone Number, Including Area Code)


800 Nicollet Mall, Suite 2690, Minneapolis, MN 55402
(Former Name, Former Address and Former Fiscal Year, If Changed Since Last Report)


Check whether the issuer: (1) 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 issuer 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 is an accelerated filer (as defined in Rule 12b-2 of the Act).
Yes |_| No |X|

As of November 10, 2003, there were 29,747,181 shares of common stock, $.01 par value, outstanding.

 
     
 

PURPOSE OF AMENDMENT NO. 1
 
This Amendment No. 1 to the Company’s Quarterly Report on Form 10-Q/A for the quarter ended September 30, 2003, which amends the Company’s Form 10-Q originally filed on November 12, 2003, is being filed in response to comments received from the Securities and Exchange Commission in connection with its review of the Company’s registration statement on Form S-2 (file number 333-110831).

The Company has restated the financial statements contained in Part I, Item 1 of this Amendment No. 1 to, among other things, show reclassification to the Company’s financial statements for the quarter ended September 30, 2003 and the consolidated balance sheet as of September 30, 2003 to reflect reclassifications of the Company’s exploration acquisitions. As reflected in the consolidated statement of operations, expenses and net loss increased by $2,538,811 for the nine months ended September 30, 2003 as a result of this adjustment. In addition, loss per share increased $0.17 for the nine months ended September 30, 2003. As reflected in the consolidated balance sheet, stockholders’ equity decreased by $2,726,560 at September 30, 2003. The restatement did not impact the Company’s consolidated cash flow for the quarter ended September 30, 2003. The Company has also restated the information contained in the Management’s Discussion and Analysis of Financial Conditions and Results of Operations contained in Part I, Item 2 of this Amendment No. 1.

The Company has also restated its financial statements to reflect its transformation into an exploratory stage company upon the adoption of a new business model, effective May 1, 2003, that of a precious minerals exploration company.
 
The amendment incorporates the cumulative changes of the Company’s Forms 10-Q/A for the quarters ended March 31, 2003 and June 30, 2003 to reflect the Hosted Solutions Business as discontinued operations. See Note 8 - Restatement.

Only Items 1 and 2 of Part I are being amended hereby and the Company has not included any items of this report not being amended. This Amendment No. 1 does not update any other disclosures to reflect developments since the original date of filing.

 
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain statements contained in this Amendment No. 1, which are forward-looking in nature, are based on the current beliefs of our management as well as assumptions made by and information currently available to management, including statements related to the markets for our products, general trends in our operations or financial results, plans, expectations, estimates and beliefs. In addition, when used in this Amendment No. 1, the words “may,” “could,” “should,” “anticipate,” “believe,” “estimate,” “expect,” “plan” and similar expressions and their variants, as they relate to us or our management, may identify forward-looking statements. These statements reflect our judgment as of the date of this Amendment No. 1 with respect to future events, the outcome of which is subject to risks, which may have a significant impact on our business, operating results or financial condition. Readers are cautioned that these forward-looking statements are inherently uncertain. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results or outcomes may vary materially from those described herein. We undertake no obligation to update forward-looking statements. The risks identified in the section following Item 2 entitled “Risk Factors” contained in the original Form 10-Q filed November 12, 2003, among others, may impact forward-looking statements contained in this Amendment No. 1.


 
  2  
 

WITS BASIN PRECIOUS MINERALS INC. and SUBSIDIARIES
(f/k/a ACTIVE IQ TECHNOLOGIES, INC.)
(AN EXPLORATION STAGE COMPANY)
PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements

Condensed Consolidated Balance Sheets
 
     

Restated
(unaudited)
September 30,
2003 

 

 

December 31,
2002 

  
Assets              
Current Assets              
Cash and equivalents
  
$
17,325
  
$
13,211
  
Accounts receivable, net
    
—
    
—
  
Prepaid expenses
    
3,334
    
—
  
Assets of operations of discontinued
             
hosted solutions business
    
—
    
1,169,154
  
Assets of operations of discontinued
             
accounting software business
    
—
    
3,589,741
  
Total current assets
    
20,659
    
4,772,106
  
               
Property and Equipment, net
    
—
    
—
  
Prepaid Royalties
    
—
    
—
  
Participation Mining Rights, net
    
490,829
    
—
  
   
$
511,488
  
$
4,772,106
  
               
Liabilities and Shareholders’ Equity
              
Current Liabilities
              
Accounts payable
  
$
102,047
  
$
19,712
  
Liabilities of operations of discontinued
             
hosted solutions business
    
77,293
    
475,948
  
Liabilities of operations of discontinued
             
accounting software business
    
—
    
3,682,819
  
Accrued expenses
    
—
    
4,494
  
Total current liabilities
    
179,340
    
4,182,973
  
               
Commitments and Contingencies
              
               
Shareholders’ Equity
              
Common stock, $0.01 par value, 150,000,000 shares authorized;
              
17,057,181 and 13,264,681 shares issued and outstanding
    
170,572
    
132,647
  
Additional paid-in capital
    
23,341,833
    
22,616,833
  
Stock subscriptions receivable
    
—
    
(2,000,000
)
Deferred compensation
    
—
    
(182,213
)
Warrants
    
2,602,860
    
2,602,860
  
Accumulated deficit
    
(22,932,460
)
  
(22,580,994
)
Deficit accumulated during the exploration stage, subsequent
              
to April 30, 2003
    
(2,850,657
)
  
—
  
Total shareholders’ equity
    
332,148
    
589,133
  
   
$
511,488
  
$
4,772,106
  


See accompanying notes to condensed consolidated financial statements.

  3  
 

(f/k/a ACTIVE IQ TECHNOLOGIES, INC.)
(AN EXPLORATION STAGE COMPANY)
Condensed Consolidated Statements of Operations
(unaudited)


 

 

 

Three Months Ended Sept. 30,

 

 Nine Months Ended Sept. 30,

      
     
Restated
2003
     
2002
     
Restated
2003
     
2002
     
May 1, 2003 (inception)
to Sept. 30,
2003
  
Revenues
  
$
—
  
$
—
  
$
—
  
$
—
  
$
—
  
                                 
Operating Expenses:
                                
Cost of sales
    
—
    
—
    
—
    
—
    
—
  
General and administrative
    
135,491
    
63,148
    
343,280
    
214,712
    
265,046
  
Exploration expenses
   
300,000
    
—
    
2,791,290
    
—
    
2,791,290
  
Depreciation and amortization
   
38,270
    
—
    
38,387
    
—
    
38,387
  
Loss on disposal of assets
    
—
    
—
    
1,633
    
—
    
1,633
  
Loss on impairment of goodwill
    
—
    
—
    
—
    
—
    
—
  
Total operating expenses
    
473,761
    
63,148
    
3,174,590
    
214,712
    
3,096,356
  
Loss from Operations
    
(473,761
)
  
(63,148
)
  
(3,174,590
)
  
(214,712
)
  
(3,096,356
)
                                 
Other Income (Expense):
          
                   
Interest and dividend income
    
175
    
—
    
25,323
    
15,244
    
1,779
  
Other income
    
—
    
—
    
—
    
—
    
—
  
Interest expense
    
—
    
—
    
—
    
(119,206
)
  
—
  
Loss on sale of prepaid royalties
    
—
    
—
    
—
    
—
    
—
  
Total other income (expense)
    
175
    
—
    
25,323
    
(103,962
)
  
1,779
  
Loss from Operations before Tax
                                
Refund and Discontinued Operations
    
(473,586
)
  
(63,148
)
  
(3,149,267
)
  
(318,674
)
  
(3,094,577
)
Income tax refund
    
—
    
—
    
243,920
    
—
    
243,920
  
Loss from Continuing Operations
  
$
(473,586
)
$
(63,148
)
$
(2,905,347
)
$
(318,674
)
$
(2,850,657
)
                                 
Discontinued Operations (See Notes 3 and 4)
                        
Loss from operations of
                                
discontinued segments
    
—
    
(1,573,793
)
  
(296,776
)
  
(6,787,411
)
  
—
  
                                 
Net Loss
  
$
(473,586
)
$
(1,636,941
)
$
(3,202,123
)
$
(7,106,085
)
$
(2,850,657
)
                                 
Basic and Diluted Net Loss
                                
Per Common Share:
                                
Continuing operations
  
$
(0.03
)
$
—
  
$
(0.20
)
$
(0.03
)
$
(0.19
)
Discontinued operations
    
—
    
(0.12
)
  
(0.02
)
  
(0.55
)
  
—
  
Net Loss
  
$
(0.03
)
$
(0.12
)
$
(0.22
)
$
(0.58
)
$
(0.19
)
                                 
Basic and Diluted Weighted Average
                                
Outstanding Shares
    
17,057,181
    
13,298,014
    
14,444,271
    
12,300,947
    
15,290,788
  


See accompanying notes to condensed consolidated financial statements



 
  4  
 



WITS BASIN PRECIOUS MINERALS INC. and SUBSIDIARIES
(f/k/a ACTIVE IQ TECHNOLOGIES, INC.)
(AN EXPLORATION STAGE COMPANY)
Condensed Consolidated Statements of Cash Flows
(unaudited)

 
     
Nine Months Ended September 30,
      
Operating Activities:
    
Restated
2003
     
2002
     
May 1, 2003 (inception)
to Sept. 30,
2003
  
Net loss
  
$
(3,202,123
)
$
(7,106,085
)
$
(2,850,657
)
Adjustments to reconcile net loss to cash flows from
operating activities:
    
   
       
Depreciation and amortization
    
57,169
    
1,014,248
    
38,387
  
Deferred compensation expense
    
41,464
    
96,850
    
16,764
  
Loss on disposal of assets
    
884
    
101,319
    
1,633
  
Loss on impairment of goodwill
    
—
    
2,548,664
    
—
  
 Issue of options, warrants and common stock for services
    
—
    
430,614
    
—
  
Interest expense related to common stock issued in
excess of note payable
    
—
    
80,000
    
—
  
Amortization of debt discount
    
—
    
104,820
    
—
  
Amortization of acquired software developed
    
53,884
    
333,745
    
—
  
Exchange of assets for services
    
2,644
    
—
    
—
  
Loss on sale of prepaid royalties
    
434,895
    
—
    
—
  
Issue of common stock for exploration rights in
excess of historical cost
    
2,491,290
    
—
    
2,491,290
  
Changes in operating assets and liabilities:
                    
Accounts receivable, net
    
154,980
    
77,512
    
12,200
 
Inventories
    
7,983
    
13,862
    
—
  
Prepaid expenses
    
343,842
    
(20,865
)
  
305,391
  
Prepaid royalties
    
—
    
309,745
    
—
  
Other assets
    
(2,890
)
  
57,553
    
—
  
Accounts payable
    
(137,315
)
  
(31,576
)
  
48,905
  
Deferred revenue
    
(130,498
)
  
56,865
    
—
  
Accrued expenses
    
99,719
    
(190,642
)
  
(215,739
)
Net cash provided by (used in) operating activities
    
215,928
    
(2,123,371
)
  
(151,826
)
                     
Investing Activities:
                    
Payments received on note receivable
    
—
    
500,000
    
—
  
Proceeds from sale of property and equipment
    
109,895
    
405,095
    
—
  
Proceeds from sale of prepaid royalties
    
540,105
    
—
    
—
  
Purchases of property and equipment
    
(3,880
)
  
(49,792
)
  
—
  
Investment in Participation Mining Rights
    
(527,889
)
  
—
    
(527,889
)
Net cash provided by (used in) investing activities
    
118,231
    
855,303
    
(527,889
)
                     
Financing Activities:
                    
Payments on long-term notes payable
    
(84,732
)
  
(1,712,569
)
  
—
  
Common stock repurchased and retired
    
—
    
(63,035
)
  
—
  
Cash proceeds from issuance of common stock
    
—
    
950,000
    
—
  
Cash proceeds from exercise of options and warrants
    
—
    
142,500
    
—
  
Cash proceeds from stock subscription receivable
    
—
    
200,000
    
—
  
Cash proceeds from short-term notes payable
    
—
    
450,000
    
—
  
Net cash used in financing activities
    
(84,732
)
  
(33,104
)
  
—
  
                     
                     
                     
Change in Cash and Equivalents of Discontinued
                   
Accounting Software Business
    
(245,313
)
  
42,321
    
—
  
Increase (Decrease) in Cash and Equivalents
    
4,114
    
(1,258,851
)
  
(679,715
)
Cash and Equivalents, beginning of period
    
13,211
    
1,377,315
    
697,040
  
Cash and Equivalents, end of period
  
$
17,325
  
$
118,464
  
$
17,325
  

See accompanying notes to condensed consolidated financial statements


  5  
 


WITS BASIN PRECIOUS MINERALS INC.
(f/k/a ACTIVE IQ TECHNOLOGIES, INC.)
(AN EXPLORATION STAGE COMPANY)
Notes to Condensed Consolidated Financial Statements
September 30, 2003
(unaudited)


NOTE 1 - NATURE OF BUSINESS

We are a precious minerals exploration company. We hold interests in two gold exploration projects that we acquired in a transaction completed on June 26, 2003 from Hawk Precious Minerals USA Inc., (“Hawk USA”), a wholly owned subsidiary of Toronto-based Hawk Precious Minerals Inc., (“Hawk”). In one of these projects, which we commonly refer to as the “FSC Project,” we are a passive investor and have the right to acquire up to a 50 percent equity interest in the company Kwagga Gold (Proprietary) Limited (“Kwagga”) through two funding stages: a $2,100,000 advance and a further $1,400,000 advance. Kwagga is a wholly owned subsidiary of AfriOre International (Barbados) Ltd., (“AfriOre”). Kwagga holds the exploration rights for the FSC Project. The FSC Project consists of approximately 107,000 hectares located in the Republic of South Africa adjacent to the major goldfields discovered at the Witwatersrand Basin. AfriOre is a coal producer and precious minerals exploration company with offices in Johannesburg, South Africa and the operator of the FSC Project. As of September 30, 2003, we have advanced $500,000 to Kwagga, which will be used to fund a 5 to 7 drillhole exploration program on the FSC Project and we are obligated to advance an additional $1,600,000. See Note 6 - Minority Interest in Active Hawk Minerals, LLC.

We also hold exploration rights in a project located near Wawa, Ontario, Canada, which we refer to as the “Holdsworth Project.” The Holdsworth Project consists of 19 contiguous patented mining claims covering approximately 304 hectares. We have no current plans to conduct exploration activities on the Holdsworth Project since we do not possess the expertise, equipment or funding necessary to conduct such activities. Based on prior surveys conducted, we estimate that initial exploration costs would be approximately $500,000. We therefore intend to partner with a third party to conduct any exploration activities.

In addition to these two projects, we intend to pursue interests in other precious mineral exploration projects. The form of these interests may be direct ownership of mineral exploration rights to certain lands or may be indirect interests in exploration projects, similar to our interest in the FSC Project.

Prior to April 30, 2003, we provided accounting software through our Accounting Software Business (“ASB”) and until March 14, 2003, we provided industry-specific solutions for managing, sharing and collaborating on business information on the Internet though our Hosted Solutions Business (“HSB”). In December 2002, our Board of Directors authorized a plan to sell the ASB. As a result of the formal plan, the results of operations have been reported as discontinued operations and previously reported condensed consolidated financial statements have been restated for the three months and nine months ended September 30, 2002. See Note 4 for further discussion regarding the discontinued operations of ASB.

Subsequent to our decision to sell the ASB, we came to the conclusion that due to current market conditions for capital funding of Internet opportunities, it would be extremely unlikely for us to secure the financing necessary to fund our HSB beyond the near term and thereby provide assurance to future customers of our long-term viability. On March 14, 2003, we sold all of our assets related to the HSB and thereby as a result of the sale, the results of operations have been reported as discontinued operations and previously reported condensed consolidated financial statements have been restated for the three months and nine months ended September 30, 2002. See Note 3 for a further discussion regarding the discontinued operations of HSB.

As a result of the sale of the HSB and ASB, we became an exploratory stage company effective May 1, 2003.


 
  6  
 

We were originally incorporated under Colorado law in December 1992 under the name Meteor Industries, Inc. In April 2001, in conjunction with our merger with activeIQ Technologies Inc., we reincorporated under Minnesota law and changed our name to Active IQ Technologies, Inc. On July 9, 2003, following the formation of our limited liability company with Hawk Precious Minerals USA, Inc., we changed our name to Wits Basin Precious Minerals Inc. in order to further associate our new business model with our corporate name. Our principal office is located at 80 South 8th Street, Suite 900, Minneapolis, Minnesota 55402. Our telephone number is (612) 349-5277 and our Internet address is www.witsbasin.com. Our common stock trades on the Over-the-Counter Bulletin Board (“OTCBB”) under the symbol WITM. Prior to August 20, 2003, our common stock’s OTCBB trading symbol was AIQT.


NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Financial Statement Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared by us in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) for interim financial information pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by US GAAP for complete financial statements. The unaudited condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto included in our Form 10-K filed March 31, 2003. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the nine months ended September 30, 2003 are not necessarily indicative of the results that may be expected for the year as a whole.

Revenue Recognition and Deferred Revenue

We did derive revenues from customers of the online document management service for monthly access to the service and initial service configuration/implementation. Customers were invoiced at the beginning of each month for access service and revenue was recognized when invoiced. Configuration/implementation revenue was invoiced the month after the services were performed and recognized in the month invoiced.

We recognized the revenues derived from ASB sales after all of the following criteria had been met: there was an executed license agreement, software had been delivered to the customer, the license fee was fixed and payable within twelve months, collection was deemed probable and product returns were reasonably estimable. Revenues related to multiple element arrangements were allocated to each element of the arrangement based on the fair values of elements such as license fees, maintenance, and professional services. Fair value was determined based on vendor specific objective evidence. Service revenue was recognized ratably over the term of the agreement, which was typically one year. All service revenue invoiced in excess of revenue recognized was recorded as deferred revenue. At December 31, 2002, deferred revenue was $1,774,491, as reported in the discontinued operations, see Note 4.

We currently do not have the ability to generate revenues in accordance with our investment in Kwagga and the FSC Project. Furthermore, we do not expect to generate revenues for the foreseeable future.

Net Loss per Common Share

Basic and diluted net loss per common share is computed by dividing the net loss by the weighted average number of common shares outstanding during the periods presented. The impact of common stock equivalents has been excluded from the computation of weighted average common shares outstanding, as the net effect would be antidilutive.

Use of Estimates

Preparing financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.


 
  7  
 

Income Taxes

We account for income taxes using the liability method to recognize deferred income tax assets and liabilities. Deferred income taxes are provided for differences between the financial reporting and tax bases of our assets and liabilities at currently enacted tax rates.

We have recorded a full valuation allowance against the net deferred tax asset due to the uncertainty of realizing the related benefits.

Exploration Costs

Exploration costs incurred in the search for new minerals are charged to expense as incurred. Due to the early stage of our passive investment in the FSC Project, we do not qualify for capitalizing development costs at this time.

Stock Based Compensation

In accordance with Accounting Principles Board (“APB”) Opinion No. 25 “Accounting for Stock Issued to Employees” and related interpretations, we use the intrinsic value-based method for measuring stock-based compensation cost which measures compensation cost as the excess, if any, of the quoted market price of our common stock at the grant date over the amount the employee must pay for the stock. Our general policy is to grant stock options and warrants at fair value at the date of grant.

We have adopted the disclosure only provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation.” We recorded compensation expense pursuant to APB Opinion No. 25 and related interpretations on options granted due to modifications of options of $41,464 and $96,850, for the nine months ended September 30, 2003 and 2002, respectively. We recorded expense related to stock based compensation issued to non-employees in accordance with SFAS No. 123. Had compensation costs for employees been recognized based upon the fair value of options at the grant date consistent with the provisions of SFAS No. 123, our results would have been as follows for:


 
     
Three Months Ended Sept. 30,
    
Nine Months Ended Sept. 30,
      
     
Restated
2003
     
2002
     
Restated
2003
     
2002
     
May 1, 2003 (inception) to
Sept. 30,
2003
  
Net loss:
                          
As reported
  
$
(473,586
)
$
(1,636,941
)
$
(3,202,123
)
$
(7,106,085
)
$
(2,850,657
)
Pro forma
  
$
(1,070,372
)
$
(2,027,599
)
$
(4,999,645
)
$
(8,278,060
)
$
(4,263,742
)
                                 
Basic and diluted net loss per share:
                                
As reported
  
$
(0.03
)
$
(0.12
)
$
(0.22
)
$
(0.58
)
$
(0.19
)
Pro forma
  
$
(0.06
)
$
(0.15
)
$
(0.35
)
$
(0.67
)
$
(0.28
)
                                 
Stock-based compensation
                                
As reported
  
$
9,377
  
$
32,638
  
$
41,464
  
$
96,850
  
$
16,764
  
Pro forma
  
$
596,786
  
$
390,658
  
$
1,797,522
  
$
1,171,975
  
$
1,413,085
  


 
  8  
 


In determining the compensation cost of the options granted during the three and nine months ended September 30, 2003 and 2002, as specified by SFAS No. 123, the fair value of each option granted has been estimated on the date of grant using the Black-Scholes option pricing model and the weighted average assumptions used in these calculations are summarized below for the three and nine months ended September 30:

   
2003
2002
  
Risk free interest rate
    
4.5
%
  
5
%
Expected life of options granted
    
10 years
    
10 years
  
Expected volatility range
    
308.1
%
  
168.6
%
Expected dividend yield
    
0
%
  
0
%


NOTE 3 - DISCONTINUED OPERATIONS HOSTED SOLUTIONS BUSINESS

In 2001, through a licensing agreement, we acquired the rights to develop and market, on a hosted basis, the online document management solutions of Stellent, Inc. This application service provider (ASP) software license agreement was the basis for our HSB, in which we were required to make advanced royalty payments and certain minimum royalty fee payments to Stellent. The balance of our prepaid royalties at December 31, 2002 was $975,000. On March 14, 2003, we sold all of the assets relating to our Hosted Solutions Business for $650,000 cash, the reimbursement of transaction-related expenses incurred by us in the amount of $150,000, and the assumption of certain obligations, liabilities and employees of ours. The remaining balance of the prepaid royalties ($975,000 at December 31, 2002) was expensed and netted together with the assets and liabilities of the HSB ($109,895 at March 14, 2003) together with the cash received ($650,000) in the transaction.

Under Minnesota law, shareholder approval is required when a corporation disposes of “all or substantially all” of its assets. The assets related to the Hosted Solutions Business, which represented only 23 percent of our total assets and which generated only 11 percent of our consolidated revenues for the year ended December 31, 2002, did not constitute the sale of all or substantially all of our assets. Therefore, the transaction was not subject to shareholder approval. With the completion of this sale, we no longer operate in the online document management business.


The following are condensed consolidated statements of discontinued operations for the:


 
 
HOSTED SOLUTIONS BUSINESS
  
Three Months Ended Sept. 30,
  
Nine Months Ended Sept. 30, 
  
   
2003
  
 2002
  
 2003
  
 2002
  
                      
Revenues
  
$
—
  
$
108,233
  
$
132,455
  
$
377,792
  
                           
Operating Expenses:
                          
Cost of sales
    
—
    
177,738
    
35,354
    
378,681
  
Selling, general and administrative
    
—
    
220,883
    
161,597
    
2,056,771
  
Depreciation and amortization
   
—
    
32,638
    
8,935
    
406,170
  
Loss (gain) on disposal of assets
    
—
    
3,894
    
(749
)
  
101,319
  
Loss on impairment of goodwill
    
—
    
417,273
    
—
    
417,273
  
Total operating expenses
    
—
    
852,426
    
205,137
    
3,360,214
  
Loss from discontinued operations
    
—
    
(744,193
)
  
(72,682
)
  
(2,982,422
)
                           
Other income
    
—
    
—
    
150,000
    
20,000
  
Loss on sale of prepaid royalties
    
—
    
—
    
(434,895
)
  
—
  
                           
Net loss from discontinued operations
  
$
—
  
$
(744,193
)
$
(357,577
)
$
(2,962,422
)





 
  9  
 




Assets and liabilities of the HSB consisted of the following at:


   
September 30, 2003
December 31, 2002
  
Accounts receivable, net
  
$
—
  
$
35,107
  
Prepaid expenses
    
—
    
35,542
  
Property and equipment, net
    
—
    
123,505
  
Prepaid royalties
    
—
    
975,000
  
Total assets
  
$
—
  
$
1,169,154
  
               
Accounts payable    
    
55,969
    
284,814
  
Accrued expenses
    
21,324
    
191,134
  
Total liabilities
  
$
77,293
  
$
475,948
  
               
               
               



NOTE 4 - DISCONTINUED OPERATIONS ACCOUNTING SOFTWARE BUSINESS

In December 2002, our Board of Directors authorized a plan to sell our ASB to key employees of that division. The ASB publishes traditional accounting and financial management software for small and medium sized businesses, farms and ranches throughout North America. We acquired (through the acquisition of 3 companies) the ASB during the year ended December 31, 2001 for the purpose of utilizing the business customer base to market other of our E-commerce products and services. The ASB consisted of two accounting software applications companies: Red Wing Business Systems, Inc. and Champion Business Systems, Inc., collectively referred to as “Red Wing.” Also, during 2002, we determined to abandon our E-commerce business after acquiring the rights to develop and market hosted online document solution products. Therefore, once we abandoned the E-commerce business model to focus on the hosted solutions business, the accounting software business no longer fit within our business plan.

On April 30, 2003, we completed the sale of substantially all of the assets of the ASB to two employees of that division, Kenneth Hilton and James Long. Mr. Hilton served as the President and Mr. Long served as the Chief Financial Officer, collectively as (the “Purchaser”).  

The assets sold consisted primarily of all intellectual property rights, cash, accounts receivable, inventories, property and equipment, and customer contracts. The Purchaser assumed substantially all the liabilities of the Accounting Software Business incurred in the ordinary course of the business consisting of trade payables, accrued expenses, debt and liabilities arising from contractual obligations related to the ongoing operations. The remaining outstanding debt (as of April 30, 2003 of $1,451,714) that was incurred during 2001 to acquire the Accounting Software Business was discharged as follows: (a) cash proceeds ($752,426) from the Purchaser were used to pay 17 of the note holders a negotiated 75 percent of the remaining balance due under the terms of their promissory notes, (b) the 25 percent discount ($250,809) re-negotiated with the 17 note holders, was booked as a component of discontinued operations, and (c) the remaining seven note holders (valued at $448,479) received new promissory notes issued by the Purchaser, again which was as a component of discontinued operations of the ASB.

The shareholders of the Company approved the sale at a special meeting on April 29, 2003.




 
  10  
 


The following are condensed consolidated statements of discontinued operations for the:


 
 
ACCOUNTING SOFTWARE BUSINESS
    
Three Months Ended Sept. 30,
    
Nine Months Ended Sept. 30,
  
     
2003
2002
2003
2002
  
                           
Revenues
  
$
—
  
$
964,488
  
$
1,491,059
  
$
2,982,350
  
                           
Operating Expenses:
                          
Cost of goods sold
    
—
    
252,672
    
371,971
    
973,741
  
Selling, general and administrative
    
—
    
763,031
    
617,417
    
2,249,102
  
Depreciation and amortization
   
—
    
415,111
    
63,848
    
941,720
  
Product development
    
—
    
194,156
    
231,243
    
276,830
  
Loss on impairment of goodwill
    
—
    
—
    
—
    
2,131,391
  
Total operating expenses
    
—
    
1,624,970
    
1,284,479
    
6,572,784
  
Income (loss) from discontinued operations
    
—
    
(660,482
)
  
206,580
    
(3,590,434
)
                           
Other expense
    
—
    
(169,118
)
  
(145,779
)
  
(234,555
)
                           
Net income (loss) from discontinued operations
  
$
—
  
$
(829,600
)
$
60,801
  
$
(3,824,989
)


Assets and liabilities of the ASB consisted of the following at December 31, 2002:

Cash
  
$
526,447
  
Accounts receivable, net
    
176,370
  
Inventories
    
46,438
  
Property and equipment, net
    
119,561
  
Acquired software developed, net
    
492,170
  
Goodwill, net
    
1,318,260
  
Other intangibles, net
    
869,927
  
Other assets
    
40,568
  
Total assets
  
$
3,589,741
  
         
Accounts payable    
    
81,064
  
Accrued expenses
    
244,360
  
Deferred revenue
    
1,774,491
  
Notes payable
    
1,582,904
  
Total liabilities
  
$
3,682,819
  
         

With the completion of the sale of the ASB on April 30, 2003, all assets and liabilities listed above were transferred to the Purchaser.

NOTE 5 - PARTICIPATION MINING RIGHTS

On June 26, 2003, we entered into a Joint Venture and Joint Contribution Agreement, and a Member Control Agreement (collectively the “Joint Agreement”) with Hawk USA. One of the terms of the Joint Agreement was the creation of a Minnesota limited liability company named Active Hawk Minerals, LLC (“Active Hawk”). We both made contributions to Active Hawk for a 50 percent equity interest. One of Hawk USA’s contributions was its right to fund and acquire an initial 35 percent interest in the FSC Project. AfriOre or one of its affiliates will be the operator of the FSC Project, and Kwagga, its wholly owned subsidiary, holds the exploration rights for the FSC Project. We have the further option to acquire an additional 15 percent interest (an aggregate 50 percent) equity interest in Kwagga by providing further cash funding of the FSC Project.
 
 

 
  11  
 

The first step to acquire our 35 percent interest in Kwagga requires us to advance $2,100,000. Kwagga is required to use our initial $2,100,000 contribution to incur expenditures for the exploration, development and maintenance of the FSC Project. Pursuant to our agreement, after Kwagga has spent our aggregate $2,100,000 contribution, we will receive such number of shares of Kwagga’s capital stock representing a 35 percent ownership position. Once the current exploration activities being conducted on the FSC Project are complete, estimated to take 24 months, AfriOre and Kwagga will deliver to us a report describing the results of these activities. Within 120 days of our receipt of that report, we have the option to increase our ownership position in Kwagga to 50 percent in exchange for a further contribution of $1,400,000. These additional funds would then be used to fund a second phase of exploration work on the FSC Project.

 
If we determine not to elect to provide the funding for the second phase, we may request that AfriOre purchase our 35 percent interest for an aggregate price of $1,050,000. If AfriOre declines to purchase our 35 percent interest, we may elect to cease funding Kwagga. In that event, however, we no longer would have any rights to vote any shares of Kwagga’s capital stock owned by us and may be subject to dilution of our equity interest in Kwagga.

In the event Kwagga elects to discontinue FSC exploration altogether or if less than $2,100,000 is expended prior to June 2006, then we have the right to either (a) direct Kwagga to retain the balance of the $2,100,000 then held, whereupon we will be issued shares of Kwagga capital stock representing a 35 percent interest, or (b) terminate our interest in the FSC Project, whereupon Kwagga shall repay the remaining unspent balance of our initial $2,100,000 contribution.

AfriOre or one of its affiliates, as operator, will have sole discretion to determine all work to be carried out on the FSC Project and will be responsible for ensuring that the property and the project are at all times in compliance with applicable laws. AfriOre is required to provide us with quarterly written reports describing the work completed and the funds expended therewith. As consideration for its role as the project operator, AfriOre will be entitled to a fee equal to 10 percent of all qualified expenditures made in connection with the FSC Project.

In accordance with South African legislation, Kwagga will offer to a black economic empowerment group an option to purchase a 28 percent equity stake in Kwagga at a price to be mutually agreed upon by us, Kwagga and AfriOre. If such empowerment groups exercises such right to be granted, our interest in Kwagga would be proportionately diluted. For example, if we own 50 percent of Kwagga’s outstanding capital stock prior to the time any black economic empowerment group purchases a 28 percent stake, we would own 36 percent of Kwagga’s outstanding capital after the sale.

After all of the funds contributed by us and any black empowerment group have been expended on the FSC Project, we, AfriOre and any such empowerment group will contribute on a pro rata basis all such further amounts necessary to continue funding the exploration work on the project on a pro rata basis. In the event any of the parties do not fully contribute in proportion to their respective equity interest in Kwagga, such party’s interest will be proportionately diluted.

Our participation mining rights components are based on the distributions made by us to Kwagga and further advanced to AfriOre to fund the drillhole program of the FSC Project. As of September 30, 2003, we have advanced $500,000 to Kwagga, which will be used to fund a 5 to 7 drillhole exploration program on the FSC Project that will commence in October 2003. This was the first of three contributions that will total $2,100,000. The balance of the remaining two contributions was originally scheduled as follows: on September 27, 2003, $1,000,000 was due, and on November 11, 2003, $600,000 was due. The September 27, 2003 contribution was subsequently extended to October 15, 2003, and has been made. The terms of the November 11, 2003 contribution were amended to allow the contribution to be paid in 2 equal payments of $300,000 on each of November 11, 2003 and April 30, 2004. If we fail to make any advances by the prescribed due dates, Kwagga has specific rights to terminate our interests. Furthermore, should Kwagga fail to complete the entire drillhole program, we could realize a complete loss of the funds advanced to Kwagga.

Other than our right to receive quarterly reports concerning the completion of work on the FSC Project, we have no rights to direct any exploration activities, receive information concerning the project or any right to examine any records, data or other information concerning the project. We do not have any permits, equipment or personnel necessary to actually explore for precious minerals at this time. Our participation is the FSC project and our relationship with Kwagga is essentially as a passive investor and we will therefore be substantially dependent on AfriOre, as the project operator. AfriOre is a wholly owned subsidiary of AfriOre Limited, a publicly-held company listed on the Toronto Stock Exchange (TSX: AFO). Historically, AfriOre Limited has operated coal and anthracite mines in South Africa, but more recently the company has been increasing its focus on gold exploration projects.


 
  12  
 

By the terms of the Joint Agreement, as described above, both parties made their contributions to Active Hawk for a 50 percent equity interest. Hawk USA contributed its right to fund and acquire a 50 percent interest in the FSC Project and its patented mining claims held in the Holdsworth Project. Hawk USA’s projects were valued at their historical cost, an aggregate of $246,210 and we agreed to fund the required $2,100,000 for the FSC Project. As additional compensation for Hawk USA’s mineral rights contributions, Hawk USA was issued 3,750,000 shares of our unregistered common stock valued at $2,737,500 (based on the closing sale price, $0.73 per share, of our common stock on June 26, 2003, as listed on the OTCBB) which represented an issuance of 28.2 percent of our total issued and outstanding common stock of 13,307,181 shares. The excess amount of stock issued to Hawk USA over the historical cost, or $2,491,290, was recorded as an exploration expense in the restated financial statements for the nine months ended September 30, 2003. See Note 8 - Restatement.

Based on the information we obtained from Hawk, we estimated that the value attributable to the FSC Project was $228,975. Based on this, the remaining value of $17,235 was assigned the Holdsworth Project. We will begin to evaluate the potential reward that the Holdsworth Project offers to our overall portfolio of mineral resource properties and report our findings by year-end.

We issued an option to purchase 100,000 shares of common stock with an exercise price of $0.40 per share to a former director of ours for consulting services rendered to complete this transaction. The option was valued at $55,000 using the Black-Scholes pricing model.

Components of Participation Mining Rights are as follows:

   
September 30, 2003
  
December 31, 2002
  
Initial advance to the FSC Project
  
$
500,000
  
$
—
  
Historical value assigned to the FSC Project
    
228,975
    
—
  
Historical value assigned to the Holdsworth Project
    
17,235
    
—
  
Miscellaneous costs (1)
    
82,889
    
—
  
Gross Participation Mining Rights
   
829,099
    
—
  
Less expenditures reported by AfriOre and Kwagga
    
300,000
    
—
  
Less amortization
    
38,270
    
—
  
Balance at September 30, 2003
  
$
490,829
  
$
—
  

(1)   Includes the joint agreement costs and the issuance of an option to a former director.

We began to amortize Participation Mining Rights (less the value assigned to the Holdsworth Project and the advance to the FSC Project) over a 24-month period on a straight-line basis. This is based on the premise that the initial 5 to 7 drillhole at the FSC Project will be completed within the next 24 months. The monthly amortization is approximately $12,700. The advances we make to the FSC Project will be expensed as exploration expenditures based on the reports we receive from AfriOre and Kwagga. We will continue to evaluate the remaining balance of the intangible based on exploration progress reported to us by AfriOre and we may accelerate the rate of amortization accordingly. We will continue to evaluate the possible opportunities to commence on the Holdsworth Project and will have formulated final plans by year-end.


NOTE 6 - MINORITY INTEREST IN ACTIVE HAWK MINERALS LLC

As a 50 percent owner in Active Hawk Minerals, LLC with Hawk USA, we will be sharing in the rights from mineral exploration projects being operated by AfriOre in the FSC Project area of South Africa. Our ownership is based on cash contributions that will total $2,100,000. Hawk USA has contributed its interest in the FSC and Holdsworth Projects.


 
  13  
 

We have a “Buyout Option” in which we can acquire Hawk USA’s 50 percent interest in the LLC by issuing Hawk USA 2,500,000 of unregistered common shares, on or before October 6, 2003. Hawk USA subsequently extended the exercise date of the Buyout Option until November 7, 2003, and on that date, we exercised such option. See Note 9 - Subsequent Events for a further discussion.

Based on our 50 percent ownership and the Buyout Option we have in the Active Hawk Minerals, LLC, we have consolidated the financial statements, as of September 30, 2003, of Active Hawk Minerals, LLC into our own consolidated financial statements.


NOTE 7 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
 
 
   
Nine Months Ended Sept. 30,
    
May 1, 2003 (inception) to Sept. 30,
  
   
2003
  
 2002
  
2003
  
Cash paid for interest
  
$
—
  
$
58,553
  
$
—
  
Non-cash financing and investing activities:
                    
Common stock issued in exchange for
                    
stock subscription receivable
  
$
—
  
$
2,025,000
  
$
—
  
Conversion of preferred stock into common stock
  
$
—
  
$
365,000
  
$
—
  
Conversion of notes payable into common stock
  
$
—
  
$
348,757
  
$
—
  
Conversion of accrued wages into common stock
  
$
56,529
  
$
—
  
$
—
  
Cancellation of stock subscription receivable
  
$
2,000,000
  
$
—
  
$
—
  
Conversion of accounts payable into common stock
  
$
250,000
  
$
—
  
$
250,000
  
Issuance of option for investment in
                    
Active Hawk Minerals LLC
  
$
55,000
  
$
—
  
$
55,000
  


NOTE 8 - RESTATEMENT

The following table reconciles the previously reported amounts to the restated amounts and the reclassification of the Hosted Solutions Business to discontinued operations effective with the sale of the business segment on March 14, 2003; a previously reported deferred compensation expense error for the quarter ended March 31, 2003; and an error recording the issuance of an option as a warrant.

   
Assets
  
Accounts Payable
  
Liabilities of HSB
  
Accrued Expenses
  
Minority interest in LLC
  
Additional Paid in Capital
  
Net Loss (4)
  
Previously reported amounts
  
$
5,188,048
  
$
158,016
  
$
—
  
$
21,324
  
$
1,950,000
  
$
23,529,582
  
$
(663,312
)
Expensing of previously recorded exploration intangibles (1)
    
(2,491,290
)
  
—
    
—
    
—
    
—
    
—
    
(2,491,290
)
Accounts payable of HSB
    
—
    
(55,969
)
  
55,969
    
—
    
—
    
—
    
—
  
Accrued expenses of HSB
    
—
    
—
    
21,324
    
(21,324
)
  
—
    
—
    
—
  
Correction of deferred compensation expense
for the period ended March 31, 2003
    
—
    
—
    
—
    
—
    
—
    
(140,749
)
  
140,749
  
Correction of error relating to warrant issued
to acquire mining rights (2)
    
(47,000
)
  
—
    
—
    
—
    
—
    
(47,000
)
  
—
  
Elimination of Minority Interest in Active
Hawk Minerals, LLC
    
(2,100,000
)
  
—
    
—
    
—
    
(1,950,000
)
  
—
    
(150,000
)
Amortization of participation mining
rights (3)
    
(38,270
)
  
—
    
—
    
—
    
—
    
—
    
(38,270
)
Restated amounts
  
$
511,488
  
$
102,047
  
$
77,293
  
$
—
  
$
—
  
$
23,341,833
  
$
(3,202,123
)


 
  14  
 

(1) The adjustment relates to 3,750,000 shares of common stock issued for participation mining rights, valued at $2,737,500 (based on the closing sale price, $0.73 per share, of our common stock on June 26, 2003, as listed on the OTCBB) over the historical cost of $246,210.

(2) Correction reported in restated amounts for the three months ended June 30, 2003.

(3) We began the amortization of participation mining rights during the three months ended September 30, 2003.

(4) The reported adjustments to net income changes the previously reported three months ended September 30, 2003 net loss of $285,316 to $473,586.


The following table reconciles the participation mining rights restatement.

 
   
September 30, 2003 
  
   
As reported
  
 Restated
  
Total value of consideration contributed by Hawk USA
  
$
2,100,000
  
$
—
  
Issuance of 3,750,000 common shares to Hawk USA
    
2,737,500
    
—
  
Issuance of option to former director
    
102,000
    
55,000
  
Joint Agreement costs
    
27,889
    
27,889
  
Historical value assigned to the FSC Project
    
—
    
228,975
  
Historical value assigned to the Holdsworth Project
    
—
    
17,235
  
Initial advance to the FSC Project
    
—
    
500,000
  
Less expenditures reported by AfriOre and Kwagga
    
—
    
(300,000
)
Less amortization
    
—
    
(38,270
)
   
$
4,967,389
  
$
490,829
  


The following table reconciles the previously reported loss per common share amounts to the restated amounts.

 
 
     
Three Months Ended
September 30, 2003
    
Nine Months Ended
September 30, 2003
  
     
Continuing Operations
     
Discontinuing Operations
     
Continuing Operations
     
Discontinuing Operations
  
Basic and diluted net loss
                     
per common share:
                     
Previously reported amounts
  
$
(0.02
)
$
--
  
$
(0.05
)
$
--
  
Restated amounts
    
(0.01
)
  
--
    
(0.15
)
  
(0.02
)
Restated Net Loss
  
$
(0.03
)
$
--
  
$
(0.20
)
$
(0.02
)

 

NOTE 9 - SUBSEQUENT EVENTS

On October 9, 2003, the Company’s Board of Directors approved an extension on the expiration of our 690,000 publicly traded redeemable warrants until May 31, 2004 from the previous extended date of November 28, 2003.

In October 2003, we completed a private placement of 10,190,000 units of our securities, each unit consisting of one share of common stock and a one-year warrant to purchase one-half of one share of common stock at a price of $0.75 per share. The units were sold at a price of $0.25 per unit, resulting in gross proceeds of $2,547,500 before agent commissions and other offering related expenses. We agreed to file a registration statement under the Securities Act of 1933 covering the resale of the shares purchased in the private placement. In the event such registration statement is not declared effective by the Securities and Exchange Commission by February 11, 2004, we are obligated to issue to the investors an additional one-fifth of one share of our common stock for each unit purchased in the private placement.

Pursuant to the terms of our Joint Agreement with Hawk USA, we also received an option to acquire Hawk USA’s entire 50 percent equity interest in Active Hawk Minerals, LLC in exchange for issuing to Hawk USA an additional 2,500,000 shares of our common stock. On November 7, 2003, we exercised the option and issued the common stock (valued at $0.94 per share, based on the closing sale price of our common stock on November 7, 2003 as listed on the OTCBB), which represented an issuance of 9.0 percent of our total issued and outstanding common stock of 27,797,181 shares. As of November 7, 2003, Active Hawk Minerals, LLC is now our wholly owned subsidiary.


 
  15  
 


NOTE 10 - LEGAL PROCEEDINGS

On June 19, 2003, we were named as a defendant in a lawsuit by Jack A. Johnson, who served as our President and CEO until leaving the Company to accept employment with Stellent, Inc., following the sale to Stellent of our hosted solutions business. Mr. Johnson has asserted claims for breach of an alleged employment contract. We have denied all liability and are vigorously defending against Mr. Johnson’s claims. In particular, we have denied the enforceability of the alleged employment agreement. According to Mr. Johnson’s pleadings, he claims to be entitled to damages in the total amount of $360,000, plus an undetermined amount for his attorneys’ fees and costs. The matter is currently in the discovery phase. We are unable to state, with any degree of certainty, the probable outcome of this matter and as such, we will not be accruing a liability until such time as the discovery phase is complete.

As reported in the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003, the Company was a defendant in two separate and unrelated actions brought in District Court, City and County of Denver, Colorado. One such action was a proceeding brought by Farmers State Bank of Ft. Morgan, Colorado, in which is was alleged that the Company was liable to the plaintiff as a result of its guaranty of certain secured debt obligations in the aggregate amount of approximately $314,000 of Meteor Marketing, Inc. Meteor Marketing was formerly a subsidiary of our predecessor, Meteor Industries, Inc., until April 2001 when it was sold prior to the completion of the merger transaction between Meteor Industries and activeIQ Technologies Inc. In October 2003, the parties reached a settlement of such litigation and filed with the court a stipulation for dismissal without prejudice. Pursuant to such settlement, the Company was not obligated to make any payments to the plaintiff, although the Company remains contingently liable pursuant to the guaranty.

The other legal proceeding venued in District Court in Denver, Colorado that was described in the Company’s most recent Quarterly Report on Form 10-Q involved an action brought by Timothy L. White against the Company and Meteor Marketing, Inc. in which the plaintiff alleged that the Company was liable in the amount of $102,750 for certain obligations of Meteor Marketing as a result of an April 1999 guaranty. As previously reported by the Company, the plaintiff obtained a default judgment against the Company. On October 9, 2003, the action was dismissed and such default judgment was vacated for improper service of process. Mr. White and Meteor Marketing subsequently entered into a forbearance agreement with respect to Meteor Marketing’s outstanding obligations. Although, to the Company’s knowledge, no attempt has since been made by the plaintiff to re-commence the action, in the event Meteor Marketing breaches or otherwise defaults upon its obligations under the forbearance agreement, Mr. White may again seek to hold the Company liable pursuant to its guaranty.

On May 15, 2003, Bobby Abrams filed suit against Red Wing Business Systems, Inc. and Champion Business Systems, Inc. (collectively “Red Wing”) our wholly owned subsidiaries, in the amount of $100,000, relating to an accounting software upgrade for his personal business. We settled the litigation with a payment in the amount of $1,750 made to Mr. Abrams and on August 19, 2003, we received notice of a settlement agreement and mutual release, whereby the action was dismissed with prejudice as to all of the parties.

 
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  16  
 

WITS BASIN PRECIOUS MINERALS INC.
(f/k/a ACTIVE IQ TECHNOLOGIES, INC.)
(AN EXPLORATION STAGE COMPANY)
Item 2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations


The following management’s discussion and analysis of financial condition and results of operations should be read in connection with the accompanying unaudited condensed consolidated financial statements and related notes thereto included elsewhere in this report and the audited consolidated financial statements and notes thereto included in our Form 10-K for the fiscal year ended December 31, 2002.


OVERVIEW

Wits Basin Precious Minerals Inc., and subsidiaries (“we,” “us,” “our,” “Wits Basin” or the “Company”) is a precious minerals exploration company. We hold interests in two gold exploration projects that we acquired in a transaction completed on June 26, 2003 from Hawk Precious Minerals USA Inc., (“Hawk USA”), a wholly owned subsidiary of Toronto-based Hawk Precious Minerals Inc., (“Hawk”). In one of these projects, which we commonly refer to as the “FSC Project,” we are a passive investor and have the right to acquire up to a 50 percent equity interest in the company Kwagga Gold (Proprietary) Limited (“Kwagga”) through two funding stages: a $2,100,000 advance and a further $1,400,000 advance. Kwagga is a wholly owned subsidiary of AfriOre International (Barbados) Ltd., (“AfriOre”). Kwagga holds the exploration rights for the FSC Project. The FSC Project consists of approximately 107,000 hectares located in the Republic of South Africa adjacent to the major goldfields discovered at the Witwatersrand Basin. AfriOre is a coal producer and precious minerals exploration company with offices in Johannesburg, South Africa and the operator of the FSC Project. For the nine months ended September 30, 2003, we have advanced $500,000 to Kwagga, which will be used to fund a 5 to 7 drillhole exploration program on the FSC Project.

In regards to the FSC Project, we are a passive investor. AfriOre is required to deliver to us a report that details the expenditures incurred, the work carried out with respect to the project and the results of such work. Other than the quarterly information concerning the project, we have no rights to examine various information related to the project. We do not have any permits, equipment or personnel necessary to actually explore for precious minerals at this time.

We also hold exploration rights in a project located near Wawa, Ontario, Canada, which we refer to as the “Holdsworth Project.” The Holdsworth Project consists of 19 contiguous, patented mining claims covering approximately 304 hectares. We have no current plans to conduct exploration activities on the Holdsworth Project since we do not possess the expertise, equipment or funding necessary to conduct such activities. Based on prior surveys conducted, we estimate that exploration costs would be approximately $500,000. Therefore, we intend to partner with a third party to conduct any exploration activities.

In addition to these two projects, we intend to pursue interests in other precious mineral exploration projects. The form of these interests may be direct ownership of mineral exploration rights to certain lands or may be indirect interests in exploration projects, similar to our interest in the FSC Project.

Prior to April 30, 2003, we provided accounting software through our Accounting Software Business (“ASB”) and until March 14, 2003, we provided industry-specific solutions for managing, sharing and collaborating on business information on the Internet though our Hosted Solutions Business (“HSB”). In December 2002, our Board of Directors authorized a plan to sell the ASB. As a result of the formal plan, the results of operations have been reported as discontinued operations and previously reported condensed consolidated financial statements have been restated for the three months and nine months ended September 30, 2002. See Note 4 included elsewhere in this quarterly report, for further discussion regarding the discontinued operations of ASB.


 
  17  
 

Subsequent to our decision to sell the ASB, we came to the conclusion that due to current market conditions for capital funding of Internet opportunities, it would be extremely unlikely for us to secure the financing necessary to fund our HSB beyond the near term and thereby provide assurance to future customers of our long-term viability. On March 14, 2003, we sold all of our assets related to the HSB and thereby as a result of the sale, the results of operations have been reported as discontinued operations and previously reported condensed consolidated financial statements have been restated for the three months and nine months ended September 30, 2002. See Note 3 included elsewhere in this quarterly report, for a further discussion regarding the HSB.

As a result of the sale of the HSB and ASB, we became an exploratory stage company effective May 1, 2003.

We were originally incorporated under Colorado law in December 1992 under the name Meteor Industries, Inc. In April 2001, in conjunction with our merger with activeIQ Technologies Inc., we reincorporated under Minnesota law and changed our name to Active IQ Technologies, Inc. On July 9, 2003, following our transaction with Hawk USA, we changed our name to Wits Basin Precious Minerals Inc. in order to further associate our new business model with our corporate name. Presently, our only business model involves sharing in the rights of mineral exploration.
 
Our principal office is located at 80 South 8th Street, Suite 900, Minneapolis, Minnesota 55402. Our telephone number is (612) 349-5277 and our Internet address is www.witsbasin.com. Our common stock trades on the Over-the-Counter Bulletin Board (“OTCBB”) under the symbol WITM. Prior to August 20, 2003, our common stock’s OTCBB trading symbol was AIQT.


RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2002.


Revenues

We had no revenues from continuing operations for the three and nine months ended September 30, 2003 and 2002. Furthermore, we do not anticipate having any future revenues until an economic mineral deposit is discovered or unless we make further acquisitions or complete other mergers or joint ventures with business models that produce such results.

Operating Expenses

General and administrative expenses were $135,491 for the three months ended September 30, 2003 as compared to $63,148 for the same period in 2002. General and administrative expenses for the nine months ended September 30, 2003 were $343,280 as compared to $214,712 for the same period in 2002. We anticipate the rate of spending for the fourth quarter pertaining to selling, general and administrative expenses to approximate the third quarter level.

Exploration expenses consists of expenditures being reported to Active Hawk Minerals LLC, on the work-in-process from the project operator, AfriOre, at the FSC Project site and expensing of consideration issued in connection with our acquisitions of mineral and mining rights. We recorded $300,000 in expenses for the three months ended September 30, 2003 as compared to $0 for the same period in 2002. These expenses were utilized to move equipment to the drill site and general administrative expenses by AfriOre. AfriOre made an announcement on October 8, 2003, of their commencement of the first of three drillholes. We will receive a report every quarter as to the amounts spent on the FSC Project. We recorded exploration expenses of $2,791,290 for the nine months ended September 30, 2003. This reflects the $300,000 at the FSC Project as described before and expensing of consideration issued in connection with our exploration acquisitions based on the issuance of 3,750,000 unregistered shares of our common stock to Hawk USA on June 26, 2003, which represented an issuance of 28.2 percent of our total issued and outstanding common stock of 13,307,181 shares. The value assigned to these shares issued was based on the fair value of our stock, based on the closing price of $0.73 per share as listed on the OTCBB. We expensed the value of these shares, $2,737,500, as excess value invested in the Active Hawk Minerals, LLC to obtain the exploration rights to the FSC and Holdsworth Projects, less the historical cost of the FSC and Holdsworth Projects of $246,210, or $2,491,290.


 
  18  
 


We began to amortize participation mining rights (less the value assigned to the Holdsworth Project and the advance to the FSC Project) over a 24-month period on a straight-line basis. This is based on the premise that the initial 5 to 7 drillhole at the FSC Project will be completed within the next 24 months. Amortization was $38,270 for the three and nine months ended September 30, 2003 as compared to $0 for the same periods in 2002. See Note 5 included elsewhere in this quarterly report, for a further discussion regarding Participation Mining Rights. Depreciation was $117 for the nine months ended September 30, 2003. With the completion of the sale of the HSB and ASB, we no longer have any depreciable assets and until such time as we make capital expenditures for new property or equipment, we do not expect to record any depreciation expense in future quarters.

During the nine months ended September 30, 2003, we had $1,633 loss on disposal of assets as compared to $0 for the same period in 2002.
 
Other Income and Expenses

Our other income and expense consists of interest and dividend income and interest expense. Interest income for the three months ended September 30, 2003 was $175 compared to $0 for the same period in 2002. Interest income for the nine months ended September 30, 2003 was $25,323 compared to $15,244 for the same period in 2002. The interest income we reported for 2003 was primarily earned from a federal income tax refund filed with the IRS. The interest and dividend income we reported for 2002 was related to portfolio interest. For the nine months ended September 30, 2002, we recorded an interest expense of $119,206, which related to a short term note payable, both as interest and conversion into common stock expense.

Income Tax Refund

We filed an amended Federal Income Return on prior Net-Operating Losses (NOL’s) and received a tax refund in the amount of $243,920 during the quarter ended June 30, 2003. No further refunds will be available based on current tax law for the periods previously amended.

Discontinued Operations

The following are condensed consolidated statements of discontinued operations for the:

 
 
HOSTED SOLUTIONS BUSINESS
  
Three Months Ended Sept. 30,
    
Nine Months Ended Sept. 30,
  
   
2003
  
 2002
  
 2003
  
 2002
  
Revenues
  
$
—
  
$
108,233
  
$
132,455
  
$
377,792
  
                           
Operating Expenses:
                          
Cost of sales
    
—
    
177,738
    
35,354
    
378,681
  
Selling, general and administrative
    
—
    
220,883
    
161,597
    
2,056,771
  
Depreciation and amortization
   
—
    
32,638
    
8,935
    
406,170
  
Loss (gain) on disposal of assets
    
—
    
3,894
    
(749
)
  
101,319
  
Loss on impairment of goodwill
    
—
    
417,273
    
—
    
417,273
  
Total operating expenses
    
—
    
852,426
    
205,137
    
3,360,214
  
Loss from discontinued operations
    
—
    
(744,193
)
  
(72,682
)
  
(2,982,422
)
                           
Other income
    
—
    
—
    
150,000
    
20,000
  
Loss on sale of prepaid royalties
    
—
    
—
    
(434,895
)
  
—
  
                           
Net loss from discontinued operations
  
$
—
  
$
(744,193
)
$
(357,577
)
$
(2,962,422
)



 
  19  
 


The following are condensed consolidated statements of discontinued operations for the:

 
 
ACCOUNTING SOFTWARE BUSINESS
  
Three Months Ended Sept. 30,
    
Nine Months Ended Sept. 30,
  
   
2003
  
 2002
  
 2003
  
 2002
  
Revenues
  
$
—
  
$
964,488
  
$
1,491,059
  
$
2,982,350
  
                           
Operating Expenses:
                          
Cost of goods sold
    
—
    
252,672
    
371,971
    
973,741
  
Selling, general and administrative
    
—
    
763,031
    
617,417
    
2,249,102
  
Depreciation and amortization
   
—
    
415,111
    
63,848
    
941,720
  
Product development
    
—
    
194,156
    
231,243
    
276,830
  
Loss on impairment of goodwill
    
—
    
—
    
—
    
2,131,391
  
Total operating expenses
    
—
    
1,624,970
    
1,284,479
    
6,572,784
  
Income (loss) from discontinued operations
    
—
    
(660,482
)
  
206,580
    
(3,590,434
)
                           
Other expense
    
—
    
(169,118
)
  
(145,779
)
  
(234,555
)
                           
Net income (loss) from discontinued operations
  
$
—
  
$
(829,600
)
$
60,801
  
$
(3,824,989
)


Liquidity and Capital Resources

We have funded our operations and satisfied our capital requirements primarily through the sale of our business assets and the sale of securities. Net cash provided by operating activities was $215,928 for the nine months ended September 30, 2003, compared to net cash used by operating activities of $2,123,371 for the same period in 2002.
 
We had working capital deficit of $158,681 at September 30, 2003, compared to working capital of $589,133 at December 31, 2002. Cash and equivalents were $17,325 at September 30, 2003, representing an increase of $4,114 from the cash and equivalents of $13,211 at December 31, 2002.

On March 14, 2003, we sold all of the assets relating to our HSB to Stellent, Inc. for $650,000 cash, the reimbursement of transaction-related expenses incurred by us in the amount of $150,000, and the assumption of certain obligations, liabilities and employees of the Company. Under Minnesota law, shareholder approval is required when a corporation disposes of “all or substantially all” of its assets. The assets related to the Hosted Solutions Business, which represented only 23 percent of our total assets and which generated only 11 percent of our consolidated revenues for the year ended December 31, 2002, did not constitute the sale of all or substantially all of our assets. Therefore, the transaction was not subject to shareholder approval. With the completion of this sale, we no longer operate in the online document management business.

On April 30, 2003, we completed the sale of substantially all of the assets of the ASB to two employees of that division, Kenneth Hilton and James Long. Mr. Hilton served as the President and Mr. Long served as the Chief Financial Officer, collectively as (the “Purchaser”). The assets sold consisted primarily of all intellectual property rights, cash, accounts receivable, inventories, property and equipment, and customer contracts. The Purchaser assumed substantially all the liabilities of the ASB incurred in the ordinary course of the business consisting of trade payables, accrued expenses, debt and liabilities arising from contractual obligations related to the ongoing operations. The remaining outstanding debt (as of April 30, 2003 of $1,451,714) was discharged as follows: (a) cash proceeds ($752,426) from the Purchaser were used to pay 17 of the note holders a negotiated 75 percent of the remaining balance due under the terms of their promissory notes, (b) the 25 percent discount ($250,809) re-negotiated with the 17 note holders, was booked as a component of discontinued operations, and (c) the remaining seven note holders (valued at $448,479) received new promissory notes issued by the Purchaser, again which was as a component of discontinued operations.


 
  20  
 

In June 2003, we acquired two exploration projects in a transaction with Hawk USA. In one of these projects, the FSC Project, we are a passive investor and have the right to acquire up to a 50 percent equity interest in Kwagga through two funding stages: a $2,100,000 advance and a further $1,400,000 advance. To date, we have advanced $500,000 to Kwagga, which will be used to fund a 5 to 7 drillhole exploration program on the FSC Project. This was the first of three contributions that will total $2,100,000. The balance of the remaining two contributions was originally scheduled as follows: on September 27, 2003, $1,000,000 was due, and on November 11, 2003, $600,000 was due. The September 27, 2003 contribution was subsequently extended to October 15, 2003, and has been made. The terms of the November 11, 2003 contribution were amended to allow the contribution to be paid in 2 equal payments of $300,000 on each of November 11, 2003 and April 30, 2004. Once Kwagga has spent our aggregate $2,100,000 contribution, (as defined in the “Heads of Agreement” dated June 4, 2003, between Hawk, Kwagga and AfriOre) we will receive such number of shares of Kwagga’s capital stock representing a 35 percent ownership position. Once the current exploration activities being conducted on the FSC Project are complete, estimated to take approximately 24 months, AfriOre and Kwagga will deliver to us a report describing the results of these activities. Within 120 days of our receipt of that report, we have the option to increase our ownership position in Kwagga to 50 percent in exchange for a further contribution of $1,400,000. If we choose not to make this additional investment, then we would continue to own the shares representing our 35 percent interest, but we would no longer have any rights to increase our participation and would be subject to dilution resulting from any additional investment in Kwagga. If we fail to make any advances by the prescribed due date, Kwagga has specific rights to terminate our interests. Furthermore, should Kwagga fail to complete the entire drillhole program, we could realize a complete loss of the funds advanced to Kwagga.

In addition, we have a “Buyout Option” in which we can acquire Hawk USA’s 50 percent interest in the LLC by issuing Hawk USA 2,500,000 common shares, on or before October 6, 2003. Hawk USA subsequently extended the exercise date of the Buyout Option until November 7, 2003, and on that date, we exercised such option.

We anticipate that the existing sources of liquidity will not provide cash to fund operations for the next twelve months. Our estimate for the next twelve months is approximately $2,800,000; with $1,600,000 due Kwagga and the balance to be used to general and administrative expenses to include a major marketing program. We will continue our attempt to raise additional capital. Some of the possibilities available to us are through private equity transactions and to develop a credit facility with a lender or the exercise of options and warrants. In the event that we are unable to obtain additional capital, we would be forced to reduce operating expenditures and/or cease operations altogether.

 

  21  
 

PART II.  OTHER INFORMATION


Item 6.     

(a)    Exhibits

31.1   Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2   Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1   Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2  Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 
  22  
 

SIGNATURES

In accordance with the requirements of the Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
     
  WITS BASIN PRECIOUS MINERALS INC
 (f/n/a ACTIVE IQ TECHNOLOGIES, INC.)
 
 		  
 		  
Date: January 14, 2005 By:   /s/ H. Vance White
 
H. Vance White
Chief Executive Officer
   

 
     
 
 
 		  
 		  
 
By:   /s/ Mark D. Dacko
 
Mark D. Dacko
Chief Financial Officer
 




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