-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, I1WBQmHUFa72xx65IKZZlG31DmuaJL2NDQEmsw0Znd2CddaocibddQmy5IWo11JA 0qqKuEOXoIu8WaoWOqjYKg== 0001144204-05-001229.txt : 20050114 0001144204-05-001229.hdr.sgml : 20050114 20050114131630 ACCESSION NUMBER: 0001144204-05-001229 CONFORMED SUBMISSION TYPE: 10QSB/A PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20040630 FILED AS OF DATE: 20050114 DATE AS OF CHANGE: 20050114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WITS BASIN PRECIOUS MINERALS INC CENTRAL INDEX KEY: 0000912875 STANDARD INDUSTRIAL CLASSIFICATION: GOLD & SILVER ORES [1040] IRS NUMBER: 841236619 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-12401 FILM NUMBER: 05530084 BUSINESS ADDRESS: STREET 1: 800 NICOLLET MALL STREET 2: SUITE 2690 CITY: MINNEAPOLIS STATE: MN ZIP: 55402 BUSINESS PHONE: (612)664-0570 MAIL ADDRESS: STREET 1: 800 NICOLLET MALL STREET 2: SUITE 2690 CITY: MINNEAPOLIS STATE: MN ZIP: 55402 FORMER COMPANY: FORMER CONFORMED NAME: ACTIVE IQ TECHNOLOGIES INC DATE OF NAME CHANGE: 20010702 FORMER COMPANY: FORMER CONFORMED NAME: METEOR INDUSTRIES INC DATE OF NAME CHANGE: 19960313 10QSB/A 1 v011184_10qsb-a.htm
U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

AMENDMENT NO. 1
FORM 10-QSB/A


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

For the quarterly period ended June 30, 2004

OR

[x] 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 Incorporation or Organization)

 

(I.R.S. Employer Identification No.)

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

612.349.5277
(Issuer’s Telephone Number, Including Area Code)

520 Marquette Avenue, Suite 900, 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 August 13, 2004, there were 33,475,181 shares of common stock, $.01 par value, outstanding.
 

  
  1  
 


PURPOSE OF AMENDMENT NO. 1

This Amendment No. 1 to the Company’s Quarterly Report on Form 10-QSB/A for the quarter ended June 30, 2004, which amends the Company’s Form 10-QSB originally filed on August 16, 2004, 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).

This amendment incorporates the cumulative changes of the Company’s Forms 10-Q/A for the quarters ended March 31, 2003 (to reflect the Hosted Solutions Business as discontinued operations); June 30, 2003 and September 30, 2003, and the Company’s Annual Report on Form 10-K/A for the year ended December 31, 2003 (to reflect its transformation into an exploratory stage company upon the adoption of a new business model and to reflect reclassifications of the Company’s exploration acquisitions); and Form 10-QSB/A for the quarter ended March 31, 2004 (to reflect the reclassification of an issuance of shares of its common stock (referred as ‘penalty shares’) related to a private placement completed in 2003).

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 June 30, 2004, consolidated balance sheet as of June 30, 2004, the consolidated statement of operations for the quarter ended June 30, 2004, and the consolidated statement of cash flows for the quarter ended June 30, 2004 to reflect a rounding adjustment, to restate the loss on impairment of our subsidiary Brazmin (as evidenced by the sale subsequent to June 30, 2004) and to restate the inception period activity. The net result of the reclassifications resulted in a decrease in net loss of $391,999 for the three month period ended June 30, 2004 and $392,000 for the six month period ended June 30, 2004. In addition, loss per share decreased by $0.02 and $0.01 for the quarter and six months ended June 30, 2004, respectively. As reflected in the consolidated balance sheet, the assets of our exploration acquisitions, Participation Mining Rights, have been consolidated into a single line. 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.

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 uncertainty of the quantity or quality of probable ore reserves, the fluctuations in the market price of such reserves, 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,” “intend,” “plan,” “predict” 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-QSB filed August 16, 2004, among others, may impact forward-looking statements contained in this Amendment No. 1.



  
  2  
 

 WITS BASIN PRECIOUS MINERALS INC. and SUBSIDIARIES
(AN EXPLORATION STAGE COMPANY)
PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements

Condensed Consolidated Balance Sheets
 
   
Restated
      
   
(unaudited)
  
Restated
  
   
June 30,
  
December 31,
  
   
2004
  
2003
  
Assets
           
Current Assets
              
Cash and equivalents
  
$
26,155
  
$
363,990
  
Prepaid expenses
    
412,301
    
612,777
  
Total current assets
    
438,456
    
976,767
  
               
Participation Mining Rights, net
    
1,724,658
    
1,547,956
  
Debt Issuance Costs, net
    
124,191
    
—
  
McFaulds Lake Project
    
—
   
—
  
Exploration Intangibles, net
    
—
    
—
  
   
$
2,287,305
  
$
2,524,723
  
               
Liabilities and Shareholders’ Equity
              
Current Liabilities
              
Secured promissory note payable
  
$
36,113
  
$
—
  
Accounts payable
    
261,894
    
59,226
  
Liabilities of operations of discontinued hosted solutions business
    
21,154
    
34,734
  
Accrued expenses
    
46,678
    
12,775
  
Total current liabilities
    
365,839
    
106,735
  
               
Accrued Guarantee Fee
    
30,000
    
30,000
  
               
Commitments and Contingencies
              
               
Shareholders’ Equity
              
Common stock, $.01 par value, 150,000,000 shares authorized;
              
33,457,181 and 30,297,181 shares issued and outstanding
    
334,752
    
302,972
  
               
Additional paid-in capital
    
30,687,973
    
27,423,258
  
Deferred compensation
    
(27,492
)
  
—
  
Warrants
    
4,943,438
    
4,146,438
  
Accumulated deficit
    
(22,932,460
)
  
(22,932,460
)
Deficit accumulated during the exploration stage, subsequent
              
to April 30, 2003
    
(11,114,745
)
  
(6,552,220
)
               
Total shareholders’ equity
    
1,891,466
    
2,387,988
  
   
$
2,287,305
  
$
2,524,723
  

See accompanying notes to condensed consolidated financial statements
 

  
  3  
 

WITS BASIN PRECIOUS MINERALS INC. and SUBSIDIARIES
(AN EXPLORATION STAGE COMPANY)
Condensed Consolidated Statements of Operations
(unaudited)
 
                             
Restated 
  
     
Three Months Ended June 30, 
    
Six Months Ended June 30, 
    
May 1, 2003 
  
     
Restated
    
Restated
    
Restated
    
Restated
    
(inception)
to June 30, 
  
     
2004
    
2003
    
2004
    
2003
    
2004
  
Revenues
  
$
—
  
$
—
  
$
—
  
$
—
  
$
—
  
                                 
Operating Expenses:
                                
General and administrative
    
295,171
    
148,457
    
1,115,077
    
207,789
    
2,489,259
  
Exploration expenses
    
297,987
    
2,491,290
    
701,490
    
2,491,290
    
6,042,780
  
Depreciation and amortization
    
42,862
    
117
    
85,722
    
117
    
166,982
  
Stock issued as penalty
    
—
    
—
    
2,152,128
    
—
    
2,152,128
  
Loss on disposal of assets
    
—
    
1,633
    
—
    
1,633
    
1,633
  
Loss on impairment of Brazmin
    
466,578
    
—
    
466,578
    
—
    
466,578
  
Total operating expenses
    
1,102,598
    
2,641,497
    
4,520,995
    
2,700,829
    
11,319,360
  
Loss from Operations
    
(1,102,598
)
  
(2,641,497
)
  
(4,520,995
)
  
(2,700,829
)
  
(11,319,360
)
                                 
Other Income (Expense):
          
                   
Interest income
    
—
    
1,604
    
—
    
25,148
    
2,225
  
Interest expense
    
(41,530
)
  
—
    
(41,530
)
  
—
    
(41,530
)
Total other income (expense)
    
(41,530
)
  
1,604
    
(41,530
)
  
25,148
    
(39,305
)
Loss from Operations before Tax Refund
                                
and Minority Interest
    
(1,144,128
)
  
(2,639,893
)
  
(4,562,525
)
  
(2,675,681
)
  
(11,358,665
)
                                 
Income Tax Refund
    
—
    
243,920
    
—
    
243,920
    
243,920
  
Minority interest in consolidated subsidiary
    
—
    
—
    
—
    
—
    
—
  
Loss from Continuing Operations
  
$
(1,144,128
)
$
(2,395,973
)
$
(4,562,525
)
$
(2,431,761
)
$
(11,114,745
)
                                 
Discontinued Operations (See Note 6)
                                
                                 
Loss from operations of discontinued
                                
Segments
    
—
    
(111,800
)
  
—
    
(296,776
)
  
—
  
Net Loss
  
$
(1,144,128
)
$
(2,507,773
)
$
(4,562,525
)
$
(2,728,537
)
$
(11,114,745
)
                                 
Basic and Diluted Net Loss
                                
Per Common Share:
                                
Continuing operations
  
$
(0.03
)
$
(0.18
)
$
(0.14
)
$
(0.19
)
$
(0.55
)
Discontinued operations
    
—
    
(0.01
)
  
—
    
(0.02
)
  
—
  
Net Loss
  
$
(0.03
)
$
(0.19
)
$
(0.14
)
$
(0.21
)
$
(0.55
)
                                 
Basic and Diluted Weighted Average
                                
Outstanding Shares
    
33,319,137
    
13,370,368
    
32,593,994
    
13,137,816
    
20,140,718
  


See accompanying notes to condensed consolidated financial statements


 
  4  
 


WITS BASIN PRECIOUS MINERALS INC. and SUBSIDIARIES
(AN EXPLORATION STAGE COMPANY)
Condensed Consolidated Statements of Cash Flows
(unaudited)
 
 
 
Six Months Ended June 30,
Restated
May 1, 2003 (inception)
Restated
Restated
to June 30,
2004
2003
2004
  
Operating Activities:
                
Net loss
  
$
(4,562,525
)
$
(2,728,537
)
$
(11,114,745
)
Adjustments to reconcile net loss to cash flows from operating activities:
    
   
       
Depreciation and amortization
    
85,722
    
18,899
    
166,982
  
Deferred compensation expense
    
82,475
    
32,087
    
99,239
  
Loss on disposal of assets
    
—
    
884
    
1,633
  
Loss on sale of prepaid royalties
    
—
    
434,895
    
—
  
Loss on impairment of Brazmin
    
466,578
    
—
    
466,578
  
Issue of common stock for exploration rights in excess of historical cost
    
—
    
2,491,290
    
4,841,290
  
Amortization of participation mining rights
    
534,077
    
—
    
1,034,077
  
Amortization of acquired software developed
    
—
    
53,884
    
—
  
Amortization of original issue discount
    
36,113
    
—
    
36,113
  
Amortization of prepaid consulting fees related to issuance of warrants and common stock
    
—
    
—
    
664,083
  
Exchange of assets for services
    
—
    
2,644
    
—
  
Employee compensation expense related to stock options-variable plan
    
72,000
    
—
    
168,800
  
Contributed services by an executive
    
40,000
    
—
    
64,500
  
Minority interest in loss of consolidated subsidiary
    
—
    
—
    
—
  
Issuance of common stock as penalty related to October 2003 private placement
    
2,152,128
    
—
    
2,152,128
  
Changes in operating assets and liabilities:
                    
Accounts receivable, net
    
—
    
130,424
    
—
  
Inventories
    
—
    
7,983
    
12,200
  
Prepaid expenses
    
(24,524
)
  
47,176
    
(275,659
)
Prepaid royalties
    
—
    
—
    
—
  
Other assets
    
(124,191
)
  
(2,890
)
  
(124,191
)
Accounts payable
    
202,668
    
(241,629
)
  
208,752
  
Deferred revenue
    
—
    
(130,498
)
  
—
  
Accrued expenses
    
(8,694
)
  
153,756
    
(181,658
)
Net cash provided by (used in) operating activities
    
(1,048,173
)
  
270,368
    
(1,779,878
)
                     
Investing Activities:
                    
Proceeds from sale of property and equipment
    
—
    
109,895
    
—
  
Proceeds from sale of prepaid royalties
    
—
    
540,105
    
—
  
Purchases of property and equipment
    
—
    
(3,880
)
  
—
  
Investment in exploration intangibles
    
—
    
—
    
—
  
Investment in Participation Mining Rights
    
(78,482
)
  
(519,493
)
  
(1,906,371
)
Investment in Active Hawk Minerals LLC
    
—
    
—
    
—
  
Acquisition of Brazmin Ltda.
    
—
    
—
    
—
  
Net cash provided by (used in) investing activities
    
(78,482
)
  
126,627
    
(1,906,371
)
                     
Financing Activities:
                    
Payments on short-term notes payable
    
—
    
(84,732
)
  
—
  
Cash proceeds from issuance of common stock
    
—
    
—
    
2,251,603
  
Cash proceeds from exercise of options
    
152,400
   
—
    
169,900
  
Cash proceeds from issuance of long-term debt and warrant
    
650,000
    
—
    
650,000
  
Net cash provided by (used in) financing activities
    
802,400
    
(84,732
)
  
3,071,503
  
                     
Change in Cash and Equivalents of Discontinued Operations and Liabilities of Discontinued Operations
    
(13,580
)
  
(245,314
)
  
(56,139
)
Increase (Decrease) in Cash and Equivalents
    
(337,835
)
  
66,949
    
(670,885
)
Cash and Equivalents, beginning of period
    
363,990
    
13,211
    
697,040
  
Cash and Equivalents, end of period
  
$
26,155
  
$
80,160
  
$
26,155
  


See accompanying notes to condensed consolidated financial statements


  5  
 


WITS BASIN PRECIOUS MINERALS INC.
(AN EXPLORATION STAGE COMPANY)
Notes to Condensed Consolidated Financial Statements
June 30, 2004
(unaudited)

NOTE 1 - NATURE OF BUSINESS

Wits Basin Precious Minerals Inc., and subsidiaries (“we,” “us,” “our,” “Wits Basin” or the “Company”) is a precious minerals exploration company based in Minneapolis, Minnesota. We have interests in mineral exploration projects in South Africa, Canada and South America. 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 investment and a further $1,400,000 cash investment. 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 140,000 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. 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 devised a plan to conduct pre-exploration activities on the Holdsworth Project, which we estimate be approximately $150,000. Any pre-exploration activities will be expensed as incurred.

On February 6, 2004, we became the holder of the exploration rights of “Brazmin,” a portfolio of 4 land regions in Brazil. See Notes 3 and 10 for more information on the subsequent sale of Brazmin.

On June 10, 2004, we entered into an option agreement to earn a 70% interest in 5 mining claims covering approximately 3,200 acres in the McFaulds Lake area of northern Ontario, currently held under option by an affiliate of ours, Hawk Precious Minerals Inc. The site is a new VMS (volcanogenic massive sulphide) base metals project. See Note 3 - Participation Mining Rights, for a detailed discussion.

In the future, we will continue to seek new areas for exploration and the rights that would allow us to be either owners or participants. These rights may take the form of direct ownership of mineral exploration or, like our interest in the FSC Project, these rights may take the form of ownership interests in entities holding exploration rights.

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 and until April 30, 2003, we provided accounting software through our Accounting Software Business. We sold substantially all of the assets relating to our Hosted Solutions Business and Accounting Software Business as of such dates. As a result of the sale of the Hosted Solutions Business and the Accounting Software Business, the Company became an exploratory stage company effective May 1, 2003. See Note 6 - Discontinued Operations for a detailed discussion.
 
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.


 
  6  
 


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 (the “SEC”). 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 30, 2004. 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 six months ended June 30, 2004 are not necessarily indicative of the results that may be expected for the year as a whole.

Segment Reporting

Due to the classification of our Hosted Business Solutions and Accounting Software Business as discontinued operations, we have a single operating segment. The single operating segment is that of precious minerals exploration. See Note 6 - Discontinued Operations for a detailed discussion.

Revenue Recognition and Deferred Revenue

The Company 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.

The Company recognized the revenues derived from the accounting software business 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 June 30, 2004 and 2003, deferred revenue was $0 and $1,643,993, respectively. See Note 6 - Discontinued Operations for a detailed discussion.

We currently do not have the ability to generate revenues in accordance with our investment in Kwagga (the FSC Project), Holdsworth or McFaulds Lake. 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.

Software Development Costs 

Effective January 1, 1999, we implemented Statement of Position (“SOP”) 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. Pursuant to SOP 98-1, expenditures for internal use software were expensed during the preliminary project stage.

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. We require additional time to assess the initial investment we have made in McFaulds Lake.

Stock Based Compensation

In accordance with Accounting Principles Board (“APB”) Opinion No. 25, 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 and due to modifications of options of $82,475 and $32,087, for the six months ended June 30, 2004 and 2003, 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:
 
 
 
 
 
 
 
 
 
 
 
 Restated
 
 
 Three Months Ended June 30, Six Months Ended June 30,
May 1, 2003(inception) to
Restated
   Restated
Restated
Restated
June 30,
2004
2003
2004
2003
2004
Net loss:
                          
As reported
  
$
(1,144,128
)
$
(2,507,773
)
$
(4,562,525
)
$
(2,728,537
)
$
(11,114,745
)
Pro forma
  
$
(1,898,601
)
$
(3,366,778
)
$
(5,720,998
)
$
(3,929,273
)
$
(15,722,812
)
                                 
Basic and diluted net loss per share:
                                
As reported
  
$
(0.03
)
$
(0.19
)
$
(0.14
)
$
(0.21
)
$
(0.55
)
Pro forma
  
$
(0.06
)
$
(0.25
)
$
(0.18
)
$
(0.30
)
$
(0.78
)
                                 
Stock-based compensation
                                
As reported
  
$
54,983
  
$
11,299
  
$
82,475
  
$
32,087
  
$
99,239
  
Pro forma
  
$
754,473
  
$
859,005
  
$
1,158,473
  
$
1,200,736
  
$
4,608,067
  
 


 
  8  
 

In determining the compensation cost of the options granted during the six and three months ended June 30, 2004 and 2003, as specified by SFAS No. 123, the fair value of each option grant has been estimated on the date of grant using the Black-Scholes pricing model and the weighted average assumptions used in these calculations are summarized below for the six months ended June 30:

   
2004
2003
  
Risk free interest rate
    
4.5
%
  
4.5
%
Expected life of options granted
    
10 years
    
10 years
  
Expected volatility range
    
333.8
%
  
304.5
%
Expected dividend yield
    
0
%
  
0
%

NOTE 3 - PARTICIPATION MINING RIGHTS

We currently have interests in mineral exploration projects in South Africa (FSC Project), Canada (Holdsworth) and South America (Brazmin).

FSC and Holdsworth Projects

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.

The first step to acquire our 35 percent interest in Kwagga requires us to invest $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.


 
  9  
 

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.

Certain components of our Participation Mining Rights are based on the distributions made by us to Kwagga and further advanced to AfriOre to fund the drillhole program of the FSC Project. Of the $2,025,000 already invested in Kwagga, $990,923 remains in their cash reserves at June 30, 2004. Each quarter, Kwagga will provide us with a report of the remaining value held in reserve.

We are obligated to invest an additional $75,000 to complete the initial $2,100,000 funding. We have received an extension for the final $75,000 payment until Kwagga has obtained the required operating permits. If we fail to make the final investment by the prescribed due date, Kwagga has specific rights to terminate our interest. Furthermore, should Kwagga fail to complete the entire drillhole program, we could realize a complete loss of our investment in Kwagga.

AfriOre has reported that it has completed the initial drillhole on the FSC Project, to a depth of 2,984 meters and has begun preparation to commence on the drilling of a second and third drill site.

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.

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.

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.
 

 
  10  
 

Active Hawk Minerals, LLC., has no revenues to date and has recorded $213,136 and $534,077 in exploration expenses for the three and six months ended June 30, 2004, respectively. All subsidiary transactions and balances have been eliminated in consolidation. Based on the estimated timeframe to complete the current drillhole program at the FSC Project, we began amortizing the FSC Project portion of the exploration agreement over 24 months, beginning in July 2003. Based on our assessment of the Holdsworth Project, we began amortizing the Holdsworth Project portion of the exploration agreement over 15 months, beginning in October 2003. The amortization period of both components will be periodically evaluated and adjusted if necessary.

Brazmin, Ltda.

On February 6, 2004, we purchased substantially all of the outstanding stock (“Quota Stock”) of Brazmin Ltda., a limited liability company formed under the laws of Brazil from Argyle Securities Limited (“Argyle”) a corporation formed under the laws of Saint Vincent. Our purchase was subject to Argyle’s right to re-acquire the Quota Stock, as described below. Prior to the date of the purchase agreement, there was no relationship between Brazmin and Argyle Securities and the Company or any of our affiliates. Brazmin’s only assets are the mineral exploration rights of four distinct regions located within the South American country of Brazil. Brazmin has never had any revenues, as its activities have been solely to search out and acquire exploration rights on properties that possess specific criteria relating to base minerals and precious minerals. We operate Brazmin as a wholly owned subsidiary.

As specified in the purchase agreement, we were required to use our best efforts to register the resale of the 700,000 shares of our common stock issued as consideration by no later than July 5, 2004, which was not accomplished. Furthermore, upon further analysis of Brazil’s business policies, further review of the history of discoveries made within the region of the Brazmin properties and our ability to furnish capital on the required schedule, we re-evaluate the rewards that Brazmin offered. We concluded that Brazmin was not a proper fit to our long-term goals and arranged with the previous owner a termination of the original purchase agreement. Therefore, we recorded a loss on impairment of $466,578 against the value of Brazmin for the quarter ended June 30, 2004. See Note 10 - Subsequent Event for information regarding the sale of Brazmin, which we completed on August 3, 2004.

McFaulds Lake Project

On June 10, 2004, we entered into an option agreement to earn a 70% interest in 5 mining claims covering approximately 3,200 acres in the McFaulds Lake area of northern Ontario, currently held under option by an affiliate of ours, Hawk Precious Minerals Inc. The site is a new VMS (volcanogenic massive sulphide) base metals project.

The optioned claims consist of a block of 5 contiguous claims (west block) comprising of approximately 80 40-acre units to the south and west of the original Spider Resources and KWG claim group. This block also is contiguous to the McNugget ground actively being explored by McDonald Mines Limited and on which airborne magnetometer and Geotem electromagnetic surveys have been completed.

The option agreement requires: (i) cash payments of Cdn$60,000 (Cdn$30,000 which was paid on the execution of the agreement and a further Cdn$30,000 due on or before November 1, 2004), (ii) we issued 200,000 shares of our non-registered common stock, and (iii) we are required to pay exploration expenditures of Cdn$200,000 (Cdn$100,000 each due by November 1, 2004 and May 1, 2005).

The balance of our investment in McFaulds Lake was $129,501 as of June 30, 2004. We estimate that we will have gathered enough information by year-end to formulate our forecast of exploration for the McFaulds Lake Project.


 
  11  
 

Components of participation mining rights are as follows:

   
June 30,
2004
  
 December 31, 2003
  
Investment made in Kwagga
  
$
2,025,000
  
$
1,800,000
  
Historical value assigned to the FSC Project
    
228,975
    
228,975
  
Historical value assigned to the Holdsworth Project
    
17,235
    
17,235
  
Miscellaneous costs (1)
    
82,889
    
82,889
  
Brazmin Ltda.
    
908,578
    
—
  
McFaulds Lake
    
129,501
    
—
  
Gross Participation Mining Rights
    
3,392,178
    
2,129,099
  
Less exploration expenditures reported by AfriOre and Kwagga
    
1,034,077
    
500,000
  
Less loss on impairment recorded against Brazmin
    
466,578
    
—
  
Less accumulated amortization (2)
    
166,865
    
81,143
  
   
$
1,724,658
  
$
1,547,956
  

(1) Includes the joint agreement costs and the issuance of an option to a former director.
 
(2) Amortization is based on $329,099 of the participation mining rights, which includes the historical values of both the FSC and Holdsworth Projects and the miscellaneous costs. We began amortization of the FSC Project over a 24-month period on a straight-line basis beginning in July 2003. We began amortization of the Holdsworth Project over a 15-month period on a straight-line basis beginning in October 2003.

NOTE 4 - DEBT ISSUANCE COSTS

On June 1, 2004 we received gross proceeds of $650,000 pursuant to the issuance of an 18-month secured convertible promissory note to Pandora Select Partners LP, a Virgin Islands limited partnership. We paid or accrued $131,497 of debt issuance costs for the following: (i) origination fees of $40,000; (ii) legal fees of $17,747; (iii) guarantee fees of $48,750; and consulting services fees of $25,000, which are being amortized on a straight-line basis over an 18-month period. The monthly amortization is approximately $7,300 per month. In order to effectuate the note, Pandora required an additional personal guarantee. Wayne W. Mills, a former board member of ours, provided that guarantee.

The following table summarizes the amortization of debt issuance costs:

   
June 30, 2004
  
 December 31, 2004
  
Gross debt issuance costs
  
$
131,497
  
$
—
  
Less: amortization of debt issuance costs through June 30, 2004
    
7,306
    
—
  
Debt issuance costs, net
  
$
124,191
  
$
—
  
 

NOTE 5 - SECURED PROMISSORY NOTE

On June 1, 2004 we received gross proceeds of $650,000 in consideration for issuing an 18-month secured convertible promissory note (the “Note”) to Pandora Select Partners LP (“Pandora”), a Virgin Islands limited partnership. The Note is secured by substantially all of our assets and bears interest of 10 percent per annum. The principal and interest payment is as follows: (a) payments of $5,417 in cash of interest only were payable in arrears on June 28, July 28 and August 28, 2004; and (b) commencing on September 28, 2004, and on the 28th day of each of the following 14 months, we are required to pay amortized principal and interest of $46,278. Notwithstanding the foregoing, in lieu of cash, we may satisfy our repayment obligations by issuing shares of our common stock. The number of shares of our common stock which may be issued to repay any or all of any monthly obligation may not exceed the lesser of: (i) 10 percent of the aggregate number of traded shares of our common stock for the 30 trading days immediately preceding such monthly payment date or (ii) the greatest number of shares of our common stock which, when added to the number of shares of our common stock beneficially owned by Pandora, would not cause Pandora to beneficially own more than 4.99 percent of the our outstanding common stock. However, we may only issue stock in satisfaction of our repayment obligations if, at the time of such payment, we have in effect an effective resale registration statement with the SEC. If we elect to pay the required monthly payment in shares of common stock, the per-share value is equal to 85 percent of the average of the high closing bid price of our common stock during the 20 trading days immediately preceding the payment date.


 
  12  
 

Furthermore, Pandora has the right to convert any portion of the principal or interest of the Note outstanding into shares of our common stock based on a conversion rate equal to the average of the high closing bid prices of our common stock for the 30 trading days immediately following the effective date of our pending registration statement on Form S-2/A, File No. 333-110831 (the “S-2 Registration Statement”). However, in no event shall such conversion rate be lower than $0.35 or higher than $0.65 per share. If by the date that Pandora notifies us, the S-2 Registration Statement has not been declared effective, then the Conversion Rate is $0.35 per share.

In the event that we fail to have an effective resale registration statement filed with the SEC covering the shares issuable upon exercise of the five-year warrants (described below) or the shares of common stock issued as payment under or upon conversion of this Note by November 28, 2004, then for each full month thereafter (prorated for partial months) that this failure continues, we shall pay in arrears in cash, with the next otherwise scheduled monthly payment, additional interest equal to the greater of $1,000 or one percent (1%) of the outstanding principal balance on the Note as of the last day of the prior month. Pandora may consent to an extension of the effective date of this resale registration statement.

As further consideration for the financing, we issued to Pandora a five-year warrant to purchase up to 928,571 shares of our common stock and issued five-year warrants to purchase an aggregate of 200,000 shares of our common stock to two affiliates of Pandora, both at a price of $0.40 per share, subject to adjustment as defined in the agreement. We issued additional five-year warrants to purchase an aggregate of 475,000 of our common stock to the guarantor of the Note. The proceeds of $650,000 would typically be allocated between the Note and the warrant based on the relative fair values of the securities at the time of issuance, but since the fair value of the warrants issued exceeded the total proceeds raised (using the Black-Scholes pricing model) we concluded that the entire proceeds should be allocated to the warrants. The resulting original issue discount, the fair value of the warrant is being amortized over the life of the Note using the straight-line method, which approximates the interest method.

The following table summarizes the secured promissory note balance:
 
Original gross proceeds
  
$
650,000
  
Less: original issue discount at time of issuance of note
    
(650,000
)
Less: principal payments
    
—
  
Add: amortization of original issue discount
    
36,113
  
Balance at June 30, 2004
  
$
36,113
  
 
As of June 30, 2004, all interest payments have been made in cash and the note is current.

NOTE 6 - DISCONTINUED OPERATIONS

Until March 14, 2003, we provided industry-specific solutions for managing, sharing and collaborating business information on the Internet though our Hosted Solutions Business. The transaction did not require shareholder approval under Minnesota law since the assets relating to our Hosted Solutions Business did not constitute all or substantially all of the assets of our Company as a whole. We received $650,000 cash plus 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 following are condensed consolidated statements of discontinued operations for the:

   
Three Months Ended June 30,
  
Six Months Ended June 30,
  
HOSTED SOLUTIONS BUSINESS
  
2004
 
2003
 
2004
 
2003
  
Revenues
  
$
—
  
$
—
  
$
—
  
$
132,455
  
                           
Operating expenses
                          
Costs of sales
    
—
    
—
    
—
    
35,354
  
Selling, general and administrative
    
—
    
31,495
    
—
    
161,597
  
Depreciation and amortization
    
—
    
216
    
—
    
8,935
  
Gain on disposal of assets
    
—
    
—
    
—
    
(749
)
Total operating expenses
    
—
    
(31,711
)
  
—
    
205,137
  
Loss from discontinued operations
    
—
    
(31,711
)
  
—
    
(72,682
)
                           
Other income
    
—
    
—
    
—
    
150,000
  
Loss on sale of prepaid royalties
    
—
    
—
    
—
    
(434,895
)
Net loss from discontinued operations
  
$
—
  
$
(31,711
)
$
—
    
(357,577
)

 
Liabilities of the Hosted Solutions Business consisted of the following at:
 
HOSTED SOLUTIONS BUSINESS
  
June 30, 2004
 
December 31, 2003
  
Accounts payable    
    
21,154
    
34,734
  
Liabilities of operations of discontinued hosted solutions business
  
$
21,154
  
$
34,734
  


 
  13  
 

Prior to April 30, 2003, we designed, developed, marketed and supported accounting software products through our Accounting Software Business subsidiaries. On April 30, 2003, we completed the sale of substantially all of the assets of our Accounting Software Business to two key employees (the “Purchaser”) of that division. 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. In addition, the Purchaser paid us cash sufficient to discharge outstanding debt that was incurred during 2001 to acquire the Accounting Software Business. 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. The shareholders of the Company approved the sale at a special meeting on April 29, 2003.

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

   
Three Months Ended June 30,
  
Six Months Ended June 30,
  
ACCOUNTING SOFTWARE BUSINESS
  
2004
 
2003
 
2004
 
2003
  
Revenues
  
$
—
  
$
304,330
  
$
—
  
$
1,491,059
  
                           
Operating expenses
                          
Costs of goods sold
    
—
    
62,170
    
—
    
371,971
  
Selling, general and administrative
    
—
    
154,408
    
—
    
617,417
  
Depreciation and amortization
    
—
    
2,523
    
—
    
63,848
  
Product development
    
—
    
65,895
    
—
    
231,243
  
Total operating expenses
    
—
    
284,996
    
—
    
1,284,479
  
Income from discontinued operations
    
—
    
19,334
    
—
    
206,580
  
                           
Other expense
    
—
    
(99,423
)
  
—
    
(145,779
)
Net income (loss) from discontinued operations
  
$
—
  
$
(80,089
)
$
—
    
60,801
  

NOTE 7 - ACCRUED GUARANTEE

We have been named a defendant in two separate and unrelated legal actions, both 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 it 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 (as of June 30, 2004, approximately $218,000 remains outstanding). The other legal proceeding involved an action brought by Timothy L. White against us and Meteor Marketing, Inc., in which the plaintiff alleged that we were liable in the amount of $102,750 for certain obligations of Meteor Marketing as a result of an April 1999 guaranty (the remaining amount owed to Mr. White, as of June 30, 2004, is approximately $36,000).

Pursuant to FASB Interpretation No. (FIN) 45, the guaranties were valued in the amount of $30,000 during the year ended December 31, 2003.

NOTE 8 - SHAREHOLDERS’ EQUITY

Secured Promissory Note

In conjunction with the $650,000 in secured debt financing, we issued a total of 1,603,571 five-year warrants to purchase common stock at an exercise price of $0.40 per share. 

McFaulds Lake Project

We issued 200,000 shares of our non-registered common stock to an affiliate of ours, Hawk Precious Minerals Inc.


 
  14  
 


NOTE 9 - RESTATEMENT

Balance Sheet Restatement for the Year Ended December 31, 2003

We restated the balance sheet for the year ended December 31, 2003 to reflect (i) the segregation of the Hosted Solutions Business (“HSB”) components effective with the sale of the business segment on March 14, 2003; (ii) the consideration issued for mining rights reclassified as expense; and (iii) to reflect changes in our exploration agreement intangible, which is now combined into the Participation Mining Rights line.

The following table reconciles the previously reported amounts to the restated amounts. In particular, the consideration issued for mining rights was reclassified as expense as of and for the year ended December 31, 2003.

   
Assets
  
Accounts Payable
  
Liabilities
of HSB
  
Accrued 
Expenses
  
Shareholders’ Equity
  
Previously reported amounts
  
$
6,984,088
  
$
87,637
  
$
—
  
$
19,098
  
$
6,847,353
  
Previously recorded exploration intangibles (4)
    
(4,707,321
)
  
—
    
—
    
—
    
—
  
Accounts payable of HSB
    
—
    
(28,411
)
  
34,734
    
(6,323
)
  
—
  
Reclassification of exploration costs (1)
    
(1,300,000
)
  
—
    
—
    
—
    
—
  
Restatement of historical costs of mining rights (4)
    
1,547,956
    
—
    
—
    
—
    
—
  
Expensing of stock issued (2)
    
—
    
—
    
—
    
—
    
(2,491,290
)
Reverse value assigned to our interest in Hawk USA
    
—
    
—
    
—
    
—
    
(2,100,000
)
Stock issued (3)
    
—
    
—
    
—
    
—
    
(400,000
)
Change in amortization expense as a result of above adjustments
    
—
    
—
    
—
    
—
    
531,925
  
Restated amounts
  
$
2,524,723
  
$
59,226
  
$
34,734
  
$
12,775
  
$
2,387,988
  
 
(1) We reclassified the previously reported prepaid exploration costs to Participation Mining Rights. This amount represents the difference of advances we made to Kwagga ($1,800,000) less the expenditures reported by AfriOre and Kwagga ($500,000) for a net amount of $1,300,000.
 
(2) Expensing of stock issued to Hawk USA in June 2003 ($2,737,500), net of historical cost of the assets ($228,975 and $17,235) contributed by Hawk.
 
(3) Expensing of stock issued to Hawk USA in November 2003 ($2,350,000) less the previously recorded minority interest ($1,950,000) required to purchase the remaining 50 percent interest in the LLC.
 
(4) The following table reconciles the participation mining rights restatement.


 
  15  
 

 
     
December 31, 2003 
  
     
As reported 
    
Restated 
  
Total value of consideration contributed by Hawk USA (a)
 
$
2,100,000
  
$
—
  
Issuance of 3,750,000 common shares to Hawk USA (b)
   
2,737,500
    
—
  
Issuance of option to former director
    
55,000
    
55,000
  
Joint Agreement costs
    
27,889
    
27,889
  
Issuance of 2,500,000 common shares to Hawk USA (c)
   
2,350,000
    
—
  
Less: Minority interest previously recorded (c)
   
(1,950,000
)
  
—
  
Advances made to Kwagga
    
—
    
1,800,000
  
Historical value assigned to the FSC Project (a)
   
—
    
228,975
  
Historical value assigned to the Holdsworth Project (a)
   
—
    
17,235
  
Gross value at December 31, 2003
    
5,320,389
    
2,129,099
  
Expenditures reported by AfriOre and Kwagga (d)
   
—
    
(500,000
)
Accumulated amortization at December 31, 2003
    
(613,068
)
  
(81,143
)
               
Participation Mining Rights, net
  
$
4,707,321
  
$
1,547,956
  

(a) On June 26, 2003, we entered into a Joint Venture and Joint Contribution Agreement, and a Member Control Agreement (the “Joint Agreement”) with Hawk USA. By the terms of the Joint Agreement, a Minnesota limited liability company was formed, named Active Hawk Minerals, LLC (the “LLC”) in which both parties would make their contributions. Hawk USA contributed its rights and interests in the FSC and Holdsworth Projects, which was valued at its historical cost of $246,210 and we agreed to fund the required $2,100,000 for the FSC Project. Based on the information we obtained from Hawk, we estimated that the value of the FSC Project was approximately $228,975. Based on this, the remaining value of $17,235 was assigned the Holdsworth Project.
 
(b) We issued 3,750,000 shares of our common stock to Hawk USA on June 26, 2003 as specified in the Joint Agreement. We valued these shares at $2,737,500, or $0.73 per share, based on the closing sale price of our common stock on June 26, 2003 as listed on the OTCBB. We have reclassified this issuance as expense since it reflects excess value of the contributions made into the LLC.
 
(c) Additionally, as specified in the Joint Agreement, we obtained a “Buyout Option” in which we could acquire Hawk USA’s 50 percent interest in LLC, by issuing Hawk USA 2,500,000 shares of our common stock. On November 7, 2003, we exercised the option and issued the common stock valued at $2,350,000, or $0.94 per share, based on the closing sale price of our common stock on November 7, 2003 as listed on the OTCBB. This amount was reclassified as expense in the restated consolidated statement of operations as an additional stock issued for consideration of exploration rights for the year ended December 31, 2003, since these shares were also issued in excess of the contributions made to the LLC.
 
(d) We record expenditures as expenses based on reports from AfriOre describing the work completed and the funds expended. At December 31, 2003, of the $1,800,000 advances made to Kwagga, $500,000 have been recorded as exploration expenses.

Balance Sheet Restatement for the Quarter Ended June 30, 2004

The following table reconciles the previously reported amounts to the restated amounts related to the reclassification loss on impairment of Brazmin (as evidenced by the sale subsequent to June 30, 2004).

   
Assets
  
Shareholders’ Equity
  
Deficit Accumulated (1)
 
Previously reported amounts
  
$
1,895,305
  
$
1,499,466
  
$
(11,495,745
)
Participation Mining Rights, net (2)
   
392,000
    
392,000
    
392,000
  
Restated amounts
  
$
2,287,305
  
$
1,891,466
  
$
(11,114,745
)

(1) This column represents the deficit accumulated during exploration stage, subsequent to April 30, 2003.
 
(2) The previously reported line items of Participation Mining Rights, McFaulds Lake Project and Exploration Intangibles, have been combined into a single line, that of Participation Mining Rights.


 
  16  
 


The following table reconciles the previously reported Exploration Intangibles that were reclassified to Participation Mining Rights as of June 30, 2004.

   
As reported
  
 Restated
  
Value assigned to the FSC Project
  
$
228,975
  
$
228,975
  
Value assigned to the Holdsworth Project
    
17,235
    
17,235
  
Miscellaneous costs
    
82,889
    
82,889
  
Brazmin, Ltda. (a)
   
50,000
    
442,000
  
Gross Exploration Intangibles (b)
   
379,099
    
771,099
  
Less accumulated amortization
    
166,865
    
166,865
  
     
212,234
    
604,234
  
Participation Mining Rights
    
—
    
990,923
  
McFaulds Lake Project
    
—
    
129,501
  
   
$
212,234
  
$
1,724,658
  

(a) We previously recorded a reduction on the value of Brazmin to $50,000, which would reconcile the sale subsequent to June 30, 2004, based only on the cash proceeds. By the terms of the sale, we will also receive 400,000 shares (of the 700,000 shares issued) of our common stock that we issued as partial consideration when we acquired Brazmin. Minnesota corporate law prohibits treasury shares and therefore these shares will be cancelled from our issued and outstanding common shares. The 700,000 shares issued were valued at $686,000, or $0.98 per share. The shares being returned are therefore valued at $392,000. See Note 10 that follows for information regarding the sale of Brazmin.
 
(b) This account has been reclassified under the Participation Mining Rights account.


Statement of Operations Restatement for the Three and Six Months Ended June 30, 2004

The following table reconciles the previously reported net loss amount to the restated net loss amount for:

   
Three Months Ended
  
Six Months Ended
  
   
June 30, 2004
  
June 30, 2004
  
Previously reported net loss
  
$
(1,536,127
)
$
(4,954,525
)
Reverse Brazmin out of exploration expenses
    
858,578
    
858,578
  
Record Brazmin portion of loss on impairment value
    
(466,578
)
  
(466,578
)
Restated amortization
   
(1
)
  
—
  
Restated net loss
  
$
(1,144,128
)
$
(4,562,525
)


The following table reconciles the previously reported loss per common share amounts to the restated amounts.
 
     
Three Months Ended
June 30, 2004
    
Six Months Ended
June 30, 2004
  
     
Continuing Operations
    
Discontinuing Operations
    
Continuing Operations
    
Discontinuing Operations
  
Basic and diluted net loss
                          
per common share:
                          
Previously reported amounts
  
$
(0.05
)
$
—
  
$
(0.15
)
$
—
  
Restated amounts
    
0.02
    
—
    
0.01
    
—
  
Restated Net Loss
  
$
(0.03
)
$
—
  
$
(0.14
)
$
—
  



 
  17  
 

Statement of Operations Restatement for the Three and Six Months Ended June 30, 2003

The following table reconciles the previously reported net loss amount to the restated net loss amount for:

   
Three Months Ended
  
Six Months Ended
  
   
June 30, 2003
  
June 30, 2003
  
Previously reported net loss
  
$
(16,483
)
$
(377,996
)
Deferred compensation expense error
    
—
    
140,749
  
Common stock issued for mining rights
    
(2,491,290
)
  
(2,491,290
)
Restated net loss
  
$
(2,507,773
)
$
(2,728,537
)

The following table reconciles the previously reported loss per common share amounts to the restated amounts.
 
     
Three Months Ended
June 30, 2003
    
Six Months Ended
June 30, 2003
  
     
Continuing Operations
    
Discontinuing Operations
    
Continuing Operations
    
Discontinuing Operations
  
Basic and diluted net loss
                          
per common share:
                          
Previously reported amounts
  
$
—
  
$
—
  
$
(0.03
)
$
—
  
Restated amounts
    
(0.18
)
  
(0.01
)
  
(0.16
)
  
(0.02
)
Restated Net Loss
  
$
(0.18
)
$
(0.01
)
$
(0.19
)
$
(0.02
)

Statement of Cash Flows Restatement for the Six Months Ended June 30, 2004

We made corrections in the presentation of the cash flow statements within the Operation Activities section only, which relates to the expensing of the investment made to Kwagga. The activity was recorded, but inadvertently was captured within the prepaid expenses category. We reclassified $534,077, previously recorded under the line heading of prepaid expenses, into the participation mining rights line heading for the six months ended June 30, 2004.

The following table lists the amounts specific to Kwagga reclassified out of prepaid expenses and into participation mining rights in the statement of cash flows for the following periods:

Period Ending
  
Quarterly Amount
  
Inception Total
  
December 31, 2003
  
$
500,000
  
$
500,000
  
June 30, 2004
  
$
534,077
  
$
1,034,077
  


 
  18  
 


NOTE 10 - SUBSEQUENT EVENT

On August 3, 2004, we completed the sale of our wholly owned subsidiary, Brazmin Ltda., (“Brazmin”) a limited liability company located in Rio de Janeiro, Brazil. We originally acquired Brazmin on February 6, 2004, in a transaction (the “Quota Agreement”) with Argyle Securities Limited, a corporation formed under the laws of Saint Vincent (“Argyle”).

During the time that we owned Brazmin, Brazmin’s only assets were the mineral exploration rights of four distinct regions (the “Four Properties”). Brazmin has never had any revenues, as its activities have been solely to search out and acquire exploration rights relating to base and precious minerals.

As specified in the purchase agreement, we were required to use our best efforts to register the resale of the 700,000 shares of our common stock issued as consideration by no later than July 5, 2004, which was not accomplished. Furthermore, upon further analysis of the country in which the Four Properties are located, further review of the history of discoveries made within the region of the Four Properties and our ability to furnish capital on the required schedule, we re-evaluate the rewards that Brazmin offered. We concluded that Brazmin was not a proper fit to our long-term goals and arranged with the previous owner a termination of the original purchase agreement. Therefore, we recorded a loss on impairment of $466,578 against the value of Brazmin for the quarter ended June 30, 2004.

According to the terms of an agreement dated July 19,2004, we sold Brazmin to the prior owner, Argyle, for the following consideration: (a) a cash payment of $25,000, (b) a further promise to receive an additional $25,000 on or before December 31, 2004, (c) a cash payment of $100,000 in the event that Brazmin commences on a pre-feasibility study on one of the Four Properties, (d) a cash payment of $100,000 in the event that Brazmin commences on a bankable feasibility study on one of the Four Properties, (e) a 10% carried interest in Brazmin’s interest of the Four Properties up until completion of a bankable feasibility process, (f) a 10% payment of any proceeds obtained by Brazmin for the sale or partial sale of any of the Four Properties, and (g) Argyle returned 400,000 shares (valued at $392,000) of the 700,000 shares of our common stock that it had received as partial consideration pursuant to the Quota Agreement. Argyle retained the 5-year warrant to purchase 150,000 shares of our common stock, with an exercise price of $1.50. Furthermore, Argyle assumed all further liabilities required to maintain the Four Properties effective July 19, 2004. The consulting agreements with two of the principles of Brazmin were also terminated effective June 30, 2004. Under the terms of the original Quota Agreement, we were required to obtain an effective registration of the 700,000 shares of its common stock by July 5, 2004. Under the terms of the July 19, 2004 agreement, we are required to register the 300,000 shares as soon as practical.


NOTE 11 - LEGAL PROCEEDINGS

As previously disclosed, we were a defendant in a lawsuit initiated by Jack A. Johnson. Mr. Johnson was formerly our President and CEO until the sale of our Hosted Solutions Business in March 2003. Mr. Johnson asserted claims for breach of an alleged employment contract. On April 29, 2004, in Minnesota District Court, a Hennepin County jury awarded Mr. Johnson $360,000 in damages for breach of contract. On June 1, 2004, using the proceeds from the Pandora financing, we paid Mr. Johnson $360,000 in consideration for a complete release of all claims.



  
  19  
 

WITS BASIN PRECIOUS MINERALS 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, 2003.


OVERVIEW

Wits Basin Precious Minerals Inc., and subsidiaries (“we,” “us,” “our,” “Wits Basin” or the “Company”) is a precious minerals exploration company based in Minneapolis, Minnesota. We have interests in mineral exploration projects in South Africa, Canada and South America. 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 investment and a further $1,400,000 cash investment. 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 140,000 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. 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 devised a plan to conduct pre-exploration activities on the Holdsworth Project, which we estimate be approximately $150,000. Any pre-exploration activities will be expensed as incurred.

In February 2004, we acquired substantially all of the outstanding shares of capital stock of a Brazilian limited liability company named Brazmin Ltda. Brazmin, located in Rio de Janeiro, which holds the exploration rights to 4 distinct properties in Brazil. Subsequent to June 30, 2004, we entered into an agreement to sell Brazmin. See Note - 10 Subsequent Event, included elsewhere in this report, for information regarding the sale of Brazmin, which we completed on August 3, 2004.
 
On June 10, 2004, we entered into an option agreement to earn a 70% interest in 5 mining claims covering approximately 3,200 acres in the McFaulds Lake area of northern Ontario, currently held under option by an affiliate of ours, Hawk Precious Minerals Inc. The site is a new VMS (volcanogenic massive sulphide) base metals project.

In the future, we will continue to seek new areas for exploration and the rights that would allow us to be either owners or participants. These rights may take the form of direct ownership of mineral exploration or, like our interest in the FSC Project, these rights may take the form of ownership interests in entities holding exploration rights.

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 and until April 30, 2003, we provided accounting software through our Accounting Software Business. We sold substantially all of the assets relating to our Hosted Solutions Business and Accounting Software Business as of such dates. As a result of the sale of the Hosted Solutions Business and the Accounting Software Business, the Company became an exploratory stage company effective May 1, 2003.

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.


 
  20  
 


RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2004 COMPARED TO THE THREE AND SIX MONTHS ENDED JUNE 30, 2003.

Revenues

We had no revenues from continuing operations for the three and six months ended June 30, 2004 and 2003. 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 $295,171 for the three months ended June 30, 2004 as compared to $148,457 for the same period in 2003. General and administrative expenses were $1,115,077 for the six months ended June 30, 2004 as compared to $207,789 for the same period in 2003. We anticipate the rate of spending for the third and forth quarter’s general and administrative expenses should decrease.

Exploration expenses relate to: (i) the issuance of stock for acquiring mining rights, (ii) expenditures being reported to Active Hawk Minerals LLC, on the work-in-process from the project operator, AfriOre, at the FSC Project site, and (iii) any expenses related to the Brazmin properties, including landowner payments, geological expenses and consulting fees. Exploration expenses were $297,987 for the three months ended June 30, 2004 as compared to $2,491,290 for the same period in 2003. Exploration expenses were $701,490 for the six months ended June 30, 2004 as compared to $2,491,290 for the same period in 2003. We anticipate the rate of spending for the third and forth quarter’s exploration expenses may increase should we make a further acquisition or AfriOre accelerate drilling.

Amortization expenses were $42,862 for the three months ended June 30, 2004 as compared to $0 for the same period in 2003. We began amortization of the FSC Project, in July 2003, 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 24 months. The quarterly amortization will be approximately $38,200. Also, we have begun amortization of the Holdsworth Project, in October 2003, over a 15-month period on a straight-line basis at a rate of $4,600 per quarter. This is based on the assessment that the Holdsworth Project is a relatively small project, and as such, our goal is to locate a third party operator by fiscal year end and move the Project forward.

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 accordance with the terms of the private placement, because such registration statement was not declared effective by the Securities and Exchange Commission by February 11, 2004, we issued to the investors an additional one-fifth of one share of our common stock for each unit purchased in the private placement, or 2,038,000 shares, which we deemed “penalty shares.” We used a five-day closing sale price average ($1.056) of our common stock, as listed on the OTCBB, to value the penalty shares. We recorded a $2,152,128 expense for the penalty shares during the quarter ended March 31, 2004.

During the three and six months ended June 30, 2004, we recorded a loss on disposal of assets of $0 as compared to $1,633 for the same periods in 2003.


 
  21  
 

We recorded a loss on impairment for the three and six months ended June 30, 2004 relating to our South American project, Brazmin. Upon further analysis of Brazil’s business policies, and further review of the history of discoveries made within the region of the Brazmin properties and our ability to furnish capital on the required schedule, we re-evaluate the rewards that Brazmin offered. We concluded that Brazmin was not a proper fit to our long-term goals and arranged with the previous owner a termination of the original purchase agreement. Therefore, we recorded a loss on impairment of $466,578 against the value of Brazmin.

Other Income and Expenses

Our other income and expense consists of interest income and interest expense. Interest income for the three months ended June 30, 2004 was $0 compared to $1,604 for the same period in 2003. Interest income for the six months ended June 30, 2004 was $0 compared to $25,148 for the same period in 2003. The interest income we reported for 2003 was primarily earned from a Federal Income Tax refund filed with the IRS. For the three and six months ended June 30, 2004, we recorded an interest expense of $41,530, which related to the secured promissory note payable.

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 three months ended June 30, 2003. No further refunds will be available based on current tax law for the periods previously amended.

Discontinued Operations

Effective with the sale of our Hosted Business Solutions model on March 14, 2003, we have classified all results as discontinued operations for all periods reported.

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

   
Three Months Ended June 30,
Six Months Ended June 30,
  
HOSTED SOLUTIONS BUSINESS
  
2004
2003
2004
2003
  
Revenues
  
$
—
  
$
—
  
$
—
  
$
132,455
  
                           
Operating expenses
                          
Costs of sales
    
—
    
—
    
—
    
35,354
  
Selling, general and administrative
    
—
    
31,495
    
—
    
161,597
  
Depreciation and amortization
    
—
    
216
    
—
    
8,935
  
Gain on disposal of assets
    
—
    
—
    
—
    
(749
)
Total operating expenses
    
—
    
(31,711
)
  
—
    
205,137
  
Loss from discontinued operations
    
—
    
(31,711
)
  
—
    
(72,682
)
                           
Other income
    
—
    
—
    
—
    
150,000
  
Loss on sale of prepaid royalties
    
—
    
—
    
—
    
(434,895
)
Net loss from discontinued operations
  
$
—
  
$
(31,711
)
$
—
    
(357,577
)



 
  22  
 

Effective with the sale of our Accounting Software Business model on April 30, 2003, we have classified all results as discontinued operations for all periods reported.

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

   
Three Months Ended June 30,
Six Months Ended June 30,
  
ACCOUNTING SOFTWARE BUSINESS
  
2004
 
2003
 
2004
 
2003
  
Revenues
  
$
—
  
$
304,330
  
$
—
  
$
1,491,059
  
                           
Operating expenses
                          
Costs of goods sold
    
—
    
62,170
    
—
    
371,971
  
Selling, general and administrative
    
—
    
154,408
    
—
    
617,417
  
Depreciation and amortization
    
—
    
2,523
    
—
    
63,848
  
Product development
    
—
    
65,895
    
—
    
231,243
  
Total operating expenses
    
—
    
284,996
    
—
    
1,284,479
  
Income from discontinued operations
    
—
    
19,334
    
—
    
206,580
  
                           
Other expense
    
—
    
(99,423
)
  
—
    
(145,779
)
Net income (loss) from discontinued operations
  
$
—
  
$
(80,089
)
$
—
    
60,801
  

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 used by operating activities was $1,048,173 for the six months ended June 30, 2004, compared to net cash provided by operating activities of $270,368 for the same period in 2003.
 
We had working capital of $72,617 at June 30, 2004, compared to $870,032 at December 31, 2003. Cash and equivalents were $26,155 at June 30, 2004, representing a decrease of $337,835 from the cash and equivalents of $363,990 at December 31, 2003.

In June 2003, we entered into a Joint Venture and Joint Contribution Agreement, and a Member Control Agreement (collectively the “Joint Agreement”) with Hawk USA. By the terms of the Joint Agreement, a limited liability company was formed (named Active Hawk Minerals, LLC) in which both parties would make their contributions. Hawk USA contributed its rights and interests in the FSC and Holdsworth Projects. We contributed 3,750,000 shares of our common stock (which represented an issuance of 28.2 percent of our total issued and outstanding common stock) and assumed the liability to make an initial $2,100,000 cash payment to Kwagga. As of June 30, 2004, we have invested $2,025,000 in Kwagga, which is being used to fund a 5 to 7 drillhole exploration program on the FSC Project that commenced in October 2003. We are obligated to advance an additional $75,000 to complete the initial $2,100,000 investment. We have received an extension for the final $75,000 payment until Kwagga has obtained the required operating permits. Once the entire $2,100,000 has been expended, we will have a further right to increase our equity position in Kwagga for an additional $1,400,000 cash investment.

On June 1, 2004 we received gross proceeds of $650,000 in consideration for issuing an 18-month secured convertible promissory note (the “Note”) to Pandora Select Partners LP (“Pandora”), a Virgin Islands limited partnership. The Note is secured by substantially all of our assets. The Note bears interest of 10 percent per annum. The principal and interest payment is as follows: (a) payments of $5,416.67 in cash of interest only are payable in arrears on June 28, July 28 and August 28, 2004; and (b) commencing on September 28, 2004, and on the 28th day of each of the following 14 months, we are required to pay amortized principal and interest of $46,278.15. Notwithstanding the foregoing, in lieu of cash, we may satisfy our repayment obligations by issuing shares of our common stock. The number of shares of our common stock which may be issued to repay any or all of any monthly obligation may not exceed the lesser of: (i) 10 percent of the aggregate number of traded shares of our common stock for the 30 trading days immediately preceding such monthly payment date or (ii) the greatest number of shares of our common stock which, when added to the number of shares of our common stock beneficially owned by Pandora, would not cause Pandora to beneficially own more than 4.99 percent of the our outstanding common stock. However, we may only issue stock in satisfaction of our repayment obligations if, at the time of such payment, we have in effect an effective resale registration statement with the SEC. If we elect to pay the required monthly payment in shares of common stock, the per-share value is equal to 85 percent of the average of the high closing bid price of our common stock during the 20 trading days immediately preceding the payment date.


 
  23  
 

Furthermore, Pandora has the right to convert any portion of the principal or interest of the Note outstanding into shares of our common stock based on a conversion rate equal to the average of the high closing bid prices of our common stock for the 30 trading days immediately following the effective date of our pending registration statement on Form S-2/A, File No. 333-110831 (the “S-2 Registration Statement”). However, in no event shall such conversion rate be lower than $0.35 or higher than $0.65 per share. If by the date that Pandora notifies us, the S-2 Registration Statement has not been declared effective, then the Conversion Rate is $0.35 per share.

As further consideration for the financing, we issued to Pandora a five-year warrant to purchase up to 928,571 shares of our common stock at a price of $0.40 per share, subject to adjustment as defined in the agreement. Additionally, we issued five-year warrants to purchase an aggregate of 200,000 shares of our common stock to two affiliates of Pandora as origination fees. In the event that we fail to have an effective resale registration statement filed with the SEC covering the shares issuable upon exercise of the five-year warrants or the shares of common stock issued as payment under or upon conversion of this Note by November 28, 2004, then for each full month thereafter (prorated for partial months) that this failure continues, we shall pay in arrears in cash, with the next otherwise scheduled monthly payment, additional interest equal to the greater of $1,000 or one percent (1%) of the outstanding principal balance on the Note as of the last day of the prior month. Pandora may consent to an extension of the effective date of this resale registration statement.

On June 10, 2004, we entered into an option agreement to earn a 70% interest in 5 mining claims covering approximately 3,200 acres in the McFaulds Lake area of northern Ontario, currently held under option by an affiliate of ours, Hawk Precious Minerals Inc. The option agreement requires: (i) cash payments of Cdn$60,000 (Cdn$30,000 which was paid on the execution of the agreement and a further Cdn$30,000 due on or before November 1, 2004), (ii) we issued 200,000 shares of our non-registered common stock, and (iii) we are required to pay exploration expenditures of Cdn$200,000 (Cdn$100,000 each due by November 1, 2004 and May 1, 2005).

We anticipate that the existing sources of liquidity will not provide cash to fund operations for the next twelve months. We have estimated our cash needs over the next twelve months to be approximately $1,100,000, which includes the final $75,000 payment owed to Kwagga, as discussed above. We will continue our attempt to raise additional capital. Some of the possibilities available to us are through private equity transactions, to develop a credit facility with a lender or the exercise of options and warrants. However, such additional capital may not be available to us at acceptable terms or at all. In the event that we are unable to obtain additional capital, we would be forced to reduce operating expenditures and/or cease operations altogether.




  
  24  
 

PART II.  OTHER INFORMATION


Item 6. Exhibits and Reports on Form 8-K
   
(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.

(b) Reports on Form 8-K
    
On May 17, 2004, the Company filed a Current Report on Form 8-K dated May 17, 2004, under items 5 and 7 to disclose that (1) the Company has a registration statement on Form S-2 (File No. 333-110831) pending with the Securities and Exchange Commission (“SEC”). The Company concurred with certain recommendations of the SEC Staff, made in connection with their review of the registration statement, relating to the issues surrounding the March 2003 sale of the Company’s then only continuing operations (i.e., Hosted Solutions Business) and subsequent transaction in which it changed its business model (that of a precious minerals exploration company), thereby effectively becoming an exploratory stage company by essence of its new business model; and (2) accordingly, the Company agreed to restate its financial statements for the year ended December 31, 2003 and that such restated financial statements were included under Item 7.
 
On June 4, 2004, the Company filed a Current Report on Form 8-K/A dated May 28, 2004, under items 5 and 7. The Company raised gross proceeds of $650,000 pursuant to the issuance of an 18-month secured convertible promissory note to Pandora Select Partners LP (“Pandora”), a Virgin Islands fund.

On June 14, 2004, the Company filed a Current Report on Form 8-K dated June 10, 2004, under items 5 and 7 to disclose that the Company had entered into an agreement to earn a 70% interest in 5 mining claims covering approximately 3,200 acres in the McFaulds Lake area of northern Ontario currently held under option by Hawk Precious Minerals Inc., an affiliate of the Company.

On August 4, 2004, the Company filed a Current Report on Form 8-K dated August 3, 2004, under items 2 and 7 to disclose that the Company had entered into an agreement to sell its wholly owned subsidiary of Brazmin Ltda., a limited liability company formed under the laws of Brazil, to its prior owner, Argyle Securities Limited, a corporation formed under the laws of Saint Vincent.




  
  25  
 

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.
 
 		  
 		  
 
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 






  
  26  
 

EXHIBIT INDEX

Exhibit No.
Description
   
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.


       
       
 

27

  






 EX-31.1 2 v011184_ex31-1.htm

Exhibit 31.1
CERTIFICATIONS

I, H. Vance White, certify that:

1. I have reviewed this Amendment No. 1 to Quarterly Report on Form 10-QSB for the quarter ended June 30, 2004, of Wits Basin Precious Minerals Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statement made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. Wits Basin Precious Minerals Inc.’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for Wits Basin Precious Minerals Inc., and have:

a.   designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to Wits Basin Precious Minerals Inc., including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b.   evaluated the effectiveness of Wits Basin Precious Minerals Inc.’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c.   disclosed in this report any change in Wits Basin Precious Minerals Inc.’s internal control over financial reporting that occurred during Wits Basin Precious Minerals Inc.’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, Wits Basin Precious Minerals Inc.’s internal control over financial reporting;

5. Wits Basin Precious Minerals Inc.’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to Wits Basin Precious Minerals Inc.’s auditors and the audit committee of Wits Basin Precious Minerals Inc.’s board of directors (or persons performing the equivalent functions):

a.   all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect Wits Basin Precious Minerals Inc.’s ability to record, process, summarize and report financial information; and

b.   any fraud, whether or not material, that involves management or other employees who have a significant role in Wits Basin Precious Minerals Inc.’s internal control over financial reporting.
 
     
 
 
 		  
 		  
 
Date: January 14, 2005 By:   /s/ H. Vance White
 
  H. Vance White
Chief Executive Officer 
       
       
       
 EX-31.2 3 v011184_ex31-2.htm

Exhibit 31.2
CERTIFICATIONS

I, Mark D. Dacko, certify that:

1. I have reviewed this Amendment No. 1 to Quarterly Report on Form 10-QSB for the quarter ended June 30, 2004, of Wits Basin Precious Minerals Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statement made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. Wits Basin Precious Minerals Inc.’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for Wits Basin Precious Minerals Inc., and have:

a.   designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to Wits Basin Precious Minerals Inc., including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b.   evaluated the effectiveness of Wits Basin Precious Minerals Inc.’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c.   disclosed in this report any change in Wits Basin Precious Minerals Inc.’s internal control over financial reporting that occurred during Wits Basin Precious Minerals Inc.’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, Wits Basin Precious Minerals Inc.’s internal control over financial reporting;

5. Wits Basin Precious Minerals Inc.’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to Wits Basin Precious Minerals Inc.’s auditors and the audit committee of Wits Basin Precious Minerals Inc.’s board of directors (or persons performing the equivalent functions):

a.   all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect Wits Basin Precious Minerals Inc.’s ability to record, process, summarize and report financial information; and

b.   any fraud, whether or not material, that involves management or other employees who have a significant role in Wits Basin Precious Minerals Inc.’s internal control over financial reporting.

     
 
 
 		  
 		  
 
Date: January 14, 2005 By:   /s/ Mark D. Dacko
 
  Mark D. Dacko
Chief Financial Officer 
       
       
       
 EX-32.1 4 v011184_ex32-1.htm

Exhibit 32.1
 

CERTIFICATION PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Amendment No. 1 to Quarterly Report of Wits Basin Precious Minerals Inc. (the “Company”) on Form 10-QSB for the quarter ending June 30, 2004, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, H. Vance White the Chief Executive Officer of the Company, certify, pursuant to and for purposes of 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

     
 
 
 		  
 		  
 
Date: January 14, 2005 By:   /s/ H. Vance White
 
  H. Vance White
Chief Executive Officer 
       
       
       
 EX-32.2 5 v011184_ex32-2.htm

Exhibit 32.2

CERTIFICATION PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Amendment No. 1 to Quarterly Report of Wits Basin Precious Minerals Inc. (the “Company”) on Form 10-QSB for the quarter ending June 30, 2004, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Mark D. Dacko the Chief Financial Officer of the Company, certify, pursuant to and for purposes of 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
     
 
 
 		  
 		  
 
Date: January 14, 2005 By:   /s/ Mark D. Dacko
 
  Mark D. Dacko
Chief Financial Officer 
       
       
       
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