DLKM Sept 2010 Annual Report
Form 10-K for DOUGLAS LAKE MINERALS INC.
14-Sep-2010
Annual Report
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion of our financial condition, changes in financial condition, plan of operations and results of operations should be read in conjunction with (i) our audited financial statements as at May 31, 2010, May 31, 2009 and for the period from inception (January 5, 2004) to May 31, 2010 and
(ii) the section entitled "Business", included in this annual report. The discussion contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including, but not limited to, those set forth under "Risk Factors" and elsewhere in this annual report.
Plan of Operations
Our plan of operations for the next twelve months is to focus on the acquisition and exploration of mineral properties in Tanzania.. We anticipate that we will require approximately $2,600,000 for our plan of operations over the next twelve months, as follows:
(a) approximately $1,600,000 for acquisition and exploration of mineral properties.
(b) approximately $1,000,000 for management, consulting, administration and operating expenses.
At May 31, 2010, we had cash of $Nil and a working capital deficit of $1,539,978. We will require additional funds to pursue our plan of operations as set forth above. Accordingly, we will be required to obtain additional financing in order to pay our planned expenses during the next 12 months. We are continuing to seek to raise funds through private placement offerings of our shares of common stock. However, there can be no assurance that we will complete any such private placement offerings or that the funds raised will be sufficient for us to pay our expenses for and beyond the next twelve months.
During the twelve month period following the date of this report, we anticipate that we will not generate any revenue. Accordingly, we will be required to obtain additional financing in order to pursue our plan of operations for and beyond the next twelve months. We believe that debt financing will not be an alternative for funding additional phases of exploration as we do not have tangible assets to secure any debt financing. We anticipate that additional funding will be in the form of equity financing from the sale of our common stock. We cannot provide investors with any assurance that we will be able to raise sufficient funding from the sale of our common stock to fund our acquisition and exploration program going forward. In the absence of such financing, we will not be able to continue acquisition and exploration of mineral claims and our business plan will fail. Even if we are successful in obtaining equity financing to fund our acquisition and exploration program, there is no assurance that we will obtain the funding necessary to pursue any advanced exploration of any mineral claims. If we do not continue to obtain additional financing, we will be forced to abandon our mineral claims and our plan of operations.
We entered into a joint venture agreement with Mr. Maita with respect to the Mkuvia Project, and we have also entered into a purchase agreement with Ruby Creek whereby Ruby Creek may purchase a substantial interest in this project from us, in each case as described in Item 1 - "Business" above. We may consider entering into additional arrangements to provide the required funding to develop the mineral claims. If we determine to pursue another joint venture partner, there is no assurance that any third party would enter into a joint venture agreement with us in order to fund the exploration of our current, and any future, mineral claims. If we entered into another joint venture arrangement, we would likely have to assign a significant percentage of our interest in our mineral claims to the joint venture partner.
Financial Condition
During the twelve-month period following the date of this annual report, we anticipate that we will not generate any revenue. Accordingly, we will be required to obtain additional financing in order to pursue our plan of operations during and beyond the next twelve months. We believe that debt financing will not be an alternative for funding as we do not have tangible assets to secure any debt financing. We anticipate that additional funding will be in the form of equity financing from the sale of our common stock. However, we do not have any financing arranged and we cannot provide investors with any assurance that we will be able to raise sufficient funding from the sale of our common stock to fund any additional and more advanced exploration programs beyond our initial aforementioned exploration program. In the absence of such financing, we will not be able to continue exploration of the property underlying our mineral claim interest and our business plan will fail. Even if we are successful in obtaining equity financing to fund any continuation of our exploration program, there is no assurance that we will obtain the funding necessary to pursue any advanced exploration of the property underlying our mineral claim interest. If we do not continue to obtain additional financing, we will be forced to abandon our mineral claim interest.
Results of Operations
The following sets table sets out our losses for the periods indicated:
Accumulatedfrom January 5,2004(Date of For the Year For the YearInception) to Ended EndedMay 31, May 31, May 31,2010 2010 2009$ $ $Revenue - - -ExpensesAmortization 42,753 24,950 16,216Consulting 7,550,389 1,710,134 1,934,253General and administrative 1,000,826 178,083 304,311Mineral property costs 19,529,413 98,361 1,661,186Professional 1,119,545 209,481 353,687Travel 1,167,830 122,291 440,014Rent 133,738 56,004 49,343Total Expenses 30,544,494 2,399,304 4,759,010Loss Before Other Income (30,544,494) (2,399,304) (4,759,010)Other Income (Expense)Mineral property option receipts 506,017 350,000 -Loss on sale of investment securities (57,071) - -Net Loss (30,095,548) (2,049,304) (4,759,010)
Results of Operations for the Years Ended May 31, 2010 and 2009
Revenues
We had no operating revenues since our inception (January 5, 2004) to May 31, 2010. We anticipate that we will not generate any revenues for so long as we are an exploration stage company.
Expenses
Our expenses in the year ended May 31, 2010 decreased to $2,399,304 from $4,759,010 in the year ended May 31, 2009, as follows:
? Our consulting fees decreased to $1,710,134 during our year ended May 31, 2010 (2009 - $1,934,253);
? Our general and administrative fees decreased to $178,083 during our year ended May 31, 2010 (2009 - $304,311) primarily due to decreased operations during the period;
? Our mineral property costs decreased substantially to $98,361 during our year ended May 31, 2010 (2009 - $1,661,186) primarily due to decreased operations during the period;
? Our professional fees decreased to $209,481 during our year ended May 31, 2010 (2009 - $353,687) primarily as a result of decreased legal costs;
? Our travel expenses decreased to $122,291 during our year ended May 31, 2010 (2009 - $440,014);
? Our only expense line items that increased during our year ended May 31, 2010 were for amortization, which increased to $24,950 (2009-$16,216) and for rent, which increased slightly to $56,004 (2009 - $49,343).
Net Loss
Our net loss for the year ended May 31, 2010 was $2,049,304, compared to $4,759,010 for the year ended May 31, 2009.
Liquidity and Capital Resources
We had cash of $Nil and a working capital deficit of $1,539,978 at May 31, 2010.
We estimate that our total expenditures over the next twelve months will be approximately $2,600,000, as outlined above under the heading "Plan of Operations".
Net Cash Used in Operating Activities
Net cash used in operating activities was $226,943 during the year ended May 31, 2010, as compared to $3,588,880 during the year ended May 31, 2009. Net cash used in operating activities from our inception on January 5, 2004 to May 31, 2010 was $6,228,367.
Net Cash Used in Investing Activities
Net cash used in investing activities was $Nil during the year ended May 31, 2010, as compared to $73,300 during the year ended May 31, 2009, with respect to the purchase of property and equipment. Net cash used in investing activities from our inception on January 5, 2004 to May 31, 2010 was $173,729.
Net Cash from Financing Activities
During the year ended May 31, 2010, we received $29,913 net cash from financing activities, primarily as proceeds from the issuance of our common stock. During the year ended May 31, 2009, we received $3,805,600 net cash from financing activities, primarily from the issuance of our common stock. We have funded our business to date primarily from sales of our common stock. From our inception on January 5, 2004 to May 31, 2010, we raised a gross total of approximately $6,733,532 from the issuance of our common stock, resulting in net cash from financing activities from inception on January 5, 2004 to May 31, 2010 of $6,402,096.
There are no assurances that we will be able to achieve further sales of our common stock or any other form of additional financing. If we are unable to achieve the financing necessary to continue our plan of operations, then we will not be able to continue our exploration of the property underlying our mineral claim interest and our venture will fail.
Going Concern
We have not attained profitable operations and are dependent upon obtaining financing to pursue any extensive exploration activities. For these reasons our auditors stated in their report on our audited financial statements for the year ended May 31, 2010 that they have substantial doubt we will be able to continue as a going concern.
Future Financings
We anticipate continuing to rely on equity sales of our common shares in order to continue to fund our business operations. Issuances of additional shares will result in dilution to our existing shareholders. There is no assurance that we will achieve any additional sales of our equity securities or arrange for debt or other financing to fund our planned exploration activities.
Off-Balance Sheet Arrangements
We have no significant off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to stockholders.
Critical Accounting Policies
Our financial statements and accompanying notes have been prepared in accordance with United States generally accepted accounting principles applied on a consistent basis. The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods.
We regularly evaluate the accounting policies and estimates that we use to prepare our financial statements. In general, management's estimates are based on historical experience, on information from third party professionals, and on various other assumptions that are believed to be reasonable under the facts and circumstances. Actual results could differ from those estimates made by management.
We believe the following critical accounting policies require us to make significant judgments and estimates in the preparation of our consolidated financial statements.
Mineral Property Costs
The Company has been in the exploration stage since its inception on January 5, 2004 and has not yet realized any revenues from its planned operations. It is primarily engaged in the acquisition and exploration of mining properties. Mineral property exploration costs are expensed as incurred. Mineral property acquisition costs are initially capitalized. The Company assesses the carrying costs for impairment under ASC 360, Property, Plant, and Equipment at each fiscal quarter end. When it has been determined that a mineral property can be economically developed as a result of establishing proven and probable reserves, the costs then incurred to develop such property, are capitalized. Such costs will be amortized using the units-of-production method over the estimated life of the probable reserve. If mineral properties are subsequently abandoned or impaired, any capitalized costs will be charged to operations.
Long-lived Assets
In accordance with ASC 360, Property Plant and Equipment the Company tests long-lived assets or asset groups for recoverability when events or changes in circumstances indicate that their carrying amount may not be recoverable. Circumstances which could trigger a review include, but are not limited to:
significant decreases in the market price of the asset; significant adverse changes in the business climate or legal factors; accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of the asset; current period cash flow or operating losses combined with a history of losses or a forecast of continuing losses associated with the use of the asset; and current expectation that the asset will more likely than not be sold or disposed significantly before the end of its estimated useful life. Recoverability is assessed based on the carrying amount of the asset and its fair value which is generally determined based on the sum of the undiscounted cash flows expected to result from the use and the eventual disposal of the asset, as well as specific appraisal in certain instances. An impairment loss is recognized when the carrying amount is not recoverable and exceeds fair value.
Asset Retirement Obligations
The Company accounts for asset retirement obligations in accordance with the provisions of ASC 440 Asset Retirement and Environmental Obligations which requires the Company to record the fair value of an asset retirement obligation as a liability in the period in which it incurs a legal obligation associated with the retirement of tangible long-lived assets that result from the acquisition, construction, development and/or normal use of the assets. The Company did not have any assets retirement obligations as of May 31, 2010 and May 31, 2009.
Financial Instruments
ASC 825, Financial Instruments requires an entity to maximize the use of observable inputs and the fair value of financial instruments, which include cash, bank indebtedness, accounts payable, amounts due to related parties, and deferred option payments were estimated to approximate their carrying values due to the immediate or short-term maturities of these financial instruments. The Company's operations are in Canada, China and Africa, which results in exposure to market risks from changes in foreign currency rates. The financial risk is the risk to the Company's operations that arise from fluctuations in foreign exchange rates and the degree of volatility of these rates. Currently, the Company does not use derivative instruments to reduce its exposure to foreign currency risk.
Income Taxes
The Company accounts for income taxes using the asset and liability method in accordance with ASC 740, Income Taxes. The asset and liability method provides that deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using the currently enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company records a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not to be realized.
Stock-based Compensation
The Company records stock-based compensation in accordance with ASC 718, Compensation - Stock Based Compensation and ASC 505, Equity Based Payments to Non-Employees, which requires the measurement and recognition of compensation expense based on estimated fair values for all share-based awards made to employees and directors, including stock options.
ASC 718 requires companies to estimate the fair value of share-based awards on the date of grant using an option-pricing model. The Company uses the Black-Scholes option-pricing model as its method of determining fair value. This model is affected by the Company's stock price as well as assumptions regarding a number of subjective variables. These subjective variables include, but are not limited to the Company's expected stock price volatility over the term of the awards, and actual and projected employee stock option exercise behaviours. The value of the portion of the award that is ultimately expected to vest is recognized as an expense in the statement of operations over the requisite service period.
All transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable.
Recent Accounting Pronouncements
In May 2009, FASB issued ASC 855, Subsequent Events, which establishes general standards of for the evaluation, recognition and disclosure of events and transactions that occur after the balance sheet date and through the date that the financial statements are issued. Although there is new terminology, the standard is based on the same principles as those that currently exist in the auditing standards. The standard, which includes a new required disclosure of the date through which an entity has evaluated subsequent events, is effective for interim or annual periods ending after June 15, 2009. The adoption of ASC 855 did not have a material effect on the Company's financial statements.
In June 2009, the FASB issued guidance now codified as ASC 105, Generally Accepted Accounting Principles as the single source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with U.S. GAAP, aside from those issued by the SEC. ASC 105 does not change current U.S. GAAP, but is intended to simplify user access to all authoritative U.S. GAAP by providing all authoritative literature related to a particular topic in one place. The adoption of ASC 105 did not have a material impact on the Company's financial statements, but did eliminate all references to pre-codification standards.
The Company has implemented all new accounting pronouncements that are in effect and that may impact its financial statements and does not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on its financial position or results of operations.