**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-Q**

** **

(MarkOne)

 

x** QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934**

 

For thequarterly period ended September 30, 2008

or

** **

o**TRANSITION REPORT PURSUANTTO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

For the transition period from ____________________________to______________________________________

Commission File Number: **0-52151**

 
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**Eastern Goldfields, Inc.**
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(Exact name of Registrant as specified in its charter)
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                                                **Nevada**                                                                  **88-0441307**
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                             (State or other jurisdiction of                                           (I.R.S. Employer
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                             incorporation or organization)                                         Identification No.)
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**1660 Hotel Circle North, Suite 207, San Diego, CA 92108-2808**
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(Address of principal executive offices – Zip Code)
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**(619) 497-2555**
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(Registrant’s telephone number, including area code)
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__________________________________________________________________
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(Former name, former address and former fiscal year, if changed since last report)
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Indicate by check mark whether theregistrant (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor such shorter period that the registrant was required to file such reports),and (2) has been subject to such filing requirements for the past 90 days. 

                                                                                                                          Yes  x        No o

 

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, a non-accelerated filer, or asmaller reporting company. See the definitions of “large accelerated filer,”“accelerated filer” and “smaller reporting company” in Rule 12b-2 of theExchange Act. 

 

        Largeaccelerated filer      o                                                                                          Acceleratedfiler   o

                

        Non-acceleratedfiler  o          (Do not check if a smaller reporting company)              Smallerreporting company   x

 

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act). 

 

                                                                                                                          Yes   o        No  x

 

1

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APPLICABLE ONLY TO ISSUERS INVOLVEDIN BANKRUPTCY 

PROCEEDINGS DURING THE PRECEDING FIVEYEARS: 

Indicate by check mark whether theregistrant has filed all documents and reports required to be filed by Sections12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to thedistribution of securities under a plan confirmed by a court.

                                                                                                                          Yes   x      No  o

 

2

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APPLICABLE ONLY TO CORPORATE ISSUERS: 

 

Indicatethe number of shares outstanding of each of the issuer’s classes of commonstock, as of the latest practicable date. 
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```

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On November 14, 2008, 9,377,986 shares of the issuer’s common stock were outstanding.
```

 

** **

**PART I—FINANCIAL INFORMATION**

**Item1. Financial Statements.**

** **

**EASTERN GOLDFIELDS, INC. AND SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS**

** **

** **

**ASSETS**

**                                                                                    September 30, 2008      December 31,2007**

**                                                                                             (Unaudited)                    (Audited)**
|  

Cash

Inventories (Note 3)

Prepaid expenses and other  current assets                                                           |  

$              |  

305,379

439,861

429,723           |  

$ |  

355,148

467,254

378,703      |
|------------------------------------------------------------------------------------------------------------------------------------------|------------------------|---------------------------------------------|-----------|----------------------------------------|
|  

Total  current assets                                                                                                            |                   |  

1,174,963                           |      |  

1,201,105                      |
|  

Property, plant, and mine  development, net  

   (Notes 4)

Other assets

Deferred debt issuance costs  (Note 5) |  

 

  |  

 

23,372,436

569,160

45,042 |      |  

 

13,377,800

189,461

- |
|  

Total  assets                                                                                                                    |  

$              |  

25,161,601                          |  

$ |  

14,768,366                     |

** **

** **

** **
```
 
```

The accompanying notes are an integral part of theseconsolidated financial statements

 

** **

3

----

 

** **

** **

** **

** **

** **

** **

**EASTERN GOLDFIELDS, INC. AND SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS**

** **

** **

**LIABILITIES ANDSTOCKHOLDERS’ EQUITY**

**                                                                                September 30, 2008        December 31, 2007**

**                                                                                      (Unaudited)                          (Audited)**
|  

Current liabilities:

Accounts  payable and other current liabilities

Advances  from stockholders

Short  term loans (Note 5)

Current  portion of long-term liabilities (Note 6)                                                                                                                                                                                                                                                                                                                                                                                                                                    | ** **

 

$

                                           |  

 

1,694,599

9,215

15,749,881

125,379                                                                                               |  

 

$ |  

 

1,688,411

17,485

-

202,704                                                                                                    |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------|-------------------|--------------------------------------------------------------------------------------------------------------------------------------------------|
|  

Total  current liabilities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |                                                                   |  

17,579,074                                                                                                                                  |              |  

1,908,600                                                                                                                                |
|  

Long-term liabilities:

Long  term liabilities, net of current portion (Note 6)

Reclamation  and remediation obligations (Note 7)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                                                                   |  

 

2,016,651

360,907                                                                                                                  |              |  

 

641,280

329,109                                                                                                                 |
|  

Total  long-term liabilities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                                                                   |  

2,377,558                                                                                                                                   |              |  

970,389                                                                                                                                  |
|  

Commitments (Note 8)

Minority interest (Note 9)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |                                                                   |  

-

1,592,097                                                                                                                                |              |  

-

1,592,097                                                                                                                             |
|  

Stockholders’ equity:

Common Stock:

$0.001 par value, 160,000,000 and 25,000,000 shares  authorized; 9,377,986 shares issued and outstanding at September 30, 2008 and  December 31, 2007, respectively

A  Class Preference Shares:

$0.00002  par value, 10,000,000 shares authorized; 2,881,393 shares issued and  outstanding at September 30, 2008 and December 31, 2007

Preferred  Stock:

$0.001  par value, 20,000,000 shares authorized; 0 shares issued and outstanding at September  30, 2008 and December 31, 2007

Additional  paid in capital 

Other  comprehensive loss

Accumulated  deficit |  

 

 

 

 

 

 

 

  |  

 

 

 

 

 

9,378

 

 

 

45

 

 

 

-

21,053,902

(5,468,459)

(10,283,531) |              |  

 

 

 

 

 

9,378

 

 

 

45

 

 

 

-

21,008,860

(448,497)

(8,235,425) |
|  

 

Less:  Loan to Lomshiyo (Note 9)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |  

                                                          |  

5,311,335

(1,698,463)                                                                                                                      |              |  

12,334,361

(2,037,081)                                                                                                                  |
|  

Total  stockholders’ equity                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |                                                                   |  

3,612,872                                                                                                                                   |              |  

10,297,280                                                                                                                               |
|  

  Total liabilities and  stockholders’ equity                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |  

$                                                              |  

25,161,601                                                                                                                                  |  

$         |  

14,768,366                                                                                                                               |

 

The accompanying notes are an integral part of theseconsolidated financial statements

4

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**EASTERN GOLDFIELDS, INC. AND SUBSIDIARIES**

** CONSOLIDATED STATEMENTS OF OPERATIONS**

**(Unaudited)**

|  

  | **Three Months**

**Ended September 30, 2008** | **Three Months**

**Ended September 30, 2007** | **Nine Months**

**Ended September 30, 2008** | **Nine Months**

**Ended September 30, 2007** |  
Income:

Sales

Other  income

 

$

 

1,485,989

105,467

 

$

 

1,863,215

116,054

 

$

 

5,746,854

314,513

 

$

 

 

5,030,336

256,042

 

Total  income

 

1,591,456

 

1,979,269

 

6,061,367

 

 

5,286,378

Costs and expenses:

Cost  of production

Exploration  costs

Operating  expenses 

 

 

 

 

1,825,502

(4,433)

724,745

 

 

1,796,775

(26,764)

827,294

 

 

5,542,937

126,846

1,953,662

 

 

 

 

4,172,701

129,543

1,949,087

 

Total  costs and expenses      

 

2,545,814

 

 

2,597,305

 

7,623,445

 

 

6,251,331

 

Loss from operations

 

 

(954,358)

 

 

(618,036)

 

 

(1,562,078)

 

 

(964,953)

 

Other expenses:

Interest

 

Loss before minority  interest

Minority interest

 

 

408,041

 

 

8,721

 

 

486,028

 

 

17,145

 

 

(1,362,399)

-

 

 

(626,757)

-

 

 

(2,048,106)

-

 

 

(982,098)

-

 

Loss before provision for  income taxes

Provision for income taxes

 

 

(1,362,399)

 -

 

 

(626,757)

-

 

 

(2,048,106)

-

 

 

(982,098)

-

 

Net loss

 

$

 

(1,362,399)

 

$

 

(626,757)

 

$

 

(2,048,106)

 

$

 

(982,098)

 

Net income (loss) per  share, basic

 

$

 

(0.15)

 

$

 

(0.07)

 

$

 

(0.22)

 

$

 

(0.11)

 

Net income (loss) per share,  diluted

 

$

 

(0.15)

 

$

 

(0.06)

 

$

 

(0.22)

 

$

 

(0.10)

 

Weighted average shares outstanding, basic

 

 

 

9,377,986

 

 

9,117,117

 

 

9,377,986

 

 

9,117,117

 

Weighted average shares outstanding, diluted

 

 

9,377,986

 

 

9,967,117

 

 

9,377,986

 

 

9,967,117

The accompanying notes are an integral part of theseconsolidated financial statements

5

 
****
**EASTERN GOLDFIELDS, INC. AND SUBSIDIARIES**

** CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’EQUITY**

**FOR THE NINE MONTHS ENDED SEPTEMBER30, 2008**

**(Unaudited)**

 

 

**Common Stock**

** **

**A Class Preference Shares**

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

 

** **

** **

**Number of Shares**

** **

** **

** **

**Par**

**Value**

** **

** **

** **

**Number of Shares**

** **

** **

** **

**Par**

**Value**

** **

** **

** **

**Additional Paid-in Capital**

** **

** **

**Other Comprehensive Loss**

** **

** **

** **

**Accumulated Deficit**

** **

** **

** **

**Loan to Lomshiyo**

** **

** **

**Total Stockholders’ Equity**

 

Balance  at December 31, 2007

 

Accrual of interest income on 

  loan to Lomshiyo

Debt issuance costs of warrants

Net  income

Foreign  currency translation

 

9,377,986

 

 

-

-

-

-

 

 

$

 

9,378

 

 

-

-

-

-

 

 

2,881,393

 

 

-

-

-

-

 

 

$

 

45

 

 

-

-

-

-

 

 

$

 

21,008,860

 

 

-

45,042

-

-

 

 

$

 

(448,497)

 

 

-

-

-

(5,019,962)

 

 

$

 

(8,235,425)

 

 

-

-

(2,048,106)

-

 

 

$

 

(2,037,081)

 

 

 (198,245)

-

-

536,863

 

 

$

 

10,297,280

 

 

(198,245)

45,042

(2,048,106)

(4,483,099)

 

Balance  at September 30, 2008

 

9,377,986

 

 

$

 

9,378

 

 

2,881,393

 

 

$

 

45

 

 

$

 

21,053,902

 

 

 

(5,468,459)

 

 

 

(10,283,531)

 

 

 

(1,698,463)

 

 

 

3,612,872

** **

** **

** **

** **

** **

** **

** **

** **

 

The accompanying notes are an integral part of theseconsolidated financial statements

6

 
****
**EASTERN GOLDFIELDS, INC. AND SUBSIDIARIES**

** CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited)**

** **

 

**Nine Months**

**Ended September 30,  2008**

** **

**Nine Months**

**Ended September 30,  2007**

 

Cash flows from operating  activities:

Net  loss

 

 

$

 

(2,048,106)

 

 

 

$

 

 

(982,098)

 

Adjustments to reconcile net  loss to net cash used

  in operating activities:

Depreciation,  depletion and amortization

Accrued  interest income on Loan Lomshiyo

Changes in assets and  liabilities:

Decrease  (Increase) in inventories

(Increase)  in other assets  

Decrease  (Increase) in prepaid expenses and other current assets

 Increase in accounts payable and other current  liabilities

 

 

 

 

544,317

(198,245)

 

27,393

-

 

(51,020)

6,188

 

 

 

 

 

 

370,153

(199,739)

 

(89,342)

(406,752)

(250,503)

435,596

    

            Net cash used in  operations    

 

(1,719,473)

 

 

 

(1,122,685)

 

Cash flows from investing activities:

Purchase  of  property and equipment

Capitalized  costs

 

 

(14,044,639)

(485,792)

 

 

 

 

(2,542,544)

-

    

            Net cash used in  investing activities

 

(14,530,431)

 

 

 

 

(2,542,544)

 

Cash flows from financing activities:

Repayment  of advances from stockholders

Proceeds  from long-term debt

Proceeds  from issuance of common stock

 

 

 

(8,270)

17,047,927

-

 

 

 

 

(6,473)

594,088

2,786,600

 

            Net cash provided  by financing activities

 

17,039,657

 

 

 

3,374,215

Effect  of exchange rates on cash

 

 

(839,522)

 

 

482,844

 

 

Net increase (decrease) in  cash

 

(49,769)

 

 

 

191,830

 

Cash, beginning of period

 

355,148

 

 

 

1,103,433

 

Cash, end of period

 

$

305,379

 

 

$

 

1,295,263

 

**Supplemental disclosure  of cash flow information:**

** **Cash paid for interest

 

 

$

 

 

486,028

 

 

 

$

 

 

17,145

 

**Supplemental disclosure  of non-cash operating,**

**   investing and  financing activities:**

 

Accrual  of interest income on loan to Lomshiyo

 

 

 

 

$

 

 

 

198,245

 

 

 

 

 

$

 

 

 

 

199,739

 

Deferred  debt issuance cost of warrants

 

$

 

45,042

 

 

$

 

-

 

 

The accompanying notes are an integral part of theseconsolidated financial statements

7

 
****
**EASTERNGOLDFIELDS, INC. AND SUBSIDIARIES**

** NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008**

**(Unaudited)**

** **

**1.        ORGANIZATION AND HISTORY**

 

EasternGoldfields, Inc., (the “Company" or "EGI") is the parentcompany of Eastern Goldfields SA (Proprietary) Limited, (“EGSA”), a corporationorganized under the laws of the Republic of South Africa. EGSA conducts all ofthe Company’s business operations in South Africa through its South Africancorporation subsidiaries.

 

EasternGoldfields, Inc. was originally incorporated under the laws of the State of Nevada on July 15, 1998, under the name of Fairbanks Financial, Inc. The Company wasestablished as a business management, marketing and consulting firm to serveboth the emerging and established business entrepreneur. Since itsincorporation, the Company has had minimal operations. It redirected itsbusiness efforts in late 2005 and on September 23, 2005, following a change incontrol, it purchased 100% of the issued and outstanding common or ordinarystock of EGSA. On October 1, 2005, the Company’s wholly owned subsidiary, EGSA,acquired, via a share exchange, 100% of the issued and outstanding common orordinary stock of Eastern Goldfields Limited. (“EGL”), a South African goldproducer and developer corporation. EGL conducts mining operations in theBarberton Greenstone Belt area of the Mpumalanga Province, South Africa.  OnOctober 25, 2005, the Company changed its corporate name to Eastern Goldfields,Inc. to more accurately reflect its business operations.  On May 30, 2008,EGSA, acquired 100% of the issued and outstanding common or ordinary stock ofBarberton Mines Limited, also a South African gold producer and developercorporation.  

 

Thisshare exchange for the acquisition of EGL by EGI’s wholly owned South Africansubsidiary, EGSA, was accounted for as a reverse acquisition, and, accordingly,for financial statement purposes, EGL was considered the accounting acquirorand the subject transaction was considered a recapitalization of EGL ratherthan an acquisition by the Company. Accordingly, the historical financial statementsprior to this share exchange are those of EGL, however, the name of theconsolidated corporation going forward is Eastern Goldfields, Inc.

 

EGLitself is a South African holding company which has three South Africansubsidiary corporations; Makonjwaan Imperial Mining Company (Pty) Ltd.(“MIMCO”), Eastern Goldfields Exploration (Pty) Ltd. (“EGE”) and CenturionMining Company (Pty) Ltd. (“Centurion”).

** **

**2.        SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES**

 

**Basisof Accounting**

 

The consolidated financialstatements of the Company have been prepared on the accrual basis of accountingand are in conformity with accounting principles generally accepted in the United States of America and prevailing industry practice.

Theinterim consolidated financial statements of the Company and its subsidiariesare unaudited.  In the opinion of management, all necessary adjustments for afair presentation of these interim statements have been included.  The resultsreported in these interim consolidated financial statements are not necessarilyindicative of the results that may be reported for the entire year.  Theaccompanying interim consolidated financial statements of the Company should beread in conjunction with the Company’s Annual Report on Form 10-KSB for theyear ended December 31, 2007.   

 

8

 

 

 
****
**EASTERNGOLDFIELDS, INC. AND SUBSIDIARIES**

** NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008**

**(Unaudited)**

** **

**2.         SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES** (Continued)

 

**Principlesof Consolidation**

 

Theconsolidated financial statements include the financial statements of theCompany and its wholly owned subsidiaries. All amounts are in U.S. dollarsunless otherwise indicated. All significant intercompany balances andtransactions have been eliminated in consolidation.

 

**Property Plant andMine Development**

 

Miningassets, including mine development and infrastructure costs and mine plantfacilities, are recorded at cost of acquisition. Expenditure incurred toevaluate and develop new ore bodies, to define mineralization in existing orebodies, to establish or expand productive capacity, is capitalized untilcommercial levels of production are achieved, at which times the costs areamortized as set out below.

 

Mineralrights are recorded at cost of acquisition. When there is little likelihood ofa mineral right being exploited, or the value of mineral rights have diminishedbelow cost, a write-down is affected against income in the period that suchdetermination is made.

 

Non-miningassets are recorded at cost of acquisition. These assets include the assets ofthe mining operation not included in the previous categories and all the assetsof the non-mining operations.

 

Depreciation,depletion and amortization are determined to give a fair and systematic chargein the income statement taking into account the nature of a particular ore bodyand the method of mining of that ore body. Mining assets, including minedevelopment and infrastructure costs, mine plant facilities and evaluationcosts, are amortized over the life of the mine using units-of-productionmethod, based on estimated proved and probable ore reserves above theinfrastructure. The proven and probable reserve quantities used to calculatedepreciation, depletion and amortization do not include the proven and probablereserve quantities attributable to stockpiled inventory.

 

Provedand probable ore reserves reflect the estimated quantities of economicallyrecoverable reserves, which can be recovered in future from known mineraldeposits.

 

Certainmining plant and equipment included in mine development and infrastructure isdepreciated on a straight-line basis over their estimated useful lives.

 

Othernon-mining assets are recorded at cost and depreciated on a straight-line basisover their estimated useful lives as follows:

 

Vehicles– 10 years

 

Furnitureand equipment – 3 years

 

Thecarrying amounts of the group's assets are reviewed at each balance sheet dateto determine whether there is any indication of impairment. If such indicationexists, the asset's recoverable amount is estimated.

 

9

 

 

**EASTERNGOLDFIELDS, INC. AND SUBSIDIARIES**

** NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008**

**(Unaudited)**

 

**2.         SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES** (Continued)

 

**Use of Estimates**

 

Thepreparation of financial statements in accordance with accounting principlesgenerally accepted in the United States of America requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities, disclosure of contingent assets and liabilities and the reportedamounts of revenues and expenses during the reporting period. Actual resultscould differ from those estimates.

 

**Earnings Per Share**

 

InFebruary 1997, the Financial Accounting Standards Board (FASB) issued SFAS No.128 Earnings Per Share which requires the Company to present basic and dilutedearnings per share for all periods presented. The computation of loss percommon share (basic and diluted) is based on the weighted average number of sharesactually outstanding during the period. Diluted earnings per share have beencalculated to give effect to the number of additional shares of common stockthat would have been outstanding if the potential dilutive instruments had beenissued for the nine months ended September 30, 2008 and 2007.  The weightedaverage number of outstanding shares includes the common stock as well as the AClass Preference Shares, as the holders of the A Class Preference Shares havethe same rights and entitlements as those attached to the common stock. Thecomputation of dilutive loss per common share does not assume conversion,exercise or contingent exercise of securities that would have an anti-dilutiveeffect on earnings.

 

Thefollowing table reconciles basic earnings per share and diluted earnings pershare and the related weighted average number of shares outstanding for the ninemonths ended September 30, 2008:

 

                                                                                                     DISCLOSURE FOR RECONCILIATION

                                                                                                               OF BASIC AND DILUTED

                                                                                                                 EARNINGS PER SHARE

 

                                                                                              For the Nine Months Ended September 30, 2008

 

                                                                                                            Income                  Shares                 Per-share

                                                                                               (Numerator)       (Denominator)            Amount

 

        Net loss                                                                                       $(2,048,106)                  9,377,986                $  (0.22)

 

        BASIC EPS

        Income availableto common

                stockholders                                                                      $(2,048,106)                  9,377,986                $  (0.22)

        

        

 

        DILUTED EPS

        Income availableto common stockholders

                and assumedconversions                                              $(2,048,106)                  9,377,986                $  (0.22)

 

 

10

 

 

 

**EASTERNGOLDFIELDS, INC. AND SUBSIDIARIES**

** NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008**

**(Unaudited)**

 

**2.         SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES** (Continued)

 

**Income Taxes**

 

Deferredincome taxes are reported using the liability method. Deferred tax assets arerecognized for deductible temporary differences and deferred tax liabilitiesare recognized for taxable temporary differences. Temporary differences are thedifferences between the reported amounts of assets and liabilities and theirtax bases. Deferred tax assets are reduced by a valuation allowance when, inthe opinion of management, it is more likely than not that some portion or allof the deferred tax assets will not be realized. Deferred tax assets andliabilities are adjusted for the effects of changes in tax laws and rates onthe date of enactment.  As the Company is operating at a loss, no income taxeshave been provided or are currently due.

 

Duringthe year ended December 31, 2007, the Company adopted Financial AccountingStandards Board (FASB) Interpretation No. 48, “Accounting for Uncertainty inIncome Taxes” (FIN 48), which supplements SFAS No. 109, “Accounting for IncomeTaxes,” by defining the confidence level that a tax position must meet in orderto be recognized in the financial statements. The Interpretation requires thatthe tax effects of a position be recognized only if it is“more-likely-than-not” to be sustained based solely on its technical merits asof the reporting date. The “more-likely-than-not” threshold represents apositive assertion by management that a company is entitled to the economicbenefits of a tax position. If a tax is not considered “more-likely-than-not”it is to be sustained based solely on its technical merits. No benefits of thetax position are to be recognized. Moreover, the more-likely-than-not thresholdmust continue to be met in each reporting period to support continuedrecognition of a benefit. With the adoption of FIN 48, companies are requiredto adjust their financial statements to reflect only those tax positions thatare more-likely-than-not to be sustained. Any necessary adjustment uponadoption would be recorded directly to retained earnings and reported as achange in accounting principle at December 31, 2006.

 

**Fair Value ofFinancial Instruments**

 

Financialinstruments consist principally of cash, short-term liabilities and long-termdebt. The estimated fair values of these instruments approximate their carryingvalue.

 

**ForeignCurrency Translation**

 

TheCompany translates the foreign currency financial statements of its foreignoperations by translating balance sheet accounts at the exchange rate on thebalance sheet date and the income statement accounts using the prevailingexchange rates at the transaction date. Translation gains and losses arerecorded in stockholders’ equity and realized gains and losses are reflected inoperations. The Company’s functional currency is the South African Rand.

 

**ExplorationExpenses**

 

Exploration costs arecharged to operations as incurred.

 

 

 

11

 

 

 
****
**EASTERNGOLDFIELDS, INC. AND SUBSIDIARIES**

** NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008**

**(Unaudited)**

 

**2.         SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES** (Continued)

 

**Impairment ofLong-Lived Assets**

 

TheCompany reviews long-lived assets and certain identifiable intangibles forimpairment whenever events or changes in circumstances indicate that thecarrying amount of an asset may not be recoverable. Recoverability of assets tobe held and used is measured by a comparison of the carrying amount of an assetto the future net cash flows expected to be generated by the asset. If suchassets are considered to be impaired, the impairment to be recognized ismeasured by the amount by which the carrying amount of the assets exceeds thefair value of the assets. Assets to be disposed of are reported at the lower ofthe carrying amount or fair value less costs to sell.

 

**Inventories**  

 

Asdescribed below, costs that are incurred in or that benefit the productiveprocess are accumulated as stockpiles and inventories. Stockpiles andinventories are carried at the lower of average cost or net realizable value.Net realizable value represents the estimated future sales price of the productbased on current and long-term metals prices, less the estimated costs tocomplete production and bring the product to sale. Write-downs of stockpilesand inventories, resulting from net realizable value impairments, are reportedas a component of*Cost of production*. The major classifications are as follows:

 

***Stockpiles***

 

Stockpilesrepresent materials that are currently in the process of being converted to asaleable product. Conversion processes vary depending on the nature of the oreand the specific processing facility, but include mill in-circuit, leachin-circuit and carbon in-pulp inventories. In-process material is measured basedon assays of the material fed into the process and the projected recoveries ofthe respective plants. In-process inventories are valued at the average cost ofthe material fed into the process attributable to the source material comingfrom the mines, stockpiles and/or leach pads plus the in-process conversioncosts, including applicable depreciation relating to the process facilitiesincurred to that point in the process.

 

***PreciousMetals In process***

 

Preciousmetals in process is gold bullion. Precious metals that result from theCompany’s mining and processing activities are valued at the average cost ofthe respective in-process inventories incurred prior to the refining process,plus applicable refining costs.

 

**RevenueRecognition** 

 

Revenueis recognized, net of treatment charges, from a sale when the price isdeterminable, the product has been delivered, the title has been transferred tothe customer and collection of the sales price is reasonably assured.

 

 

 

12

 

 

 

**EASTERNGOLDFIELDS, INC. AND SUBSIDIARIES**

** NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008**

**(Unaudited)**

 

**2.         SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES** (Continued)

 

**DeferredStripping Costs** 

 

Ingeneral, mining costs are allocated to production costs and inventories, andare charged to c*osts of production*whengold is sold. However, at open pit mines with diverse grades and waste-to-oreratios over the mine life, the Company defers and amortizes certain miningcosts on a UOP basis over the life of the mine. These mining costs, which arecommonly referred to as “deferred stripping” costs, are incurred in miningactivities that are normally associated with the removal of waste rock. Thedeferred stripping accounting method is generally accepted in the mining industrywhere mining operations have diverse grades and waste-to-ore ratios; however,industry practice does vary. Deferred stripping matches the costs of productionwith the sale of such production at the Company’s operations where it isemployed, by assigning each ounce of gold with an equivalent amount of wasteremoval cost.

 

If the*Company* were to expense stripping costs as incurred, there could begreater volatility in the Company’s period-to-period results of operations.

 

Deferred*stripping* costs are charged to*Costsof Production*as gold is produced andsold using the UOP method based on estimated recoverable ounces of proven andprobable gold, using a stripping ratio calculated as the ratio of total tons tobe moved to total proven and probable ore reserves, which results in therecognition of the costs of waste removal activities over the life of the mineas gold is produced.

 

TheCompany reviews and evaluates its deferred stripping costs for impairment whenevents or circumstances indicate that the related carrying amounts may not berecoverable.

** **

As theCompany’s open pit operations are forecasted to cease by end-2008, the Companydid not measure and recognize production stage deferred stripping costs andcredits for the nine months period ended September 30, 2008.

** **

**Reclamationand Remediation Costs (Asset Retirement Obligations)**

 

InAugust 2001, the FASB issued Statement of Financial Accounting Standards(“SFAS”) No. 143, “Accounting for Asset Retirement Obligations”, whichestablished a uniform methodology for accounting for estimated reclamation andabandonment costs. Reclamation costs are allocated to expense over the life ofthe related assets and are adjusted for changes resulting from the passage oftime and revisions to either the timing or amount of the original present valueestimate. Prior to adoption of SFAS No. 143, estimated future reclamation costswere based principally on legal and regulatory requirements. Such costs relatedto active mines are accrued and charged over the expected operating lives ofthe mines using the UOP method based on proven and probable reserves. Futureremediation costs for inactive mines are accrued based on management’s bestestimate at the end of each period of the undiscounted costs expected to beincurred at a site. Such cost estimates included, where applicable, ongoingcare, maintenance and monitoring costs. Changes in estimates at inactive minesare reflected in earnings in the period an estimate is revised.

 

13

 

 

** **

** **

**EASTERNGOLDFIELDS, INC. AND SUBSIDIARIES**

** NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008**

**(Unaudited)**

** **

**2.         SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES** (Continued)

 

**StockOption Expense** 

Compensationcost recognized in 2008 and 2007 includes: (a) compensation cost for allshare-based payments granted prior to, which have since vested as of January 1,2006, based on the grant-date fair value estimated in accordance with theoriginal provisions of FAS 123, and (b) compensation cost for all share-basedpayments granted subsequent to January 1, 2006, which have vested based on thegrant-date fair value estimated in accordance with the provisions of FAS123(R).

 

        **Fair ValueAccounting**

** **

InSeptember 2006, the Financial Accounting Standards Board (“FASB”) issued FASBStatement No. 157, “Fair Value Measurements” (“FAS 157”).  FAS 157 defines fairvalue, establishes a framework for measuring fair value in generally acceptedaccounting principles, and expands disclosures about fair value measurements. The provisions of FAS 157 were adopted January 1, 2008.  In February 2008, theFASB staff issued Staff Position No. 157-2 “Effective Date of FASB StatementNo. 157” (“FSP FAS 157-2”).  FSP FAS 157-2 delayed the effective date of FAS157 for nonfinancial assets and nonfinancial liabilities, except for items thatare recognized or disclosed at fair value in the financial statements on arecurring basis (at least annually).  The provisions of FSP FAS 157-2 areeffective for the Company’s fiscal year beginning January 1, 2009.            

 

FAS157 establishes a fair value hierarchy that prioritizes the inputs to valuationtechniques used to measure fair value.  The hierarchy gives the highestpriority to unadjusted quoted prices in active markets for identical assets orliabilities (Level 1 measurements) and the lowest priority to unobservableinputs (Level 3 measurements).  The three levels of the fair value hierarchyunder FAS 157 are described below:

 

                Level1   Unadjusted quoted prices in active markets that are accessible at themeasurement date                                  for identical, unrestrictedassets or liabilities;

                Level2   Quoted prices in markets that are not active, or inputs that areobservable, either directly                                  or indirectly forsubstantially the full term of the asset or liability;

                Level3   Prices or valuation techniques that require inputs that are bothsignificant to the fair value                               measurement andunobservable (supported by little or no market activity).

 

Thefollowing table sets forth the Company’s financial assets and liabilitiesmeasured at fair value by level within the fair value hierarchy.  As requiredby FAS 157, assets and liabilities are classified in their entirety based onthe lowest level of output that is significant to the fair value measurement.

 

                                                                                                                         Fair Value at September 30, 2008

                                                                                                                            (in thousands) 

                                                                                                                Total          Level1           Level 2         Level 3

Assets:

                Cash                                                                                  $  305          $     305               $  -                 $  -

                Otherassets                                                                     24,812          24,812               _____           _____

                                                                                                          $25,117         $25,117               _____           _____

Liabilities:

                None

14

 

**EASTERNGOLDFIELDS, INC. AND SUBSIDIARIES**

** NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008**

**(Unaudited)**

 

**2.         SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES** (Continued)

 

**FairValue Accounting**(Continued)

 

The Company’scash and certain other assets are classified within Level 1 of the fair valuehierarchy because they are valued using quoted market prices.  The cash andcertain other assets that are valued based on quoted market prices in activemarkets are primarily money market securities.

 

Thetotal amount of the changes in fair value for the period was included in netloss as a result of changes in the Company’s stock price from December 31,2007.

 

InFebruary 2007, the FASB issued FASB Statement No. 159, “The Fair Value Optionfor Financial Assets and Financial Liabilities” (“FAS 159”) permits entities tochoose to measure many financial instruments and certain other items at fairvalue, with the objective of improving financial reporting by mitigatingvolatility in reported earnings caused by measuring related assets andliabilities differently without having to apply complex hedge accountingprovisions.  The provisions of FAS 159 were adopted January 1, 2008.  TheCompany did not elect the Fair Value Option for any of its financial assets orliabilities, and therefore, the adoption of FAS 159 had no impact on theCompany’s consolidated financial position, results of operations or cashflows.   

 

**3.         INVENTORIES**

 

Inventories at September30, 2008 and December 31, 2007 consist of the following:

 

                                                                                                                            **2008                        2007**

 

Precious  metals in process

Stockpiles

 

$

 

220,105

219,756

 

$

 

224,333

242,921

 

 

$

 

439,861

 

$

 

467,254

** **

 

   

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

15

 

** **

** **

**EASTERNGOLDFIELDS, INC. AND SUBSIDIARIES**

** NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008**

** (Unaudited)**

** **

**4.         PROPERTY,PLANT AND MINE DEVELOPMENT**

 

Major classes of property, plant, and mine developmentas of September 30, 2008 and December 31, 2007 are as follows:

                                                                                                                            **2008                          2007**

Land  and buildings

Mining  assets

Mine  development costs

Mining  rights

Motor  vehicles

Furniture  and equipment

Metallurgical  plant

Plant  and equipment

Environmental  rehabilitation fund

 

$

349,661

3,303,359

25,350,375

1,085,010

86,546

173,418

4,713,162

267,780

178,462

 

$

91,162

5,839,151

7,344,539

1,489,488

97,738

60,099

1,735,479

214,752

331,827

 

 

Less:  accumulated depreciation

 

 

35,507,773

(12,135,337)

 

 

17,204,235

(3,826,435)

 

Net  property and equipment

 

$

 

23,372,436

 

$

 

13,377,800

** **

                Depreciation, depletion and amortization expense is $471,448and $370,153 for the nine months ended September 30, 2008 and 2007,respectively.  Included in property, plant and mine development is Barbrookassets at acquisition cost of $16,749,383 and accumulated depreciation of $7,275,480.

** **

**5.         SHORTTERM LOANS**

 

Short term loans at September30, 2008 consist of the following:

 

 

Phoenix Gold Fund and Asian Investment Management Services  Ltd

Investec  Bank Limited

Kestrel  S.A.

 

$

 

3,845,830

10,008,108

1,895,943

 

 

$

 

15,749,881

There were no short term loans at December 31, 2007.

On March 28, 2008, the Company’s wholly owned subsidiary EGSA enteredinto a Convertible Loan Agreement (the “Agreement”) with Phoenix Gold Fund andAsian Investment Management Services Ltd, collectively referred to as “the Lenders”.

The Loan amounting to R32 million ($3,845,830 as of September 30, 2008)received on April 18, 2008 is termed as pre-listing funds prior to EGSA’sintended listing on the Johannesburg Stock Exchange within twelve months fromthe date of this Agreement.   

For the purposes of this Agreement, EGSA has been ascribed a value ofR432 million and the percentage shareholding that will be issued to the Lendersin order to discharge the Loan has been calculated accordingly.

 

16

 

 

 

**EASTERNGOLDFIELDS, INC. AND SUBSIDIARIES**

** NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008**

**(Unaudited)**

** **

**5.         SHORTTERM LOANS** (Continued)****

**       **

                The loan principal canconvert into 6.9% of the total issued and outstanding shares of the ordinarycapital  of EGSA after the conversion of the loan by EGSA.  Conditions relatingto interest payments are as                follows:    

** **

•        If EGSA is able to list its shareswith the JSE Limited (JSE) within six months of the agreement date then nointerest is due and payable.  

•        If EGSA is not able to list itsordinary shares with the JSE within six months of the agreement date theninterest will accrue at the South African Prime Lending Rate. 

•        If EGSA lists its ordinary shareswith the JSE after six months but before twelve months of the agreement date,then interest will accrue and be paid on a monthly basis until conversion orrepayment of the loan.  

•        If EGSA has been unable to listits ordinary shares with the JSE within twelve months of the agreement date,then the lender can demand repayment of principal and accrued interest orconversion of the debt into the corresponding ordinary shares of EGSA.

 

On May 27, 2008, the Company’s wholly owned subsidiaryEGSA obtained R80 million ($9,614,229 as of September 30, 2008) six monthbridging loan facility from Investec Bank Ltd. (“Investec”) for the acquisitionof Barbrook Mines Ltd.  The facility is repayable 6 months after disbursementof May 30, 2008.  Interest on the facility is calculated at 3 month JIBAR plus3% p.a., capitalized and payable quarterly.  EGSA has issued a R20 millionwarrant package to Investec on the execution of the Facility Documents.  Thewarrant package is calculated with reference to the conversion price for thecommon shares of EGSA equal to 110% of the lesser of R7.00 per share or theactual price per share achieved in the R100 million pre IPO equity raising.  Asof the date of this filing the pre IPO equity raising has not taken place,therefore, the valuation of the warrants cannot be determined.  The warrantsshall be convertible, in tranches of at least R1 million into ordinary sharesof EGSA at the holder’s option at any time prior to 3 years after issue date.  IfEGSA is not listed within nine months of execution of the Facility Documents,the Investec shall be entitled to elect to receive a settlement fee from EGSAequivalent to an independent valuation of the Warrant Package.  Security forthe facility is:

 

•        A guarantee from the Companysecured by a pledge and cession of its shareholding in and claims against EGSA;

•        A pledge and cession over EGSA’sshareholding in and claims against Barbrook Mines Ltd;

•        Suitable security over all ofEGSA’s bank accounts, and

•        Subordination of shareholder andGroup company loans to EGSA.

 

                The loan balanceoutstanding at September 30, 2008 includes $393,879 of accrued interest.  

 

                Also see SubsequentEvents Note 12.  
****
17

 

**EASTERNGOLDFIELDS, INC. AND SUBSIDIARIES**

** NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008**

**(Unaudited)**

** **

**5.         SHORTTERM LOANS** (Continued)****

  

               The following disclosuresare in line with the requirements of Financial Accounting Standards Board             StatementNo. 141 (“FAS 141”):

 

a.       On May 30, 2008, EGSA purchased 100% of theissued ordinary share capital of Barbrook Mines Limited (“Barbrook”) from Maid'O The Mist (Proprietary) Limited, a company incorporated in the Republic ofSouth Africa and a subsidiary of Caledonia Mining Corporation Limited(“Caledonia”), a company incorporated in Canada.  In accordance with the saleagreement, Caledonia also agreed to procure the sale and cession of totalamount owing by Barbrook to the Caledonia Group with effect from the closingdate.

 

b.       The primary reason for this acquisition wasthat the dormant processing plant of Barbrook will allow the Company to changeits original strategy of building a new plant at the Company’s Lily Mine sitethereby resulting in substantial reductions in capital expenditure.

 

c.       As the acquisition wascompleted on May 30, 2008, results of operations of Barbrook for the periodfrom May 31, 2008 to September 30, 2008 are included in the interimconsolidated statement of operations of the Company for the nine month periodended September 30, 2008.

 

d.       The cost of acquisition for the 100% of theissued ordinary share capital of Barbrook and shareholders loan accounts wasSouth African Rands 70 million which approximated to $9.2 million as of theclosing date.  The carrying value of the assets at December 31, 2007 has beenwritten down to reflect the realisable value as per the value of thisacquisition.

   

On August 25, 2008, the Company obtained Swiss Francs2,200,000 six month loan from a shareholder, Kestrel SA (“Kestrel”) and forpurposes of working capital requirements.  Interest on the loan is 15% p.a.calculated on the outstanding balance and compounded monthly in arrears.  As ofSeptember 30, 2008, the draw down on the loan amounted to Swiss Francs2,057,000 ($1,895,943) and the balance as of that date included accruedinterest of $22,620.  In addition, on August 22, 2008, the Company entered intoa Common Stock Purchase Warrant Agreement with Kestrel whereby Kestrel isentitled to purchase up to Fifty Thousand (50,000) shares of Common Stock (parvalue $0.001 per share) from the Company upon payment to the Company of FiveDollars ($5.00) per share.   Warrants may be purchased at any time on or afterAugust 20, 2008 but all rights to purchase the Shares and to exercise thisWarrant shall expire on August 21, 2011 after which it shall become void andall rights hereunder shall thereupon cease.                                                                                     

18

 

**EASTERN GOLDFIELDS, INC. AND SUBSIDIARIES**

** NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008**

**(Unaudited)**

** **

**6.         LONGTERM LIABILITIES**

 

                                                                                                  **September 30, 2008  December 31, 2007**

 

Standard  Bank Vehicle and Asset Finance 

Less:  Current portion

 

$

 

2,142,030

(125,379)

 

$

 

843,984

(202,704)

 

 

$

 

2,016,651

 

$

 

641,280

Secured banking facility against mining equipment bearing interest atthe prime bank overdraft rate less 1% and repayable in monthly installments ofSouth African Rands 551,474 ($66,275) and South African Rands 182,669 ($26,620)at September 30, 2008 and December 31, 2007, respectively.

 

Maturitiesof the liabilities are as follows:

 

**For the year ending December 31:**

2008

2009

2010

2011

2012

 

 

 

 

$

 

125,379

542,096

616,131

635,180

223,244

 

 

 

 

 

 

$

 

2,142,030

** **

                

** **

 

 

 

 

 

 

 

19

 

 

 

 

**EASTERNGOLDFIELDS, INC. AND SUBSIDIARIES**

** NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008**

**(Unaudited)**

** **

**7.         RECLAMATIONAND REMEDIATION**

 

TheCompany’s mining and exploration activities are subject to various laws andregulations governing the protection of the environment.  These laws andregulations are continually changing and are generally becoming morerestrictive.  The Company conducts its operations so as to protect the publichealth and environment and believes its operations are in compliance withapplicable laws and regulations in all material respects.  The Company hasmade, and expects to make in the future, expenditures to comply with such lawsand regulations, but cannot predict the full amount of such futureexpenditures. Estimated future reclamation costs are based principally on legaland regulatory requirements. 

 

At September 30,2008 $360,907 were accrued for reclamation obligations relating to currently orrecently producing mineral properties.

 

Thefollowing is a reconciliation of the total liability for reclamation andremediation: 

 

                                                                                                                                   

 

Balance, December 31, 2007

Addition,  change in estimate and other

Liabilities  settled

Accretion  expense

 

$

 

329,109

31,798

-

-

 

Balance, September 30, 2008

 

$

 

360,907

 

**8.         COMMITMENTS**

 

A first continuingcovering bond amounting to South African Rands 200,000 ($24,035) was registeredover the property held by a subsidiary, Makonjwaan Properties Henry Nettman TwoEight (Pty) Ltd., in lieu of financial guarantees amounting to South AfricanRands 164,000 ($19,709) issued in favor of the Department of Minerals andEnergy. 

During the year ended December 31, 2006, the Company entered into aService and Support Agreement with Cheston Minerals PTY Limited (“CML”), acompany owned by EGI’s President.  This agreement covers the rental of theCompany’s South African office and use of the office equipment and supplies,which are owned by CML.  The agreement requires a monthly payment of $16,000. The term of the agreement is one year and is renewable on an annual basis.  TheCompany charged $144,000 and $135,000 to operating expense for the nine monthperiod ended September 30, 2008 and 2007, respectively.

During the year ended December 31, 2006, the Company entered into anAgreement for Consulting Services and Public Relations with Zenith PremierLimited (“ZPL”), a company in which EGI’s CFO serves as a director.  Thisagreement covers the investor relation services to be provided by ZPL to EGI. The agreement requires a monthly payment of $16,500 and was terminated onAugust 31, 2008.  The Company charged $132,000 and $148,500 to operatingexpense for the nine month period ended September 30, 2008 and 2007,respectively.

** **

20

 
****
**EASTERN GOLDFIELDS,INC. AND SUBSIDIARIES**

** NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008**

**(Unaudited)**

** **

**9.         MINORITYINTEREST**

The current South African mining legislation promulgated under “Mineraland Petroleum Resources Development Act of 2004 (“MPRDA”) seeks, among otherthings, (i) to expand opportunities for historically disadvantaged SouthAfricans to enter the mineral industry and obtain benefits from theexploitation of mineral resources; and (ii) to promote employment, social andeconomic welfare as well as ecologically sustainable development.  In order toconvert an old order mining right to a new order mining right the holder isrequired to submit a social and labor plan.  The plan should describe how itwill expand opportunities for historically disadvantaged South Africans toenter the mineral industry.  

Further, for purposes of mining right conversions effective May 1, 2004(the effective date), the MPRDA (incorporating the Mining Charter) requiresmining company ownership for historically disadvantaged South Africans to 15%ownership within five years and 26% ownership within 10 years of the effectivedate.  The transfer of ownership is to be consummated at fair market value.  

Accordingly, and pursuant to the requirements of MPRDA, EGL on December9, 2005 entered into a “Heads of Agreement” to sell 26% of its ordinary stockto Lomshiyo Investments (Proprietary) Limited (“Lomshiyo”) for a considerationof R9,900,000 ($1,081,600 and $1,442,728 at September 30, 2008 and December 31,2007, respectively.)  This amount is a loan to Lomshiyo and is reflected as areduction of equity in the Company’s September 30, 2008 consolidated balancesheet.  Lomshiyo is a South African corporation whose majority shareholders arehistorically disadvantaged South Africans.  The transaction closed on February2, 2006.  The ownership percentage of net assets of EGL acquired by Lomshiyo atDecember 31, 2005 amounted to $1,379,142 or 26%. 

The purchase of ordinary stock was financed with a note receivablebearing an annual interest rate of the South African Prime Rate (12.075% at June30, 2007).  The note accrues interest and is payable to the Company on January2, of each year.  A total of $616,863 of accrued interest has been added to thenote receivable.  The note is due and payable on December 31, 2010.  TheCompany’s common stock collaterizes the note receivable.

** **

**10.       STOCKOPTIONS**

** **

**            Employee Stock Options**

 

TheCompany currently maintains the Eastern Goldfields, Inc. 2005 Stock Plan(“Stock Plan”), approved by stockholders on November 26, 2005, forexecutives and eligible employees.  Under this Stock Plan, options to purchaseshares of stock can be granted with exercise prices not less than 100% of fairmarket value of the underlying stock at the date of grant.  Options grantedunder the Company’s stock plan vest over periods ranging from one to threeyears of the date of the grant and are exercisable over a period of time not toexceed 10 years from grant date.  At December 31, 2006, no shares wereavailable for future grants under the Company’s 2005 Stock Incentive Plan.  Alsosee Subsequent Events Note 12. 

 

 The following table summarizes annual activity forall stock options for the nine months ended September  30, 2008 and the yearended December 31, 2007:

 

 

21

 

 

 

 

**EASTERNGOLDFIELDS, INC. AND SUBSIDIARIES**

** NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008**

**(Unaudited)**

 

**10.       STOCKOPTIONS**(Continued)

** **

**            Employee Stock Options** (Continued)

 

 

**2008**

** **

**2007**

 

** **

**Number of Shares**

** **

**Weighted Average Exercise Price**

** **

** **

**Number of Shares**

** **

**Weighted Average Exercise Price**

 

Outstanding,  beginning 

    of the period

Granted

Exercised  

Forfeited  and expired

 

 

 

 

 

850,000

-

-

-

 

 

 

$

 

 

1.50

-

-

-

 

 

 

 

850,000

-

-

-

 

 

 

$

 

 

1.50

-

-

-

 

Outstanding,  end of period

 

 

850,000

 

 

$

 

1.50

 

 

 

850,000

 

 

$

 

1.50

 

Options  exercisable, end of period

 

Weighted  average fair value of options granted during the period

 

 

 

 

 

 

$

 

 

833,000

 

 

 

-

 

 

 

$

 

 

1.50

 

 

 

 

 

 

 

 

$

 

 

833,000

 

 

 

-

 

 

 

$

 

 

1.50

 

 

 

 

 
The fair value of the stock options granted (and vested) during the nine month period ended September 30, 2008 and the year ended December 31, 2007, was approximately $0 and $0 or $0 and $0 per stock option, respectively, and was determined using the Black Scholes option pricing model.  The factors used for the nine month period ended September 30, 2008 and the year ended December 31, 2007, were the option exercise price of $1.50 per share, a 3 year life of the options, volatility measure of 43.77% (2007 - 50%), a dividend rate of 0% and a risk free interest rate of 2.10% (2007 - 4.55%).
Thefollowing table summarizes information about stock options outstanding at September 30,2008, with exercise prices less than the fair market value on the date of grantwith no restrictions on exercisability after vesting: 

 

 

  

**Options Outstanding**

  

 

  

**Options Exercisable**

**Range of Exercise Prices**

 

**Number  Outstanding**

 

**Weighted-  average  Remaining  Contractual  Life  (in years)**

 

**Weighted-  average  Exercise  Price**

 

**Number  Exercisable**

 

**Weighted  Average  Exercise  Price**

 

$1.50

  

850,000

  

      0.6

  

 $

1.50

  

833,000

 

 $

1.50

 

As of September 30, 2008,there was approximately $86,000 of unrecognized compensation cost related tounvested stock options.  This cost is expected to be recognized over a weightedaverage period of 0.6 years.
 
22

 

**EASTERN GOLDFIELDS, INC. AND SUBSIDIARIES**

** NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008**

**(Unaudited)**

 

**11.       CAPITALSTOCK**

 

**Common Stock**

 

On September 30, 2008 the Board of Directors ofEastern Goldfields, Inc. approved an amendment to the Company’s Articles ofIncorporation to increase the authorized common stock to 160,000,000.

 

**Preferred Stock**

 

On September 30, 2008, the Board of Directors ofEastern Goldfields, Inc. approved an amendment to the Company’s Articles ofIncorporation to authorize 20,000,000 shares of Preferred Stock with a parvalue of $0.001 per Share.

** **

**12.       SUBSEQUENTEVENTS**

 

a.  On October 30,2008, the Company received a commitment letter agreement from Investec BankLimited (“Investec”).  Under the terms of the agreement, Investec has agreed toextend the maturity date of the Company’s existing bridging loan (the “ExistingLoan”) from the original maturity date of November 28, 2008 to May 29, 2009(the “Loan Extension”).

 

As consideration for the Loan Extension,the Company agreed to the following:

 

i.         To grant Investec 820,000 CommonStock Purchase Warrants for the purchase of 820,000 shares of the Company’sCommon Stock at an exercise price equal to the lower of $3.75 per share and theprice at which the Company raises equity capital in its next offering;

 

ii.       To increase the interest rate onthe Existing Loan from Jibar plus 3% to Jibar plus 4%;

 

iii.      To confirm that the Company has sufficient workingcapital for the period through the last date of the Loan Extension;

 

iv.      To subordinate all shareholder loans to the ExistingLoan;

 

v.       To prohibit the payment of any interest and principalon all shareholder loans;

 

vi.      To prohibit further indebtedness without the priorwritten approval of Investec; and

 

vii.    To provide Investec on or before the 5th calendar dayof each month, monthly management accounts and an update on the Company’sfinancing strategy and provide Investec with an opportunity to review thestrategy with Investec, upon Investec’s request.

 

 

b.     On October 9,2008, the Board of Directors approved the extension of the Company's 2005 StockOption Plan so that, as extended, the 2005 Stock Option Plan shall not expireuntil October 28, 2010.

 

23

 
****
**MATTER OF FORWARD-LOOKINGSTATEMENTS**

 

THIS FORM 10-Q CONTAINS "FORWARD-LOOKING STATEMENTS" THAT CAN BE IDENTIFIED BY THEUSE OF FORWARD-LOOKING WORDS SUCH AS "BELIEVES," "EXPECTS," "MAY," "WILL,""SHOULD," OR "ANTICIPATES," OR THE NEGATIVE OF THESE WORDSOR OTHER VARIATIONS OF THESE WORDS OR COMPARABLE WORDS, OR BY DISCUSSIONS OFPLANS OR STRATEGY THAT INVOLVE RISKS AND UNCERTAINTIES.  MANAGEMENT WISHES TOCAUTION THE READER THAT THESE FORWARD-LOOKING STATEMENTS, INCLUDING,  BUT NOTLIMITED TO, STATEMENTS REGARDING THE COMPANY’S MARKETING PLANS, GOALS,COMPETITIVE CONDITIONS, REGULATIONS THAT AFFECT PUBLIC COPMPANIES THAT HAVE NOEXISTING BUSINESS AND OTHER MATTERS THAT ARE NOT HISTORICAL FACTS ARE ONLYPREDICTIONS.  NO ASSURANCES CAN BE GIVEN THAT SUCH PREDICTIONS WILL PROVECORRECT OR THAT THE ANTICIPATED FUTURE RESULTS WILL BE ACHIEVED.  ACTUAL EVENTSOR RESULTS MAY DIFFER MATERIALLY EITHER BECAUSE ONE OR MORE PREDICTIONS PROVETO BE ERRONEOUS OR AS A RESULT OF OTHER RISKS FACING THE COMPANY. FORWARD-LOOKINGSTATEMENTS SHOULD BE READ IN LIGHT OF THE CAUTIONARY STATEMENTS AND IMPORTANTFACTORS DESCRIBED IN THIS FORM 10-Q FOR EASTERN GOLDFIELDS, INC., INCLUDING,BUT NOT LIMITED TO THE MATTERS SET FORTH IN MANAGEMENT’S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. THE RISKS INCLUDE,BUT ARE NOT LIMITED TO, THE RISK FACTORS AND UNCERTAINTIES SET FORTH IN ITEM1A, RISKS ASSOCIATED WITH A SMALL COMPANY THAT HAS ONLY A LIMITED HISTORY OFOPERATIONS, THE COMPARATIVELY LIMITED FINANCIAL RESOURCES OF THE COMPANY, THEINTENSE COMPETITION THE COMPANY FACES FROM OTHER ESTABLISHED COMPETITORS, ANYONE OR MORE OF THESE OR OTHER RISKS COULD CAUSE ACTUAL RESULTS TO DIFFERMATERIALLY FROM THE FUTURE RESULTS INDICATED, EXPRESSED, OR IMPLIED IN SUCHFORWARD-LOOKING STATEMENTS.  WE UNDERTAKE NO OBLIGATION TO UPDATE OR REVISE ANYFORWARD-LOOKING STATEMENT TO REFLECT EVENTS, CIRCUMSTANCES, OR NEW INFORMATIONAFTER THE DATE OF THIS FORM 10-Q OR TO REFLECT THE OCCURRENCE OF UNANTICIPATEDOR OTHER SUBSEQUENT EVENTS.

 

*Asused herein, the term “the Company,” “we,”  “us,” and “our” refer to EasternGoldfields, Inc., a Nevada corporation and its subsidiaries unless otherwisenoted.*

 

**Item1A.  Risk Factors.**

** **

**Lack of Diversification: **Our business, assets, and operations are concentratedin South Africa and the mining of gold. As a result, we are not diversified andto that extent we face continuing challenges to achieve stable revenues,profits, and cash flow while also remaining exposed to the risks associatedwith this concentration.

** **

**SmallCompany, Limited Resources & Need for Additional Capital**:  We are a small company with limited financialresources relative to the many competitors in our industry.  In the event ofany unexpected problems or difficulties in our business and operations, we maynot have the ability to obtain sufficient additional capital on terms that arereasonable in light of our current circumstances and market conditions.Further, we currently estimate that we will need to raise $60,000,000 inadditional capital.  We have not received any assurances that this additionalcapital can be obtained or if it is obtained, that can be obtained onreasonable terms and in a timely fashion to allow us to execute our plans.  

 

**LimitedTrading Market for Common Stock:*** *Our common stock is presently traded in theover-the-counter Bulletin Board and is quoted on the “OTCBB Market”.  Our stocktrades on a limited and sporadic basis and we cannot assure you that acontinuous liquid trading market will develop or, if it does develop, that itwill be sustained for any continuous period. 

 

24

 

 

**Lackof Profits and Negative Cash Flow:** During the nine months ended September 30, 2008, we recorded a net loss of $2,048,106compared to a net loss of $982,098 for the nine months ended September 30, 2007and negative cash flow during both periods.  While we believe that if we cansuccessfully implement our business plan and if market and competitiveconditions allow, we may achieve profitability and positive cash flow, however,we can not assure you that we will achieve profitability and positive cash flowor if we do achieve these goals, that we can sustain profitability and positivecash flow in the future.

 

**Extensionof Loan & Covenants Granted to Investec**:  On October 30, 2008, we entered into an extension of the bridgingloan with Investec Bank Limited.  Under the terms of the loan, we are obligatedto pay interest to Investec and repay all principal due to Investec on May 29,2009.  Further, and in addition to other provisions, we granted Investec820,000 common stock purchase warrants and agreed to provide Investec withmonthly management reports.  While we believe that the agreement extending theexisting bridging loan serves our long-term interests, we can not assure youthat we will be successful in repaying the loan as required.

 

**Lack of Dividends**:  Our board of directors determines whether to pay dividends on theCompany’s issued and outstanding shares. The declaration of dividends willdepend upon our future earnings (if any), our capital requirements, our financialcondition and other relevant factors. Our board of directors does not intend todeclare any dividends on our Common Stock for the foreseeable future. Weanticipate that we will retain any earnings to finance the growth of our businessand for general corporate purposes.

 

**Competition & Lack of Diversification**:  Gold properties eventually become depleted oruneconomical to continue mining. As a result, our long-term success isdependent on its ability to acquire, discover, develop and mine new properties.The acquisition of gold properties and their exploration and development aresubject to intense competition. Companies with greater financial resources,larger staffs, more experience and more equipment for exploration anddevelopment may be in a better position than us to compete for such mineralproperties. If the Company is unable to locate, develop and economically minenew properties, it most likely will not be able to be profitable on a long-termbasis. In addition, all of our assets and operations are concentrated in themining business described in this Form 10-Q and we have no current plans todiversify into any other business activity.  

 

**Reliance Upon Estimates & Matter of EstimatedReserves:**  Our business and the plansdescribed in this Form 10-Q rely in large measure upon estimates that wereceived from others (including those in the Bank Feasibility Study) used incombination with our own assessments.  While we continue to evaluate the geologicalinformation that we use, we cannot assure you that the estimates recited inthis Form 10-Q are accurate or that we will not later revise and lower ourestimated reserves which may adversely impact our financial performance. 

 

**LimitedTrading and Limited History for our Common Stock**:  Our common stock trades on a limited and sporadicbasis and, as a result, there is only limited liquidity in our common stock. Further our common stock has had only a limited trading history on the BulletinBoard Market.  As a result and given the limited trading market for our commonstock, the price of our common stock may be far more volatile and unpredictablethan the prices of common stocks and other securities that have a long andestablished trading history.

** **

**Possible Rule 144 Stock Sales**:  A large portion of our outstanding Common Stock is"restricted securities" and may be sold only in compliance with Rule144 adopted under the Securities Act of 1933 or other applicable exemptionsfrom registration.  As revised effective February 15, 2008, Rule 144 generallynow requires that a holder of our restricted Common Stock hold these“restricted securities” for at least six months from the date at which theywere acquired before undertaking any re-sale of the restricted Common Stockpursuant to Rule 144.  And if the holder is an “affiliate” (as defined in Rule144(a)(1) or was an “affiliate” in the immediately preceding 90 day period),then the holder must also satisfy certain other requirements of Rule 144.  As aresult of the revision to Rule 144 that became effective February 15, 2008(including but not limited to the shorter holding period under Rule 144(d)),potential and actual sales of our Common Stock by our present shareholders mayhave a depressive effect on the price of our Common Stock in the marketplace. 

 

 

25

 

** **

**Item2. Management’s Discussion and Analysis of Financial Condition and Results ofOperations.**

** **

Our strategy, to the extent that we are able, is togrow our mineral reserves.  At the same time, we seek to optimize our currentoperations, through exploration and prudent acquisitions.  During 2008, we tookthe following actions:

 

 

**•**

We expanded the Lily Mine operation and success of  drilling programs to date

 

 

**•**

We commenced refurbishment of the Barbrook Mine

 

 

**•**

We continued our exploration

 

**Growth and Expansion**

 

**Lily Mine**

 

Our primary focus, to the extent that we are able, isto develop the underground mine at Lily.  Primary development of the initialunderground section began in July 2007 and we are anticipating that if currentprojections hold, our first production will be in the fourth quarter of 2008. Under these conditions, the underground tonnage will be treated at the currentMakonjwaan mill until the Barbrook Plant has been refurbished. The dormantprocessing plant of the recently acquired Barbrook Mine (see discussion below),will allow us to change the original strategy of building a new plant at theLily Mine site.  We commenced refurbishment of the Barbrook plant by thebeginning of 2008 which may allow us to undertake operations in 2009.

 

The Lily Main Pit opencast operation which commencedin 2000 was completed in September 2006. Production from the additionaldiscovery of open pit reserves along the eastern strike extension (Lily Eastand Rosie’s Fortune) commenced immediately thereafter to give the Company acontinuous production life of mine up until December 2008.

 

The following table summarizes the tons milled, goldproduced and operating profit (loss) for the life of the open pit operations todate (using the estimates that we have obtained and which, based on currentinformation, appear as reasonable projections):

 

 

**Period**

**Ore Milled**

 

**Au Produced**

**Average Grade Produced**

**Operating Profit/(loss)**

**Year**

**mths**

**t**

**kg**

**oz**

**g/t**

**Oz/t**

**US$**

2000/01

9

120,000

240

7,700

1.99

0.062

338,087

2001/02

12

154,000

309

9,900

2.00

0.063

647,117

2002/03

12

153,000

343

11,000

2.24

0.074

1,049,173

2003/04

12

131,000

241

7,700

1.84

0.057

(541,559)

2004

9

116,000

230

7,400

1.98

0.062

(743,916)

2005

12

168,000

398

12,800

2.37

0.074

420,522

2006

12

166,200

377

12,100

2.27

0.071

2,276,493

2007

12

160,000

322

10,400

2.01

0.072

1,010,599

2008

9

  115,915

 195

6,339

1.68

0.055

(1,562,078)

**TOTAL**

 

**1,284,115**

**2,655**

**85,339**

**2.04**

**0.066**

**2,894,438**

 

 

(1)

Prior  to March 31, 2004, 12 month accounting periods were from April 1 to March 31

 

 

(2)

2005  represents the first year of change to the accounting period or fiscal year  based on a calendar year.

 

 

If our current estimates are reasonable, we currentlyanticipate a potential of about 1,500 oz may remain in the Rosie’s Fortune Pitfor extraction in the fourth of 2008. Thereafter the Company will require, asreported in previous reports, working capital financing to meet therequirements of its future short term business plan.

 

26

 

 

The extensive exploration diamond drilling programscompleted since 2005 up to the end of 2007 have successfully increased themineral reserves of the Lily Mine to the extent that a full BankableFeasibility Study has been completed giving the entire project a very positiveNPV and IRR at a conservative medium term gold price of US$800/ounce.  Ninetydiamond drill holes (with deflections), totaling in excess of 28,800 meters of drilling, have increasedthe confidence in the reserves.  Thediscovery cost remains remarkably low at an estimated +/-US$1.50 per ounce duringthis exploration period.

 

To the extent that we are able and provided that wecan implement our current plans, we anticipate that exploration will continueon the mine property both from surface and later from underground as the minedevelops in depth to continue increasing the reserve potential.

 

There can be no assurance that we will be successfulin implementing our plans or the plan of operations described in this Form 10-Q. We face many risks and uncertainties and we have only a limited history ofoperations.

** **

**Acquisitions**

 

If circumstances and our financial resources allow, weintend to make strategic acquisitions in the next few years with the objectiveof increasing its production to 100,000 oz/annum.  We continue to investigatepotential opportunities.  We cannot assure you that we will achieve these orother goals or if we achieve them, that we can sustain any such achievement forany period in the future.

  

**Barbrook Mine**

 

As previously disclosed in our Form 8-K, on February21, 2008 we entered into an agreement to purchase Barbrook Mine.  This offerwas accepted by the seller corporation, Caledonia Mining Corporation.  Theacquisition was completed on May 30, 2008.  

 

                Currentlyand based on the due diligence that we have completed, the Barbrook MinesLimited holds title to a Mining Authorization covering an estimated 2,286hectares which hosts a consolidation of numerous small mines and claims in thehistorically renowned Barberton gold mining district of South Africa.  Miningat Barbrook commenced in the 1880’s.  In 1996 exploration significantlyimproved the definition of estimated main ore zones.  Treatment of refractoryores commenced in July 1996 and continued until July 1997.  A total of 166,400tons of sulphide ore was treated at an average rate of 14,000 tons per month.311 kg of gold was produced at a recovered grade of 1.87g/t.  Both the headgrade and metallurgical recovery achieved over this period (~40%) were belowtarget and the mine was put on care and maintenance pending a re-evaluation ofthe mining method and metallurgical process.

 

Based on the information we have available andprovided that current trends continue, we believe that the Barbrook Mine looks promising. Various metallurgical tests took place between 1997-2007 which showed thatimprovements to gold recoveries are achievable.  A complete re-evaluation wasdone in 2002.  At that date, this lead to an estimate of Proven and ProbableOre Reserves amounting to 176,000 tons at an insitu grade of an estimated 6.0g/t gold.  All quoted Resource and Reserve estimates will be re-evaluated byEGL’s competent staff in time as additional information becomes available.  Ourestimates and projections may change and there can be no assurance that we willnot later reduce our current estimates and projections as additionalinformation becomes available.

 

The present state of the mine includes extensive (40km)underground development above “10 Level” adit (600m amsl) up to surface.  Acomplete but partially operational plant remains requiring refurbishment.Barbrook lies approximately 7km from Lily Mine on a flat well-maintained dirtroad.  Our plans for the Barbrook Mine are subject to our receipt of additionalfinancial resources.  We cannot assure that we will be successful in obtainingadditional financial resources or, if we are successful, that we can obtainsuch resources on a reasonable basis given our present circumstances.

 

** **

27

 

** **

** **

**Prospects for the Future:**

 

**Exploration**

 

**OtherProperties**

 

Geological exploration has continued with positiveresults on the Worcester project area where continued diamond drilling hassuccessfully identified the continuation of the mineralized zone well below theold workings. This exercise will be completed in the fourth quarter and all theinformation assessed. However it is envisaged that this project will be takento pre-feasibility status in the first quarter of 2009.  The Bonanza projectarea and other target locations are still under investigation and proposals forfurther exploration are being considered. The outcome of these explorationprograms is expected to result in the further delineation of new ore bodieswhich can be developed for mining in the medium term future.  To the extentthat it is possible and if we are successful, our goal is to produce anadditional 20,000 oz/annum from a second operation.  While we currently believethat this goal is feasible, we cannot assure that we will achieve this goal orthe related objectives.

 

            We anticipate that the acquisition of Barbrook mayalso add to the exploration focus for the last quarter of 2008 but we have notmade any specific determinations with respect to the extent of the amount ofexploration that may be completed in 2008 or the precise time frame for thisexploration.

 

** **

**Requirement for Additional Capital**

 

Based on our current estimates and subject to laterevaluations that are to be completed by management, we anticipate that ourcapital requirements can be grouped into three general areas:

 

 

**•**

Development of the Lily underground mine and refurbishment  of the Barbrook plant

 

 

**•**

Exploration of the company’s minerals rights  including extensions to Lily and the Worcester project area

 

 

**•**

Partial financing of acquisitions.

 

The development of the underground mine at Lily is ofprimary importance and the capital expenditure is currently estimated at US$31 Million. Breakdown of this estimate is as follows:  

 

                                                                                                                                                        **US$million**

Repayment of bridging loan (incl. interest) arrangedto acquire 

       100% of the shares in Barbrook Mines                                                                                                     $12

Development of underground mine at the Lily Mine                                                                                      10

Refurbish and expand Barbrook plant                                                                                                                 5

Working capital and finance costs                                                                                                                    4

                                                                                                                                                                                $31

 

Our current estimates and projections suggest that thismay be sufficient to allow us to develop the underground workings and the mineinfrastructure at the Lily Mine site as well as the refurbishment of theBarbrook plant to be used for processing the Lily ore.  We may change or reviseour estimates as we obtain additional information and as studies of the mineare completed.  In the event that the amount needed is increased, we mayre-evaluate our plans and delay or re-schedule capital expenditures for thisproperty and other properties consistent with circumstances and priorities atthat time.

 

Currently, we anticipate that ongoing exploration willcontinue at the Worcester Mine and the other target locations within our mineralrights.  In most cases we have had encouraging results so far.  But weanticipate that we will likely need to make an estimated US $4 Million in additionalcapital expenditures to achieve the exploration objectives that we have set forthe next 18 months.  That estimate may change or increase if furtherevaluations show that additional expenditures may be needed to fully completethese explorations.

28

 

 

 

If circumstances allow and if we are successful inobtaining additional necessary capital, we anticipate that we may developBarbrook underground by expanding Barbrook plant for production of a planned 28,000oz pa starting in 2010.  Currently, and subject to further confirmation, we estimatethat capital expenditures for Barbrook are as follows:  

 

                                                                                                                                                       **US$ million**

Pre-production capital program to develop undergroundworkings

       commencing 2009                                                                                                                                           $6

Barbrook plant expansion to accommodate Barbrook ore –2009/10                                                              9

Construction of BIOX plant to treat refractory ore -2010                                                                             10

                                                                                                                                                                              $25

 

The BIOX Process is a pretreatment process forrefractory gold ores or concentrates, using naturally occurring bacteria tobreak down the sulphide matrix and liberate the gold for subsequentcyanidation.  This is an alternative to the conventional processes of roastingand pressure oxidation and offers advantages that typically include reducedcapital cost, simplicity of operation, robustness and environmentalfriendliness.

 

If circumstances and opportunities allow, we may makeat least one other acquisition in 2008 and will require funds in order tosecure such acquisition or to provide initial support for the acquiredoperation.  An amount of US$10 Million has been estimated for this purpose andthis estimate may be changed as we complete further reviews in light of newadditional information.

 

Accordingly and to the extent that we are able, weseek to raise additional capital of $31 million for our Lily Mine undergrounddevelopment in the third quarter of 2008 and $4 million for our ongoingexploration program and objectives.  Our current capital raising strategy alsocalls for us to seek an additional $25 million in new capital for developingunderground mining operations at Barbrook Mine.  While we have had discussionswith several potential providers of capital, we are not in a position toestimate the form or terms of any such financing arrangement and we cannot giveyou any assurance we will successfully complete any financing arrangements or,if we do, that the additional new capital obtained in any financing arrangementcan be raised on terms that are reasonable in light of our currentcircumstances.

 

But, overall and if we can achieve our currentobjectives, our goal is to complete financing arrangements for the Lily Mine andour exploration program in the fourth quarter of 2008.  For this we seek toraise $25 million.  Accordingly, as an interim step and as part of our capitalraising strategy, we completed:

a.   Convertiblebond facility in March 2008 which raised US$4 million.  

b.     Bridging loan facility in May 2008 ofapproximately US$10 million.  

These interim fundings are necessary to implement our plansprior to the main fund raising in the fourth quarter of 2008.  Given theuncertainties of the marketplace and the challenges that we face, there can beno assurance that our efforts to raise additional new capital will besuccessful or if we are successful, that we can raise additional capital onterms that are reasonable in light of our current circumstances.

** **

** **

** **

** **

** **

** **

** **

** **

** **

29

 

** **

** **

** **

** **

** **

**Results of Operations for the Nine Months Ended September30, 2008 and 2007**

A summary of our comparative operations, which ariseonly from open pit mining operations at the Lily Mine for the nine monthsperiod ended September 30, 2008 and September 30, 2007 were as follows:

 

 

**Nine months period**

**ended September 30,**

 

**Three months period**

**ended September 30,**

 

**2008**

**2007**

 

**2008**

**2007**

Ore Tons Milled

115,915

119,624

 

39,678

43,343

Yield  – grams per ton

1.81

1.96

 

1.44

1.91

Gold  Sold – oz

6,339

7,257

 

1,826

2,639

Gold  price - $/oz

$896

$668

 

$870

$678

 

 

 

 

 

 

Total  Income*

$6,061

$5,286

 

$1,591

$1,979

Cost  of Production*

($5,543)

($4,173)

 

($1,825)

($1,797)

Exploration  Costs*

($127)

($129)

 

$4

$27

**Operating  Income (Loss)***

**$391**

**$984**

** **

**($230)**

**$209**

Operating  Expenses, net*

($2,439)

($1,966)

 

($1,132)

($836)

Minority  Interest*

-

-

 

-

-

**Net  Loss ***

**($2,048)**

**($982)**

** **

**($1,362)**

**($627)**

  

* Expressed in Thousands

** **

**Comparative Results of the Nine Months Ended September30, 2008 and 2007**

 

**Revenues:  **Forthe 2008 period covering nine months of commercial production from January 1,2008 to September 30, 2008 (“First Three-Quarter 2008”), we recorded revenuesof approximately $5,747,000 from sales of gold versus revenues of approximately$5,030,000 for the nine month period from January 1, 2007 to September 30, 2007(the “First Three-Quarter 2007”), which amounted to an increase ofapproximately 14%.  The principal factors affecting this increase in revenuewere as follows:

 

•        Although ore tons milled in theFirst Three-Quarter 2008 was slightly lower than that of Three-Quarter 2007 at 115,915tons, yield had dropped by approximately 8% resulting in lower goldproduction.  Accordingly, 6,339 oz. of gold was sold in First Three-Quarter2008 as compared with 7,257 oz. of gold sold in First Three-Quarter 2007, adrop of approximately 13%.  This was primarily due to  production specificallyin the third quarter which consisted of open and underground production.  Tonsmined, ore and waste were significantly down as the open pit nears the end ofits life.  Problems with ground water flowing into the open pit continuedcausing dilution of ore and adversely affecting the extraction of ore.  Developmentof the underground section was not sufficiently advanced to make up for theshortfall in ore tons.  

  

•        However, this reductionin production was compensated primarily by the increase in the price of gold. Whereas, our 2007 sales averaged $668 per ounce of gold, our 2008 sales haveaveraged $896 per ounce of gold; an increase in the price of gold of approximately34%.  This increase enhanced our margins and our results of operations.  However,this increase in the price of gold may or may not be a trend and if it is atrend, we do not know if it will continue.  We are not able to project goldprices and to the extent that gold prices fall in the future, our operations,revenues, profitability, and cash flow will be adversely and significantlyimpacted for such period of time as lower price levels in the marketplace aremaintained.  

 

30

 

 

**Cost of Production:**  Although ore tons milled in the First Three-Quarter 2008 was slightlylower than that of First  Three-Quarter 2007 at 115,915 tons, overall weexperienced higher cost of production.  During the First Three-Quarter 2008, weproduced 6,339 oz. of gold at a cost $5,543,000, whereas, during the First Three-Quarter2007, we produced 7,257 oz. of gold for $4,173,000.  Accordingly, per ouncecost of production for the First Three-Quarter 2008 was $874 whereas per ouncecost of production for First Three-Quarter 2007 was $575; an increase in theper ounce production of gold of 52%.

 

Principal factors affecting this increase in cost ofproduction were:

 

•        Increase in diesel price per literof 11.5% during the First Quarter 2008 and in comparison to diesel price inFirst Quarter 2007 a 43.7% increase

 

•        7.5% increase in the plant hirecosts effective January 1, 2008

 

•        Significantly lower tons of oremined from the open pit as it nears the end of its life         

 

Fuel and oil price increases generally have a negativeimpact on our margins, cash flow, and profitability.  

 

**Operating Expenses for the First Three-Quarter 2008:** Our operating expenses increased to $1,954,000 in the First Three-Quarter2008 from $1,949,000 in the First Three-Quarter 2007; an increase ofapproximately 0%.  Major factor affecting this was increase in interest chargesof $486,000 on the Company’s loan commitments.      

** **

**Changesin Exchange Rates: **Changesin exchange rates did not have a significant impact on the comparability of ourresults for the First Three-Quarter 2008 versus the First Three-Quarter 2007.  The average rates of exchange for the interim periods ended September30, 2008 and September 30, 2007 were SAR 7.5913 to $1 and SAR 6.9664 to $1,respectively – approximately 9% weakening of the South African Rand against theUS Dollar.  Had the exchange rate remained the same during the First Three-Quarter 2008 as that of FirstThree-Quarter 2007, the results of our operationsarising from South African Rand transactions would have been approximately $100,000lower.

 

Changes in exchange rates had a significant impact onthe comparability of our balance sheets as of September 30, 2008 versus September30, 2007.  The rates of exchange as at September 30, 2008 and September 30,2007 were SAR 8.3210 to $1 and SAR 6.8840 to $1, respectively – approximately 21%weakening of the South African Rand against the US Dollar.  Had the exchangerate remained the same in 2008 as that of 2007, our total South African Randbased net assets would have been approximately $2,200,000 higher.  Thisvariation in the main relates to: 

 

•        our property, plant and mine development costs whichwould have been approximately $5,400,000 higher; and

•        our liabilities whichwould have been 3,700,000 higher.

** **

**Restructuring: **On March 28, 2008 and through our subsidiary, EGSA, we entered into aConvertible Loan Agreement.  The agreement involves EGSA receiving $3,981,932(32,000,000 SA Rands) of proceeds.  The loan principal can convert into 6.9% ofthe total issued and outstanding shares of ordinary capital after theconversion of the loan by EGSA. If EGSA is able to list its shares withJohannesburg Stock Exchange Limited (JSE) within six months of the agreementdate then no interest is due and payable. However, if EGSA is not able to listits ordinary shares with the JSE within six months of the agreement date theninterest will accrue at the South African Prime Rate and be due and payableimmediately. If EGSA list its ordinary shares with JSE after six months due butbefore twelve months of the agreement date, then interest will accrue and bepaid on a monthly basis until conversion or repayment of the loan. If, for anyreason, EGSA is unable to list itsordinaryshares with JSE within twelve months of the agreement date, then the lender candemand repayment of principal and accrued interest or conversion of the debtinto the corresponding shares of ordinary shares of EGSA.

 

OnMay 27, 2008, our wholly owned subsidiary EGSA obtained R80 million ($9,614,229as of September 30, 2008) six month bridging loan facility from Investec BankLtd. (“Investec”) for the acquisition of Barbrook Mines Ltd.  This facility isrepayable on May 29, 2009.  Interest on the facility is calculated at 3 monthJIBAR plus 4% p.a., capitalized and payable quarterly.  EGSA has issued a R20million warrant package to Investec on the execution of the Facility Documents. The warrant package is calculated with reference to the conversion price forthe common shares of EGSA equal to 110% of the lesser of R7.00 per share or theactual price per share achieved in the R100 million pre IPO equity raising.  Thewarrants shall be convertible, in tranches of at least R1 million into ordinaryshares of EGSA at the holder’s option at any time prior to 3 years after issuedate.  If EGSA is not listed within nine months of execution of the FacilityDocuments, the Investec shall be entitled to elect to receive a settlement feefrom EGSA equivalent to an independent valuation of the Warrant Package. Security for the facility is:

31

 

 

•        A guarantee from us secured by apledge and cession of our shareholding in and claims against EGSA;

 

•        A pledge and cession over EGSA’sshareholding in and claims against Barbrook Mines Ltd;

 

•        Suitable security over all ofEGSA’s bank accounts, and

 

•        Subordination of shareholder andGroup company loans to EGSA.

 

On October 30, 2008, the Company received a commitmentletter agreement from Investec Bank Limited (“Investec”).  Under the terms ofthe agreement, Investec has agreed to extend the maturity date of the Company’sexisting bridging loan (the “Existing Loan”) from the original maturity date ofNovember 28, 2008 to May 29, 2009 (the “Loan Extension”).

 

As consideration for the Loan Extension, the Companyagreed to the following:

 

a.      To grant Investec 820,000 CommonStock Purchase Warrants for the purchase of 820,000 shares of the Company’sCommon Stock at an exercise price equal to the lower of $3.75 per share and theprice at which the Company raises equity capital in its next offering;

 

b.      To increase the interest rate onthe Existing Loan from Jibar plus 3% to Jibar plus 4%;

 

c.       To confirm that the Company hassufficient working capital for the period through the last date of the LoanExtension;

 

d.      To subordinate all shareholderloans to the Existing Loan;

 

e.       To prohibit the payment of anyinterest and principal on all shareholder loans;

 

f.       To prohibit further indebtednesswithout the prior written approval of Investec; and

 

g.       To provide Investec on or beforethe 5th calendar day of each month, monthly management accounts and an updateon the Company’s financing strategy and provide Investec with an opportunity toreview the strategy with Investec, upon Investec’s request.

 

In the event that we breach our obligations toInvestec Bank Ltd., we could lose our wholly owned subsidiary and all of ourassets and business.

 

On October 28, 2008, the Company engaged IBK CapitalCorporation of Toronto ("IBK") where IBK has agreed to undertake itsbest efforts to assist the Company in raising up to $10 million in the nextthree months.  In the event that market conditions allow and if IBK issuccessful, IBK will be paid a commission on the funds raised and will receivecommon stock purchase warrants.  In this event, the net proceeds will be usedto fund expenditures on the development of the Lily project and for general andcorporate working capital purposes.  

 

The Company is also under discussions with a majorbroker-dealer in New York for the purpose of raising an additional $15 million.

 

With funds raised and positive cash flow from itsongoing production activities, the Company believes that it will be able torepay the existing Investec bridging loan.  While the Company has not receivedany commitment from the broker-dealer with respect to raising these additionalfunds and there can be no assurance that the efforts of IBK Capital will besuccessful, the Company remains optimistic that if market conditions allow, itmay be able to complete one or more of these planned financial transactions onreasonable terms.

 

32

 

 
****
**Item 3. Quantitative and Qualitative Disclosures AboutMarket Risk.**

* *

The Company’s operations and its securities aresubject to a number of substantial risks, including those described below.  Ifany of these or other risks actually occur, the Company’s business, financialcondition and operating results, as well as the trading price or value of itssecurities could be materially adversely affected.  No attempt has been made torank these risks in the order of their likelihood or potential harm.  Inaddition to those general risks enumerated elsewhere in the document, any purchaserof the Company’s common stock should also consider the following risk factors:

 

**Risks Related to the Company’s Operations**

** **

**We require additional funding which may not beavailable.  If we are unable to obtain necessary financing on acceptable terms,we may have to curtail our current or planned operations.**

 

We require additional funding to implement ourbusiness plan. Our current open pit operations at our Lily Mine are anticipatedto terminate by December 2008.  Additional capital will be required in order toundertake underground mining operations at the Lily Mine.  We also will requirestill additional funding to explore our other properties. We may seek to obtainsuch funding for these activities through equity or debt financing, jointventures or from other sources.  There can be no assurances that we will beable to raise adequate funds on acceptable terms from these or other sources(in light of our current circumstances), which may hinder us from continuing orexpanding our operations.

 

Operational hazards and responsibilities couldadversely affect our operations.

 

Our current operational activities are subject to anumber of risks and hazards which include but not limited to the following:

 

 

**•**

environmental hazards,

 

**•**

industrial accidents

 

**•**

Labor disputes,

 

**•**

unusual or unexpected geological or operating  conditions,

 

**•**

changes in regulatory environment

 

**•**

natural phenomena such as severe weather conditions,  floods, earthquakes and

 

**•**

Other hazards

 

These occurrences could result in significant damageto, or destruction of, mineral properties or production equipment, personalinjury or death, environmental damage, delays in mining, monetary losses andpossible legal liability.  The occurrence of these operational hazards couldadversely affect our mining operations by limiting production or the closure ofthe mines themselves.

 

**We are not insured against any losses or liabilitiesthat could arise from our operations either because insurance is unavailable orbecause the premium cost is excessive.  The payment of such liabilities couldhave a material adverse effect on our financial position and, depending on theextent of such liability, could result in the total loss of our assets andoperations.**

 

                Exploration for gold involves hazards,which could result in us incurring substantial losses and liabilities to thirdparties for pollution, accidents and other hazards. We have public liabilityinsurance of $1,500,000, but if we incur uninsured losses or liabilities, thefunds available for the implementation of its business plan will be reduced andour assets may be jeopardized. The payment of such liabilities may have amaterial adverse effect on our financial position and, depending on the extentof such liability, could result in the total loss of our assets and operations.

 

 

33

 

 

**The Bank Feasibility Study (“BFS”) contains estimatesand assumptions regarding the feasibility of the Company’s mining operationswhich may later prove to be inaccurate as additional information becomesavailable**.

 

While we believe that the Bank Feasibility Study wasconducted in a responsible fashion and the estimates, assumptions, andmethodology of the BFS follows standards that are consistent with industrypractice, the amount of Reserves, Proven Reserves, and other projections may belater significantly reduced as we obtain additional information. The extent ofany reduction in these estimates and their magnitude can not be known at thistime. The Company is aware that estimates in the mining industry can be subjectto dramatic changes. For these reasons, we can not assure you that we will notlater discover that our estimates need to be significantly reduced as wecomplete further work on our mining properties.

 

**Our ability to discover a viable and economic mineralreserve on its properties is subject to numerous factors, most of which arebeyond its control and are not predictable. If the Company is unable todiscover such reserves, it most likely will not be able to establish aprofitable commercial mining operation on these properties.**

 

Exploration for gold is speculative in nature,involves significant financial risks and is frequently unsuccessful. Fewproperties that are explored are ultimately developed into commerciallyproducing mines. The Company’s long-term profitability will be, in part,directly related to the cost and success of exploration programs. The Company’sgold exploration programs entail risks relating to the following:

 

 

**•**

location of economic ore bodies,

 

**•**

Development of appropriate metallurgical process

 

**•**

receipt of necessary government approvals, and

 

**•**

construction of mining and processing facilities at  sites chosen for mining

 

The commercial viability of a mineral deposit isdependent on a number of factors including, but not limited to, the following:

 

 

**•**

the price of gold,

 

**•**

exchange rates,

 

**•**

the particular attributes of the deposit (i.e. size,  grade and the proximity to infrastructure)

 

**•**

financing costs,

 

**•**

taxation,

 

**•**

royalties,

 

**•**

land tenure,

 

**•**

land use,

 

**•**

water use,

 

**•**

availability and cost of power source

 

**•**

importing and exporting gold, and

 

**•**

environmental protection

 

The effect of these factors and their magnitude cannotbe accurately predicted and any one of which could adversely affect theCompany’s ability to operate. Further, we have little or no control over thesevariables.

 

 

 

34

 

 

 

 

**Our ability to become and remain profitable, should webecome profitable, will be dependent on our ability to locate, explore, developand mine additional properties. There is intense competition for theacquisition of gold properties. If we are unable to accomplish this, we mostlikely will not be able to be profitable on a long-term basis.**

 

Gold properties eventually become depleted oruneconomical to continue mining. As a result, the Company’s long-term successis dependent in large part on its ability to acquire, discover, develop andmine new properties. The acquisition of gold properties and their explorationand development are subject to intense competition. There are many largercompanies with greater financial resources, larger staffs, more experience andmore equipment for exploration and development may be in a better position thanthe Company to compete for such mineral properties. If we are unable to locate,develop and economically mine new properties, we most likely will not be ableto be profitable on a long-term basis.  Further, given the competition that weface from these larger companies, we cannot assure you that we can achieve orsustain profitability or if we do, that we can sustain it.

 

**Our property interests are located in South Africa. The risk of doing business in a foreign country could adversely affect itsresults of operations and financial condition.**

 

We face risks normally associated with any conduct ofbusiness in foreign countries, including various levels of political andeconomic risk. The occurrence of one or more of these events could have amaterial adverse impact on our current and future operations which, in turn,could have a material adverse impact on its future cash flows, earnings,results of operations and financial condition. These risks include thefollowing:

 

 

**•**

prevalence of various diseases at the mining sites,

 

**•**

security concerns

 

**•**

adverse weather such as rainy season

 

**•**

labor disputes

 

**•**

uncertain or unpredictable political and economic  environments,

 

**•**

war and civil disturbances,

 

**•**

changes in laws or policies,

 

**•**

mining policies,

 

**•**

monetary policies,

 

**•**

unlinking of rates of exchange to world market  prices,

 

**•**

environmental regulations,

 

**•**

labor relations,

 

**•**

return of capital,

 

**•**

taxation,

 

**•**

delays in obtaining or the inability to obtain  necessary governmental permits,

 

**•**

Governmental seizure of land or mining claims,

 

**•**

limitations on ownership,

 

**•**

Institution of laws requiring repatriation of  earnings,

 

**•**

increased financial costs,

 

**•**

import and export regulations, and

 

**•**

Establishment of foreign exchange regulations.

 

 

35

 

 

Any such changes may affect our current miningoperations and ability to undertake exploration activities in respect ofpresent and future properties in the manner currently contemplated, as well asour ability to explore and eventually develop and operate those properties inwhich we have an interest or in respect of which we have obtained explorationrights to date. Certain changes could result in the confiscation of property bynationalization or expropriation without fair compensation. We do not carry anyinsurance for any of these risks and we have no plans to acquire any suchinsurance in the future.

 

**There are uncertainties as to title matters in themining industry. Any defects in such title may cause the Company to forfeit itsrights in mineral properties and could jeopardize its business operations.**

 

There are uncertainties as to title matters in themining industry. If the title to or our rights of ownership in its properties,prospects and/or claims are challenged or impugned by third parties, or theproperties, prospects and/or claims in which wehave  an interest are subject to prior transfers or claims, such title defectscould cause us to loose our rights in such properties. If we lose its rights inand to any of its mineral properties, its business operations could bejeopardized.  We may not have the financial resources to protect andassert our legal claims in such properties.

 

**In the event that we breach our obligations toInvestec, we may lose our wholly-owned subsidiary EGSA and thereby lose all ofour assets.**

 

While we believe that the financing arrangement withInvestec was prudent and appropriate, we have incurred a risk that in the eventthat we breach our obligations to Investec, Investec has the right to ourwholly owned subsidiary, EGSA, and in that event we could lose all of ourassets and business.

 

**Our current and planned operations require permits andlicenses from various governmental authorities. If we are unable to obtain andmaintain such requisite permits, licenses and approvals, our businessoperations and ability to become profitable may be adversely affected.**

 

Our current and planned operations require permits andlicenses from various governmental authorities. Such permits and licenses aresubject to change in regulations and in various operating circumstances. We cannotassure you that we will be able to obtain or maintain in force all necessarypermits and licenses that may be required to conduct exploration or commenceconstruction or operation of mining facilities at properties to be explored orto maintain continued operations at economically justifiable costs. Further,certain of our mineral rights and interests are subject to governmentapprovals. In all such cases such approvals are, as a practical matter, subjectto the discretion of the South African government or governmental officials. Noassurance can be given that we will be successful in obtaining any or all ofsuch approvals. Our inability to obtain and maintain the requisite permits,licenses and approvals could materially and adversely affect our operations andability to become profitable.

 

**Gold prices can fluctuate on a material and frequentbasis due to numerous factors beyond the Company’s control.  Our ability togenerate profits from operations could be materially and adversely affected bysuch fluctuating prices.**

 

The profitability of our current and future goldmining operations is significantly affected by changes in the market price ofgold. Between January 1, 2006 and September 30, 2008, the “fixed price” forgold on the London Exchange has fluctuated between $524.75 and $1,011.25 perounce.  Gold prices fluctuate on a daily basis and are affected by numerousfactors beyond our control, including:

 

 

**•**

Level of interest rates,

 

**•**

rate of inflation,

 

**•**

central bank sales, and

 

**•**

world supply of gold

 

 

36

 

 

 

Each of these factors can cause significantfluctuations in gold prices. Such external factors are in turn influenced bychanges in international investment patterns and monetary systems and politicaldevelopments.  The price of gold has historically fluctuated widely and,depending on the price of gold, revenues from mining operations may not besufficient to offset the costs of such operations.  We have no means ofcontrolling or influencing any of these factors and there is no likelihood thatwe will achieve any such control or influence in the future.

** **

**Gold is sold in South Africa in South African Rands. If applicable currency exchange rates fluctuate our revenues and results ofoperations may be materially and adversely affected.** 

 

All of the gold that we produce is sold is required tobe sold to The Rand Refinery Ltd. which is a South African corporation and theworld’s largest gold refinery. Such sales are paid for with South AfricanRands. We also incur a significant amount of our expenses which are payable inSouth African Rands. As a result of the required utilization of the SouthAfrican Rand, our financial performance is affected by fluctuations in thevalue of the South African Rand to the U.S. Dollar. At the present time, wehave no plan or policy to utilize forward contracts or currency options tominimize this exposure, and even if these measures are implemented there can beno assurance that such arrangements will be available, be cost effective or beable to fully offset such future currency risks.

 

**Dependence upon Key Executives and Employees**

 

Our success depends to a great extent upon thecontinued successful performance of key executives and employees in general andspecifically Mr. Michael McChesney. Mr. McChesney is presently employed by usas our President and Chief Executive Officer. Mr. McChesney also serves as oneofour directors. If Mr. McChesney andcertain other present key executives and employees are unable to perform theirduties for any reason, our ability to operate in South Africa will bematerially adversely effected. We do not have a key man life insurance policyon the life of Mr. McChesney or any other key executives and employees and wehave no present plans to acquire any such policies. 

 

* *

 

37

 

** **

**Item 4. Controls and Procedures.**

 

***Evaluation ofDisclosure Controls and Procedures***

 

Weconducted an evaluation under the supervision and with the participation of ourmanagement, including our Chief Executive Officer and Chief Financial Officer,of the effectiveness of the design and operation of our disclosure controls andprocedures.  The term “disclosure controls and procedures,” as defined in Rules13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934, asamended (“Exchange Act”), means controls and other procedures of a company thatare designed to ensure that information required to be disclosed by the companyin the reports it files or submits under the Exchange Act is recorded,processed, summarized and reported, within the time periods specified in theSecurities and Exchange Commission's rules and forms.  Disclosure controls andprocedures also include, without limitation, controls and procedures designedto ensure that information required to be disclosed by a company in the reportsthat it files or submits under the Exchange Act is accumulated and communicatedto the company's management, including its principal executive and principalfinancial officers, or persons performing similar functions, as appropriate, toallow timely decisions regarding required disclosure.  Based on thisevaluation, our Chief Executive Officer and Chief Financial Officer concludedas of September 30, 2008, that our disclosure controls and procedures areeffective to a reasonable assurance level of achieving such objectives. However, it should be noted that the design of any system of controls is basedin part upon certain assumptions about the likelihood of future events, andthere can be no assurance that any design will succeed in achieving its statedgoals under all potential future conditions, regardless of how remote.

 

***Management’s Reporton Internal Control Over Financial Reporting***

 

Ourmanagement is responsible for establishing and maintaining adequate internalcontrol over financial reporting as defined in Rules 13a-15(f) and 15d-15(f)under the Exchange Act.  Our internal control over financial reporting isdesigned to provide reasonable assurance regarding the reliability of financialreporting and the preparation of financial statements for external purposes inaccordance with generally accepted accounting principles.  The internal controls for the Company are provided byexecutive management’s review and approval of all transactions.  Ourinternal control over financial reporting also includes those policies andprocedures that:

 

(1) pertain to the maintenance of records that in reasonable detail accurately andfairly reflect the transactions and dispositions of our assets;

 

(2) provide reasonable assurance that transactions are recorded as necessary topermit preparation of financial statements in accordance with U.S. GAAP, andthat our receipts and expenditures are being made only in accordance with theauthorization of our management; and

 

(3) provide reasonable assurance regarding prevention or timely detection ofunauthorized acquisition, use or disposition of our assets that could have amaterial effect on the financial statements.

 

Becauseof its inherent limitations, internal control over financial reporting may notprevent or detect misstatements.  Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls maybecome inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate. 

 

Managementassessed the effectiveness of the Company’s internal control over financialreporting as of December 31, 2007.  In making this assessment, management usedthe criteria set forth by the Committee of Sponsoring Organizations of theTreadway Commission in Internal Control-Integrated Framework.  Management’sassessment included an evaluation of the design of our internal control overfinancial reporting and testing of the operational effectiveness of thesecontrols.

 

Basedon this assessment, management has concluded that as of December 31, 2007, ourinternal control over financial reporting was effective to provide reasonableassurance regarding the reliability of financial reporting and the preparationof financial statements for external purposes in accordance with U.S. generally accepted accounting principles.

 

 

38

 

 

Thisannual report does not include an attestation report of the Company’sregistered public accounting firm regarding internal control over financialreporting.  Management’s report was not subject to attestation by the Company’sregistered public accounting firm pursuant to temporary rules of the Securitiesand Exchange Commission that permit the Company to provide only management’sreport in this annual report.

 

***Changes in InternalControl over Financial Reporting***

 

Therewere no changes in our internal control over financial reporting during ourfiscal quarter ended September 30, 2008 that have materially affected, or arereasonably likely to materially affect, our internal control over financial reporting.

** **
****
 

39

 

**PART II—OTHER INFORMATION**

** **

**Item 1. Legal Proceedings.**

 

The Company’s recently acquired subsidiary, BarbrookMines, was subject to several claims brought against it by creditors during2006 and 2007 fiscal years.  These claims, which had been accrued for at 2007year end, were in the main settled and the matters finalized.  In the matterwith Sentinel Corporate Solutions (Pty) Limited, Sentinel has issued summonsagainst Barbrook for R1,108,061 (approximately US$133,000) in respect ofamounts payable, which are accrued for, in respect of a labor contract. Barbrook has instituted an action against Sentinel for R7,456,465 (approximatelyUS$896,000) in respect of damages incurred when the labor force set fire to theBarbrook administration building.  Both matters with Sentinel are presentlystill being defended and are not yet finalized.

 

Other than the matter discussed above, we are not a party to any pending legal proceedings, and no suchproceedings are known to be threatened or contemplated.

** **

**Item 2. Unregistered Sales of Equity Securities andUse of Proceeds.**

 

OnMarch 28, 2008, our subsidiary, EGSA, entered into a Convertible Loan Agreementwhich was completed without the use of an underwriter.  The transaction and theagreements were completed directly without any intermediary.

 

Throughour subsidiary, EGSA, we received net proceeds of $3,981,932 (32,000,000 SARands) (based on current exchange rates). 

 

Inentering into the transaction with the Lender, we received assurances that: 

 

(1)the Lender had received information, business and financial documents, and otherdisclosures regarding the Company, EGSA, and management equivalent to thatfound in a registration statement; 

 

(2)the Lender had a full and unrestricted opportunity to ask questions of theCompany’s and EGSA’s officers and directors and to receive answers to all suchquestions; 

 

(3) the Lender is an Accredited Investor who is experienced and sophisticated ininvestment transactions made with small public companies;

 

(4)the Lender understood that it acquired the Convertible Loan (and subsequently,any shares of EGSA’s common stock thereby) as “restricted securities,” forinvestment purposes only and not with a view toward their resale; and

 

(5) the transaction with the Lender was not the product of any general solicitationor advertising but was the result of a pre-existing business relationship.

 

Onthis basis, we relied upon the exemption provided by Section 4(2) of theSecurities Act of 1933.

 

Allof the proceeds were and are to be used by EGSA to increase its working capitaland for capital expenditures.

 

Theloan principal can convert into 6.9% of the total issued and outstanding sharesof ordinary capital (of EGSA) after the conversion of the loan by EGSA.  IfEGSA is able to list its shares with the Johannesburg Stock Exchange Limited(JSE) within six months of the agreement date then no interest is due andpayable. If EGSA is not able to list its ordinary shares with the JSE withinsix months of the agreement date then interest will accrue at the South AfricanPrime Rate.  If EGSA list its ordinary shares with JSE after six months butbefore twelve months of the agreement date, then interest will accrue and bepaid on a monthly basis until conversion or repayment of the loan.  If EGSA hasbeen unable to list its ordinary shares with JSE within twelve months of theagreement date, then the lender can demand repayment of principal and accruedinterest or conversion of the debt into the corresponding shares of ordinaryshares of EGSA.

 

 

40

 

 

OnOctober 30, 2008, we received a commitment letter agreement from Investec BankLimited (“Investec”).  Under the terms of the agreement, Investec has agreed toextend the maturity date of our existing bridging loan (the “Existing Loan”)from the original maturity date of November 28, 2008 to May 29, 2009 (the “LoanExtension”).

 

As consideration for the LoanExtension, the Company agreed to the following:

 

(1)                To grant Investec 820,000 CommonStock Purchase Warrants for the purchase of 820,000 shares of the Company’sCommon Stock at an exercise price equal to the lower of $3.75 per share and theprice at which the Company raises equity capital in its next offering;

 

(2)                To increase the interest rate onthe Existing Loan from Jibar plus 3% to Jibar plus 4%;

 

(3)                To confirm that the Company hassufficient working capital for the period through the last date of the LoanExtension;

 

(4)                To subordinate all shareholder loans to the ExistingLoan;

 

(5)                To prohibit the payment of anyinterest and principal on all shareholder loans;

 

(6)                To prohibit further indebtednesswithout the prior written approval of Investec; and

 

(7)                To provide Investec on or beforethe 5th calendar day of each month, monthly management accounts andan update on the Company’s financing strategy and provide Investec with anopportunity to review the strategy with Investec, upon Investec’s request.

 

Wedid not use an underwriter or pay any fees or commissions to any third party inconnection with the Loan Extension.  All of the Warrants granted to Investecwere granted pursuant to the exemption provided by Section 4(2) of theSecurities Act of 1933 pursuant to the representations and assurances that theCompany received from Investec and the due diligence conducted by Investec. The Warrants were issued to Investec with a restricted securities legend andInvestec agreed that it was acquiring the Warrants for investment purposesonly.

 

** **

** **

 

41

 
****
**Item 3. Defaults Upon Senior Securities.**

** **

None

** **

**Item 4. Submission of Matters to a Vote of SecurityHolders.**

 

None

 

**Item 5. Other Information.**

 

None

** **

**Item 6. Exhibits.**

** **

**Regulation**

**S-BNumber                                              Exhibit**

** **

31.1                      Rule13a-14(a) Certification of Chief Executive Officer

 

31.2                      Rule13a-14(a) Certification of Chief Financial Officer

 

32.1                      Certification Pursuant to 18U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-OxleyAct of 2002 of Chief Executive Officer

 

32.2                      Certification Pursuantto 18 U.S.C. Section 1350, as Adopted Pursuantto Section 906 of the Sarbanes-Oxley Act of 2002 of ChiefFinancial Officer
 
 

42

 

****

**SIGNATURES**

** **
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.                                                                                                  EASTERN GOLDFIELDS, INC.   Date:  November 18, 2008                                                        BY:____________________________                                                                                        MICHAEL MCCHESNEY                                                                                        Chief Executive Officer
** **
Date:  November 18, 2008                                                        BY:____________________________                                                                                        TAMER MUFTIZADE
                                                                             Chief Financial Officer
 
 

43
 
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