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**UNITED STATES**
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**SECURITIES AND EXCHANGE COMMISSION**
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**WASHINGTON, DC 20549**
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**FORM 10-Q**
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** **
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Mark One)
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** **x**     QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**
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** **
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For the quarterly period ended June 30, 2009
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or
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        **TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**
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For the transition period from .............................................................to............................................................................
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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, California 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 the registrant (1) has filed all reports filed by Section	13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12	months (or for such shorter period that the registrant was required to file	such reports), and (2) has been subject to such filing requirements for the	past 90 days.
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                                                                                                                                                               Yes x     No 
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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. 

 
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Large accelerated filer                                                                                                         Accelerated filer  
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Non-accelerated filer           (Do not check if a smaller reporting company)             Smaller reporting company  x
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  
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                                                                                                                                       Yes              No x
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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.

 
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                                                                                                                                                               Yes x     No 
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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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On July 30, 2009, 9,979,215 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**

**                                                                                      June 30, 2009           December 31, 2008**

**                                                                                 (Unaudited)                    (Audited)**

|  

Cash

Inventories (Note 4)

Prepaid expenses and other  current assets                   |  

$              |  

82,947

493,706

537,101    |  

$ |  

38,275

357,777

289,222    |
|--------------------------------------------------------------------------------------------------|------------------------|-------------------------------------|-----------|-------------------------------------|
|  

Total  current assets                                                                    |                   |  

1,113,754                   |      |  

685,274                     |
|  

Property, plant, and mine  development, net  

   (Notes 5)

Other assets |  

 

  |  

 

28,448,225

637,867 |      |  

 

24,583,241

485,522 |
|  

Total  assets                                                                            |  

$              |  

30,199,846                  |  

$ |  

25,754,037                  |

** **

** **

** **
```
 
```

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **The accompanying notes are anintegral part of these consolidated financial statements.

** 3**

** **

----

**EASTERN GOLDFIELDS, INC. AND SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS**

** **

** **

**LIABILITIES ANDSTOCKHOLDERS’ EQUITY**

**                                                                               June 30, 2009                December 31, 2008**

**                                                                          (Unaudited)                         (Audited)**

|  

Current liabilities:

Accounts  payable and other current liabilities

Advances  from stockholders

Short  term loans (Note 6)

Current  portion of long-term liabilities (Note 7)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | ** **

 

$

                                           |  

 

2,308,857

268,250

19,162,828

297,908                                                                                                          |  

	 

	$ |  

	 

	1,650,370

	110,832

	15,350,549

	480,636                                                                                                     |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------|---------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  

Total  current liabilities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |                                                                   |  

22,037,843                                                                                                                                               |                |  

17,592,387                                                                                                                                               |
|  

Long-term liabilities:

Long  term liabilities, net of current portion (Note 7)

Reclamation  and remediation obligations (Note 8)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |                                                                   |  

 

1,675,090

425,766                                                                                                                               |                |  

 

1,370,472

352,974                                                                                                                               |
|  

Total  long-term liabilities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                                                                   |  

2,100,856                                                                                                                                                |                |  

1,723,446                                                                                                                                                |
|  

Commitments (Note 9)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                   |  

-                                                                                                                                                        |                |  

-                                                                                                                                                        |
|  

Eastern Goldfields, Inc.  stockholders’ equity:

A  Class Preference Shares:

$0.00001  par value, 10,000,000 shares authorized; 3,081,393 and 2,881,393 shares  issued and outstanding at June 30, 2009 and December 31, 2008

Preferred Stock:

   $0.001 par value, 20,000,000 shares authorized; 0  shares issued and outstanding at June 30, 2009 and December 31, 2008

Common Stock:

$0.001 par value, 160,000,000 shares authorized; 9,979,215  and 9,377,986 shares issued and outstanding at June 30, 2009 and December 31,  2008, respectively

Common  stock to be issued

Additional  paid in capital 

Other  comprehensive loss

Accumulated  deficit |  

 

 

 

 

 

 

 

  |  

 

 

 

 

 

40

 

 

 

-

 

 

 

 

9,979

300

24,157,901

(5,016,598)

(12,658,951) |                |  

 

 

 

 

 

45

 

 

 

-

 

 

 

 

9,378

440

22,914,882

(2,668,197)

(11,196,876) |
|  

 

Less:  Loan to Lomshiyo (Note 10)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |  

                                                          |  

6,492,671

(4,894,959)                                                                                                                                   |                |  

9,059,672

(3,800,214)                                                                                                                                   |
|  

Total  Eastern Goldfields, Inc. stockholders’ equity                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |                                                                   |  

1,597,712                                                                                                                                                |                |  

5,259,458                                                                                                                                                |
| Noncontrolling interest (Note 10)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |                                                                   | 4,463,435                                                                                                                                                        |                | 1,178,746                                                                                                                                                        |
| Total equity                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                   | 6,061,147                                                                                                                                                        |                | 6,438,204                                                                                                                                                        |
|  

  Total liabilities and  stockholders’ equity                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  

$                                                              |  

30,199,846                                                                                                                                               |  

$           |  

25,754,037                                                                                                                                               |

 

 

 

 

The accompanying notes are an integral part of these	consolidated financial statements.

4

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**EASTERN GOLDFIELDS, INC. AND SUBSIDIARIES**

** CONSOLIDATED STATEMENTS OF OPERATIONS**

**(Unaudited)**

|  

  | **Three Months Ended June 30, 2009** | **Three Months**

**Ended June 30, 2008** | **Six Months**

**Ended June 30, 2009** | **Six Months**

**Ended June 30, 2008** |  
Income:

Sales

Other  income

 

$

 

2,153,909

1,495,493

 

$

 

2,075,850

135,784

 

$

 

4,066,699

1,633,871

 

$

 

 

4,260,865

209,046

 

Total  income

 

3,649,402

 

2,211,634

 

5,700,570

 

4,469,911

Costs and expenses:

Cost  of production

Exploration  costs

Operating  expenses 

 

 

 

 

2,114,997

	-

1,743,493

 

 

2,128,424

131,279

686,011

 

 

3,600,706

	-

2,410,010

 

 

 

 

3,717,435

131,279

1,228,917

 

Total  costs and expenses      

 

3,858,490

 

2,945,714

 

6,010,716

 

5,077,631

 

Income (Loss) from  operations

 

 

(209,088)

 

 

(734,080)

 

 

(310,146)

 

 

(607,720)

 

Other expenses:

Interest

 

Income (Loss) before noncontrolling  interest

Noncontrolling interest

 

 

505,132

 

 

54,273

 

 

1,159,761

 

 

77,987

 

 

(714,220)

33,967

 

 

(788,353)

15,397

 

 

(1,469,907)

	7,832

 

 

(685,707)

-

 

Income (Loss) before  provision for income taxes

Provision for income taxes

 

 

(680,253)

-

 

 

(772,956)

 -

 

 

(1,462,075)

-

 

 

(685, 707)

-

Net income (loss)  attributable to Eastern Goldfields, Inc

Shareholders

 

$

 

(680,253)

 

$

 

(772,956)

 

$

 

(1,462,075)

 

$

 

(685,707)

Net income (loss) per share  attributable to Eastern Goldfields, Inc common shareholders, basic

 

$

 

(0.07)

 

$

 

(0.08)

 

$

 

(0.15)

 

$

 

(0.07)

Net income (loss) per share  attributable to Eastern Goldfields, Inc common shareholders, diluted

 

$

 

(0.07)

 

$

 

(0.08)

 

$

 

(0.15)

 

$

 

(0.07)

Weighted average Eastern Goldfields, Inc. shares  outstanding, basic

 

 

 

9,979,215

 

 

9,377,986

 

 

9,979,215

 

 

9,377,986

Weighted average Eastern Goldfields, Inc. shares  outstanding, diluted

 

 

9,543,159

 

 

9,377,986

 

 

9,461,029

 

 

9,377,986

 

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 SIX MONTHS ENDED JUNE 30,2009**

**(Unaudited)**

 

 

 

**Common Stock**

 

**A Class Preference**

** **

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

** **

** **

** **

** **

 

**Shares**

** **

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

** **

 

** **

** **

 

** **

 

** **

** **

** **

**Common**

** **

** **

** **

 

** Accumulated Other     **

 

** **

** **

 

** **

** **

 

**Total**

 

 

**Number of**

 

**Par**

 

**Number of**

 

**Par **

** **

**Stock  to be**

** **

**Additional     Paid-in**

 

**Comprehensive**

 

**Accumulated**

 

**Loan to  **

 

**Stockholders'**

 

 

**Shares**

 

**Value**

 

**Shares**

 

**Value**

** **

**Issued**

** **

**Capital**

 

**Loss**

 

**Deficit**

 

**Lomshiyo**

 

**Equity**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

** **

** **

 

 

 

 

 

 

 

** **

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2008  (Unaudited)

 

9,377,986 

 

$

9,378 

 

2,881,393 

 

$

45 

 

$

440 

 

$

22,914,882 

 

$

(2,668,197)

 

$

(11,196,876)

 

$

(3,800,214)

 

$

5,259,458 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock issued

 

601,229 

 

 

601 

 

 

 

 

 

 

 

(440)

 

 

313,319 

 

 

 

 

 

 

 

 

 

 

 

313,480 

Common stock to be issued  for services rendered (300,000  shares)            

 

 

 

 

 

 

 

 

 

 

 

 

300 

 

 

929,700 

 

 

 

 

 

 

 

 

 

 

 

930,000 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock issued in  exchange for A Class Shares 

 

 

 

 

 

 

200,000 

 

 

3 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accrual of interest income  on loan to Lomshiyo

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(294,747)

 

 

(294,747)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss including  non-controlling interest

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,348,401)

 

 

(1,462,075)

 

 

 

 

 

(3,810,476)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation

 

 

 

 

 

 

 

 

 

(8)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(799,998)

 

 

(800,006)

Comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(4,610,482)

Balance Eastern Goldfields,  Inc.’s equity at June 30, 2009 (Unaudited)

 

9,979,215 

 

 

 9,979

 

3,081,393 

 

 

40 

 

 

300 

 

 

24,157,901 

 

 

(5,016,598)

 

 

(12,658,951)

 

 

(4,894,959)

 

 

1,597,712 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-controlling Interest

 

-

 

 

-

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

4,463,435 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at June 30, 2009  (Unaudited)

 

9,979,215 

 

 

9,979 

 

3,081,393 

 

$

40 

 

$

300 

 

$

24,157,901 

 

$

(5,016,598)

 

$

(12,658,951)

 

$

(4,894,959)

 

$

6,061,147 

 

The accompanying notes are an integral part of theseconsolidated financial statements

6
****
**EASTERN GOLDFIELDS, INC. AND SUBSIDIARIES**

** CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited)**

** ** 

 

 

**Six Months**

** **

**Six Months**

 

**Ended June 30,  2009**

** **

**Ended June 30,  2008**

 

 

 

 

 

 

 

Cash flows from operating  activities:

 

 

 

 

 

 

Net  loss including noncontrolling interest

 

$

(1,462,075)

 

$

(685,707)

 

 

 

 

 

 

 

Adjustments to reconcile net  loss to net cash used

 

 

 

 

 

 

  in operating activities:

 

 

 

 

 

 

Depreciation,  depletion and amortization

 

 

274,993 

 

 

382,982 

Accrued  interest income on Loan Lomshiyo

 

 

(294,747)

 

 

(202,750)

Noncontrolling  interest

 

 

26,135 

 

 

-

Common  stock issued for services

 

 

930,000 

 

 

-

Changes in assets and  liabilities:

 

 

 

 

 

 

Increase  in inventories

 

 

(135,929)

 

 

(29,949)

Increase  in prepaid expenses and other current assets

 

 

(247,879)

 

 

(198,807)

Increase  in accounts payable and other current liabilities

 

 

658,487 

 

 

441,353 

    

 

 

 

 

 

 

            Net cash used in  operations    

 

 

(284,982)

 

 

(292,878)

 

 

 

 

 

 

 

Cash  flows from investing activities:

 

 

 

 

 

 

Purchase  of  property and equipment

 

 

(983,404)

 

 

(12,975,651)

Capitalized  costs

 

 

-

 

 

(517,691)

    

 

 

 

 

 

 

            Net cash used in  investing activities

 

 

(983,404)

 

 

(13,493,342)

 

 

 

 

 

 

 

Cash  flows from financing activities:

 

 

 

 

 

 

Advances  from (to) stockholders

 

 

157,418 

 

 

(17,485)

Proceeds  from long-term debt

 

 

1,302,880 

 

 

15,566,916 

Proceeds  from common stock to be issued

 

 

313,480 

 

 

-

 

 

 

 

 

 

 

            Net cash  provided by financing activities

 

 

1,773,778 

 

 

15,549,431 

 

 

 

 

 

 

 

Effect of exchange rates on  cash

 

 

(494,687)

 

 

(870,459)

Net increase (decrease) in  cash

 

 

44,672 

 

 

892,752 

Cash, beginning of period

 

 

38,275 

 

 

355,148 

Cash, end of period

 

$

82,947 

 

$

1,247,900 

 

 

 

 

 

 

 

**Supplemental disclosure  of cash flow information:**

** **

 

 

 

 

 

** **Cash paid for interest

** **

$

1,159,761 

 

$

77,987 

 

 

 

 

 

 

 

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

** **

 

 

 

 

 

**   investing and  financing activities:**

** **

 

 

 

 

 

Accrual  of interest income on loan to Lomshiyo

 

$

294,747 

 

$

202,750 

 

 

 

 

 

 

 

Common  stock issued for services

 

$

930,000 

 

$

-

 

 

The accompanying notes are an integral part of theseconsolidated financial statements

7****

**EASTERNGOLDFIELDS, INC. AND SUBSIDIARIES**

** NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**FOR THE SIX MONTHS ENDED JUNE 30, 2009**

**(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 ofNevada on July 15, 1998, under the name of Fairbanks Financial, Inc. TheCompany was established as a business management, marketing and consulting firmto serve both 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 the BarbertonGreenstone Belt area of the Mpumalanga Province, South Africa.  On October25, 2005, the Company changed its corporate name to Eastern Goldfields, Inc. tomore accurately reflect its business operations.  On May 30, 2008, EGSAacquired 100% of the issued and outstanding common or ordinary stock ofBarbrook Mines Limited (“Barbrook”), also a South African gold producer anddeveloper corporation.  On December 15, 2008, ownership of Barbrook wasplaced under EGL.    

 

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 financialstatements prior to this share exchange are those of EGL, however, the name ofthe consolidated 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”).

** **

8

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

** NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**FOR THE SIX MONTHS ENDED JUNE 30, 2009**

** (Unaudited)**

** **

**2.        SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES**

 

**Basisof Presentation**

 

Theunaudited consolidated financial statements included herein have been preparedin accordance with the accounting principles generally accepted in the UnitedStates for interim financial information and with the instructions to Form 10-Qand Article 8 and Rule 10-01 of Regulation S-X.  They do not include allinformation and notes required by generally accepted accounting principles forcomplete financial statements.  However, except as disclosed herein, there hasbeen no material changes in the information disclosed in the notes to the consolidatedfinancial statements included in the Company’s annual report on Form 10-K ofEastern Goldfields, Inc. and Subsidiaries for the year ended December 31, 2008.  In the opinion of management, all adjustments (including normalrecurring accruals) considered necessary for a fair presentation have beenincluded.  Operating results for the three and six months ended June 30, 2009, are notnecessarily indicative of the results that may be expected for any otherinterim period or the entire year.  For further information, these unauditedconsolidated financial statements and the related notes should be read inconjunction with the Company’s audited financial statements for the year endedDecember 31, 2008, included in the Company’s annual report on Form  10-K.

 

**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 and transactionshave 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 is 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.

** **

 9

 

**EASTERNGOLDFIELDS, INC. AND SUBSIDIARIES**

** NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**FOR THE SIX MONTHS ENDED JUNE 30, 2009**

** (Unaudited)**

 

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

 

**Property Plant andMine Development** (Continued)

 

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. 

 

**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.  Actualresults could 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 ofshares actually outstanding during the period.  Diluted earnings per share havebeen calculated to give effect to the number of additional shares of commonstock that would have been outstanding if the potential dilutive instrumentshad been issued for the six months ended June 30, 2009 and 2008.  Theweighted average number of outstanding shares includes the common stock as wellas the A Class Preference Shares, as the holders of the A Class PreferenceShares have the same rights and entitlements as those attached to the commonstock.  The computation of dilutive loss per common share does not assumeconversion, exercise or contingent exercise of securities that would have an anti-dilutiveeffect on earnings.

 

 

10

 

**EASTERNGOLDFIELDS, INC. AND SUBSIDIARIES**

** NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**FOR THE SIX MONTHS ENDED JUNE 30, 2009**

** (Unaudited)**

 

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

 

**Earnings Per Share** (Continued)

 

Thefollowing table reconciles basic earnings per share and diluted earnings pershare and the related weighted average number of shares outstanding for the sixmonths ended June 30, 2009:

 

                                                                                        

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 For the Six Months Ended June 30, 2009

 

 

 

 

 

 

 

 

 

Income 

 

Shares  

 

Per-share

 

 

(Numerator)

 

(Denominator)  

 

Amount

 

 

 

 

 

 

 

Net  loss        

 

 $(1,462,015) 

 

9,979,215

 

 $   (0.15)

 

 

 

 

 

 

 

         BASIC AND DILUTED EPS

 

 

 

 

 

 

         Income available to common

 

 

 

 

 

 

                 stockholders    

 

$(1,462,015)  

 

9,979,215

 

    $   (0.15)

 

 

 

 

 

 

 

DILUTED  EPS

 

 

 

 

 

 

Income  available to common

 

 

 

 

 

 

          stockholders

 

$(1,462,015)  

 

9,461,029

 

   $   (0.15)

 

**Income Taxes**

 

Deferredincome taxes are reported using the liability method.  Deferred tax assetsare recognized for deductible temporary differences and deferred taxliabilities are recognized for taxable temporary differences.  Temporarydifferences are the differences between the reported amounts of assets andliabilities and their tax bases.  Deferred tax assets are reduced by avaluation allowance when, in the opinion of management, it is more likely thannot that some portion or all of the deferred tax assets will not berealized.  Deferred tax assets and liabilities are adjusted for theeffects of changes in tax laws and rates on the date of enactment.  Thecomponents of the deferred tax assets and liabilities are individuallyclassified as current and non-current based on their characteristics.

 

**ForeignCurrency Translation**

 

TheCompany’s functional currency is the South African Rand.  The Companytranslates the foreign currency financial statements of its foreign operationsby translating balance sheet accounts at the exchange rate on the balance sheetdate and the income statement accounts using the prevailing exchange rates atthe transaction date.  Translation gains and losses are recorded instockholders’ equity and realized gains and losses are reflected in operations.

 

**ExplorationExpenses**

 

Exploration costs arecharged to operations as incurred.

 

11

**EASTERNGOLDFIELDS, INC. AND SUBSIDIARIES**

** NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**FOR THE SIX MONTHS ENDED JUNE 30, 2009**

** (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 lowerof the carrying amount or fair value less costs to sell.  During the sixmonths ended June 30, 2009, there was no impairment of long-lived assets.

 

**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.  Netrealizable 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 measuredbased on assays of the material fed into the process and the projectedrecoveries of the respective plants.  In-process inventories are valued at theaverage cost of the material fed into the process attributable to the sourcematerial coming from the mines, stockpiles and/or leach pads plus thein-process conversion costs, including applicable depreciation relating to theprocess facilities incurred 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 SIX MONTHS ENDED JUNE 30, 2009**

** (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 andwaste-to-ore ratios over the mine life, the Company defers and amortizescertain mining costs on a UOP basis over the life of the mine.  Thesemining costs, which are commonly referred to as “deferred stripping” costs, areincurred in mining activities that are normally associated with the removal ofwaste rock.  The deferred stripping accounting method is generallyaccepted in the mining industry where mining operations have diverse grades andwaste-to-ore ratios; however, industry practice does vary.  Deferredstripping matches the costs of production with the sale of such production atthe Company’s operations where it is employed, by assigning each ounce of goldwith an equivalent amount of waste removal cost.

 

If theCompany were to expense stripping costs as incurred, there could be greatervolatility 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 ceased by end-2008, the Company did not measureand recognize production stage deferred stripping costs and credits for the sixmonths period ended June 30, 2009. 

 

**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 reclamationcosts were based principally on legal and regulatory requirements.  Such costsrelated to active mines are accrued and charged over the expected operatinglives of the 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, ongoing care,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 SIX MONTHS ENDED JUNE 30, 2009**

** (Unaudited)**

** **

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

 

**StockOption Expense** 

 

Compensationcost recognized includes: (a) compensation cost for all share-based paymentsgranted prior to, which have since vested as of January 1, 2006, based on thegrant-date fair value estimated in accordance with the original provisions ofFAS 123, and (b) compensation cost for all share-based payments grantedsubsequent to January 1, 2006, which have vested based on the grant-date fair valueestimated in accordance with the provisions of FAS 123(R).

 

        **Fair ValueAccounting**

** **

InSeptember 2006, the Financial Accounting Standards Board (“FASB”) issued FASBStatement No. 157, “Fair Value Measurements” (“FAS 157”).  FAS 157 definesfair value, establishes a framework for measuring fair value in generallyaccepted accounting principles, and expands disclosures about fair valuemeasurements.  The provisions of FAS 157 were adopted January 1,2008.  In February 2008, the FASB staff issued Staff Position No. 157-2“Effective Date of FASB Statement No. 157” (“FSP FAS 157-2”).  FSP FAS157-2 delayed the effective date of FAS 157 for nonfinancial assets andnonfinancial liabilities, except for items that are recognized or disclosed atfair value in the financial statements on a recurring basis (at leastannually).  The provisions of FSP FAS 157-2 are effective for theCompany’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 valuehierarchy under FAS 157 are described below:

 

Level1           Unadjusted quotedprices in active markets that are accessible at the measurement date foridentical, unrestricted assets or liabilities;

 

Level 2          Quoted prices in markets that are not active, or inputs that are observable,either directly or indirectly for substantially the full term of the asset orliability;

 

Level3           Prices orvaluation techniques that require inputs that are both significant to the fairvalue measurement and unobservable (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.  Asrequired by FAS 157, assets and liabilities are classified in their entiretybased on the lowest level of output that is significant to the fair valuemeasurement.

 

** **

** **14

** **

** **

** **

**EASTERNGOLDFIELDS, INC. AND SUBSIDIARIES**

** NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**FOR THE SIX MONTHS ENDED JUNE 30, 2009**

** (Unaudited)**

 

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

 

**FairValue Accounting**(Continued)

 

 

 

              Fair Value at June 30, 2009

 

 

 

(in thousands) 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

  Level 3

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

                   Cash

 

$

83 

 

$

83

 

$

-

 

$

-

                   Other assets

 

 

30,117

 

 

30,117

 

 

 

 

 

 

 

 

$

30,200

 

$

$30,200 

 

$

-

 

$

-

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

                   Accounts payable and other

 

 

 

 

 

 

 

 

 

 

 

 

                       current liabilities

 

$

2,308

 

$

2,308

 

$

-

 

$

-

                  Advances from stockholders   

 

 

268

 

 

268

 

 

-

 

 

-

                  Short term loans

 

 

19,163

 

 

-

 

 

19,163

 

 

-

                  Long term liabilities   

 

 

1,972

 

 

-

 

 

1,972

 

 

-

 

 

$

23,711

 

$

2,576

 

$

21,135

 

$

-

 

TheCompany’s cash and certain other assets are classified within Level 1 of thefair value hierarchy since they are valued using quoted market prices. The cash and certain other assets that are valued based on quoted market pricesin active markets are primarily money market securities.

 

TheCompany’s accounts payable and other current liabilities and advances fromstockholders are classified within Level 1 of the fair value hierarchy sincethey occur with sufficient frequency and volume to provide pricing informationon an ongoing basis.

 

**The Company’s short term loans and long term liabilitiesare classified within Level 2 of the fair value hierarchy since they have aspecified (contractual) term.**

 

Thetotal amount of the changes in fair value for the period was included in netloss as a result of changes from December 31, 2008.

 

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. The Company did not elect the Fair Value Option for any of its financial assetsor liabilities, and therefore, the adoption of FAS 159 had no impact on theCompany’s consolidated financial position, results of operations or cash flows.

   

15

 

 

**EASTERN GOLDFIELDS,INC. AND SUBSIDIARIES**

** NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**FOR THE SIX MONTHS ENDED JUNE 30, 2009**

** (Unaudited)**

 

**2.        SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES** (Continued)

** **

**                Recent Accounting Pronouncements**

 

InApril 23, 2009, the Financial Accounting Standards Board (FASB) issued FASBStaff Position (FSP)  Financial Accounting Standard (FAS) 157-4, *DeterminingFair Value When the Volume and Level of Activity for the Asset or LiabilityHave Significantly Decreased and Identifying Transactions That Are Not Orderly.*Based on guidance, if an entity determines that the level of activity foran asset or liability has significantly decreased and that a transaction is notorderly, further analysis of transactions or quoted prices is needed, and asignificant adjustment to the transaction or quoted prices may be necessary toestimate fair value in accordance with the Statement of Financial AccountingStandards (SFAS) No. 157 *Fair Value Measurements*.  This FSP is to beapplied prospectively and is effective for interim and annual periods endingafter June 15, 2009 with early adoption permitted for periods ending afterMarch 15, 2009. The company will adopt this FSP for its quarter ending June 30,2009.  There is no expected impact on the Company’s financial statements.

 

InApril 2009, the FASB issued FSP FAS 115-2 and FAS 124-2, *Recognition andPresentation of Other-Than-Temporary Impairments.* The guidance applies toinvestments in debt securities for which other-than-temporary impairments maybe recorded. If an entity’s management asserts that it does not have the intentto sell a debt security and it is more likely than not that it will not have tosell the security before recovery of its cost basis, then an entity mayseparate other-than-temporary impairments into two components:  1) theamount related to credit losses (recorded in earnings), and 2) all otheramounts (recorded in other comprehensive income). This FSP is to be appliedprospectively and is effective for interim and annual periods ending after June15, 2009 with early adoption permitted for periods ending after March 15, 2009.The company will adopt this FSP for its quarter ended June 30, 2009. There isno expected impact on the Company’s financial statements.

 

InApril 2009, the FASB issued FSP FAS 107-1 and Accounting Principles Board (APB)28-1, *Interim Disclosures about Fair Value of Financial Instruments.*TheFSP amends FSAS No. 107 “Disclosures about Fair Value of Financial Instruments”to require an entity to provide disclosures about fair value of financialinstruments in interim financial instruments in interim financial information.This FSP is to be applied prospectively and is effective for interim and annualperiods ending after June 15, 2009 with early adoption permitted for periodsending after March 15, 2009. The company will include the required disclosuresin its quarter ending June 30, 2009.

 

InDecember 2007, the FASB issued SFAS No. 141 (R), *Business Combinations,*which became effective January 1, 2009 via prospective application to businesscombinations. This Statement requires that the acquisition method of accountingbe applied to a broader set of business combinations, amends the definition ofa business combination, provides a definition of a business, requires anacquirer to recognize an acquired business at its fair value at the acquisitiondate and requires the assets and liabilities assumed in a business combinationto be measured and recognized at their fair values as of the acquisition date(with limited exceptions). The company adopted this Statement on January 1,2009. There was no impact upon adoption, and its effects on future periods willdepend on the nature and significance of business combinations subject to thisstatement.

 

InApril 2009, the FASB issued FSP FAS 141 (R)-1, *Accounting for AssetsAcquired and Liabilities Assumed in a Business Combination That Arise fromContingencies.* This FSP requires that assets acquired and liabilitiesassumed in a business combination that arise from contingencies be recognizedat fair value if fair value can be reasonably estimated. If fair value cannotbe reasonably estimated, the asset or liability.

 

16

 

**EASTERNGOLDFIELDS, INC. AND SUBSIDIARIES**

** NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**FOR THE SIX MONTHS ENDED JUNE 30, 2009**

** (Unaudited)**

 

**2.        SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES** (Continued)

 

**RecentAccounting Pronouncements**(Continued)

 

wouldgenerally be recognized in accordance with SFAS No. 5, “Accounting forContingencies” and FASB Interpretation No. 14, “Reasonable Estimation of theAmount of a Loss”. Further, the FASB removed the subsequent accounting guidancefor assets and liabilities arising from contingencies from SFAS no. 141(R). Therequirements of this FSP carry forward without significant revision theguidance on contingencies of SFAS No.  141, “Business Combinations”, whichwas superseded by SFAS No. 141(R) (see previous paragraph). The FSP alsoeliminates the requirement to disclose an estimate of the range of possibleoutcomes of recognized contingencies at the acquisition date. For unrecognizedcontingencies, the FASB requires that entities include only the disclosuresrequired by SFAS No. 5. This FSP was adopted effective January 1, 2009. Therewas no impact upon adoption, and its effects on future periods will depend onthe nature and significance of business combinations subject to this statement.

 

InApril 2008, the FASB issued FSP FAS 142-3, *Determination of the Useful Lifeof Intangible Assets.* The FSP states that in developing assumptions aboutrenewal or extension options used to determine the useful life of an intangibleasset, an entity needs to consider its own historical experience adjusted forentity-specific factors. In the absence of that experience, an entity shall considerthe assumptions that market participants would used about renewal or extensionoptions. This FSP is to be applied to intangible assets acquired after January1, 2009. The adoption of this FSP did not have an impact on the Company’sfinancial statements.

 

In May 2008, the FASB issued SFAS No. 162 ("FAS 162"), The Hierarchy of Generally Accepted Accounting Principles.  FAS 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements that are presented in accordance with accounting principles generally accepted in the United States of America.  FAS 162 was effective on November 13, 2008.   The adoption of FAS 162 did not have a material impact on the Company's consolidated financial statements.  FAS 162 was superseded by FAS 168.

 

In June 2009, the FASB issued SFAS No. 168 ("FAS 168"), The FASB Accounting Standards Codification.  FAS 168 is effective for financial statements issued for annual and interim periods beginning after September 15, 2009.  On the effective date of FAS 168, the Codification will supersede all then-existing non-SEC accounting and reporting standards.  Rules and interpretive releases of the SEC under authority of federal securities laws will continue to be sources of authoritative GAAP for SEC registrants.  The adoption of FAS 168 is not expected to have a material effect on the Company's financial statements.

 

 

**3.        GOING CONCERN**

** **

Theaccompanying consolidated financial statements have been prepared in conformitywith accounting principles generally accepted in the United States of America,which contemplate continuation of the Company as a going concern.  The Companyhas sustained net losses of $1,462,075 for the six months ended June 30, 2009. Net cash used in operations for the six months ended June 30, 2009 was $284,982.The Company also has an accumulated deficit of $12,658,951 and a working capitaldeficit of $20,924,089 at June 30, 2009. 

 

Theitems discussed above raise substantial doubt about the Company's ability tocontinue as a going concern. If the Company's financial resources areinsufficient, the Company may require additional financing in order to executeits business plan and support its operations. The Company cannot predictwhether this additional financing will be in the form of equity, debt oranother form. The Company may not be able to obtain the necessary additionalcapital on a timely basis, on acceptable terms, or at all. Should financingsources fail to materialize, management would seek alternate funding sourcessuch as the sale of common and/or preferred stock, the issuance of debt orother means. The Company plans to attempt to address its working capitaldeficiency by increasing its sales, maintaining strict expense controls andseeking strategic alliances.

 

In theevent that these financing sources do not materialize, or the Company isunsuccessful in increasing its revenues and profits, the Company will be forcedto further reduce its costs, may be unable to repay its debt obligations asthey become due, or respond to competitive pressures, any of whichcircumstances would have a material adverse effect on its business, prospects,financial condition and results of operations. Additionally, if these fundingsources or increased revenues and profits do not materialize, and the Companyis unable to secure additional financing, the Company could be forced to reduceor curtail its business operations.

 

17

 

**EASTERNGOLDFIELDS, INC. AND SUBSIDIARIES**

** NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**FOR THE SIX MONTHS ENDED JUNE 30, 2009**

** (Unaudited)**

 

**4.         INVENTORIES**

 

Inventoriesat June 30, 2009 and December 31, 2008 consist of the following:

** **

 

June 30, 2009

 

December 31, 2008

 

 

 

 

 

 

Gold  in hand

$

-

 

$

146,364

Precious  metals in process

 

218,294

 

 

187,259

Stockpiles

 

275,413

 

 

24,154

 

 

 

 

 

 

 

 

$

 

493,707

 

 

$

357,777

 

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

 

Majorclasses of property, plant, and mine development as of June 30, 2009 andDecember 31, 2008 are as follows:

 

 

 

June 30, 2009

 

December 31, 2008

 

 

 

 

 

 

 

Land  and buildings

 

$

 

457,705

 

 

$

 

379,428 

Mining  assets

 

6,845,872

 

 

4,608,130 

Mine  development costs

 

26,050,185

 

 

24,108,457 

Mining  rights

 

1,166,305

 

 

966,842 

Motor  vehicles

 

98,198

 

 

81,404 

Furniture  and equipment

 

194,150

 

 

160,946 

Metallurgical  plant

 

5,066,298

 

 

4,199,851 

Plant  and equipment

 

222,708

 

 

50,224 

Environmental  rehabilitation fund

 

279,163

 

 

159,026 

 

 

 

 

 

 

 

40,380,584

 

34,714,308 

Less:  accumulated depreciation

(11,932,359)

 

(10,131,067)

 

 

 

 

 

 

Net property and equipment

$

28,448,225

 

$

24,583,241 

** **

Depreciation,depletion and amortization expense is $274,993 and $382,982 for the six monthsended June 30, 2009 and 2008, respectively.   

 

   

18

** **

** **

**EASTERNGOLDFIELDS, INC. AND SUBSIDIARIES**

** NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**FOR THE SIX MONTHS ENDED JUNE 30, 2009**

** (Unaudited)**

** **

**6.         SHORTTERM LOANS**

 

Shortterm loans at June 30, 2009 and December 31, 2008 consist of the following:

 

 

June 30, 2009

 

December 31, 2008

 

 

 

 

 

 

 

Phoenix  Gold Fund and Asian Investment Management Services Ltd

 

$

 

16,874,526

 

 

 

$

0

3,822,724

Investec  Bank Limited

 

-

 

 

9,364,097

Kestrel  S.A.

 

2,288,302

 

 

2,163,728

 

 

 

 

 

 

 

$

19,162,828

 

$

15,350,549

 

OnMarch 28, 2008, the Company’s wholly owned subsidiary EGSA entered into aConvertible Loan Agreement (the “Agreement”) with Phoenix Gold Fund and AsianInvestment Management Services Ltd, collectively referred to as “the Lenders”.

 

TheLoan amounting to R32 million ($4,133,833 as of June 30, 2009) received onApril 18, 2008 is termed as pre-listing funds prior to EGSA’s intended listingon the Johannesburg Stock Exchange within twelve months from the date of thisAgreement.   

 

Forthe purposes of this Agreement, EGSA has been ascribed a value of R432 millionand the percentage shareholding that will be issued to the Lenders in order todischarge the Loan has been calculated accordingly.

 

Theloan principal can convert into 6.9% of the total issued and outstanding sharesof the ordinary capital of EGSA after the conversion of the loan by EGSA. Conditions relating to interest payments are as follows:    

** **

•     If EGSA is able to list its shares with the JSELimited (JSE) within six months of the agreement date then no interest is dueand payable.  

•    If EGSA is not able to list its ordinary shares withthe JSE within six months of the agreement date then interest will accrue atthe South African Prime Lending Rate. 

•     If EGSA lists its ordinary shares with the JSE aftersix months but before twelve months of the agreement date, then interest willaccrue and be paid on a monthly basis until conversion or repayment of theloan.  

 

IfEGSA has been unable to list its ordinary shares with the JSE within twelvemonths of the agreement date, then the lender can demand repayment of principaland accrued interest or conversion of the debt into the corresponding ordinaryshares of EGSA.  

 

** **

 19

** **

** **

**EASTERNGOLDFIELDS, INC. AND SUBSIDIARIES**

** NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**FOR THE SIX MONTHS ENDED JUNE 30, 2009**

** (Unaudited)**

** **

**6.         SHORTTERM LOANS** (Continued)****

**       **

OnApril 30, 2009 the Company entered into the Restated Convertible Loan andOption Agreement (the "Restated Agreement") with Asian InvestmentManagement Services, Limited ("AIMS"). The Restated Agreementprovides that AIMS will; (A) provide technical and corporate assistance to theCompany's subsidiary, EGSA, in connection with EGSA's strategies andobjectives; (B) make available additional funds as an "AdditionalLoan" not later than May 29, 2009 in an amount not to exceed 93,000,000(South African Rand) to EGSA so as to allow EGSA to pay all amounts dueInvestec Bank Limited under the Investec Loan and for EGSA to cancel thesecurity given by or on behalf of EGSA to Investec Bank including, but notlimited to, the Borrower's Cession and the Guarantee; (C) convert theAdditional Loan and the existing convertible loan of March 31, 2008 in theamount of 32,000,000 (South African Rand) that EGSA received from AIMS and thePhoenix Gold Fund (as amended on March 27, 2009) (the "Original Loan"),both consolidated and totaling 125,000,000 (South African Rand) into 40% of theoutstanding common shares of either EGSA or such other entity as the partiesagree for purposes of the planned listing of the common stock of the Companyand its subsidiaries (or such other entity as the Company and AIMS maydetermine by subsequent agreement) pursuant to the Listing Commitment. TheRestated Agreement also grants AIMS a right of first refusal which providesthat the Company shall not obtain any additional funding from any other sourceunless the Company has first offered AIMS the opportunity to provide suchadditional funding on no less favorable terms and conditions and AIMS has,after thirty days from the date of receipt of notice, declined to exercise its rightof first refusal.  In association with the listing commitment in theRestated Agreement for the option to convert the loans into 40% of theoutstanding common shares, the Company received a one time fee of $1,300,00.

 

Theloan balance outstanding at June 30, 2009 of 16,874,526 includes $449,602 of accruedinterest. 

** **

On May 27, 2008, the Company’s wholly owned subsidiaryEGSA obtained R80 million ($8,404,421 as of March 31, 2009) six month bridgingloan facility (“facility”) from Investec Bank Ltd. (“Investec”) for theacquisition of Barbrook Mines Ltd.  On October 30, 2008, this facility wasrenegotiated and the Company received a commitment letter agreement fromInvestec.  Under the terms of this 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”).  The facility was repaid on May 29,2009.

 

OnAugust 25, 2008, the Company obtained a Swiss Francs 2,200,000 ($2,061,650 asof March 31, 2009) six month loan from a shareholder, Kestrel SA (“Kestrel”),for purposes of working capital requirements.  Interest on the loan is 15%p.a. calculated on the outstanding balance and compounded monthly inarrears.  In addition, on August 22, 2008, the Company entered into aCommon 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 orafter August 20, 2008 but all rights to purchase the Shares and to exercisethis Warrant shall expire on August 21, 2011 after which it shall become voidand all rights hereunder shall thereupon cease.  The repayment of the loanwas extended to December 31, 2009. 

 

The loan balance outstanding at June 30, 2009of 2,288,302  includes$157,257 of accrued interest.

****20

 

**EASTERN GOLDFIELDS,INC. AND SUBSIDIARIES**

** NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**FOR THE SIX MONTHS ENDED JUNE 30, 2009**

** (Unaudited)**

** **

**7.        LONG TERM LIABILITIES**

 

        Longterm liabilities as of June 30, 2009, are as follows:

 

 

June 30, 2009

 

December 31, 2008

 

 

 

 

 

 

Standard  bank vehicle and asset financing

$

1,972,998

 

$

1,851,108

Less:  current portion

 

(297,908)

 

 

(480,636)

 

$

1,675,090

 

$

1,370,472

 

Securedby installment sale agreements over certain mining equipment, bearing interestat the prime bank overdraft rate less 1% and repayable in monthly installmentsof R520,959 ($67,299), including interest.

 

Maturities of theliabilities are as follows:

 

**For the year ending December 31:**

2009

2010

2011

2012

 

 

 

 

$

 

357,725

533,671

574,895

208,799

 

 

 

 

 

 

$

 

1,675,090

** **

**8.        RECLAMATION AND 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 has made,and expects to make in the future, expenditures to comply with such laws andregulations, but cannot predict the full amount of such future expenditures.Estimated future reclamation costs are based principally on legal and regulatoryrequirements.

 

AtJune 30, 2009 $425,768 were accrued for reclamation obligations relatingto currently or recently producing mineral properties.

 

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

 

 

Balance,  December 31, 2008

Reduction, change in  estimate and other

Liabilities settled

Accretion expense

 

 

 

 

$

 

352,974

72,794

-

-

 

Balance,  June 30, 2009

 

 

 

 

$

 

425,768

** **

21

 

**EASTERN GOLDFIELDS, INC. AND SUBSIDIARIES**

** NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**FOR THE SIX MONTHS ENDED JUNE 30, 2009**

** (Unaudited)**

** **

**9.        COMMITMENTS AND CONTINGENCIES**

 

Afirst continuing covering bond in the amount of South African Rands 200,000 ($25,836)was registered over the property held by a subsidiary, Makonjwaan PropertiesHenry Nettman Two Eight (Pty) Ltd., in lieu of financial guarantees amountingto South African Rands 164,000 ($21,186) issued in favor of the Department ofMinerals and Energy.

 

Duringthe year ended December 31, 2006, the Company entered into a Service andSupport Agreement with Cheston Minerals PTY Limited (“CML”), a company owned byEGI’s President.  This agreement covers the rental of the Company’s SouthAfrican office and use of the office equipment and supplies, which are owned byCML.  The term of the agreement is one year and is renewable on an annualbasis.  The Company charged $99,000 to operating expense for the sixmonths ended June 30, 2009.

 

Thecompany’s subsidiary, Barbrook Mines, was subject to several claims broughtagainst it by creditors during 2006 and 2007 fiscal years.  These claims,which had been accrued for at 2007 year end, were in the main settled and thematters finalized.  In the matter with Sentinel Corporate Solutions (Pty)Limited, Sentinel has issued summons against Barbrook for R1,108,061(approximately $143,142) in respect of amounts payable, which are accrued for,in respect of a labor contract.  Barbrook has instituted an action againstSentinel for R7,456,465 (approximately $963,243) in respect of damages incurredwhen the labor force set fire to the Barbrook administration building. Both matters with Sentinel are presently still being defended and are not yetfinalized.

** **

**10.      NON-CONTROLLING INTEREST**

 

Thecurrent South African mining legislation promulgated under “Mineral andPetroleum 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 effectivedate), the MPRDA (incorporating the Mining Charter) requires mining companyownership for historically disadvantaged South Africans to 15% ownership withinfive years and 26% ownership within 10 years of the effective date. Thetransfer of ownership is to be consummated at fair market value.

 

Accordingly,and pursuant to the requirements of MPRDA, EGL on December 9, 2005 entered intoa “Heads of Agreement” to sell 26% of its ordinary stock to LomshiyoInvestments (Proprietary) Limited (“Lomshiyo”) for a consideration ofR9,900,000 (At June 30, 2009 – $1,278,905).  The transaction closed onFebruary 2, 2006.  Further, and upon the acquisition of Barbrook on May30, 2008, a similar agreement was concluded with Lomshiyo on December 15, 2008amounting to R20,800,000 (At June 30, 2009 – $2,686,991). 

** **

 22

**EASTERNGOLDFIELDS, INC. AND SUBSIDIARIES**

** NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**FOR THE SIX MONTHS ENDED JUNE 30, 2009**

** (Unaudited)**

** **

**10.      NON-CONTROLLING INTEREST** (Continued)

 

Thesetwo amounts are classified as loans to Lomshiyo and are reflected as areduction of equity in the Company’s June 30, 2009 consolidated balancesheet.  Lomshiyo is a South African corporation whose majorityshareholders are historically disadvantaged South Africans.  

 

Thepurchase of ordinary stock was financed with a note receivable bearing anannual interest rate of the South African Prime Rate (15% at June 30,2009).  The note accrues interest and is payable to the Company on January2, of each year.  A total of $929,063 of accrued interest has been addedto the note receivable.  The note is due and payable on December 31,2010.  The Company’s common stock collateralizes the note receivable.

**  **

**11.      STOCK OPTIONS**

** **

**           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 topurchase shares of stock can be granted with exercise prices not less than 100%of fair market value of the underlying stock at the date of grant. Options granted under the Company’s stock plan vest over periods ranging fromone to three years of the date of the grant and are exercisable over a periodof time not to exceed 10 years from grant date.  At December 31,2006, no shares were available for future grants under the Company’s 2005 StockIncentive Plan. 

 

The following table summarizes annual activity for allstock options for each of the two years ended December 31:

 

 

**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 the  period

 

850,000

 

$

1.50

 

 

850,000

 

$

1.50

Options exercisable,  end of year

 

Weighted average fair  value of options granted during the period

 

 

 

 

 

$

 

833,000

 

 

 

-

 

 

$

 

1.50

 

 

 

$

 

 

 

$

 

550,000

 

 

 

-

 

 

$

 

1.50

 

 

 

 

 

 23

 

**EASTERNGOLDFIELDS, INC. AND SUBSIDIARIES**

** NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**FOR THE SIX MONTHS ENDED JUNE 30, 2009**

** (Unaudited)**

** **

**11.      STOCK OPTIONS**(Continued)

** **

**           Employee Stock Options** (Continued)

Thefair value of the stock options granted (and vested) during the years endedDecember 31, 2008 and 2007, was approximately $0 and $0 or $0 and $0 per stockoption, respectively, and was determined using the Black Scholes option pricingmodel.  The factors used for the years ended December 31, 2008, were theoption 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 riskfree interest rate of 2.10% (2007 - 4.55%).

 

Thefollowing table summarizes information about stock options outstanding atDecember 31, 2008, with exercise prices less than the fair market value onthe date of grant with 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

  

      9

  

 $

1.50

  

833,000

 

 $

1.50

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of June30, 2009, there were $NIL of unrecognized compensation cost related to unvestedstock options.  This cost is expected to be recognized over a weightedaverage period of 0.3 years.

 

**12.      COMMON STOCK**

 

OnNovember 21, 2008, the Board of Directors approved the issuance of 300,000Special Shares to certain employees in payment of the services that the Companyhad received.  Of the total 300,000 Special Shares, 200,000 related to SouthAfrican employees, and, in accordance with the South African ExchangeRegulations, 200,000 Class A Preference Shares in the South African subsidiaryEGSA had been issued. The corresponding 200,000 shares in EGI and the balanceof 100,000 shares of EGI to non-South African employees are in the process ofbeing issued.

 

OnFebruary 16, 2009, 554,228 shares of restricted common stock at $3.00 per shareand 554,228 Common Stock Purchase Warrants in the form of a unit security at$3.00 per unit were issued for cash for a total offering of $1,662,684 lessoffering costs of $29,134 totaling $1,633,550. These share certificates wereissued on May 7, 2009.

 

24

 

** **

**MATTER OF FORWARD-LOOKINGSTATEMENTS**

 

THIS FORM 10-Q CONTAINS"FORWARD-LOOKING STATEMENTS" THAT CAN BE IDENTIFIED BY THE USE OFFORWARD-LOOKING WORDS SUCH AS "BELIEVES," "EXPECTS,""MAY," "WILL," "SHOULD," OR"ANTICIPATES," OR THE NEGATIVE OF THESE WORDS OR OTHER VARIATIONS OFTHESE WORDS OR COMPARABLE WORDS, OR BY DISCUSSIONS OF PLANS OR STRATEGY THATINVOLVE RISKS AND UNCERTAINTIES.  MANAGEMENT WISHES TO CAUTION THE READERTHAT THESE FORWARD-LOOKING STATEMENTS, INCLUDING,  BUT NOT LIMITED TO,STATEMENTS REGARDING THE COMPANY’S MARKETING PLANS, GOALS, COMPETITIVECONDITIONS, REGULATIONS THAT AFFECT PUBLIC COPMPANIES THAT HAVE NO EXISTINGBUSINESS 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.  ACTUALEVENTS OR RESULTS MAY DIFFER MATERIALLY EITHER BECAUSE ONE OR MORE PREDICTIONSPROVE TO BE ERRONEOUS OR AS A RESULT OF OTHER RISKS FACING THE COMPANY.FORWARD-LOOKING STATEMENTS SHOULD BE READ IN LIGHT OF THE CAUTIONARY STATEMENTSAND IMPORTANT FACTORS DESCRIBED IN THIS FORM 10-Q FOR EASTERN GOLDFIELDS, INC.,INCLUDING, BUT NOT LIMITED TO THE MATTERS SET FORTH IN MANAGEMENT’S DISCUSSIONAND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. THE RISKSINCLUDE, BUT ARE NOT LIMITED TO, THE RISK FACTORS AND UNCERTAINTIES SET FORTHIN ITEM 1A, RISK FACTORS, RISKS ASSOCIATED WITH A SMALL COMPANY THAT HAS ONLY ALIMITED HISTORY OF OPERATIONS, THE COMPARATIVELY LIMITED FINANCIAL RESOURCES OFTHE COMPANY, THE INTENSE COMPETITION THE COMPANY FACES FROM OTHER ESTABLISHEDCOMPETITORS, ANY ONE OR MORE OF THESE OR OTHER RISKS COULD CAUSE ACTUAL RESULTSTO DIFFER MATERIALLY FROM THE FUTURE RESULTS INDICATED, EXPRESSED, OR IMPLIEDIN SUCH FORWARD-LOOKING STATEMENTS.  WE UNDERTAKE NO OBLIGATION TO UPDATEOR REVISE ANY FORWARD-LOOKING STATEMENT TO REFLECT EVENTS, CIRCUMSTANCES, ORNEW INFORMATION AFTER THE DATE OF THIS FORM 10-Q OR TO REFLECT THE OCCURRENCEOF UNANTICIPATED OR OTHER SUBSEQUENT EVENTS.

 

*As used herein, the term“the Company,” “we,”  “us,” and “our” refer to Eastern Goldfields, Inc., aNevada corporation and its subsidiaries unless otherwise noted.*

 

 

**Item2. Plan of Operation.**

 

**CriticalAccounting Policies and Estimates. **Our Plan of Operations section discusses our unaudited consolidatedfinancial statements, which have been prepared in accordance with accountingprinciples generally accepted in the United States of America.  Thepreparation of these financial statements requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities as thedate of the financial statements and the reported amounts of revenues andexpenses during the reporting period. On an on-going basis, managementevaluates its estimates and judgments, including those related to revenuerecognition, accrued expenses, financing operations, and contingencies andlitigation. Management bases its estimates and judgments on historicalexperience and on various other factors that are believe to be reasonable underthe circumstances, the results of which form the basis for making judgmentsabout the carrying value of assets and liabilities that are not readilyapparent from other sources. Actual results may differ from these estimatesunder different assumptions or conditions. The most significant accountingestimates inherent in the preparation of our financial statements includeestimates as to the appropriate carrying value of certain assets andliabilities which are not readily apparent from other sources.

 

25

 

Theseaccounting policies are described at relevant sections in this discussion andanalysis and in the notes to the financial statements included in our QuarterlyReport on Form 10-Q for the period ended June 30, 2009

 

Ourstrategy, to the extent that we are able, is to grow our mineral reservesthrough optimization of current operations, exploration and prudentacquisitions.  The following is a summary of the actions and strategiesthat we implemented in 2008 and during the first six months of 2009:

 

•        Development of the Lily Mine operation 

•        Acquisitions 

•        Exploration

 

**Growthand Expansion**

 

**LilyMine**

 

Our primary focus, to the extent that we are able, isto develop the underground mine at Lily.  Primary development of theinitial underground section began in June 2007 and full conversion from open pitmining to underground mining commenced in January 2009.  All of LilyMine’s gold production since January 2009 is being derived from undergroundoperations.  To date, some 2,400 meters of underground development hasbeen completed.  This underground tonnage will be treated at the currentMakonjwaan mill for the next two years.  The acquisition of the nearbyBarbrook Mine, discussed below, with a dormant processing plant has altered theoriginal strategy of building a new plant at the Lily Mine site.  TheBarbrook processing plant, which is in the process of being refurbished, willbe used to process the ore from Lily Mine’s underground mining operation. 

 

If our estimates and operating conditions can bemaintained and assuming no interruptions in our plans,we anticipate that Lily underground operations may ramp up to full productionof around 30,000 tons per month by mid 2010.  If current operating levelscan be maintained and if we are successful in meeting the challenges anduncertainties that we face, we expect to produce approximately 14,000 ounces ofgold in 2009 for gross revenue of approximately $12,450,000 increasing toapproximately 35,000 ounces of gold per year in years 2011 through 2023 forgross annual revenue of approximately $31,400,000 (using a projected gold priceof $900/oz.).  These are only estimates and are subject to change andfluctuating market conditions.  The results of the Bankable FeasibilityStudy (“BFS”) completed in March 2008, include an estimate that the Lily Minehas a life of at least 15 years based on existing mineralreserves.     

 

The Lily Main Pit opencast operation: 

 
- Commenced     in June 2000 and was closed in October 2006.  During this period,     1,012,000 tonnes were successfully extracted at an average grade of 2.89     grams of gold per ton. 

 
- The     closure of the Lily Main open pit was timed to coincide with extraction of     oxidized ore from the Lily East pit.  Mining continued until August     2007 before the pit was closed due to unstable high wall conditions.      During this period a total of 96,347 tons were extracted having an average     grade of 2.27 grams of gold per ton. 

  
- Open     pit production commenced at Rosie’s Fortune in July 2007.  This open     pit was initially planned to be mined until May 2008 but was found to be     sufficiently productive to be continued until December 2008.  A total     of 180,572 tonnes were extracted at an average grade of 2.22 grams of gold     per ton. 

 

26

 

The strategy behind extending open pit miningoperations after closure of the Main pit in October 2006 was to maintain cashflow while establishing and preparing the underground workings forproduction.  This was done with the expectation that the Lily East andRosie’s Fortune open pit operations would be marginal but profitable.

 

The following table summarizes the tons milled, goldproduced and operating profit (loss) for the life of the open pit operations toDecember 2008.

 

 

**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

2.36

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

2,278,341

2007

12

160,000

322

10,400

2.32

0.072

1,660,754

2008

12

154,000

242

7,800

1.58

0.051

846,214

**TOTAL**

 

**1,322,200**

**2,702**

**86,800**

**2.09**

**0.064**

**5,954,733**

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

(2)     2005 represents the firstyear of change to the accounting period or fiscal year based on a calendar year

 

The extensive exploration diamond drilling programscompleted since 2005 up to the end of 2008 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.  82diamond drill holes (with wedges), totaling in excess of 28,800 meters ofdrilling, have increased reserves from 210,000 ounces at the end of 2004 to anestimated 565,000 ounces by the end of 2008.  The discovery cost isremarkably low at an estimated +/-US$2.00 per ounce during this explorationperiod.  

 

The aim of this extensive drilling exercise wastwofold: 

 

•        To extend Mineral Reserves alongstrike and in depth.  The drilling has successfully identified themineralized zone over 2,000 meters of horizontal strike to 600 meters ofvertical depth below surface.

 

•        To infill between existing drillintersections in certain areas, thereby upgrading the estimation confidence ofthe Mineral Reserves within the planned underground section of the extended Lilyore body. 

 

The resultant revised Reserves allow for a Life ofMine is projected to be 15 years with a production capacity of 32,000 tons permonth. 

 

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 these plans or the plan of operations described in this Form10-Q.  We face many risks and uncertainties and we have only a limitedhistory of operations.  See Item 3 “RiskFactors”

 

27

 

**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 toinvestigate potential opportunities.  We cannot assure you that we willachieve these or other goals or if we achieve them, that we can sustain anysuch achievement for any period in the future.

  

**BarbrookMine: **As disclosed in our Form8-K, on February 21, 2008 we entered into an agreement to purchase BarbrookMine. This offer was accepted by the seller corporation, Maid 'O The Mist(Proprietary) Limited, a company incorporated in the Republic of South Africaand a subsidiary of Caledonia Mining Corporation Limited (“Caledonia”), acompany incorporated in Canada.  The acquisition was completed on May 30,2008.  

 

The acquisition of Barbrook has had the followingtwofold positive impact on EGI:

 

•        The planned underground miningoperations at Lily Mine, as reported in the BFS (March 2008), required theconstruction of a new processing plant on site.  The existing processingplant at Barbrook, once refurbished, will substitute for a new plant.  Thepurchase price of Barbrook was less than half the budgeted cost for theproposed new plant.  The plant, complete with a large slimes dam, islocated less than half the distance from Lily Mine (6 km) than its currentoperating Makonjwaan plant facility (17 km)

 

•        Barbrook contains substantialmineralized assets and a well developed underground infrastructure includingsome 50 km of development and readily accessible areas for mining.  Extensionsto the processing plant will be required to treat the metallurgicallycomplicated ore bodies once mining commences at Barbrook. This is currentlybeing investigated.  It is planned to geologically model and re-evaluateBarbrook by commencing exploration and primary development with the objectiveof bringing Barbrook Mine successfully into initial production in 2010.

 

Currently and based on the due diligence that wecompleted to date, we believe that the Barbrook Mines Limited holds title to aMining Authorization covering an estimated 2,286 hectares which hosts aconsolidation of numerous small mines and claims in the historically renownedBarberton gold mining district of South Africa.  Mining at Barbrookcommenced in the 1880’s.  In 1996 exploration significantly improved thedefinition of estimated main ore zones.  Treatment of refractory orescommenced 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 permonth.  311 kg of gold was produced at a recovered grade of 1.87g/t. Both the head grade and metallurgical recovery achieved over this period (~40%)were below target and the mine was put on care and maintenance pending are-evaluation of the mining method and metallurgical process.

Historic Production – Barbrook Mine

**Period**

**Tonnage Treated**

**T**

**Gold Produced**

**Kg**

**Gold Produced**

**Oz**

**Recovered Grade**

**g/t**

Oct  ’89 – Jan ‘91

220,630

500

16,075

2.31

Nov  ’93 – Jan ‘95

490,533

645

20,740

1.31

Feb  ’95 – May ‘95

81,130

131

4,210

1.62

Jul  ’96 – Jul ‘97

166,397

311

10,000

1.87

2006

74,904

224

7,200

4.64

**Total  Production**

1,033,594

1,811

58,225

1.66

Note: Information taken from Venmyn (Pty) Ltd TechnicalStatement January 2007

 

Based on the information we have available and providedthat current trends continue, we believe that the Barbrook Mine lookspromising.  Various metallurgical test work took place between 1997-2007which showed that improvements to gold recoveries are achievable.  Acomplete re-evaluation was done in 2002.  At that date, this lead to anestimate of Proven and Probable Ore Reserves amounting to 176,000 tons at aninsitu grade of an estimated 6.0 g/t gold.  All quoted Resource andReserve estimates will be re-evaluated by EGI’s competent staff in time as additionalinformation becomes available.

 

28

 

Barbrook has a well established surface infrastructure(plant, workshops, laboratory, tailings dam, etc) and extensive undergrounddevelopment (>50 km).  Access to the mine is via two adits,respectively on 7 and 10 Levels, separated by 150 meters.  No developmentexists and very little exploration has been completed below 10 Level, which isat surface river elevation.  All ancillary utilities are operational.

 

If we are successful in obtaining sufficient financingon reasonable terms and assuming that our current assessments and estimates arenot later reduced, we intend to further implement our plans for the operationof the Barbrook Mine. However, there can be no assurance that we will besuccessful in these efforts.

               

**Prospectsfor the Future:**

 

**Exploration**

 

**Other Properties**

 

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.  A further 4,180 meters of exploration diamond drilling wascompleted during 2008, bringing the total amount of core recovered since 2006to 9,385 meters. The additional drilling was successful in confirming thedown-dip extension of the Worcester mineralized zone below the old mineworkings.  It is envisaged that this project will proceed topre-feasibility status during early 2009.

 

The Bonanza project area and other target locationsare still under investigation and proposals for further exploration are beingconsidered.  The outcome of these exploration programs is expected toresult in the further delineation of new ore bodies which can be developed formining in the medium term future.  To the extent that it is possible andif we are successful, our goal is to produce an additional 20,000 oz/annum froma second operation.  While we currently believe that this goal isfeasible, we cannot assure that we will achieve this goal or the relatedobjectives.

 

We anticipate that the acquisition of Barbrook mayalso add to the exploration focus in 2009 but we have not made any specificdeterminations with respect to the extent of the amount of exploration that maybe completed in 2009 or the precise time frame for this exploration.

 

**Requirementfor 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 areas: 

 
- Development     of the Lily underground mine and new processing plant; 
- Exploration     of the company’s minerals rights including extensions to Lily and the     Worcester project area; and 
- Partial     financing of acquisitions. 

 

The development of the underground mine at Lily is ofprimary importance and the capital expenditure is currently estimated at $15Million as of this date.  Breakdown of this estimate is as follows:  

 

                                                                                                                                            

 

 

**US$ million**

Development  of underground mine at the Lily Mine

 

12

Refurbish  and expand Barbrook plant

 

3

 

 

$15 

 

29

 

Our current estimates and projections suggest thatthis may be sufficient to allow us to develop the underground workings and themine infrastructure at the Lily Mine site as well as the refurbishment of theBarbrook plant to be used for processing the Lily ore.  We may change orrevise our estimates as we obtain additional information and as studies of themine are completed.  In the event that the amount needed is increased, wemay re-evaluate our plans and delay or re-schedule capital expenditures forthis property and other properties consistent with circumstances and prioritiesat that time.

 

Currently, we anticipate that ongoing exploration willcontinue at the Worcester Mine and the other target locations within ourmineral rights.  In most cases we have had encouraging results sofar.  But we anticipate that we will likely need to make an estimated $4Million in additional capital expenditures to achieve the explorationobjectives that we have set for the next 12 months.  That estimate maychange or increase if further evaluations show that additional expenditures maybe needed to fully complete these explorations.

 

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 planned28,000 oz pa starting in 2010.  Currently, and subject to furtherconfirmation, we estimate that capital expenditures for Barbrook are asfollows:  

                                                                                                                                           

 

 

**US$ million**

 

 

 

Pre-production  capital program to develop underground workings

 

 

        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 ofroasting and pressure oxidation and offers advantages that typically includereduced capital cost, simplicity of operation, robustness and environmentalfriendliness.

 

If circumstances and opportunities allow, we may makeat least one other acquisition in 2009 and will require funds in order tosecure such acquisition or to provide initial support for the acquiredoperation.  An amount of $10 Million has been estimated for this purposeand this 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 $25 million for our Lily Mine undergrounddevelopment in the second quarter of 2009 and $4 million for our ongoingexploration program and objectives.  Our current capital raising strategyalso calls for us to seek an additional $25 million in new capital fordeveloping underground mining operations at Barbrook Mine.  While we havehad discussions with several potential providers of capital, we are not in aposition to estimate the form or terms of any such financing arrangement and wecannot give you any assurance that we will successfully complete any financingarrangements or, if we do, that the additional new capital obtained in anyfinancing arrangement can be raised on terms that are reasonable in light ofour current circumstances.

 

But, overall and if favorable conditions allow and ifwe can achieve our current objectives, our goal is to complete financingarrangements for the Lily Mine and our exploration program in the secondquarter of 2009.  For this we seek to raise $29 million. Accordingly, as an interim step and as part of our capital raising strategy, in2008 we completed:

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

b.     Bridging loan facility in May 2008 ofapproximately US$10 million (which was repaid in May 2009).

  

30

 

These interim financings were necessary to implementour plans prior to the main fund raising in the second quarter of 2009. Given the uncertainties of the marketplace and the challenges that we face,there can be no assurance that our efforts to raise additional new capital willbe successful or if we are successful, that we can raise additional capital onterms that are reasonable in light of our current circumstances.

 

On April 30, 2009 the Company entered into theRestated Convertible Loan and Option Agreement (the "RestatedAgreement") with Asian Investment Management Services, Limited("AIMS").  The Restated Agreement provides that AIMS will; (A)provide technical and corporate assistance to the Company's subsidiary, EGSA,in connection with EGSA's strategies and objectives; (B) make availableadditional funds as an "Additional Loan" not later than May 29, 2009in an amount not to exceed 93,000,000 (South African Rand) to EGSA so as toallow EGSA to pay all amounts due Investec Bank Limited under the Investec Loanand for EGSA to cancel the security given by or on behalf of EGSA to InvestecBank including, but not limited to, the Borrower's Cession and the Guarantee;(C) convert the Additional Loan and the existing convertible loan of March 31,2008 in the amount of 32,000,000 (South African Rand) that EGSA received fromAIMS and the Phoenix Gold Fund (as amended on March 27, 2009) (the"Original Loan"), both consolidated and totaling 125,000,000 (SouthAfrican Rand) into 40% of the outstanding common shares of either EGSA or suchother entity as the parties agree for purposes of the planned listing of thecommon stock of the Company and its subsidiaries (or such other entity as theCompany and AIMS may determine by subsequent agreement) pursuant to the ListingCommitment.  The Restated Agreement also grants AIMS a right of first refusalwhich provides that the Company shall not obtain any additional funding fromany other source unless the Company has first offered AIMS the opportunity toprovide such additional funding on no less favorable terms and conditions andAIMS has, after thirty days from the date of receipt of notice, declined toexercise its right of first refusal.

 

**Resultsof Operations for the Six Months Ended June 30, 2009 and June 30, 2008**

A summary of our comparative operations, which ariseonly from mining operations at the Lily Mine for the six months period ended June30, 2009 (the “First Six Months 2009”) and June 30, 2008 (the “First Six Months2008”) were as follows:

 

 

 

**Six months period**

**ended June 30,**

 

**2009**

 

**2008**

Ore Tons Milled

66,846

 

76,237

Yield – grams per ton

1.91

 

1.81

Gold Sold – oz

4,071

 

4,513

Gold price - $/oz

$999

 

$944

 

 

 

 

Total Income*

$5,701

 

$4,470

Cost of Production*

($3,601)

 

($3,717)

Exploration Costs*

Nil

 

(131)

**Operating Income***

**$2,100**

 

**$622**

Operating Expenses, net*

($3,570)

 

($1,308)

Minority Interest*

$8

 

Nil

**Net Loss***

**($1,462)**

 

**$(686)**

 

 

 

 

 

* Expressed in Thousands

 

 

31

 

 

 

 

**Comparative Results of theSix Months Ended June 30, 2009 and 2008**

 

**Revenues: **For the First Six Months 2009,we recorded revenues of approximately $4,066,699 from sales of gold versusrevenues of approximately $4,260,865 for the First Six Months 2008, whichamounted to a decrease of approximately 5%.  The principal factorsaffecting this decrease in revenue were as follows:

 
- Ore     tons milled in the First Six Months 2009 were lower than that of First Six     Months 2008 at 66,846 tons, however, yield had increased by approximately 5%     resulting in lower gold production.  Accordingly, 4,071 oz. of gold     was sold in First Six Months 2009 as compared with 4,513 oz. of gold sold     in First Six Months 2008, a drop of approximately 10%.  This was     primarily due to change in the nature of production in that First Six     Months 2008 was totally from open pit operations whereas First Six Months 2009     was the first output obtained from underground mining activity.  

 
- In     2008 sales averaged $944 per ounce of gold, our 2009 sales averaged $999     per ounce of gold; an increase in the price of gold of approximately 6%.      However, this increase in the price of gold may or may not be a trend and     if it is a trend, we do not know if it will continue.  We are not     able to project gold prices and to the extent that gold prices fall in the     future, our operations, revenues, profitability, and cash flow will be     adversely and significantly impacted for such period of time as lower     price levels in the marketplace are maintained.  

 

**Cost of Production:**  Ore tonsmilled in the First Six Months 2008 at 66,846 tons.  During the First Six Months 2009,we produced and sold 4,071 oz. of gold at a cost of $3,601,000, whereas, duringthe First Six Months 2008, we produced and sold 4,513 oz. of gold at a cost of$3,717,000.  Accordingly, per ounce cost of production for the First SixMonths 2009 was $885 whereas per ounce cost of production for First Six Months 2008was $824; an increase in the per ounce production of gold of 7%.

 

Principalfactor affecting this increase in cost of production were the change over fromopen pit production to underground production and that the First Six Months 2009was the first production from underground mining activities.

 

**OperatingExpenses for the First Six Months 2009:** Our operating expensesincreased to $3,570,000 in the First Six Months 2009 from $1,307,000 in the FirstSix Months 2008; an increase of approximately 273%.  A major factor affectingthis was an increase in interest charges of $1,082,000 on the Company’s loancommitments and the cost of special shares allocated for services rendered tocertain employees of $930,000.  

 

Asa result, we recorded a Net Loss of $1,462,075 during the First Six Months 2009compared  to a Net Loss of $685,707 during the First Six Months2008.  This resulted in a Net Loss per share (basic) of $0.15 during the FirstSix Months 2009 compared to a Net Loss per share (basic) of $0.07 during theFirst Six Months 2008.  Computed using Net Loss per share (diluted), thesenumbers did not change from the amount shown for Net Loss per share (basic).

 

**Changesin Exchange Rates: **Changes inexchange rates had a significant impact on the comparability of our results forFirst Six Months 2009 versus the First Six Months 2008.  The average ratesof exchange for the interim periods ended June 30, 2009 and June 30, 2008 wereSAR 8.5394 to $1 and SAR 7.3350 to $1, respectively – approximately 16%weakening of the South African Rand against the US Dollar.  Had theexchange rate remained the same during the First Six Months 2009 as that of FirstSix Months 2008, the results of our operations arising from South African Randtransactions would have been approximately $155,000 higher.

 

Changesin exchange rates had a significant impact on the comparability of our balancesheets as of June 30, 2009 versus June 30, 2008.  The rates of exchange asat June 30, 2009 and June 30, 2008 were SAR 7.7410 to $1 and SAR 7.8083 to $1,respectively – approximately 1% strengthening of the South African Rand againstthe US Dollar.  Had the exchange rate remained the same in 2009 as that of2008, our total South African Rand based net assets would have beenapproximately $90,000 higher. 

 

32

 

**Restructuring:**** **On March 28, 2008 and through oursubsidiary, EGSA, we entered into a Convertible Loan Agreement.  Theagreement involves EGSA receiving $4,133,833 (32,000,000 SA Rands) ofproceeds.  The loan principal can convert into 6.9% of the total issuedand outstanding shares of ordinary capital after the conversion of the loan byEGSA.  If EGSA has been unable to list its ordinary shares with the JSEwithin twelve months of the agreement date, then the lender can demandrepayment of principal and accrued interest or conversion of the debt into thecorresponding ordinary shares of EGSA.  

 

On April 30, 2009 the Company entered into theRestated Convertible Loan and Option Agreement (the "RestatedAgreement") with Asian Investment Management Services, Limited("AIMS"). The Restated Agreement provides that AIMS will; (A) providetechnical and corporate assistance to the Company's subsidiary, EGSA, inconnection with EGSA's strategies and objectives; (B) make available additionalfunds as an "Additional Loan" no later than May 29, 2009 in an amountnot to exceed 93,000,000 (South African Rand) to EGSA so as to allow EGSA topay all amounts due Investec Bank Limited under the Investec Loan and for EGSAto cancel the security given by or on behalf of EGSA to Investec Bankincluding, but not limited to, the Borrower's Cession and the Guarantee; (C)convert the Additional Loan and the existing convertible loan of March 31, 2008in the amount of 32,000,000 (South African Rand) that EGSA received from AIMSand the Phoenix Gold Fund (as amended on March 27, 2009) (the "OriginalLoan"), both consolidated and totaling 125,000,000 (South African Rand)into 40% of the outstanding common shares of either EGSA or such other entityas the parties agree for purposes of the planned listing of the common stock ofthe Company and its subsidiaries (or such other entity as the Company and AIMSmay determine by subsequent agreement) pursuant to the Listing Commitment. TheRestated Agreement also grants AIMS a right of first refusal which providesthat the Company shall not obtain any additional funding from any other sourceunless the Company has first offered AIMS the opportunity to provide suchadditional funding on no less favorable terms and conditions and AIMS has,after thirty days from the date of receipt of notice, declined to exercise itsright of first refusal.  In association with the listing commitment in theRestated Agreement for the option to convert the loans into 40% of theoutstanding common shares, the Company received a one time fee of $1,300,00.

 

The loan balance outstanding at June 30, 2009of 16,874,526  includes$449,602 of accrued interest.

 

On May 27, 2008, the Company’s wholly owned subsidiaryEGSA obtained R80 million ($8,567,145 as of December 31, 2008) six monthbridging loan facility (“facility”) from Investec Bank Ltd. (“Investec”) forthe acquisition of Barbrook Mines Ltd.  On October 30, 2008, this facilitywas renegotiated and the Company received a commitment letter agreement fromInvestec.  Under the terms of this 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”).  The facility was repaid on May 29, 2009.

 

On August 25, 2008, the Company obtained a SwissFrancs 2,200,000 ($2,061,650 as of March 31, 2009) six month loan from ashareholder, Kestrel SA (“Kestrel”), for purposes of working capital requirements. Interest on the loan is 15% p.a. calculated on the outstanding balance andcompounded monthly in arrears.  In addition, on August 22, 2008, theCompany entered into a Common Stock Purchase Warrant Agreement with Kestrelwhereby Kestrel is entitled to purchase up to Fifty Thousand (50,000) shares ofCommon Stock (par value $0.001 per share) from the Company upon payment to theCompany of Five Dollars ($5.00) per share.  Warrants may be purchased atany time on or after August 20, 2008 but all rights to purchase the Shares andto exercise this Warrant shall expire on August 21, 2011 after which it shallbecome void and all rights hereunder shall thereupon cease.  The repaymentof the loan was extended to June 30, 2009. 

 

Theloan balance outstanding at June 30, 2009 of 2,288,302 includes $157,257 of accruedinterest.

 

On October 28, 2008, theCompany engaged IBK Capital Corporation of Toronto ("IBK") where IBKhas agreed to undertake its best efforts to assist the Company in raising up to$10 million in the next three months.  In the event that market conditionsallow and if IBK is successful, IBK will be paid a commission on the fundsraised and will receive common stock purchase warrants.  In this event,the net proceeds will be used to fund expenditures on the development of theLily project and for general and corporate working capital purposes.  Asof the end of March 2009, IBK was not successful and their appointment wasterminated as of April 1, 2009.  

 

OnApril 14, 2009, the Company received a proposal from AIMS Asset Management SdnBhd (“AIMS”) offering the Company the following facilities:

 

33

 
- AIMS     to purchase the Investec loan in full either by funding EGSA to settle the     loan or by directly buying the loan from Investec; 
- The     period of the loan assigned to AIMS to be extended for 2 months to end     July 2009; 
- EGSA     to be owned by a listed holding company on Australian Stock Exchange; and 
- Upon     satisfaction of imminent listing but prior to listing, AIMS undertakes to     convert this loan together with the existing convertible loan into a     direct 40% stake in     EGSA.                   

 

Thisproposal was considered by the Board of Directors of EGI upon receipt and aresolution was passed approving it.

 

OnApril 30, 2009 and subject to our satisfactions of certain conditions, weentered into the Restated Convertible Loan and Option Agreement (the “RestatedAgreement”) with Asian Investment Management Services, Limited (“AIMS”). The Restated Agreement provides that AIMS will; (A)  provide technical andcorporate assistance to our subsidiary, EGSA, in connection with EGSA’sstrategies and objectives; (B) make available additional funds as an“Additional Loan" no later than May 29, 2009 in an amount not to exceed93,000,000 (South African Rand) to EGSA so as to allow EGSA to pay all amountsdue Investec Bank Limited under the Investec Loan and for EGSA to cancel thesecurity given by or on behalf of EGSA to Investec Bank including, but notlimited to, the Borrower’s Cession and the Guarantee (as set forth in the Form8-K that we filed on April 23, 2008);  (C) convert the Additional Loan andthe existing convertible loan of March 31, 2008 in the amount of 32,000,000(South African Rand) that EGSA received from AIMS and the Phoenix Gold Fund (asamended on March 27, 2009) (the “Original Loan”), both consolidated andtotaling 125,000,000 (South African Rand) into 40% of the outstanding commonshares of either EGSA or such other entity as the parties agree for purposes ofthe planned listing of the common stock of the Company and its subsidiaries (orsuch other entity as we and AIMS may determine by subsequent agreement)pursuant to the Listing Commitment (in that event, we agreed to grant AIMS anoption to purchase an additional 10% of the issued share capital of EGSA whichshall be exercisable at any time after the date at which all of the conditionsset forth above  have been satisfied by us or waived by AIMS but no laterthan the date at which the common stock of EGSA) (or such other entity as weand AIMS may determine by subsequent agreement), is listed on an acceptablestock exchange (such as the London AIM, the Australian Stock Exchange or suchother stock exchange to which AIMS gives its consent). The Restated Agreementalso grants AIMS a right of first refusal which provides that the Company shallnot obtain any additional funding from any other source (other than CollinsStewart, LLC) unless the Company has first offered AIMS the opportunity toprovide such additional funding on no less favorable terms and conditions and AIMShas, after thirty days from the date of receipt of notice, declined to exerciseits right of first refusal.

 

**Liquidity **

 

We have very limited liquidity and limited sources of capital to meet our cash requirements.  Currently, our operations and prevailing market prices for gold have not allowed us to achieve positive cash flow or profitability.  As a result we have implemented policies that will assist us in conserving our cash resources and ensure that we can limit or delay expenditures as circumstances may allow.  Further and in light of our circumstances, we continue to explore opportunities that may allow us to raise additional capital to meet our capital expenditure plans and provide additional working capital. As of June 30, 2009, we had Total Current Assets of $1,113,754 and Total Current Liabilities of $22,037,843 which resulted in a Net Working Capital that was a negative $20,924,089.   As a result, we remain very illiquid and we can not assure you that we will be successful in raising a sufficient amount of additional capital to meet our needs to satisfy our existing and future creditors and avoid potential litigation that could serve to cause severe and protracted losses and our ability to conduct our business.

 

 34

 

 

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

 

** **Notapplicable.

** **

**Item4. Controls and Procedures.**

 

Our Chief Executive Officer and Chief Financial Officer (theprincipal executive officer and principal financial officer, respectively) haveconcluded, based on their evaluation as of June 30, 2009 ("Evaluation Date"),that the design and operation of our "disclosure controls and procedures" (asdefined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of1934, as amended ("Exchange Act")) are effective to ensure that informationrequired to be disclosed by us in the reports filed or submitted by us under theExchange Act is accumulated, recorded, processed, summarized and reported to ourmanagement, including our principal executive officer and principal financialofficer, or persons performing similar functions, as appropriate to allow timelydecisions regarding whether or not disclosure is required.

 

 

**Changes in Internal Control over Financial Reporting:** There were no changes in our internal control over financial reporting duringthe second quarter ended June 30, 2009, thathave materially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting.

 

 

35****

**PART II—OTHER INFORMATION**

 

**Item 1. Legal Proceedings.**

 

TheCompany’s recently acquired subsidiary, Barbrook Mines, was subject to severalclaims brought against it by creditors during 2006 and 2007 fiscal years. These claims, which had been accrued for at 2007 year end, were in the mainsettled and the matters finalized.  In the matter with Sentinel CorporateSolutions (Pty) Limited, Sentinel has issued summons against Barbrook forR1,108,061 (approximately US$143,142) in respect of amounts payable, which areaccrued for, in respect of a labor contract.  Barbrook has instituted anaction against Sentinel for R7,456,465 (approximately US$963,243) in respect ofdamages incurred when the labor force set fire to the Barbrook administrationbuilding.  Both matters with Sentinel are presently still being defendedand are not yet finalized.

 

Other than the matter discussed above, we are not aparty to any pending legal proceedings, and no such proceedings are known to bethreatened or contemplated.

 

 

**Item1A.  Risk Factors.**

 

Not applicable

 

 

**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 transactionand the agreements were completed directly without any intermediary.

 

Throughour subsidiary, EGSA, we received net proceeds of $4,133,833 (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, andother disclosures regarding the Company, EGSA, and management equivalent tothat found in a registration statement; 

 

36

 

(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. If EGSA 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 within sixmonths of the agreement date then interest will accrue at the South AfricanPrime Rate.  If EGSA list its ordinary shares with JSE after six monthsbut before twelve months of the agreement date, then interest will accrue andbe paid on a monthly basis until conversion or repayment of the loan.  IfEGSA has been unable to list its ordinary shares with JSE within twelve monthsof the agreement date, then the lender can demand repayment of principal andaccrued interest or conversion of the debt into the corresponding shares ofordinary shares of EGSA.

 

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

 

We did not use an underwriter or pay any fees or commissions toany third party in connection with the Loan Extension.  All of the Warrantsgranted to Investec were granted pursuant to the exemption provided by Section4(2) of the Securities Act of 1933 pursuant to the representations andassurances that the Company received from Investec and the due diligenceconducted by Investec.  The Warrants were issued to Investec with arestricted securities legend and Investec agreed that it was acquiring theWarrants for investment purposes only.

 

On February 16, 2009, 554,228 shares of restrictedcommon stock at $3.00 per share and 554,228 Common Stock Purchase Warrants inthe form of a unit security at $3.00 per unit were issued for cash for a totaloffering of $1,662,684 less offering costs of $29,134 totaling $1,633,550. Theshare certificates were issued on May 7, 2009.

 

OnApril 30, 2009, we entered into the Restated Convertible Loan and OptionAgreement (the “Restated Agreement”) with Asian Investment Management ServicesLimited (“AIMS”).  Under the terms of the Restated Agreement, AIMS agreedto provide funds to allow us to pay our outstanding commitments that we have toInvestec Bank Limited (“Investec”) and we also granted AIMS an option topurchase shares of our Common Stock.

 

Inentering into the Restated Agreement with AIMS, we received assurances that: 

 

(1)AIMS had received copies of our 2006, 2007, and 2008 Form 10-K as filed withthe U.S. Securities and Exchange Commission, our audited financial statementsfor each of those years together with other information, business and financialdocuments, and other disclosures equivalent to that found in a registrationstatement; 

 

(2)AIMS had a full and unrestricted opportunity to ask questions of the Company’sofficers and directors and to receive answers to all such questions; 

 

37

 

(3) AIMS had full and unrestricted access to our corporate books and records;

 

(4)AIMS is an Accredited Investor who is experienced and sophisticated ininvestment transactions made with small public companies;

 

(5)AIMS understood that the securities acquired by AIMS pursuant to the RestatedAgreement are “restricted securities” acquired by it for investment purposesonly and not with a view toward any resale; and

 

(6) the transaction with AIMS as recited in the Restated Agreement was not theproduct of any general solicitation or advertising but was the result of apre-existing business relationship.

 

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

 

Theproceeds we received under the Restated Agreement are to be used to repay theoutstanding balance of the bridging loan that we have with Investec that is duefor payment no later than May 29, 2009.

 

 

38

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

 

None

 

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

 

None

 

**Item 5. Other Information.**

 

On May 13, 2009, a majority of our stockholders executed an Actionby a Majority of the Holders of our Common Stock by Written Consent in lieu ofa Meeting (the “Written Consent”).

 

By the terms of the Written Consent, the holders of a majority ofour outstanding Common Stock approved the Restated Convertible Loan and OptionAgreement (the “Restated Agreement”) with Asian Investment Management ServicesLimited (“AIMS”).  The Restated Agreement and its terms and conditions areset forth in our Form 8-K that we filed on May 5, 2009.

 

We intend to file Schedule 14C with the Commission inthe near future and to meet the requirements set forth in Section 14 of theSecurities Exchange Act of 1934 and the rules adopted by the Commission thereunder in connection stockholder actions arising out of this Written Action.

 

**Item 6. Exhibits.**

 

**Regulation**

**S-BNumber                                             Exhibit**

 

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

 

31.2                       Rule 13a-14(a) Certification of Chief Financial Officer

 

32.1                        CertificationPursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of theSarbanes-Oxley Act of 2002 of Chief Executive Officer

 

32.2                       CertificationPursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of theSarbanes-Oxley Act of 2002 of Chief Financial Officer 

  

39
****
**SIGNATURES**

 

In accordance with the requirements of the ExchangeAct, the registrant caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 

 

                                                                                               EASTERN GOLDFIELDS, INC.

 

 

 

Date: August 14,2009                                                                 BY:*/s/ Michael McChesney*

                                                                                         MICHAEL MCCHESNEY

                                                                                        Chief Executive Officer

 

Date: August 14,2009                                                                 BY:*/s/ Tamer Muftizade*

                                                                                         TAMER MUFTIZADE

                                                                                                         Chief Financial Officer

 

 

 
 40
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