UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2005
 
OR
 
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 
Commission File Number: 001-31593
 
APOLLO GOLD CORPORATION
(Exact name of Registrant as Specified in Its Charter)
 
Yukon Territory, Canada
Not Applicable
(State or Other Jurisdiction of
Incorporation or Organization)
(I.R.S. Employer Identification No.)
 
5655 South Yosemite St., Suite 200
Greenwood Village, Colorado 80111-3220
(Address of Principal Executive Offices) (Zip Code)
 
Registrant’s telephone number, including area code: (720) 886-9656
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
Yes þ
 
No o 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12-b2 of the Exchange Act).
 
Yes þ
 
No o 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
Yes o
 
No þ
 
At November 7, 2005, there were 106,556,451 common shares of Apollo Gold Corporation outstanding.
 



 
TABLE OF CONTENTS

 
     
Page
PART I
FINANCIAL INFORMATION
3
 
ITEM 1.
FINANCIAL STATEMENTS
3
   
Consolidated Balance Sheets - As of September 30, 2005 and as of December 31, 2004
4
   
Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2005 and 2004
5
   
Consolidated Statements of Shareholders’ Equity for the Year Ended December 31, 2004 and the Nine Month Period ended September 30, 2005
6
   
Consolidated Statements of Cash Flows for the Three and Nine Months Ended September 30, 2005 and 2004
7
   
Notes to Financial Statements
8
 
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
25
 
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
37
 
ITEM 4.
CONTROLS AND PROCEDURES
37
PART II
OTHER INFORMATION
39
 
ITEM 1.
LEGAL PROCEEDINGS
39
 
ITEM 2.
UNREGISTERED SALES OF EQUITY IN SECURITIES AND USE OF PROCEEDS
39
 
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
39
 
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
39
 
ITEM 5.
OTHER INFORMATION
39
 
ITEM 6.
EXHIBITS
39
INDEX TO EXHIBITS
 
40
 
Certification of CEO Pursuant to Section 302
2
 
Certification of CFO Pursuant to Section 302
4
 
Certification of CEO and CFO Pursuant to Section 906
6
 
STATEMENTS REGARDING FORWARD LOOKING INFORMATION
 
This Quarterly Report on Form 10-Q contains forward looking statements as defined in the Private Securities Litigation Reform Act of 1995 with respect to our financial condition, results of operations, business prospects, plans, objectives, goals, strategies, future events, capital expenditure, and exploration and development efforts. Words such as “expects,” anticipates,” “intends,” believes” and similar expressions identify forward looking statements. These statements include comments regarding:
 
1

 
 
·
closing of and the closing date for the sale of our Nevada Assets;
     
 
·
production and production costs;
     
 
·
cash operating costs;
     
 
·
total cash costs;
     
 
·
grade;
     
 
·
remediation efforts;
     
 
·
exploration;
     
 
·
development and drilling program;
     
 
·
life of mine estimates;
     
 
·
cash flows;
     
 
·
future financing;
     
 
·
use of funds;
     
 
·
the ability to substitute collateral for the convertible debentures;
     
 
·
expenditures;
     
 
·
estimates of environmental liabilities;
     
 
·
cash balances;
     
 
·
our belief that certain deficiencies in our internal control and procedures have been remediated;
     
 
·
our ability to fund our working capital and exploration and development expenditures; and
     
 
·
factors impacting our results of operations.
 
These forward looking statements are subject to numerous risks, uncertainties and assumptions, including unexpected changes in business and economic conditions; significant increases or decreases in gold, silver, or lead prices; timing and amount of production changes in mining and milling costs; pit slides at our mining properties; results of current and future exploration activities; weather fluctuations; and other factors discussed in our Annual Report on Form 10-K for the year ended December 31, 2004. We disclaim any obligation to update forward looking statements, whether as a result of new information, future events or otherwise.
 
ACCOUNTING PRINCIPLES, REPORTING CURRENCY AND OTHER INFORMATION
 
Apollo Gold Corporation prepares its consolidated financial statements in accordance with accounting principles generally accepted in Canada and publishes its financial statements in United States dollars. This Quarterly Report on Form 10-Q should be read in conjunction with our consolidated financial statements and related notes included in this quarterly report, as well as our annual financial statements for the fiscal year ended December 31, 2004 included in our Annual Report on Form 10-K. Certain classifications have been made to the prior period financial statements to conform with the current period presentation.
 
2

 
Unless stated otherwise, all dollar amounts are expressed in United States dollars.
 
References to “we,”“our,”  “us,” the “Company” or “Apollo” mean Apollo Gold Corporation and its consolidated subsidiaries, or to any one or more of them, as the context requires.
 
NON-GAAP FINANCIAL INFORMATION
 
Cash operating, total cash and total production costs are non-GAAP financial measures and are used by management to assess performance of individual operations as well as a comparison to other gold producers. We have included cash operating costs information to provide investors with information about the cost structure of our mining operations.
 
The term “cash operating costs” is used on a per ounce of gold basis. Cash operating costs per ounce is equivalent to direct operating cost as found on the Consolidated Statements of Operations, less production royalty expenses and mining taxes but includes by-product credits for payable silver, lead and zinc.
 
The term “total cash costs” is equivalent to cash operating costs plus production royalties and mining taxes.
 
The term “total production costs” is equivalent to total cash costs plus non-cash costs including depreciation and amortization.
 
This information differs from measures of performance determined in accordance with generally accepted accounting principles (GAAP) in Canada and the United States and should not be considered in isolation or a substitute for measures of performance prepared in accordance with GAAP. These measures are not necessarily indicative of operating profit or cash flow from operations as determined under GAAP and may not be comparable to similarly titled measures of other companies. See Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations, for a reconciliation of these non-GAAP measures to our Statements of Operations.
 
PART I    FINANCIAL INFORMATION
 
ITEM 1.   FINANCIAL STATEMENTS
 
These consolidated financial statements should be read in conjunction with the financial statements, accompanying notes and other relevant information included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004 filed with the Securities and Exchange Commission on March 16, 2005.
 
3

 
APOLLO GOLD CORPORATION
 
CONSOLIDATED BALANCE SHEETS
(In thousands of United States Dollars)
(Unaudited)
   
September 30,
2005
 
December 31,
2004
 
       
(Restated -
Note 3(b))
 
Assets
         
Current
         
Cash and cash equivalents
 
$
309
 
$
6,886
 
Accounts receivable
   
3,257
   
2,963
 
Prepaids
   
179
   
109
 
Inventories
   
1,849
   
2,192
 
Current assets held for sale (Note 4)
   
9,089
   
10,510
 
Total Current Assets
   
14,683
   
22,660
 
               
Property, plant and equipment
   
39,979
   
37,599
 
Restricted certificate of deposit
   
5,715
   
4,371
 
Deferred financing costs
   
1,145
   
901
 
Non-current assets held for sale (Note 4)
   
23,074
   
32,104
 
Total Assets
 
$
84,596
 
$
97,635
 
               
Liabilities
             
Current
             
Accounts payable
 
$
6,458
 
$
5,942
 
Accrued liabilities
   
1,992
   
1,860
 
Notes payable
   
501
   
789
 
Property and mining taxes payable
   
1,287
   
1,070
 
Current liabilities held for sale (Note 4)
   
3,953
   
8,224
 
Total Current Liabilities
   
14,191
   
17,885
 
               
Notes payable and long-term liability
   
54
   
423
 
Convertible debentures
   
6,368
   
5,538
 
Accrued site closure costs
   
12,390
   
11,753
 
Non-current liabilities held for sale (Note 4)
   
15,192
   
14,815
 
Total Liabilities
   
48,195
   
50,414
 
               
Continuing operations (Note 1)
             
               
Shareholders’ Equity
             
Share capital (Note 5)
   
148,079
   
141,795
 
Issuable common shares
   
231
   
231
 
Equity component of convertible debentures
   
1,809
   
1,815
 
Note warrants
   
781
   
781
 
Contributed surplus
   
10,489
   
9,627
 
Deficit
   
(124,988
)
 
(107,028
)
Total Shareholders’ Equity
   
36,401
   
47,221
 
Total Liabilities and Shareholders’ Equity
 
$
84,596
 
$
97,635
 

The accompanying notes are an integral part of these interim consolidated financial statements.
 
4

 
APOLLO GOLD CORPORATION
 
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands of United States Dollars, except for share and per share amounts)
(Unaudited)

   
Three months ended
September 30,
 
Nine months ended
September 30,
 
   
2005
 
2004
 
2005
 
2004
 
       
(Restated - Notes
3(b) and 7)
     
(Restated - Notes
 3(b) and 7)
 
Revenue
                 
Revenue from sale of minerals 
 
$
13,351
 
$
7,393
 
$
36,264
 
$
25,542
 
Operating Expenses
                         
Direct operating costs 
   
14,162
   
12,627
   
40,273
   
39,815
 
Depreciation and amortization 
   
672
   
674
   
2,006
   
1,907
 
General and administrative expenses 
   
866
   
1,087
   
3,732
   
4,325
 
Stock-based compensation 
   
171
   
388
   
525
   
487
 
Accretion expense - accrued site closure costs 
   
242
   
479
   
636
   
560
 
Exploration and business development 
   
173
   
515
   
731
   
774
 
     
16,286
   
15,770
   
47,903
   
47,868
 
Operating (Loss) 
   
(2,935
)
 
(8,377
)
 
(11,639
)
 
(22,326
)
Other Income (Expenses)
                         
Interest income 
   
105
   
10
   
278
   
261
 
Interest expense 
   
(747
)
 
(30
)
 
(1,940
)
 
(113
)
 (Loss) gain on sale of property, plant and equipment 
   
(42
)
 
-
   
1,323
   
-
 
Foreign exchange gain (loss) and other 
   
5
   
(79
)
 
(28
)
 
(567
)
(Loss) from continuing operations 
   
(3,614
)
 
(8,476
)
 
(12,006
)
 
(22,745
)
(Loss) from discontinued operations
(Note 4)
   
(3,599
)
 
(2,753
)
 
(5,954
)
 
(2,521
)
Net (loss) for the period 
 
$
(7,213
)
$
(11,229
)
$
(17,960
)
$
(25,266
)
Basic and diluted net (loss) per share from:
                         
Continuing operations 
 
$
(0.04
)
$
(0.11
)
$
(0.12
)
$
(0.29
)
Discontinued operations
   
(0.03
)
 
(0.03
)
 
(0.06
)
 
(0.03
)
   
$
(0.07
)
$
(0.14
)
$
(0.18
)
$
(0.32
)
                           
Weighted average number of shares outstanding 
   
106,556,451
   
79,617,391
   
100,106,695
   
77,924,423
 

The accompanying notes are an integral part of these interim consolidated financial statements.
 
5

 
APOLLO GOLD CORPORATION
 
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(In thousands of United States Dollars, except for number of shares)
(Unaudited)
 
 
 
 
               
Equity
                         
 
   
 
          Component                            
 
 
 
Share Capital 
 
 
Issuable
   
of 
                         
     
Number of
         
Common
   
Convertible 
   
Note
   
Contributed
             
     
Shares
   
Amount
   
Shares
   
 Debentures 
   
Warrant
   
Surplus
   
Deficit
   
Total
 
Balance, December 31, 2003 
   
73,539,790
 
$
120,881
 
$
231
 
$
-
 
$
-
 
$
12,766
 
$
(51,988
)
$
81,890
 
Cumulative effect of change in accounting policy (Note 3(b))
   
-
   
-
   
-
   
-
   
-
   
-
   
(24,033
)
 
(24,033
)
Adjusted balance, December 31, 2003 
   
73,539,790
   
120,881
   
231
   
-
   
-
   
12,766
   
(76,021
)
 
57,857
 
Units issued for cash 
   
8,299,999
   
4,873
   
-
   
-
   
-
   
622
   
-
   
5,495
 
Conversion of special warrants 
   
2,326,666
   
1,449
   
-
   
-
   
-
   
50
   
-
   
1,499
 
Flow-through common shares 
   
714,285
   
515
   
-
   
-
   
-
   
-
   
-
   
515
 
Warrants exercised 
   
5,399,848
   
12,695
   
-
   
-
   
-
   
(4,083
)
 
-
   
8,612
 
Options exercised 
   
399,054
   
966
   
-
   
-
   
-
   
(647
)
 
-
   
319
 
Shares reacquired and cancelled 
   
(20,500
)
 
(48
)
 
-
   
-
   
-
   
-
   
-
   
(48
)
Shares issued for Huizopa interest 
   
48,978
   
88
   
-
   
-
   
-
   
-
   
-
   
88
 
Shares issued for 2003 share-based compensation 
   
265,000
   
376
   
-
   
-
   
-
   
(376
)
 
-
   
-
 
Bridge loan compensation warrants 
   
-
   
-
   
-
   
-
   
-
   
275
   
-
   
275
 
Equity component of convertible debentures 
   
-
   
-
   
-
   
1,815
   
-
   
63
   
-
   
1,878
 
Note warrant 
   
-
   
-
   
-
   
-
   
781
   
27
   
-
   
808
 
Debenture compensation warrants 
   
-
   
-
   
-
   
-
   
-
   
163
   
-
   
163
 
Stock-based compensation 
   
-
   
-
   
-
   
-
   
-
   
767
   
-
   
767
 
Net loss (Note 3(b)) 
   
-
   
-
   
-
   
-
   
-
   
-
   
(31,007
)
 
(31,007
)
Balance, December 31, 2004 
   
90,973,120
   
141,795
   
231
   
1,815
   
781
   
9,627
   
(107,028
)
 
47,221
 
Unit issued for cash 
   
4,199,998
   
2,567
   
-
   
-
   
-
   
194
   
-
   
2,761
 
Shares issued for Huizopa interest restructuring 
   
1,000,000
   
410
   
-
   
-
   
-
   
-
   
-
   
410
 
Shares issued for cash  
   
10,000,000
   
3,184
   
-
   
-
   
-
   
-
   
-
   
3,184
 
Conversion of convertible debentures 
   
33,333
   
23
   
-
   
(6
)
 
-
   
-
   
-
   
17
 
Engagement fee shares and
warrants
   
350,000
   
100
   
-
   
-
   
-
   
143
   
-
   
243
 
Stock-based compensation 
   
-
   
-
   
-
   
-
   
-
   
525
   
-
   
525
 
Net loss 
   
-
   
-
   
-
   
-
   
-
   
-
   
(17,960
)
 
(17,960
)
Balance, September 30, 2005 
   
106,556,451
 
$
148,079
 
$
231
 
$
1,809
 
$
781
 
$
10,489
 
$
(124,988
)
$
36,401
 
 
The accompanying notes are an integral part of these interim consolidated financial statements.
 
6

 
APOLLO GOLD CORPORATION
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of United States Dollars)
(Unaudited)
 
   
Three months ended
September 30,
 
Nine months ended
September 30,
 
   
2005
 
2004
 
2005
 
2004
 
       
(Restated -
Notes 3(b)
and 7)
     
(Restated -
Notes 3(b)
and 7)
 
Operating Activities
                 
Loss from continuing operations for the period 
 
$
(3,614
)
$
(8,476
)
$
(12,006
)
$
(22,745
)
Items not affecting cash
                         
Depreciation and amortization
   
672
   
674
   
2,006
   
1,907
 
 Amortization of deferred financing costs 
   
80
   
-
   
239
   
-
 
Stock-based compensation
   
171
   
388
   
525
   
487
 
Accretion expense - accrued site closure costs 
   
242
   
479
   
636
   
560
 
Accretion expense - convertible debentures 
   
221
   
-
   
850
   
-
 
Loss (gain) on sale of property, plant and equipment 
   
42
   
-
   
(1,323
)
 
-
 
Net change in non-cash operating working capital items 
   
(614
)
 
4,059
   
1,025
   
5,491
 
Discontinued operations
   
872
   
(24
)
 
1,358
   
(1,960
)
     
(1,928
)
 
(2,900
)
 
(6,690
)
 
(16,260
)
Investing Activities
                         
Property, plant and equipment expenditures 
   
(1,037
)
 
(4,051
)
 
(4,736
)
 
(11,346
)
Short-term investments 
   
-
   
7,446
   
-
   
5,855
 
Proceeds from disposal of property, plant and equipment 
   
9
   
-
   
2,000
   
-
 
Restricted certificate of deposit and other assets 
   
(733
)
 
(437
)
 
(1,584
)
 
(885
)
Discontinued operations
   
(318
)
 
(2,586
)
 
1,003
   
(7,460
)
     
(2,079
)
 
372
   
(3,317
)
 
(13,836
)
Financing Activities
                         
Proceeds on issuance of shares 
   
-
   
71
   
5,944
   
8,931
 
Acquisition and cancellation of shares 
   
-
   
-
   
-
   
(48
)
Payments of notes payable 
   
(192
)
 
(453
)
 
(756
)
 
(1,289
)
Discontinued operations
   
(368
)
 
(697
)
 
(1,758
)
 
(1,945
)
     
(560
)
 
(1,079
)
 
3,430
   
5,649
 
Net (decrease) in cash
   
(4,567
)
 
(3,607
)
 
(6,577
)
 
(24,447
)
Cash and cash equivalents, beginning of period 
   
4,876
   
4,992
   
6,886
   
25,832
 
Cash and cash equivalents, end of period 
 
$
309
 
$
1,385
 
$
309
 
$
1,385
 
Supplemental Cash Flow Information:
                         
Interest paid 
 
$
298
 
$
80
 
$
923
 
$
287
 
 
During the three months ended September 30, 2005 and 2004, property, plant and equipment of $99 and $19, respectively, were acquired under a capital lease arrangement.
 
During the nine months ended September 30, 2004, property, plant and equipment totaling $340 was acquired under a capital lease arrangement.
 
During the nine months ended September 30, 2005, the company issued 1,000,000 shares to Argonaut Mines LLC (“Argonaut”) in connection with the restructuring of the Huizopa interest in Mexico. Share capital and property, plant and equipment both increased by $410 as a result of this transaction.
 
During the nine months ended September 30, 2004, the company issued 48,978 shares to meet the earn-in requirements of the Huizopa joint venture agreement. Share capital and property, plant and equipment both increased by $88 as a result of this transaction.
 
The accompanying notes are an integral part of these interim consolidated financial statements.
 
7

 
APOLLO GOLD CORPORATION
Notes to the Consolidated Financial Statements
Nine month period ended September 30, 2005
(Stated in United States Dollars; tabular amounts in thousands, except for share and per share amounts)
(Unaudited)

 
1.
CONTINUING OPERATIONS
 
These consolidated financial statements are prepared on the basis of a going concern which assumes that Apollo Gold Corporation (“Apollo” or the “Company”) will realize its assets and discharge its liabilities in the normal course of business for the foreseeable future. To date, Apollo has funded its operations primarily through issuances of debt and equity securities plus the sale of some surplus assets. The Company’s current funds are not sufficient to complete the planned underground drilling program and produce a bankable feasibility study in 2006 at the Black Fox Project and commence an exploration program at its Huizopa project. In May 2005 the Company adopted a plan to dispose of its Nevada assets (the “Nevada Assets”) (the Florida Canyon Mine, Standard Mine and four exploration properties) (see Note 4) and on October 17, 2005, the Company executed a stock purchase agreement (the “Agreement”), pursuant to which the Company has agreed to sell to Jipangu Inc., a Delaware corporation and wholly owned subsidiary of Jipangu International Inc., a Japanese corporation, all of the issued and outstanding stock of Florida Canyon Mining Inc., Standard Gold Mining Inc., and Apollo Gold Exploration Inc. for $14.0 million. In addition, Apollo entered into a Subscription Agreement with Jipangu for a $3.5 million private placement pursuant to which Jipangu would purchase up to 11,650,000 units of Apollo priced at Cdn$0.35 per unit, with each unit consisting of one common share of Apollo and 0.1716 of a warrant with each whole warrant exercisable for two years at Cdn$0.39 for one common share of Apollo. The closing of the Agreement is subject to certain conditions. The Company expects to use approximately $10.9 million of the proceeds from the sale of the Nevada Assets to secure the Company’s convertible debentures, currently secured by the Nevada Assets, with the balance used to supplement the funding of the Company’s general and administrative expenses, the development of Black Fox, exploration at Huizopa, the Montana Tunnels operations and other general corporate purposes. External financing would be required to further develop and construct the Black Fox project. The availability, amount, terms and timing of this financing are not certain at this time. If  the Company is unable to sell the Nevada Assets, successfully generate cash flow from its mines, or secure additional financing and therefore be unable to continue as a going concern, then material adjustments would be required to the carrying value of assets and liabilities and balance sheet classifications used.
 
2.
NATURE OF OPERATIONS
 
Apollo is engaged in gold mining including extraction, processing, refining and the production of other by-product metals, as well as related activities including exploration and development. The Company currently owns and operates the Montana Tunnels Mine, an open pit mine and mill, producing gold doré and lead-gold and zinc-gold concentrates located in the State of Montana. The Company also owns the Diamond Hill Mine, currently under care and maintenance, also located in the State of Montana.
 
Apollo has a development property, the Black Fox Project, which is located near the Township of Matheson in the Province of Ontario, Canada. Apollo also owns Mexican subsidiaries which own or have the right to acquire concessions at the Huizopa exploration project, located in the Sierra Madre gold belt in Chihuahua, Mexico. Pursuant to an agreement with the previous owner of one of those Mexican subsidiaries (the “Previous Owner”), if Apollo exercises its right to acquire those concessions at the Huizopa project on which it currently holds an option, one of Apollo’s Mexican subsidiaries and a Mexican company owned by the Previous Owner will enter into a joint venture agreement governing activities at the Huizopa project going forward, pursuant to which Apollo can elect to ultimately retain up to an 80% interest in the Huizopa project. If Apollo’s Mexican subsidiary chooses not to go forward with the Huizopa project, it is obligated to transfer a controlling interest in the subsidiary that holds the option back to the Previous Owner, and to transfer 91% of the concessions it owns at the Huizopa Project back to the Previous Owner.
 
8

 
APOLLO GOLD CORPORATION
Notes to the Consolidated Financial Statements
Nine month period ended September 30, 2005
(Stated in United States Dollars; tabular amounts in thousands, except for share and per share amounts)
(Unaudited)

 
2.
NATURE OF OPERATIONS (Continued)
 
The Company’s assets held for sale, the Nevada Assets (Note 4), include the Florida Canyon Mine, an open pit heap leach operation located in the State of Nevada; the Standard Mine, an open pit heap leach operation situated 8 kilometers south of the Florida Canyon Mine, which shares common facilities, such as warehousing, administration and the gold recovery plant with the Florida Canyon Mine; and four exploration properties located near the Florida Canyon Mine. Mining activities at the Florida Canyon Mine were temporarily suspended on March 1, 2005, although gold production continues from the leach pad. The Standard Mine was developed during 2004 and 2005 and entered into commercial production on June 1, 2005.
 
3.
ACCOUNTING POLICIES
 
 
(a)
These unaudited consolidated interim financial statements have been prepared in accordance with Canadian generally accepted accounting principles (“Canadian GAAP”) and except as described in Note 9, conform in all material respects with accounting principles generally accepted in the United States (“U.S. GAAP”). The accounting policies followed in preparing these financial statements are those used by the Company as set out in the audited financial statements for the year ended December 31, 2004, except as disclosed in (b) below. Certain information and note disclosures normally included in consolidated financial statements prepared in accordance with Canadian GAAP have been omitted. These interim financial statements should be read together with the Company’s audited financial statements for the year ended December 31, 2004.
 
In the opinion of management, all adjustments considered necessary for fair presentation have been included in these financial statements. Interim results are not necessarily indicative of the results expected for the fiscal year.
 
Certain of the comparative figures have been reclassified to conform to the current period presentation. In particular, the assets and liabilities of the Nevada Assets as at December 31, 2004 and their results of operations and cash flows for the three and nine months ended September 30, 2004 (Note 4) have been reclassified as held for sale and discontinued operations, respectively.
 
 
(b)
On March 30, 2005, the Financial Accounting Standards Board (“FASB”) ratified the consensus of the Emerging Issues Task Force (“EITF”) Issue 04-6 that stripping costs incurred during the production phase of a mine are variable production costs that should be included in the costs of the inventory produced during the period that the stripping costs are incurred.
 
In the first quarter of 2005 and prior periods, Apollo deferred or accrued stripping costs incurred during production, as appropriate, and charged these costs to operations on the basis of the estimated average stripping ratio for Montana Tunnels. Commencing in the second quarter of 2005, Apollo changed its accounting policy under Canadian GAAP and U.S. GAAP with respect to stripping costs to be consistent with the consensus reached by the EITF, on the basis that the consensus results in a more reliable, relevant and consistent application of GAAP. This change has been applied retrospectively by restating prior periods. The effect of this change was to increase the deficit at January 1, 2004 by $24,033,000 and to increase the net loss for the year ended December 31, 2004 by $12,818,000 ($0.16 per share). The net loss for the three months and nine months ended September 30, 2004 increased by $4,097,000 ($0.05 per share) and $11,446,000 ($0.15 per share), respectively, as a result of this change.
 
9

 
APOLLO GOLD CORPORATION
Notes to the Consolidated Financial Statements
Nine month period ended September 30, 2005
(Stated in United States Dollars; tabular amounts in thousands, except for share and per share amounts)
(Unaudited)

 
4.
ASSETS HELD FOR SALE
 
During the second quarter, the Company adopted a plan to dispose of its Nevada Assets. When management identifies an asset held for sale, the company estimates the net selling price and the Company recorded an impairment in the second quarter 2005 of $4.6 million. On October 17, 2005, Apollo entered into an agreement with Jipangu for the sale of the Nevada Assets for $14.0 million, resulting in the Company recording an additional impairment of $3.9 million, for a total impairment at September 30, 2005 of $8.4 million.
 
The following tables present summarized financial information related to discontinued operations:
 
   
September 30, 2005
 
December 31, 2004
 
ASSETS
         
Cash and cash equivalents
 
$
16
 
$
61
 
Broken ore on leach pad - current
   
7,700
   
8,960
 
Other non-cash current assets
   
1,373
   
1,489
 
Current assets held for sale
   
9,089
   
10,510
 
Broken ore on leach pad - long-term
   
4,020
   
4,824
 
Property, plant and equipment
   
21,699
   
20,945
 
Restricted certificate of deposit
   
5,780
   
4,995
 
Deferred loss on commodity contracts (Note 7)
   
-
   
1,340
 
Less: impairment
   
(8,425
)
 
-
 
Non-current assets held for sale
   
23,074
   
32,104
 
Total assets held for sale
   
32,163
   
42,614
 
LIABILITIES
             
Current liabilities held for sale
   
3,953
   
8,224
 
Notes payable
   
-
   
376
 
Accrued site closure costs
   
15,192
   
14,439
 
Non-current liabilities held for sale
   
15,192
   
14,815
 
Total liabilities held for sale
   
19,145
   
23,039
 
Net assets held for sale
 
$
13,018
 
$
19,575
 
 
10

 
APOLLO GOLD CORPORATION
Notes to the Consolidated Financial Statements
Nine month period ended September 30, 2005
(Stated in United States Dollars; tabular amounts in thousands, except for share and per share amounts)
(Unaudited)

 
4.
ASSETS HELD FOR SALE (Continued)
 
     
Three months ended
September 30,  
   
Nine months ended
September 30,  
 
     
2005 
 
 
2004 
 
 
2005 
 
 
2004 
 
Revenue from sale of minerals (Note 7)
 
$
6,582
 
$
4,957
 
$
14,677
 
$
20,063
 
Direct operating costs
   
5,935
   
5,959
   
13,829
   
19,518
 
Depreciation and amortization
   
-
   
618
   
776
   
1,987
 
Accretion expense
   
280
   
304
   
737
   
914
 
Royalty expenses
   
65
   
133
   
231
   
507
 
Exploration and business  development
   
28
   
-
   
217
   
-
 
Impairment
   
3,861
   
-
   
8,425
   
-
 
     
10,169
   
7,014
   
24,215
   
22,926
 
Operating loss
   
(3,587
)
 
(2,057
)
 
(9,538
)
 
(2,863
)
Interest expense
   
(12
)
 
(50
)
 
(69
)
 
(174
)
Gain on sale of property, plant and equipment
   
-
   
-
   
3,615
   
-
 
Realized and unrealized gain (loss) on commodity contracts (Note 7)
   
-
   
(646
)
 
38
   
516
 
(Loss) from discontinued operations
 
$
(3,599
)
$
(2,753
)
$
(5,954
)
$
(2,521
)
 
5.
SHARE CAPITAL
 
 
(a)
Shares issued in 2005
 
 
(i)
On January 7, 2005, the Company completed the second tranche of a private placement of 4,199,998 units with a purchase price of $0.75 for net proceeds of $2.8 million, net of expenses $0.3 million and fair value of broker’s compensation warrants of $0.2 million. Each unit is comprised of one common share of the Company and 0.75 share purchase warrant, with each whole share purchase warrant exercisable into one common share of the Company for two years at an exercise price of $1.00 per share. In connection with the first and second tranches, 1,250,000 broker compensation warrants were issued. (See Note 5(b) for a description of the broker compensation warrants.)
 
11

 
APOLLO GOLD CORPORATION
Notes to the Consolidated Financial Statements
Nine month period ended September 30, 2005
(Stated in United States Dollars; tabular amounts in thousands, except for share and per share amounts)
(Unaudited)

 
5.
SHARE CAPITAL (Continued)
 
 
(ii)
During the nine months ended September 30, 2005, the Company restructured its existing earn-in joint venture arrangement with Argonaut at the Huizopa project in Mexico and issued 1,000,000 common shares to Argonaut in consideration for such restructuring. The shares issued were valued at $410,000 and recorded as property, plant and equipment within the balance sheet. Following this restructuring, the Company’s Mexican subsidiary owns Argonaut’s former subsidiary which has a contractual interest in two of the concessions at the project and the Company no longer has any earn-in requirement for the project, although it will still be responsible for the underlying payments to the landowner at the project, and the payments and performance or obligations required to maintain those concessions.
 
 
(iii)
On June 3, 2005, the Company completed the issuance to Jipangu Inc. (“Jipangu”) of 10,000,000 common shares at $0.32 (Cdn$0.40) per share for proceeds of $3.2 million, net of issue expenses of $32,000. On October 17, 2005, the Company entered into an agreement with Jipangu for the sale of its Nevada Assets for $14.0 million. In addition, the Company entered into a Subscription Agreement with Jipangu for a $3.5 million private placement pursuant to which, if the sale of the Nevada Assets is completed, Jipangu would purchase up to 11,650, 000 units of Apollo priced at Cdn$0.35 per unit, with each unit consisting of one common share of Apollo and 0.17167 of a warrant (for a total of up to 2,000,000 warrants) with each whole warrant exercisable for two years at Cdn$0.39 for one common share of Apollo. If the sale of the Nevada Assets is not completed, Jipangu would have the option to invest up to $3.5 million in a private placement under certain circumstances.
 
 
(iv)
On June 30, 2005, the Company issued 350,000 common shares of the Company and 1,250,000 common share purchase warrants of the Company, with each warrant immediately exercisable into one common share of the company at an exercise price of Cdn$0.40 and an expiry date of June 30, 2007 to BMO Nesbitt Burns Inc. (“BMO”) as an engagement fee to act as a financial adviser to the Company with respect to the sale of the Nevada Assets. In addition, the Company has agreed to issue BMO 900,000 common shares of the Company upon closing of the Agreement to sell the Nevada Assets to Jipangu during the BMO engagement or within the following 12 months.
 
The 1,250,000 common share purchase warrants were fair valued using an option pricing model with the following assumptions: no dividends are paid, a volatility of the Company’s share price of 78%, an expected life of the warrants of two years, and an annual risk-free rate of 3.6%.
 
12

 
APOLLO GOLD CORPORATION
Notes to the Consolidated Financial Statements
Nine month period ended September 30, 2005
(Stated in United States Dollars; tabular amounts in thousands, except for share and per share amounts)
(Unaudited)

 
5.
SHARE CAPITAL (Continued)

 
(b)
Warrants
 
The following summarizes outstanding warrants as at September 30, 2005:
 
 
Warrants
 
Number of
Shares
 
Exercise
Price
 
Expiry
Date
63,969
   
63,969
 
$
1.67
   
October 27, 2005
1,000,000
 
 
1,000,000
   
0.80
   
October 19, 2006
1,400,133
   
1,400,133
   
0.80
   
November 4, 2006
3,000,000
   
3,000,000
   
2.10
   
December 23, 2006
6,224,999
   
6,224,999
   
1.00
   
December 31, 2006
3,149,998
   
3,149,998
   
1.00
   
January 7, 2007
1,250,000
   
1,250,000
   
0.33
   
June 30, 2007
5,253,600
   
5,253,600
   
0.80
   
November 4, 2007
1,396,000
   
1,396,000
   
0.80
   
November 4, 2007
22,738,699
   
22,738,699
           
 
In addition, 1,250,000 broker compensation warrants were issued and were immediately exercisable on January 7, 2005. The broker compensation warrants were issued in connection with the first and second tranches of the private placement described in Note 5(a)(i). Each broker compensation warrant is exercisable at $0.75 into one common share of the Company and 0.75 of a share purchase warrant, with each whole share purchase warrant exercisable into one common share of the Company at $1.00 per common share. The broker compensation warrants expire on January 7, 2007. The share purchase warrants are exercisable for two years from the date of issue.

The 63,969 warrants with an expiry date of October 27, 2005 expired unexercised.

 
(c)
Options
 
A summary of information concerning outstanding stock options at September 30, 2005 is as follows:
 
   
Fixed Stock Options
 
Performance-based
Stock Options
 
   
Number of Common Shares
 
Weighted Average Exercise Price
 
Number of Common Shares
 
Weighted Average Exercise Price
 
Balances, December 31, 2004 
   
2,196,300
 
$
2.10
   
1,904,756
 
$
0.80
 
Options granted
   
2,739,700
   
0.63
   
-
   
-
 
Options cancelled
   
(853,400
)
 
(1.71
)
 
(110,174
)
 
0.80
 
Balances, September 30, 2005 
   
4,082,600
 
$
1.19
   
1,794,582
 
$
0.80
 

13

 
APOLLO GOLD CORPORATION
Notes to the Consolidated Financial Statements
Nine month period ended September 30, 2005
(Stated in United States Dollars; tabular amounts in thousands, except for share and per share amounts)
(Unaudited)

 
5.
SHARE CAPITAL (Continued)

 
(i)
Fixed stock option plan
 
The following table summarizes information concerning outstanding and exercisable fixed stock options at September 30, 2005:
 
Options Outstanding
 
Options Exercisable
Number Outstanding
 
Expiry Date
 
Weighted Average Exercise Price per Share
 
Number Exercisable
 
Weighted Average Exercise Price per Share
                 
1,015,700
   
February 18, 2013
 
$
2.24
   
1,015,700
 
$
2.24
2,600
 
 
March 28, 2013
   
2.34
   
2,600
   
2.34
100,000
   
November 13, 2013
   
1.67
   
50,000
   
1.67
317,400
   
March 10, 2014
   
2.05
   
158,700
   
2.05
135,000
   
May 19, 2014
   
1.44
   
67,500
   
1.44
34,200
   
August 10, 2014
   
0.95
   
17,100
   
0.95
600
   
November 10, 2014
   
0.60
   
-
   
-
2,277,100
   
March 10, 2015
   
0.65
   
-
   
-
100,000
   
April 6, 2015
   
0.39
   
-
   
-
100,000
   
August 4, 2015
   
0.27
   
-
   
-
4,082,600
       
$
1.19
   
1,311,600
 
$
2.14
 
 
(ii)
Performance-based stock option plan
 
As at September 30, 2005, the 1,794,582 performance-based stock options were fully vested and have an expiry date of June 25, 2007.
 
 
(d)
Stock-based compensation
 
The fair value of each option granted is estimated at the time of grant using the Black-Scholes option pricing model with weighted average assumptions for grants as follows:
 
   
Nine months ended
September 30,
 
   
2005
 
2004
 
Risk free interest rate
   
3.8
%
 
3.1
%
Dividend yield
   
0
%
 
0
%
Volatility
   
74
%
 
56
%
Expected life in years
   
5
   
5
 
 
6.
INCOME TAXES
 
The Company did not record a recovery for income taxes for the period ended September 30, 2005 as the net loss carry forwards are fully offset by a valuation allowance.
 
14

 
APOLLO GOLD CORPORATION
Notes to the Consolidated Financial Statements
Nine month period ended September 30, 2005
(Stated in United States Dollars; tabular amounts in thousands, except for share and per share amounts)
(Unaudited)

 
7.
FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
 
Commodity contracts
 
In 2003 the Company entered into commodity contracts with Standard Bank London Limited for gold in the aggregate amount of 100,000 ounces involving the use of combinations of put and call options. As of September 30, 2005 there were no ounces remaining on these contracts. The contracts gave the holder the right to buy, and the Company the right to sell, stipulated amounts of gold with a put option strike price of $295 per ounce and a call option strike price of $345 per ounce.
 
The Company incorrectly accounted for the above commodity contracts with Standard Bank London Limited as hedges during each of the quarters ended March 31, June 30 and September 30, 2004, respectively. Quarterly losses for 2004 have been restated to reflect the correct accounting treatment for these commodity contracts. The previously reported and restated information as at and for the three and nine month periods ended September 30, 2004 is disclosed below:
 
   
Three months ended
September 30, 2004
 
Nine months ended
September 30, 2004
 
   
As reported
 
As restated
 
As reported
 
As restated
 
Statement of Operations
                 
Revenue from discontinued operations (Note 4)
 
$
5,327
 
$
4,957
 
$
20,362
 
$
20,063
 
Realized and unrealized gain (loss) on commodity contracts (Note 4)
   
-
   
(646
)
 
-
   
516
 
Net loss
   
(10,213
)
 
(11,229
)
 
(25,483
)
 
(25,266
)
Deficit
   
(101,504
)
 
(101,287
)
 
(101,504
)
 
(101,287
)
Basic and diluted net loss per share
   
(0.13
)
 
(0.14
)
 
(0.33
)
 
(0.32
)

15

 
APOLLO GOLD CORPORATION
Notes to the Consolidated Financial Statements
Nine month period ended September 30, 2005
(Stated in United States Dollars; tabular amounts in thousands, except for share and per share amounts)
(Unaudited)

 
8.
SEGMENTED INFORMATION
 
Apollo operates the Montana Tunnels Mine in the United States and owns the Black Fox development project in Canada. The reportable segments have been determined at the level where decisions are made on the allocation of resources and capital and where performance is measured. The Nevada Assets have been reported as discontinued operations (Note 4). The accounting policies for these segments are the same as those followed by the Company as a whole.
 
Amounts as at September 30, 2005 are as follows:
 
   
Montana Tunnels
 
Black Fox
 
Corporate and Other
 
Total
 
Cash and cash equivalents
 
$
8
 
$
94
 
$
207
 
$
309
 
Other non-cash current assets
   
5,047
   
68
   
170
   
5,285
 
     
5,055
   
162
   
377
   
5,594
 
Property, plant and equipment
   
14,742
   
23,920
   
1,317
   
39,979
 
Restricted certificate of deposit
   
4,851
   
581
   
283
   
5,715
 
Deferred financing costs
   
-
   
-
   
1,145
   
1,145
 
Total assets of continuing operations
 
$
24,648
 
$
24,663
 
$
3,122
 
$
52,433
 
Current liabilities
 
$
7,467
 
$
127
 
$
2,644
 
$
10,238
 
Notes payable and convertible debentures
   
24
   
-
   
6,398
   
6,422
 
Accrued site closure costs
   
12,390
   
-
   
-
   
12,390
 
Total liabilities of continuing operations
 
$
19,881
 
$
127
 
$
9,042
 
$
29,050
 

Amounts as at December 31, 2004 are as follows (restated - Note 3(b)):
 
   
Montana Tunnels
 
Black Fox
 
Corporate and Other
 
Total
 
Cash and cash equivalents
 
$
(260
)
$
53
 
$
7,093
 
$
6,886
 
Other non-cash current assets
   
4,985
   
151
   
128
   
5,264
 
     
4,725
   
204
   
7,221
   
12,150
 
                           
Property, plant and equipment
   
17,239
   
19,560
   
800
   
37,599
 
Restricted certificate of deposit
   
3,752
   
562
   
57
   
4,371
 
Deferred financing costs
   
-
   
-
   
901
   
901
 
Total assets of continuing operations
 
$
25,716
 
$
20,326
 
$
8,979
 
$
55,021
 
                           
Current liabilities
 
$
6,943
 
$
481
 
$
2,237
 
$
9,661
 
Notes payable
   
423
   
-
   
5,538
   
5,961
 
Accrued site closure costs
   
11,753
   
-
   
-
   
11,753
 
Total liabilities of continuing operations
 
$
19,119
 
$
481
 
$
7,775
 
$
27,375
 

16

 
APOLLO GOLD CORPORATION
Notes to the Consolidated Financial Statements
Nine month period ended September 30, 2005
(Stated in United States Dollars; tabular amounts in thousands, except for share and per share amounts)
(Unaudited)

 
8.
SEGMENTED INFORMATION (Continued)
 
Amounts for the three and nine month periods ended September 30, 2005 and 2004, respectively, are as follows:
 
   
 
Three Months ended
September 30, 2005
 
   
Montana Tunnels
 
Black Fox
 
Corporate and Other
 
Total
 
Revenue from sale of minerals
 
$
13,351
 
$
-
 
$
-
 
$
13,351
 
Direct operating costs
   
14,162
   
-
   
-
   
14,162
 
Depreciation and amortization
   
615
   
-
   
57
   
672
 
General and administrative expenses
   
-
   
-
   
866
   
866
 
Stock-based compensation
   
-
   
-
   
171
   
171
 
Accretion expense
   
242
   
-
   
-
   
242
 
Exploration and business development
   
-
   
-
   
173
   
173
 
     
15,019
   
-
   
1,267
   
16,286
 
Operating loss
   
(1,668
)
 
-
   
(1,267
)
 
(2,935
)
Interest income
   
-
   
-
   
105
   
105
 
Interest expense
   
(14
)
 
-
   
(733
)
 
(747
)
Foreign exchange loss and other
   
-
   
-
   
(37
)
 
(37
)
Loss from continuing operations
 
$
(1,682
)
$
-
 
$
(1,932
)
$
(3,614
)
Investing activities
                         
Property, plant and equipment expenditures
 
$
106
 
$
870
 
$
160
 
$
1,136
 
 
 
   
Nine months ended
September 30, 2005
 
   
Montana Tunnels
 
Black Fox
 
Corporate and Other
 
Total
 
Revenue from sale of minerals
 
$
36,264
 
$
-
 
$
-
 
$
36,264
 
Direct operating costs
   
40,273
   
-
   
-
   
40,273
 
Depreciation and amortization
   
1,885
   
-
   
121
   
2,006
 
General and administrative expenses
   
-
   
-
   
3,732
   
3,732
 
Stock-based compensation
   
-
   
-
   
525
   
525
 
Accretion expense
   
636
   
-
   
-
   
636
 
Exploration and business development
   
-
   
-
   
731
   
731
 
     
42,794
   
-
   
5,109
   
47,903
 
Operating loss
   
(6,530
)
 
-
   
(5,109
)
 
(11,639
)
Interest income
   
-
   
-
   
278
   
278
 
Interest expense
   
(52
)
 
-
   
(1,888
)
 
(1,940
)
Gain (loss) on sale of property, plant and equipment
   
1,365
   
-
   
(42
)
 
1,323
 
Foreign exchange loss and other
   
-
   
-
   
(28
)
 
(28
)
Loss from continuing operations
 
$
(5,217
)
$
-
 
$
(6,789
)
$
(12,006
)
Investing activities
                         
Property, plant and equipment expenditures
 
$
197
 
$
4,359
 
$
689
 
$
5,245
 
 
17

 
APOLLO GOLD CORPORATION
Notes to the Consolidated Financial Statements
Nine month period ended September 30, 2005
(Stated in United States Dollars; tabular amounts in thousands, except for share and per share amounts)
(Unaudited)

 
8.
SEGMENTED INFORMATION (Continued)
 
   
Three months ended September 30, 2004
(Restated - Note 3(b))
 
   
Montana Tunnels
 
Black Fox
 
Corporate and Other
 
Total
 
Revenue from sale of minerals
 
$
7,393
 
$
-
 
$
-
 
$
7,393
 
Direct operating costs
   
12,627
   
-
   
-
   
12,627
 
Depreciation and amortization
   
646
   
-
   
28
   
674
 
General and administrative expenses
   
-
   
-
   
1,087
   
1,087
 
Stock-based compensation
   
-
   
-
   
388
   
388
 
Accretion expense
   
479
   
-
   
-
   
479
 
Exploration and business development
   
-
   
-
   
515
   
515
 
     
13,752
   
-
   
2,018
   
15,770
 
Operating income (loss)
   
(6,359
)
 
-
   
(2,018
)
 
(8,377
)
Interest income
   
-
   
-
   
10
   
10
 
Interest expense
   
(30
)
 
-
   
-
   
(30
)
Foreign exchange loss and other
   
(108
)
 
-
   
29
   
(79
)
Loss from continuing operations
 
$
(6,497
)
$
-
 
$
(1,979
)
$
(8,476
)
Investing activities
                         
Property, plant and equipment expenditures
 
$
1,069
 
$
3,002
 
$
-
 
$
4,071
 

 
   
Nine months ended September 30, 2004
(Restated - Note 3(b))
 
   
Montana Tunnels
 
Black Fox
 
Corporate and Other
 
Total
 
Revenue from sale of minerals
 
$
25,542
 
$
-
 
$
-
 
$
25,542
 
Direct operating costs
   
39,815
   
-
   
-
   
39,815
 
Depreciation and amortization
   
1,823
   
-
   
84
   
1,907
 
General and administrative expenses
   
-
   
-
   
4,325
   
4,325
 
Stock-based compensation
   
-
   
-
   
487
   
487
 
Accretion expense
   
560
   
-
   
-
   
560
 
Exploration and business development
   
-
   
-
   
774
   
774
 
     
42,198
   
-
   
5,670
   
47,868
 
Operating income (loss)
   
(16,656
)
 
-
   
(5,670
)
 
(22,326
)
Interest income
   
-
   
-
   
261
   
261
 
Interest expense
   
(113
)
 
-
   
-
   
(113
)
Foreign exchange loss and other
   
(108
)
 
-
   
(459
)
 
(567
)
Loss from continuing operations