Unassociated Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

R QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2007

OR

£ 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 R No £

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer £
Accelerated Filer £
Non-Accelerated Filer R

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
Yes £ No R

At May 6, 2007, there were 143,467,186 common shares of Apollo Gold Corporation outstanding.
 


 


TABLE OF CONTENTS
 
       
Page
PART I
 
FINANCIAL INFORMATION
 
4
         
ITEM 1.
 
FINANCIAL STATEMENTS (Unaudited)
 
4
         
   
Condensed Consolidated Balance Sheets - As of March 31, 2007 and as of December 31, 2006
 
5
   
Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three Months Ended March 31, 2007 and 2006
 
6
   
Condensed Consolidated Statements of Shareholders’ Equity for the Year ended December 31, 2006 and the Three Months Ended March 31, 2007
 
7
   
Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2007 and 2006
 
8
   
Notes to the Condensed Consolidated Financial Statements
 
9
         
ITEM 2.
 
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
22
ITEM 3.
 
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
28
ITEM 4.
 
CONTROLS AND PROCEDURES
 
29
         
PART II
 
OTHER INFORMATION
 
30
         
ITEM 1.
 
LEGAL PROCEEDINGS
 
30
ITEM 2.
 
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
30
ITEM 3.
 
DEFAULTS UPON SENIOR SECURITIES
 
30
ITEM 4.
 
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
30
ITEM 5.
 
OTHER INFORMATION
 
30
ITEM 6.
 
EXHIBITS
 
30
         
INDEX TO EXHIBITS
 
32
     
   
Certification of CEO Pursuant to Section 302
 
Exhibit 31.1
   
Certification of CFO Pursuant to Section 302
 
Exhibit 31.2
   
Certification of CEO and CFO Pursuant to Section 906
 
Exhibit 32.1
 
2

 
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. Forward-looking statements can be identified by the use of words such as “may,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “intends,” “continue,” or the negative of such terms, or other comparable terminology. These statements include comments regarding:
 
 
·
future cash flow from the Montana Tunnels mine;
 
 
·
the establishment and estimates of mineral reserves and resources;
 
 
·
the timing of completion of underground reserve and feasibility studies at Black Fox;
 
 
·
the availability of stockpiled lower grade material and ore for processing and production if mining activity were temporarily interrupted;
 
 
·
production and production costs;
 
 
·
daily production rates;
 
 
·
throughput rates;
 
 
·
cash operating costs;
 
 
·
total cash costs;
 
 
·
grades of ore mined and milled;
 
 
·
expenditures;
 
 
·
exploration;
 
 
·
permits;
 
 
·
expansion plans;
 
 
·
plans for Black Fox and Huizopa;
 
 
·
closure costs;
 
 
·
cash flows;
 
 
·
future financing;
 
 
·
liquidity;
 
 
·
estimates of environmental liabilities;
 
 
·
our ability to obtain future financing to fund our estimated expenditure and capital requirements;
 
 
·
anticipated exploration, development and corporate overhead expenditures;
 
 
·
factors impacting our results of operations;
 
 
·
application of Sarbanes-Oxley 404 reporting requirements and our ability to meet those reporting requirements; and
 
 
·
the impact of adoption of new accounting standards.
 
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 and zinc prices; changes in interest and currency exchange rates; timing and amount of production; unanticipated grade changes; unanticipated recovery or production problems; changes in mining and milling costs; operational problems at our mining property; metallurgy, processing, access, availability of materials, equipment, supplies and water; determination of reserves; changes in project parameters; costs and timing of development of new reserves; results of current and future exploration activities; results of pending and future feasibility studies; joint venture relationships; political or economic instability, either globally or in the countries in which we operate; local and community impacts and issues; timing of receipt of government approvals; accidents and labor disputes; environmental costs and risks; competitive factors, including competition for property acquisitions; availability of external financing on reasonable terms or at all; and the factors discussed in our Annual Report on Form 10-K for the year ended December 31, 2006 under the heading “Risk Factors.” Many of these factors are beyond our ability to control and predict. These factors are not intended to represent a complete list of the general or specific factors that may affect us. We disclaim any obligation to update forward looking statements, whether as a result of new information, future events or otherwise.
 
3

 
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 condensed 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, 2006 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.
 
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 condensed 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, 2006 filed with the Securities and Exchange Commission on April 2, 2007.
 
4


APOLLO GOLD CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands of U.S. dollars)
(Unaudited)

   
March 31,
2007
 
December 31,
2006
 
ASSETS
     
CURRENT
     
Cash and cash equivalents
 
$
7,489
 
$
4,512
 
Accounts receivable and other
   
1,389
   
728
 
Note receivable (Note 4)
   
-
   
1,865
 
Prepaids
   
272
   
301
 
Inventories
   
1,241
   
660
 
Total current assets
   
10,391
   
8,066
 
Property, plant and equipment
   
41,538
   
38,868
 
Deferred stripping costs (Note 3)
   
2,149
   
-
 
Restricted certificates of deposit
   
4,998
   
4,605
 
Deferred financing costs
   
-
   
265
 
TOTAL ASSETS
 
$
59,076
 
$
51,804
 
LIABILITIES
             
CURRENT
             
Accounts payable
 
$
2,489
 
$
1,710
 
Accrued liabilities 
   
2,519
   
1,254
 
Notes payable
   
1,756
   
671
 
Property and mining taxes payable
   
379
   
442
 
Convertible debentures
   
7,959
   
7,660
 
Total current liabilities
   
15,102
   
11,737
 
Accrued severance
   
-
   
370
 
Notes payable
   
413
   
569
 
Convertible debentures (Note 5)
   
3,418
   
-
 
Accrued site closure costs
   
7,268
   
7,135
 
Deferred gain (Note 4)
   
3,679
   
3,750
 
TOTAL LIABILITIES
   
29,880
   
23,561
 
               
Continuing operations (Note 1)
             
               
SHAREHOLDERS’ EQUITY
             
Share capital (Note 6)
   
159,665
   
159,029
 
Equity component of convertible debentures
   
4,101
   
1,809
 
Note warrants
   
3,334
   
1,062
 
Contributed surplus
   
11,831
   
11,166
 
Deficit
   
(149,735
)
 
(144,823
)
TOTAL SHAREHOLDERS’ EQUITY
   
29,196
   
28,243
 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
 
$
59,076
 
$
51,804
 
 
The accompanying notes are an integral part of these interim condensed consolidated financial statements.
 
5


APOLLO GOLD CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In thousands of U.S. dollars, except share and per share amounts)
(Unaudited)

   
Three months ended
March 31,
 
   
2007
 
2006
 
Revenue from sale of minerals
 
$
2,890
 
$
6,138
 
Operating expenses
             
Direct operating costs
   
3,063
   
7,158
 
Depreciation and amortization
   
250
   
581
 
General and administrative expenses
   
1,140
   
1,224
 
Accretion expense - accrued site closure costs
   
127
   
237
 
Amortization of deferred gain
   
(71
)
 
-
 
Exploration and business development
   
1,552
   
351
 
Loss on sale of property, plant and equipment
   
-
   
7
 
     
6,061
   
9,558
 
Operating loss
   
(3,171
)
 
(3,420
)
Other income (expenses)
             
Interest income
   
188
   
66
 
Interest expense (Note 7)
   
(1,145
)
 
(600
)
Financing costs
   
(480
)
 
-
 
Foreign exchange loss and other
   
(39
)
 
1
 
Loss from continuing operations for the period
   
(4,647
)
 
(3,953
)
Loss from discontinued operations for the period
   
-
   
(250
)
Net loss and comprehensive loss for the period
 
$
(4,647
)
$
(4,203
)
               
Basic and diluted net loss per share from:
             
Continuing operations
 
$
(0.03
)
$
(0.04
)
Discontinued operations
   
-
   
-
 
   
$
(0.03
)
$
(0.04
)
Basic and diluted weighted-average number of shares outstanding
   
142,672,545
   
116,555,263
 
 
The accompanying notes are an integral part of these interim condensed consolidated financial statements.
 
6



APOLLO GOLD CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(In thousands of U.S. dollars)
(Unaudited)
 
   
Share Capital
                   
   
Number
of Shares
 
Amount
 
Equity Component of
Convertible Debentures
 
Note Warrants
 
Contributed
Surplus
 
Deficit
 
Total
 
Balance, December 31, 2005
   
107,456,451
 
$
148,526
 
$
1,809
 
$
781
 
$
10,561
 
$
(129,236
)
$
32,441
 
Units issued for cash
   
11,650,000
   
3,488
   
-
   
-
   
-
   
-
   
3,488
 
Shares issued for 2005 stock-based compensation
   
2,290,408
   
955
   
-
   
-
   
-
   
-
   
955
 
Reduction of exercise price of Note Warrants
   
-
   
-
   
-
   
305
   
-
   
-
   
305
 
Note warrants exercised
   
600,000
   
264
   
-
   
(24
)
 
-
   
-
   
240
 
Shares issued for services
   
1,325,000
   
668
   
-
   
-
   
-
   
-
   
668
 
Flow-through units issued for cash
   
2,222,221
   
746
   
-
   
-
   
27
   
-
   
773
 
Units issued for cash 
   
16,688,206
   
4,357
   
-
   
-
   
156
   
-
   
4,513
 
Options exercised
   
50,000
   
25
   
-
   
-
   
(5
)
 
-
   
20
 
Stock-based compensation
   
-
   
-
   
-
   
-
   
427
   
-
   
427
 
Net loss
   
-
   
-
   
-
   
-
   
-
   
(15,587
)
 
(15,587
)
Balance, December 31, 2006
   
142,282,286
   
159,029
   
1,809
   
1,062
   
11,166
   
(144,823
)
 
28,243
 
Change in accounting policy (Note 3)
   
-
   
-
   
-
   
-
   
-
   
(265
)
 
(265
)
Balance (as adjusted), January 1, 2007
   
142,282,286
   
159,029
   
1,809
   
1,062
   
11,166
   
(145,088
)
 
27,978
 
Shares issued for services
   
20,000
   
10
   
-
   
-
   
-
   
-
   
10
 
Shares issued for Huizopa settlement (Note 6(a))
   
1,000,000
   
540
   
-
   
-
   
-
   
-
   
540
 
Note warrants exercised
   
164,900
   
86
   
-
   
(20
)
 
-
   
-
   
66
 
Equity component of convertible debentures (Note 5)
   
-
   
-
   
2,292
   
-
   
-
   
-
   
2,292
 
Note warrants (Note 5)
   
-
   
-
   
-
   
2,292
   
-
   
-
   
2,292
 
Debenture compensation warrants (Note 5)
   
-
   
-
   
-
   
-
   
467
   
-
   
467
 
Stock-based compensation
   
-
   
-
   
-
   
-
   
198
   
-
   
198
 
Net loss and comprehensive loss
   
-
   
-
   
-
   
-
   
-
   
(4,647
)
 
(4,647
)
Balance, March 31, 2007
   
143,467,186
 
$
159,665
 
$
4,101
 
$
3,334
 
$
11,831
 
$
(149,735
)
$
29,196
 
 
The accompanying notes are an integral part of these interim condensed consolidated financial statements.
 
7


APOLLO GOLD CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of U.S. dollars)
(Unaudited)

   
Three months ended
March 31,
 
   
2007
 
2006
 
Operating activities
         
Net loss for the period
 
$
(4,647
)
$
(4,203
)
Items not affecting cash:
             
Depreciation and amortization
   
250
   
581
 
Amortization of deferred stripping costs
   
103
   
-
 
Amortization of deferred financing costs
   
-
   
80
 
Financing costs
   
174
   
-
 
Loss from discontinued operations
   
-
   
250
 
Reduction in exercise price of Note Warrants
   
-
   
305
 
Stock-based compensation
   
198
   
108
 
Shares issued for services and settlement of claims
   
550
   
-
 
Accretion expense - accrued site closure costs
   
127
   
237
 
Accretion expense - convertible debenture
   
532
   
246
 
Loss on sale of property, plant and equipment and other
   
-
   
20
 
Amortization of deferred gain
   
(71
)
 
-
 
Net change in non-cash operating working capital items (Note 10)
   
398
   
(1,875
)
Discontinued operations
   
-
   
(250
)
Net cash used in operating activities
   
(2,386
)
 
(4,501
)
               
Investing activities
             
Property, plant and equipment expenditures
   
(2,875
)
 
(3,445
)
Deferred stripping costs
   
(2,252
)
 
-
 
Proceeds from disposal of property, plant and equipment
   
-
   
90
 
Restricted certificate of deposit and other assets
   
(393
)
 
10,553
 
Net cash (used in) provided by investing activities
   
(5,520
)
 
7,198
 
               
Financing activities
             
Proceeds on issuance of convertible debentures and note warrants, net
   
8,062
   
3,488
 
Proceeds from exercise of warrants
   
66
   
-
 
Proceeds from notes payable
   
1,250
   
-
 
Payments of notes payable
   
(360
)
 
(357
)
Notes receivable from Elkhorn Tunnels, LLC
   
1,865
   
-
 
Net cash provided by financing activities
   
10,883
   
3,131
 
               
Net increase in cash and cash equivalents
   
2,977
   
5,828
 
Cash and cash equivalents, beginning of period
   
4,512
   
127
 
Cash and cash equivalents, end of period
 
$
7,489
 
$
5,955
 
               
SUPPLEMENTAL CASH FLOW INFORMATION
             
Interest paid
 
$
335
 
$
275
 
Income taxes paid
 
$
-
 
$
-
 
 

Non-cash investing and financing activities
 
During the three months ended March 31, 2007, property, plant and equipment totaling $39 was acquired via issuance of a promissory note.
 
The Company issued agent’s compensation warrants with a value of $294 for services rendered in connection with the issuance of the convertible debentures (Note 5).
 
The accompanying notes are an integral part of these interim condensed consolidated financial statements.
 
8

 
APOLLO GOLD CORPORATION
Notes to the Condensed Consolidated Financial Statements
Three month period ended March 31, 2007
(Stated in U.S. dollars; tabular amounts in thousands)
(Unaudited)

1.
CONTINUING OPERATIONS
 
These condensed 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 the Company has funded its operations through issuance of debt and equity securities and funding from joint venture partners (Note 4). The Company’s ability to continue as a going concern is dependent on its ability to generate cash flow from the Montana Tunnels joint venture and/or continue to issue debt and equity securities.
 
If the Company is unable to generate cash flow from the Montana Tunnels joint venture and/or secure additional financing, it may be unable to continue as a going concern and 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 co-product metals, as well as related activities including exploration and development. The Company is the operator of the Montana Tunnels mine (the “Mine”), which is a 50% joint venture with Elkhorn Tunnels, LLC (“Elkhorn”). The Mine is 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 development project (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 concessions at the Huizopa exploration project (the “Huizopa Project”), located in the Sierra Madres in Chihuahua, Mexico.
 
3.
SIGNIFICANT 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 12, 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, 2006, except as disclosed in (b), (c) and (d) 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, 2006.
 
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.
 
(b)    At March 31, 2007, the Company has ore stockpiles which are included in Inventories. Ore stockpiles represent ore that has been mined and is available for further processing. Work-in-process inventories, including ore stockpiles, are valued at the lower of average production cost and net realizable value, after a reasonable allowance for further processing and sales costs.
 
9

 
APOLLO GOLD CORPORATION
Notes to the Condensed Consolidated Financial Statements
Three month period ended March 31, 2007
(Stated in U.S. dollars; tabular amounts in thousands)
(Unaudited)
 
3.
SIGNIFICANT ACCOUNTING POLICIES (continued)
 
(c)    On March 2, 2006, the Emerging Issues Committee issued EIC-160, Stripping Costs Incurred in the Production Phase of a Mining Operation, which requires stripping costs that represent a betterment to the mineral property to be capitalized and amortized in a rational and systematic manner over the reserves that directly benefit from the specific stripping activity. The Company adopted EIC-160 as of January 1, 2007 on a prospective basis. During the three months ended March 31, 2007, the Company capitalized $2.3 million in deferred stripping costs and recorded amortization thereon in the amount of $0.1 million. Deferred stripping costs are amortized using the units-of-production method over the expected life of the operation based on the estimated recoverable gold equivalent ounces.
 
(d)    Effective January 1, 2007, the Company adopted CICA Handbook Section 1530, Comprehensive Income, CICA Handbook Section 3855, Financial Instruments - Recognition and Measurement, CICA Handbook Section 3865, Hedges, and CICA Handbook Section 3251, Equity. These new Handbook Sections provide comprehensive requirements for the recognition and measurement of financial instruments, transaction costs incurred on financial instruments, as well as standards on when and how hedge accounting may be applied. Handbook Section 1530 also introduces a new component of equity referred to as comprehensive income. The Company has adopted these standards prospectively.
 
In accordance with this new standard, the Company now classifies all financial instruments as either held-to-maturity, available-for-sale, held for trading, loans and receivables, or other financial liabilities. Financial assets held to maturity, loans and receivables and financial liabilities other than those held for trading, are measured at amortized cost. Available-for-sale instruments are measured at fair value with unrealized gains and losses recognized in other comprehensive income. Instruments classified as held for trading are measured at fair value with unrealized gains and losses recognized in the statement of operations. Transaction costs are expensed as incurred.
 
Upon adoption of this new standard, the Company has designated its cash and cash equivalents as held-for-trading, which are measured at fair value. Accounts receivable and other are classified as loans and receivables, which are measured at amortized cost. Restricted certificates of deposit are classified as held-to-maturity, and are measured at amortized cost. Accounts payable and accrued liabilities, property and mining taxes payable, convertible debentures, notes payable, and accrued site closure costs are classified as other liabilities, which are measured at amortized cost.
 
Under Section 3855, the Company adopted a policy to expense debt financing costs when they are incurred and as a result the Company recorded a non-cash adjustment to increase opening deficit by $0.3 million to eliminate the opening balance of deferred financing costs that were capitalized and amortized under the Company’s previous accounting policy.
 
Comprehensive income is the change in shareholders’ equity during a period from transactions and other events and circumstances from non-owner sources. The adoption of Section 1530 had no impact on the Company.
 
10

 
APOLLO GOLD CORPORATION
Notes to the Condensed Consolidated Financial Statements
Three month period ended March 31, 2007
(Stated in U.S. dollars; tabular amounts in thousands)
(Unaudited)
 
4.
MONTANA TUNNELS JOINT VENTURE
 
On July 28, 2006, Apollo entered into a joint venture (“JV Agreement”) with Elkhorn in respect of the Mine. Elkhorn contributed $13 million in return for a 50% interest in the Mine.
 
Elkhorn will receive 55% and Apollo will receive 45% of the positive free cash flow, as defined in the JV agreement, from the Mine until such time as Elkhorn has received cash flow of $13 million (at which time Apollo will have received $10.6 million). At that time, Apollo would become entitled to 60% and Elkhorn 40% of the positive free cash flow from the Mine, until both parties have received an equal amount (at which time Apollo will have received $17.7 million). Thereafter, the sharing would be 50/50. Additionally, Elkhorn is entitled to a 12% interest distribution (reduced to 10% effective April 1, 2007) charged to the joint venture as interest expense (Note 7) on its initial contribution of $13 million until it has received cash flow of $13 million.
 
Apollo accounts for its 50% interest in the assets and liabilities of the Montana Tunnels joint venture using the proportionate consolidation method. As of December 31, 2006, the Company recorded a deferred gain on the transfer of assets and liabilities to the joint venture of $3.8 million. The deferred gain is amortized using the units-of-production method over the expected life of the operation based on the estimated recoverable gold equivalent ounces. Amortization of the deferred gain was $0.1 million for the three months ended March 31, 2007.
 
Apollo’s 50% share of the assets and liabilities of the Montana Tunnels joint venture is as follows:
 
   
March 31,
2007
 
December 31,
2006
 
Current
         
Cash and cash equivalents
 
$
60
 
$
(64
)
Accounts receivable and other
   
1,005
   
21
 
Note receivable
   
-
   
1,865
 
Inventories
   
1,241
   
660
 
Prepaids
   
92
   
24
 
     
2,398
   
2,506
 
Property, plant and equipment
   
7,054
   
7,151
 
Deferred stripping costs
   
2,149
   
-
 
Restricted certificates of deposit
   
3,817
   
3,430
 
Total assets
 
$
15,418
 
$
13,087
 
               
Current
             
Accounts payable
 
$
824
 
$
216
 
Accrued liabilities
   
1,234
   
669
 
Notes payable
   
1,693
   
496
 
Property and mining taxes payable
   
374
   
438
 
 
   
4,125
   
1,819
 
Notes payable
   
376
   
527
 
Accrued site closure costs
   
6,242
   
6,127
 
Total liabilities
 
$
10,743
 
$
8,473
 
 
11

 
APOLLO GOLD CORPORATION
Notes to the Condensed Consolidated Financial Statements
Three month period ended March 31, 2007
(Stated in U.S. dollars; tabular amounts in thousands)
(Unaudited)
 
5.
CONVERTIBLE DEBENTURES
 
On February 23, 2007, the Company completed a private placement of $8.6 million aggregate principal amount of Series 2007-A convertible debentures (“Debentures”) with each $1,000 of principal amount of Debentures including 2,000 common share purchase warrants (“Note Warrants”) (Note 6(b)(i)). The Debentures mature on February 23, 2009 and bear interest at a rate of 12% per annum during the first year and 18% per annum during the second year, payable annually beginning on February 23, 2008. The Note Warrants have an exercise price of $0.50 per common share and have a term of two years from the date of grant.
 
The Debentures are convertible, at the option of the holder, at any time prior to maturity into common shares of the Company at a price of $0.50 per common share. The Company has the option to force conversion of the Debentures under certain circumstances. The Debentures are classified as a compound financial instrument for accounting purposes.
 
On the date of issuance, the gross proceeds in the amount of $8.6 million has been allocated to the relative fair values of the Debentures ($3.2 million), the holder’s option to convert the principal balance into common shares ($2.7 million) (the “Conversion Option”), and the Note Warrants ($2.7 million). The $3.2 million fair value of the Debentures is classified as a liability, while the $5.4 million allocated to the Conversion Option and the Note Warrants has been classified as separate components within shareholders’ equity.
 
Over the two-year term, the Debentures are accreted to their face value through a periodic charge to accretion expense with a corresponding credit to the liability component. The accretion expense is based on the effective interest method. For the three months ended March 31, 2007, the Company recorded accretion expense of $0.2 million related to the Debentures.
 
In addition to the Note Warrants, the agents were granted 1,201,200 compensation warrants with the same terms and conditions as the Note Warrants above.
 
The Company incurred transaction costs of $1.3 million (including the fair value of the agents’ compensation warrants of $0.5 million). These costs were allocated to Debenture issuance costs of $0.5 million and to equity issuance costs of $0.8 million, based on their relative fair values of the debt and equity components. Debenture financing costs are expensed as incurred.
 
The fair values of the Conversion Option, the Note Warrants, and the compensation warrants were determined using the Black-Scholes option pricing model assuming no expected dividends, a volatility of the Company’s share price of 70%, an interest rate of 4.1%, and an expected life of two years.
 
6.
SHARE CAPITAL
 
(a)
Shares issued in 2007
 
On February 28, 2007, the Company issued 1,000,000 common shares of the Company at $0.54 per share in connection with the settlement of certain claims in relation to the Huizopa property.
 
12


APOLLO GOLD CORPORATION
Notes to the Condensed Consolidated Financial Statements
Three month period ended March 31, 2007
(Stated in U.S. dollars; tabular amounts in thousands)
(Unaudited)
 
6.
SHARE CAPITAL (continued)
 
(b)
Warrants
 
The following summarizes outstanding warrants as at March 31, 2007:
 
Date Issued
 
Number of Warrants
 
Number of Shares
 
Exercise Price
 
Expiry Date
 
           
Exercisable in US$
     
November 4, 2004
   
4,248,700
   
4,248,700
   
0.40
   
November 4, 2007
 
November 4, 2004
   
240,000
   
240,000
   
0.80
   
November 4, 2007
 
November 4, 2004
   
1,396,000
   
1,396,000
   
0.80
   
November 4, 2007
 
November 8, 2006
   
8,344,103
   
8,344,103
   
0.50
   
November 8, 2009
 
November 8, 2006
   
1,168,174
   
1,168,174
   
0.50
   
November 8, 2009
 
February 23, 2007
   
17,160,000
   
17,160,000
   
0.50
   
February 23, 2009
 
February 23, 2007
   
1,201,200
   
1,201,200
   
0.50
   
February 23, 2009
 
     
33,758,177
   
33,758,177
             
               
Exercisable in Cdn$
       
June 30, 2005
   
1,250,000
   
1,250,000
   
0.40
   
June 30, 2007
 
January 26, 2006
   
2,000,000
   
2,000,000
   
0.39
   
January 26, 2008
 
October 30, 2006
   
1,111,111
   
1,111,111
   
1.00
(1)
 
October 30, 2008
 
     
4,361,111
   
4,361,111
             
     
38,119,288
   
38,119,288
             

(1) The exercise price of these warrants increase to Cdn$1.15 on October 31, 2007 if unexercised as of that date.

In addition, 166,666 broker compensation warrants were issued and were immediately exercisable on October 30, 2006. Each broker compensation warrant is exercisable at Cdn$0.45 for two years into one common share of the Company and one-half of one share purchase warrant, with each whole share purchase warrant exercisable into one common share of the Company at Cdn$1.00 per common share through October 30, 2007 and at Cdn$1.15 through October 30, 2008. The broker compensation warrants expire on October 30, 2008.
 
(c)
Options
 
A summary of information concerning outstanding stock options at March 31, 2007 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, 2006
   
3,052,900
 
$
1.06
   
1,230,852
 
$
0.80
 
Options granted
   
3,142,114
   
0.57
   
-
   
-
 
Options forfeited
   
(30,400
)
 
1.06
   
-
   
-
 
Balances, March 31, 2007
   
6,164,614
 
$
0.81
   
1,230,852
 
$
0.80
 

13

 
APOLLO GOLD CORPORATION
Notes to the Condensed Consolidated Financial Statements
Three month period ended March 31, 2007
(Stated in U.S. dollars; tabular amounts in thousands)
(Unaudited)
 
6.
SHARE CAPITAL (continued)

(i) Fixed stock option plan
 
The Company has a stock option plan that provides for the granting of options to directors, officers, employees and service providers of the Company. Options vest over two years and have a 10-year contractual term, unless otherwise determined by the Company’s Board of Directors. The Company is authorized to issue a maximum of 12,139,686 fixed stock options. As at March 31, 2007, an aggregate of 5,975,072 fixed stock options were available for future grants of awards under the plan.
 
The following table summarizes information concerning outstanding and exercisable fixed stock options at March 31, 2007:
 
Options Outstanding
 
Options Exercisable
 
Number
Outstanding
 
Expiry Date
 
Weighted Average
Exercise
Price per Share
 
Weighted Average
Remaining Contractual Life (in years)
 
Number
Exercisable
 
Weighted Average
Exercise
Price per Share
 
678,800
   
February 18, 2013
 
$
2.24
   
5.9
   
678,800
 
$
2.24
 
261,000
   
March 10, 2014
   
2.05
   
6.9
   
261,000
   
2.05
 
25,000
   
May 19, 2014
   
1.44
   
7.1
   
25,000
   
1.44
 
21,200
   
August 10, 2014
   
0.95
   
7.4
   
21,200
   
0.95
 
1,163,500
   
March 10, 2015
   
0.65
   
7.9
   
1,163,500
   
0.65
 
100,000
   
August 4, 2015
   
0.27
   
8.4
   
50,000
   
0.27
 
300,000
   
December 12, 2015
   
0.20
   
8.7
   
150,000
   
0.20
 
125,000
   
March 28, 2016
   
0.65
   
9.0
   
125,000
   
0.65
 
200,000
   
May 23, 2016
   
0.53
   
9.2
   
-
   
-
 
108,000
   
August 10, 2016
   
0.48
   
9.4
   
-
   
-
 
40,000
   
November 9, 2016
   
0.32
   
9.6
   
-
   
-
 
3,142,114
   
February 6, 2017
   
0.57
   
9.9
   
-
   
-
 
6,164,614
       
$
0.81
   
8.8
   
2,474,500
 
$
1.21
 

(ii) Performance-based stock option plan
 
As of March 31, 2007, the 1,230,852 performance-based stock options exercisable at $0.80 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:

   
Three months ended March 31,
 
   
2007
 
2006
 
Risk free interest rate
   
4.0
%
 
4.1
%
Dividend yield
   
0
%
 
0
%
Volatility
   
71
%
 
91
%
Expected life in years
   
6
   
5
 
Weighted average grant-date fair value of stock options
 
$
0.38
 
$
0.47
 
 
14

 
APOLLO GOLD CORPORATION
Notes to the Condensed Consolidated Financial Statements
Three month period ended March 31, 2007
(Stated in U.S. dollars; tabular amounts in thousands)
(Unaudited)
 
6.
SHARE CAPITAL (continued)

(e)
Shareholder Rights Plan
 
On January 17, 2007, the Company adopted a Shareholder Rights Plan (the “Rights Plan”). The Rights Plan was adopted to ensure the fair treatment of shareholders in connection with any take-over bid for common shares of Apollo. The Rights Plan seeks to provide shareholders with adequate time to properly assess a take-over bid without undue pressure. It also is intended to provide the Board with more time to fully consider an unsolicited take-over bid and, if applicable, to explore other alternatives to maximize shareholder value. The Rights Plan is not intended to prevent take-over bids that treat shareholders fairly.

The Rights Plan, adopted and effective in January 2007, will be presented for ratification by the shareholders at the Apollo Annual Meeting scheduled for May 16, 2007. If approved by the shareholders, the Rights Plan would expire in January 2012.
 
7.
INTEREST EXPENSE
 
Interest expense at March 31, 2007 and March 31, 2006 consists of:
 
   
Three months ended
March 31,
 
   
2007
 
2006
 
Accretion on convertible debentures
 
$
532
 
$
246
 
Interest paid on convertible debentures
   
265
   
264
 
Amortization of deferred financing costs
   
-
   
80
 
Interest related to Montana Tunnels joint venture agreement (Note 4)
   
278
   
-
 
Capital leases and other
   
70
   
10
 
   
$
1,145
 
$
600
 

8.
INCOME TAXES
 
The Company did not record a recovery for income taxes for the period ended March 31, 2007 as the net loss carry forwards are fully offset by a valuation allowance.

9.
LITIGATION AND CLAIMS
 
In May 2006, a purported class action lawsuit was filed in U.S. Federal Court Missoula Division of Montana by 14 former employees at the Montana Tunnels mine alleging (i) violations of the Worker Adjustment and Retraining Notification Act of 1988 (the “WARN Act”) and the Montana Wage Act and (ii) breach of contract. The allegations relate to the termination of the employees following the cessation of mining in October 2005. Specifically, the plaintiffs allege that the Company gave deficient WARN Act notice and are seeking damages for back pay and benefits. The Company believes that it has meritorious defenses in this suit and is vigorously defending itself against these claims.
 
15

 
APOLLO GOLD CORPORATION
Notes to the Condensed Consolidated Financial Statements
Three month period ended March 31, 2007
(Stated in U.S. dollars; tabular amounts in thousands)
(Unaudited)
 
10.
CHANGE IN NON-CASH OPERATING WORKING CAPITAL ITEMS
 
Net changes in non-cash operating working capital items for the three months ended March 31 are:
 
   
Three months ended
March 31,
 
   
2007
 
2006
 
(Increase) decrease in:
         
Accounts receivable and other
 
$
(661
)
$
1,262
 
Prepaids
   
29
   
229
 
Inventories
   
(581
)
 
(43
)
Increase (decrease) in:
             
Accounts payable
   
779
   
(3,860
)
Accrued liabilities
   
895
   
577
 
Property and mining taxes payable
   
(63
)
 
(40
)
   
$
398
 
$
(1,875
)

11.
SEGMENTED INFORMATION
 
Apollo operates the Montana Tunnels mine (a 50% joint venture effective December 31, 2006) in the United States and 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 assets and liabilities of Montana Tunnels as at March 31, 2007 and December 31, 2006 below differ from the amounts for the Montana Tunnels joint venture in Note 4 due to the inclusion of assets and liabilities of Montana Tunnels Mining, Inc. not pertaining to the Montana Tunnels joint venture, which are primarily those of the Diamond Hill mine. The accounting policies for these segments are the same as those followed by the Company as a whole.
 
Amounts as at March 31, 2007 are as follows:
 
   
Montana Tunnels
 
Black
Fox
 
Corporate
and Other
 
Total
 
Cash and cash equivalents
 
$
60
 
$
19
 
$
7,410
 
$
7,489
 
Other non-cash current assets
   
2,349
   
107
   
446
   
2,902
 
     
2,409
   
126
   
7,856
   
10,391
 
Property, plant and equipment
   
7,062
   
31,301
   
3,175
   
41,538
 
Deferred stripping costs
   
2,149
   
-
   
-
   
2,149
 
Restricted certificates of deposit
   
4,440
   
558
   
-
   
4,998
 
Total assets
 
$
16,060
 
$
31,985
 
$
11,031
 
$
59,076
 
                           
Current liabilities and convertible debenture
 
$
4,130
 
$
170
 
$
10,802
 
$
15,102
 
Notes payable
   
376
   
37
   
-
   
413
 
Convertible debenture
   
-
   
-
   
3,418
   
3,418
 
Accrued site closure costs
   
6,887
   
381
   
-
   
7,268
 
Deferred gain
   
3,679
   
-
   
-
   
3,679
 
Total liabilities
 
$
15,072
 
$
588
 
$
14,220
 
$
29,880
 

16

 
APOLLO GOLD CORPORATION
Notes to the Condensed Consolidated Financial Statements
Three month period ended March 31, 2007
(Stated in U.S. dollars; tabular amounts in thousands)
(Unaudited)
 
11.
SEGMENTED INFORMATION (continued)

Amounts as at December 31, 2006 are as follows:

   
Montana Tunnels
 
Black Fox
 
Corporate and Other
 
Total
 
Cash and cash equivalents
 
$
(64
)
$
9
 
$
4,567
 
$
4,512
 
Other non-cash current assets
   
2,579
   
105
   
870
   
3,554
 
     
2,515
   
114
   
5,437
   
8,066
 
Property, plant and equipment
   
7,159
   
30,455
   
1,254
   
38,868
 
Restricted certificates of deposit
   
4,052
   
553
   
-
   
4,605
 
Deferred financing costs
   
-
   
-
   
265
   
265
 
Total assets
 
$
13,726
 
$
31,122
 
$
6,956
 
$
51,804
 
                           
Current liabilities
 
$
1,823
 
$
149
 
$
9,765
 
$
11,737
 
Notes payable and other long term liabilities
   
527
   
42
   
370
   
939
 
Accrued site closure costs
   
6,760
   
375
   
-
   
7,135
 
Deferred Gain
   
3,750
   
-
   
-
   
3,750
 
Total liabilities
 
$
12,860
 
$
566
 
$
10,135
 
$
23,561
 
 
Amounts for the three month periods ended March 31, 2007 and 2006, respectively, are as follows:
 
   
Three months ended March 31, 2007
 
   
Montana Tunnels
 
Black Fox
 
Corporate and Other
 
Total
 
Revenue from sale of minerals
 
$
2,890
 
$
-
 
$
-
 
$
2,890
 
Direct operating costs
   
3,063
   
-
   
-
   
3,063
 
Depreciation and amortization
   
224
   
-
   
26
   
250
 
General and administrative expenses
   
-
   
-
   
1,140
   
1,140
 
Accretion expense - accrued site closure costs
   
127
   
-
   
-
   
127
 
Amortization of deferred gain
   
(71
)
 
-
   
-
   
(71
)
Exploration and business development and other
   
-
   
-
   
1,552
   
1,552
 
     
3,343
   
-
   
2,718
   
6,061
 
Operating loss
   
(453
)
 
-
   
(2,718
)
 
(3,171
)
Interest income
   
45
   
-
   
143
   
188
 
Interest expense
   
(348
)
 
-
   
(797
)
 
(1,145
)
Financing costs
   
-
   
-
   
(480
)
 
(480
)
Foreign exchange gain and other
   
-
   
-
   
(39
)
 
(39
)
Loss from continuing operations
 
$
(756
)
$
-
 
$
(3,891
)
$
(4,647
)
Investing activities
                         
Property, plant and equipment expenditures and deferred stripping expenditures
 
$
2,379
 
$
840
 
$
1,947
 
$
5,166
 

17

 
APOLLO GOLD CORPORATION
Notes to the Condensed Consolidated Financial Statements
Three month period ended March 31, 2007
(Stated in U.S. dollars; tabular amounts in thousands)
(Unaudited)
 
11.
SEGMENTED INFORMATION (continued)
 
   
Three months ended March 31, 2006
 
   
Montana Tunnels
 
Black Fox
 
Corporate and Other
 
Total
 
Revenue from sale of minerals
 
$
6,138
 
$
-
 
$
-
 
$
6,138
 
Direct operating costs
   
7,158
   
-
   
-
   
7,158
 
Depreciation and amortization
   
550
   
-
   
31
   
581
 
General and administrative expenses
   
-
   
-
   
1,224
   
1,224
 
Accretion expense - accrued site closure costs
   
237
   
-
   
-
   
237
 
Exploration and business development and other
   
-
   
-
   
358
   
358
 
     
7,945
   
-
   
1,613
   
9,558
 
Operating loss
   
(1,807
)
 
-
   
(1,613
)
 
(3,420
)
Interest income
   
51
   
-
   
15
   
66
 
Interest expense
   
(9
)
 
-
   
(591
)
 
(600
)
Foreign exchange loss and other
   
-
   
-
   
1
   
1
 
Loss from continuing operations
 
$
(1,765
)
$
-
 
$
(2,188
)
$
(3,953
)
Investing activities
                         
Property, plant and equipment expenditures
 
$
-
 
$
3,445
 
$
-
 
$
3,445
 
 
12.
DIFFERENCES BETWEEN CANADIAN AND U.S. GAAP
 
The Company prepares its consolidated financial statements in accordance with Canadian GAAP. The following adjustments and/or additional disclosures would be required in order to present the financial statements in accordance with U.S. GAAP and with practices prescribed by the U.S. Securities and Exchange Commission for the three months ended March 31, 2007 and 2006.
 
Material variances between financial statement items under Canadian GAAP and the amounts determined under U.S. GAAP are as follows:
 
   
March 31, 2007
 
December 31,
2006
 
Total assets in accordance with Canadian GAAP
 
$
59,076
 
$
51,804
 
Impairment of property, plant and equipment, and change in depreciation and amortization(a)(ii)
   
(1,994
)
 
(2,038
)
Deferred stripping costs (a)(iii)
   
(2,149
)
 
-
 
Black Fox development costs(b)
   
(23,032
)
 
(22,354
)
Convertible debentures(c)
   
1,099
   
103
 
Equity accounting for investment in Montana Tunnels joint venture(a)(i)
   
(10,743
)
 
(8,473
)
Total assets in accordance with U.S. GAAP
 
$
22,257
 
$
19,042
 
 
Total liabilities in accordance with Canadian GAAP
 
$
29,880
 
$
23,561
 
Convertible debentures (c)
   
3,223
   
764
 
Equity accounting for investment in Montana Tunnels joint venture(a)(i)
   
(10,743
)
 
(8,473
)
Deferred gain(a)(i)
   
(3,679
)
 
(3,750
)
Total liabilities in accordance with U.S. GAAP
 
$
18,681
 
$
12,102
 

18

 
APOLLO GOLD CORPORATION
Notes to the Condensed Consolidated Financial Statements
Three month period ended March 31, 2007
(Stated in U.S. dollars; tabular amounts in thousands)
(Unaudited)

12.
DIFFERENCES BETWEEN CANADIAN AND U.S. GAAP (continued)
 
     
March 31, 2007
   
December 31,
2006
 
Total shareholders’ equity in accordance with Canadian GAAP
 
$
29,196
 
$
28,243
 
Impairment of property, plant and equipment, and change in depreciation and amortization(a)(ii)
   
(1,994
)
 
(2,038
)
Deferred stripping costs (a)(iii)
   
(2,149
)
 
-
 
Black Fox development costs(b)
   
(23,032
)
 
(22,354
)
Convertible debentures(c)
   
(2,124
)
 
(661
)
Deferred gain(a)(i)
   
3,679
   
3,750
 
Total shareholders’ equity in accordance with U.S. GAAP
 
$
3,576
 
$
6,940
 
 
Total shareholders’ equity and liabilities in accordance with U.S. GAAP
 
$
22,257
 
$
19,042
 

Under U.S. GAAP, the components of shareholders’ equity would be as follows:

   
March 31, 2007
 
December 31,
2006
 
Share capital
 
$
159,426
 
$
158,790
 
Note warrants
   
3,334
   
1,062
 
Contributed surplus
   
38,512
   
31,964
 
Deficit
   
(197,696
)
 
(184,876
)
Total shareholders’ equity in accordance with U.S. GAAP
 
$
3,576
 
$
6,940
 

Under U.S. GAAP, the net loss and net loss per share would be adjusted as follows:
 
   
2007
 
2006
 
Loss from continuing operations for the period ended March 31, based on Canadian GAAP
 
$
(4,647
)
$
(3,953
)
Change in depreciation of property, plant and equipment (a)(ii)
   
44
   
131
 
Capitalized deferred stripping costs and amortization (a)(iii)
   
(2,149
)
 
-
 
Black Fox development costs (b)
   
(678
)
 
(862
)
Convertible debentures (c)
   
(5,053
)
 
142
 
Amortization of deferred gain (a)(i)
   
(71
)
 
-
 
Loss from continuing operations for the period based on U.S. GAAP
   
(12,555
)
 
(4,542
)
Loss from discontinued operations for the period based on Canadian GAAP
   
-
   
(250
)
Loss from discontinued operations for the period based on U.S. GAAP
   
-
   
(250
)
Net loss and comprehensive loss for the year based on U.S. GAAP
 
$
(12,555
)
$
(4,792
)
Basic and diluted loss per share in accordance with U.S. GAAP:
             
Continuing operations
 
$
(0.09
)
$
(0.04
)
Discontinued operations
   
-
   
-
 
Net loss per share - U.S. GAAP basic and diluted
 
$
(0.09
)
$
(0.04
)

19

 
APOLLO GOLD CORPORATION
Notes to the Condensed Consolidated Financial Statements
Three month period ended March 31, 2007
(Stated in U.S. dollars; tabular amounts in thousands)
(Unaudited)

12.
DIFFERENCES BETWEEN CANADIAN AND U.S. GAAP (continued)

(a)
Montana Tunnels
 
(i) Under Canadian GAAP, the Company has accounted for its joint venture interest in the Montana Tunnels mine ("MTM") using the proportionate consolidation method whereby the Company's proportionate share of each line item of MTM's assets, liabilities, revenues and expenses is included in the corresponding line item of the Company's financial statements.  Under U.S. GAAP, the Company would account for MTM using the equity method whereby the Company's share of the investees' earnings and losses is included in operations and its investments therein are adjusted by a similar amount.  The carrying value of MTM was lower under U.S. GAAP than under Canadian GAAP following an impairment of the property, plant and equipment in prior years and as a result the gain on transfer of the Company's interest in MTM into the joint venture under U.S. GAAP is higher.  Under U.S. GAAP, the gain on transfer of the Company's interest in MTM into the joint venture was included in the net loss for the year ended December 31, 2006; whereas under Canadian GAAP it was deferred and is recognized as an adjustment to net loss using the units of production method over the expected life of the operation based on the estimated recoverable gold equivalent ounces.
 
(ii) Impairment of property, plant and equipment
 
Under Canadian GAAP, write-downs for impairment of property, plant and equipment are determined using current proven and probable reserves and mineral resources expected to be converted into mineral reserves. In 2002, under U.S. GAAP, write-downs were determined using current proven and probable reserves. Accordingly, for U.S. GAAP purposes, an impairment of property, plant and equipment and an adjustment to the related depreciation has been recorded.
 
(iii) Deferred stripping costs
 
Under Canadian GAAP, stripping costs that represent a betterment to the mineral property are capitalized and amortized using the units-of-production method over the expected life of the operation based on the estimated recoverable gold equivalent ounces. Under U.S. GAAP, these expenditures are expensed as incurred.
 
(b)
Black Fox Project
 
Under Canadian GAAP, mining development costs at the Black Fox Project have been capitalized. Under U.S. GAAP, these expenditures are expensed as incurred. Accordingly, for U.S. GAAP purposes, a reduction in property, plant and equipment of $23.0 million has been recorded as at March 31, 2007.
 
(c)
Convertible debentures
 
(i) Under Canadian GAAP, the Series 2007-A Convertible Debentures (the “2007 Debentures”) were recorded as a compound financial instrument including detachable note warrants. On issuance in February 2007, under U.S. GAAP, the detachable note warrants are similarly treated as an equity instrument with the remainder of the 2007 Debentures treated as a liability. Further, under U.S. GAAP, the beneficial conversion feature determined using the effective conversion price based on the proceeds allocated to the 2007 Debentures in accordance with EITF 00-27, “Application of Issue No. 98-5 to Certain Convertible Instruments” (“EITF 00-27”), is allocated to contributed surplus. This discount on the 2007 Debentures, in the amount of $5.9 million, is recognized as additional interest expense immediately as the debt is convertible at the date of issuance. Canadian GAAP does not require the recognition of any beneficial conversion feature.
 
20

 
APOLLO GOLD CORPORATION
Notes to the Condensed Consolidated Financial Statements
Three month period ended March 31, 2007
(Stated in U.S. dollars; tabular amounts in thousands)
(Unaudited)

12.
DIFFERENCES BETWEEN CANADIAN AND U.S. GAAP (continued)
 
(ii) Under Canadian GAAP, the 12% Series 2004-B Convertible Debentures (the “2004 Debentures”) were recorded as a compound financial instrument including detachable note warrants. On issuance in November 2004, under U.S. GAAP, the detachable note warrant is similarly treated as an equity instrument with the remainder of the 2004 Debentures treated as a liability. Further, under U.S. GAAP, the beneficial conversion feature determined using the effective conversion price based on the proceeds allocated to the 2004 Debentures in accordance with EITF 00-27, is allocated to contributed surplus. This discount on the 2004 Debentures, in the amount of $0.1 million, is recognized as additional interest expense immediately as the debt is convertible at the date of issuance. Canadian GAAP does not require the recognition of any beneficial conversion feature.
 
(iii) As of January 1, 2007, under Canadian GAAP, the Company expenses debt financing costs when they are incurred (Note 3(d)). Prior to January 1, 2007, under Canadian GAAP, debt financing costs were capitalized and amortized. Under U.S. GAAP, debt financing costs are capitalized and amortized.
 
(d)
Statements of cash flows
 
(i) Under Canadian GAAP, mining development costs at the Black Fox Project are included in cash flows from investing activities in the consolidated statements of cash flows.  Under U.S. GAAP, these expenditures are included in cash flows from operating activities.  Accordingly, under U.S. GAAP, the consolidated statements of cash flows for the three months ended March 31, 2007 would reflect a decrease in cash used in investing activities of $0.7 million and for the three months ended March 31, 2006 an increase of $0.9 million in cash provided by investing activities, and a corresponding increase in cash used in operating activities for each period.
 
(ii) Under Canadian GAAP, deferred stripping costs are included in cash flows from investing activities in the consolidated statements of cash flows.  Under U.S. GAAP, these stripping costs are included in cash flows from operating activities. Accordingly, under U.S. GAAP, the consolidated statements of cash flows for the three months ended March 31, 2007 would reflect a decrease in cash used in investing activities of $2.3 million and a corresponding increase in cash used in operating activities.
 
(iii) Under Canadian GAAP, debt financing costs are included in cash flows from operating activities. Under U.S. GAAP, these costs are capitalized and are included in cash flows from financing activities. Accordingly, under U.S. GAAP, the consolidated statement of cash flows for the three months ended March 31, 2007 would reflect a decrease in cash flows provided by financing activities of  $0.3 million, and a corresponding decrease in cash used in operating activities.
 
(e)
Income taxes
 
The Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, on January 1, 2007. There was no effect on the Company’s cumulative retained earnings as of January 1, 2007, as a result of the adoption of Interpretation 48. As of the date of adoption, there were no unrecognized U.S. tax benefits. Under current conditions and expectations, management does not foresee any significant changes in unrecognized tax benefits that would have a material impact on the Company’s financial statements. The Company and/or one or more of its subsidiaries file income tax returns in the United States and Canada. The Company is generally not subject to U.S. and Canada  income tax examinations that could create a tax liability for tax years before 2001. The Company recognizes interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expenses.

21


ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
All Dollar amounts are expressed in United States Dollars
 
The following discussion and analysis should be read in conjunction with the accompanying consolidated financial statements and related notes. The financial statements have been prepared in accordance with generally accepted accounting principles in Canada (Canadian GAAP). For a reconciliation to GAAP in the United States (U.S. GAAP), see Note 12 to the attached consolidated financial statements.
 
In this Form 10-Q, the terms “cash operating cost,” “total cash cost” and “total production cost” are non-GAAP financial measures and are used on a per ounce of gold sold 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 production. 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.
 
Certain of the comparative figures have been reclassified to conform with the current period presentation.
 
BACKGROUND AND RECENT DEVELOPMENTS
 
We are principally engaged in gold mining including extraction, processing, refining and the production of other co-product metals, as well as related activities including exploration and development of mineral deposits principally in North America. We are the operator of the Montana Tunnels mine (the “Mine”), which is a 50% joint venture with Elkhorn Tunnels, LLC (“Elkhorn”). The Mine is an open pit mine and mill located near Helena, Montana, which produces gold doré and lead-gold and zinc-gold concentrates. On July 28, 2006, we entered into a joint venture agreement with Elkhorn in respect of the Mine, pursuant to which Elkhorn was granted a 50% interest in the Mine in exchange for financial contributions.
 
We own a development property, the Black Fox Project, which is located near the township of Matheson in the Province of Ontario, Canada. We also own Mexican subsidiaries which own concessions at the Huizopa exploration property located in the Sierra Madres in Chihuahua, Mexico.
 
On January 17, 2007, the Company adopted a Shareholder Rights Plan (the “Rights Plan”). The Rights Plan was been adopted to ensure the fair treatment of shareholders in connection with any take-over bid for common shares of Apollo. The Rights Plan seeks to provide shareholders with adequate time to properly assess a take-over bid without undue pressure. It also is intended to provide the Board with more time to fully consider an unsolicited take-over bid and, if applicable, to explore other alternatives to maximize shareholder value. The Rights Plan is not intended to prevent take-over bids that treat shareholders fairly.

The Rights Plan, adopted and effective in January 2007, will be presented for ratification by the shareholders at the Apollo Annual Meeting expected to be held in May 2007. If approved by the shareholders, the Rights Plan would expire in January 2012.
 
On February 23, 2007, the Company completed a private placement of $8.6 million aggregate principal amount of convertible debentures with each $1,000 principal amount of the convertible debentures including 2,000 common share purchase warrants. The convertible debentures are convertible at the holder’s option at $0.50 per common share at any time until they mature. The Company has the option to force conversion of the convertible debentures under certain circumstances. The convertible debentures mature on February 23, 2009 and bear interest at a rate of 12% per annum during the first year and 18% per annum during the second year, payable annually beginning on February 23, 2008. The accompanying warrants, each of which is exercisable for one common share of the Company, have an exercise price of $0.50 per share and a term of two years.
 
22

 
Montana Tunnels

At the Montana Tunnels mine the open pit remediation program, which began in September 2006, was completed in late January 2007 when the new ramp system reached the bottom of the pit. Upon reaching the bottom of the pit, an additional amount of material was removed from the pit bottom to ensure good access to the ore body for the commencement of mill production.
 
Mill personnel were hired during late 2006 and early 2007 in preparation for the commencement of production which occurred on March 1, 2007. At the time production commenced, a stockpile of 380,000 tons of ore had been built up in front of the mill which would allow mill production, and therefore metal production, to continue if mining activity were temporarily interrupted.

The remediation program, which lasted from September 2006 to the end of February 2007, required the removal of 8.4 million tons of waste material, at a total cost of $15.5 million. These costs, plus working capital of $2.5 million, were funded $14.25 million by Elkhorn, our joint venture partner, $1.25 million by us and $2.5 million from a working capital loan to the joint venture from Teck Cominco Metals Ltd., our smelter contractor.

During the first quarter 2007, approximately 3,900,000 tons were mined, of which 685,000 tons were ore. The mill processed 382,000 tons of ore at an average throughput of 12,300 tons per day for the month and payable production was 2,300 ounces of gold, 125,000 ounces of silver, 650,000 lbs of lead and 1,850,000 lbs of zinc. Apollo’s share of this production was 50%.

In 2007, we plan to run the mill at a daily production rate of 14,600 tons per day. During March, the daily throughput of ore rose from 11,000 tons per day during the first week up to the planned level of 14,600 during the last week of the month. We anticipate that during the second quarter of 2007 we will achieve the average mill throughput rate at slightly improved grades of ore.

Total cash costs for March 2007 on a by-product basis were minus $270 per ounce of gold and on a co-product basis they were $418 per ounce of gold, $8.41 per ounce silver, $0.55 per lb of lead and $0.95 per lb of zinc.

Black Fox

During the first quarter 2007, we entered into a memorandum of understanding with the Wahgoshig First Nation with regard to our Black Fox Project which establishes the foundation for a positive and mutually beneficial relationship covering the development and production at the property. Wahgoshig First Nation asserts treaty and aboriginal rights to the land on which our Black Fox Project is located.

In addition, during the first quarter 2007, our third party consultant, SRK Consulting, Inc., continued working on a new resource statement which we expect will contain an underground reserve. We anticipate that it will be completed during the second quarter of 2007 and be followed up six months later by a feasibility study.

Huizopa Project
 
During the first quarter 2007, the Company made payments ahead of schedule in settlement of certain claims and the outstanding land payments on its Huizopa properties. These payments resulted in Apollo’s 100% Mexican owned subsidiaries owning 100% of the 128 square kilometers mining concessions known as Huizopa.
 
23

 
Production & Metals Price Averages
 
The table below summarizes our share of production of gold, silver and other metals, as well as average metal prices and other key statistics, for each period indicated:
 
   
Three months ended
March 31,
2007 (1)(2)
 
Three months ended
March  31,
2006 (3)
 
Production:
         
Gold (ounces)
   
1,161
   
3,213
 
Silver (ounces)
   
24,189
   
61,109
 
Lead (pounds)
   
503,977
   
870,325
 
Zinc (pounds)
   
925,015
   
2,270,967
 
Total revenue ($millions)
 
$
2.9
 
$
6.1
 
Total cash and production costs on a by-product basis:
             
Total cash costs per ounce of gold
 
$
(270
)
$
932
 
Total production costs per ounce of gold
 
$
(174
)
$
1,036
 
Total cash costs on a co-product basis:
             
Total cash costs per ounce of gold
 
$
418
 
$
730
 
Total cash costs per ounce of silver
 
$
8.41
 
$
13.59
 
Total cash costs per pound of lead
 
$
0.55
 
$
0.72
 
Total cash costs per pound of zinc
 
$
0.95
 
$
1.46
 
Average metal prices:
             
Gold - London bullion mkt. ($/ounce)
 
$
656
 
$
554
 
Silver - London bullion mkt. ($/ounce)
 
$
13.18
 
$
10.38
 
Lead - LME ($/pound)
 
$
0.81
 
$
0.56
 
Zinc - LME ($/pound)
 
$
1.57
 
$
1.02
 

RECONCILIATION OF CASH OPERATING AND TOTAL PRODUCTION COSTS PER OUNCE
 
($ in thousands)
 
One month
ended
March 31,
2007 (1)(2)
 
Three months ended
March 31,
2006 (3)
 
Gold ounces sold
   
1,161
   
3,213
 
Direct operating costs
 
$
1,816
 
$
7,107
 
Less: