The accompanying notes are an integral part of the unaudited consolidated financial statements.
The accompanying notes are an integral part of these unaudited consolidated financial statements.
The accompanying notes are an integral part of the unaudited consolidated financial statements.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2019
(Unaudited)
NOTE 1 – ORGANIZATION AND BUSINESS DESCRIPTION
Santa Fe Gold Corporation (the “Company”, “our” or “we”) is a U.S. mining company incorporated in Delaware in August 1991. Our general business strategy is to acquire, explore, develop and mine mineral properties. The Company elected on August 26, 2015, to file for Chapter 11 Bankruptcy protection, Case # 15-11761 (MFW) and that case was dismissed on June 15, 2016. The Summit Silver-Gold Project, the Lordsburg Copper Project, Black Canyon Mica Project, Planet MIO Project, all claims and other assets were lost in the process. After the Company emerged from the bankruptcy with a management team of two with no assets, we developed a business plan to raise equity funds to acquire new mining claims, a potential processing plant or arrangements with a processing plant in an acceptable geographic location to potential new mining claims.
In August 2017, the Company acquired all the capital stock of Bullard’s Peak Corporation and the related patented and unpatented claims in the Black Hawk district of New Mexico from Black Hawk Consolidated Mines Company for a purchase price of $3,115,365. The mine property is known as the Alhambra mine site. The transaction was finalized and closed in April 2019. The mining property acquired is an asset of Mineral Acquisitions, LLC, one of the Company’s five wholly owned subsidiaries.
In January 2019 the Company has acquired right of use on two properties in western New Mexico, consisting of eight (8) patented claims and two unpatented claims, all located in the Steeple Rock Mining District, Grant County, New Mexico and a related water rights lease agreement. The two properties are known as the Billali Mine and the Jim Crow Imperial Mine. The Company has begun improvements to the Jim Crow Imperial mine to start mining operations during the third calendar quarter of 2020.
We are considered an “exploration stage” company under the U.S. Securities and Exchange Commission (“SEC”) Industry Guide 7.
Interim Financial Statements
The accompanying unaudited financial statements and related notes present the Company’s consolidated financial position as of September 30, 2019 and June 30, 2019 (Audited), the consolidated results of operations for the three months ended September 30, 2019 and 2018, the consolidated statements of shareholders’ deficit for the three months ended September 30, 2019 and 2018 and, consolidated cash flows for the three months ended September 30, 2019 and 2018. The unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions of Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended September 30, 2019, are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2020. The accounting policies followed by the Company are set forth in Note 2 to the Company’s financial statements included in Form 10-K for the fiscal year ended June 30, 2019. These interim financial statements and notes thereto should be read in conjunction with the consolidated financial statements presented in the Company’s 2019 Annual Report on Form 10-K filed on July 15, 2020.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Going Concern
The financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities and commitments in the normal course of business. Should the Company be unable to continue as a going concern, it may be unable to realize the carrying value of its assets and to meet its liabilities as they become due.
The Company has recorded net loss of $735,985 for the three months ended September 30, 2019, and has a total accumulated deficit of $94,214,655 and a working capital deficit at September 30, 2019 of $4,384,295. The Company used in operating activities approximately $469,000 during the current period of measurement. The Company currently has no source of generating revenue.
10
To continue as a going concern, the Company is dependent on continued capital financing for project development, repayment of various debt facilities and payment of current operating expenses until the Company has put into production an acceptable source to generate mineralized ore to generate a revenue stream. Currently we have no commitment from any party to provide additional working capital and there is no assurance that any funding will be available as required, or if available, that its terms will be favorable or acceptable to the Company.
At September 30, 2019, the Company was in default on delinquent payments of approximately: $3.04 million on accounts payable, $398,000 on a note payable and $643,000 on other accrued liabilities.
The unaudited consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset amounts or the classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries AZCO Mica, Inc., a Delaware corporation, The Lordsburg Mining Company, a New Mexico corporation, and Santa Fe Gold Barbados Corporation, a Barbados corporation, Santa Fe Acquisitions Company, a New Mexico Limited Liability Company, Mineral Acquisitions, a New Mexico Limited Liability Company and Bullard’s Peak Corporation, a New Mexico Corporation. All significant inter-company accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates under different assumptions or conditions.
Significant estimates are used when accounting for the Company's carrying value of mineral properties, fixed assets, depreciation, amortization, accruals, derivative instrument liabilities, valuation of warrants, taxes and contingencies, and stock-based compensation.
Fair Value Measurements
The carrying values of cash and cash equivalents, accounts payable and accrued liabilities approximated their related fair values as of September 30, 2019, and June 30, 2019, due to the relatively short-term nature of these instruments.
Cash and Cash Equivalents
The Company considers all liquid investments purchased with an initial maturity of three months or less to be cash equivalents. The Company maintains its cash in bank deposit accounts which, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts. The Company believes it is not exposed to any significant credit risk on cash balances.
Property and Equipment
Property and equipment are carried at cost. Maintenance and repairs that do not improve or extend the life of the respective assets are expensed as incurred. Expenditures for new property or equipment and expenditures that extend the useful lives of existing property and equipment are capitalized and recorded at cost. Upon retirement, sale or other disposition, the cost and accumulated amortization are eliminated and the gain or loss is included in operations. Depreciation is taken over the estimated useful lives of the assets using the straight-line method. The estimated useful lives of the equipment are shown below. Land is not depreciated.
|
Estimated Useful Life
|
Mine equipment
|
7 Years
|
General equipment
|
5 – 7 Years
|
Automotive
|
4.5 - 5 Years
|
Small tools
|
1.25 Years
|
Derivative Financial Instruments
11
The Financial Accounting Standards Board (“FASB”) provides guidance that requires derivative instruments to be recognized as either assets or liabilities in the balance sheet at fair value. The accounting for changes in the fair value of derivative instruments depends on their intended use and resulting hedge designations. For derivative instruments designated as hedges, the changes in fair value are recorded in the balance sheets as a component of accumulated other comprehensive income (loss). Changes in the fair value of derivative instruments not designated as hedges are recorded in the consolidated statements of operations, generally as a component of other income (expense).
Net Income (Loss) Per Share
Basic earnings (loss) per share are calculated by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted earnings per share are calculated by dividing net income (loss) by the weighted average number of common shares and dilutive common stock equivalents outstanding. During the periods when they are anti-dilutive, common stock equivalents, if any, are not considered in the computation. For the three months ended September 30, 2019, the impact of outstanding stock equivalents has not been included as they would be anti-dilutive.
A reconciliation of the weighted average shares outstanding used in the basic and diluted earnings per share (“EPS”) computation is as follows:
|
|
Net Income
(Numerator)
|
|
|
Weighted
Average
Common Shares
(Denominator)
|
|
|
Per Share
Amount
|
|
For the three months ended September 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
Income available to common stockholders
|
|
$
|
146,292
|
|
|
|
300,000,000
|
|
|
$
|
0.00
|
|
Diluted EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive shares from options and warrants
|
|
|
—
|
|
|
|
100,000
|
|
|
|
|
|
Income available to common stockholders plus assumed conversions
|
|
$
|
146,292
|
|
|
|
300,100,000
|
|
|
$
|
0.00
|
|
The number of stock options excluded from the calculation of diluted earnings per share for the three months ended September 30, 2018 was 100,000 and excluded warrants was 4,320,000, because their inclusion would have been anti-dilutive.
Stock-Based Compensation
Share-based compensation is accounted for based on the requirements of ASC 718, “Compensation—Stock Compensation’ (“ASC 718”), which requires recognition in the financial statements of the cost of employee and director services received in exchange for an award of equity instruments over the period the employee or director is required to perform the services in exchange for the award (presumptively, the vesting period). ASC 718 also requires measurement of the cost of employee and director services received in exchange for an award based on the grant-date fair value of the award. Pursuant to ASC 505, “Equity—Equity Based Payments to Non-Employees” (“ASC 505-50”), for share-based payments to consultants and other third parties, compensation expense is determined at the measurement date, which is the grant date. Until the measurement date is reached, the total amount of compensation expense remains uncertain.
The Company accounts for share-based compensation on the grant date fair value of the award. The Company estimates the fair value of the award using the Black-Scholes option pricing model for valuation of the share-based payments. The Company believes this model provides the best estimate of fair value due to its ability to incorporate inputs that change over time, such as volatility and interest rates, and to allow for actual exercise behavior of option holders. The compensation cost is recognized over the expected vesting period. Share based payments to nonemployees are valued at the earlier or a commitment date or completion of services. The Company had stock-based compensation of $15,279 and $17,800 in the three months ending September 30, 2019 and 2018, respectively.
Accounting Standards to be Adopted in Future Periods
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842),” which requires lessees to recognize assets and liabilities on the balance sheet for the rights and obligations created by all leases with a term of more than one year. Accounting by lessors will remain similar to existing U.S. GAAP. Subsequent accounting standards updates have been issued, which amend and/or clarify the application of ASU 2016-02. The guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. The Company adopted Topic 842 as of July 1, 2019 and at this time the new standard will not have an impact on our consolidated financial statements until significant a lease agreement is entered.
12
In June 2018, the FASB issued ASU 2018-07, “Compensation — Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting”, which expands the scope of Topic 718 to include all share-based payment transactions for acquiring goods and services from nonemployees. ASU 2018-07 specifies that Topic 718 applies to all share-based payment transactions in which the grantor acquires goods and services to be used or consumed in its own operations by issuing share-based payment awards. ASU 2018-07 also clarifies that Topic 718 does not apply to share-based payments used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under ASC 606. ASU 2018-07 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted, but no earlier than adoption of ASC 606. The Company adopted ASU 2018-07, effective July 1, 2019, and determined the adoption of this standard did not have a material impact on the Company’s consolidated financial statements and related disclosures.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement, which removes, modifies and adds various disclosure requirements related to fair value disclosures. Disclosures related to transfers between fair value hierarchy levels will be removed and further detail around changes in unrealized gains and losses for the period and unobservable inputs used in determining level 3 fair value measurements will be added, among other changes. ASU 2018-13 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company is currently evaluating this guidance and the impact on its Consolidated Financial Statements.
Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the American Institute of Certified Public Accountants, and the SEC did not, or are not believed by management to, have a material impact on the Company's present or future financial position, results of operations or cash flows.
Mine Development
Mine development costs include engineering and metallurgical studies, drilling and other related costs to delineate an ore body, and the building of access ways, shafts, lateral access, drifts, ramps and other infrastructure in an underground mine. Costs incurred before mineralization is classified as proven and probable reserves are expensed and classified as exploration expense. Capitalization of mine development project costs, that meet the definition of an asset, begins once mineralization is classified as proven and probable reserves.
Drilling and related costs are capitalized for an ore body where proven and probable reserves exist and the activities are directed at obtaining additional information on the ore body or converting non-reserve mineralization to proven and probable reserves. All other drilling and related costs are expensed as incurred. Drilling costs incurred during the production phase for operational ore control are allocated to inventory costs and then included as a component of costs applicable to sales.
As of September 30, 2019, the Company has not established proven or probable reserves or established the commercial feasibility of any of our exploration projects and all exploration costs are being expensed. The Company may never identify proven and probable reserves.
Mineral Rights
Costs of exploration, carrying and retaining unproven mineral lease properties are expensed as incurred. The Company expenses all mineral exploration costs as incurred as it is still in the exploration stage. If the Company identifies proven and probable reserves in its investigation of its properties and upon development of a plan for operating a mine, it would enter the development stage and capitalize future costs until production is established.
To date, the Company has not established the commercial feasibility of any exploration projects; therefore, all exploration costs are expensed as incurred. Mineral properties are capitalized at their fair value at the acquisition date, either as an individual asset purchase or as part of a business combination. ASC 930-805, “Extractive Activities-Mining: Business Combinations.” ASC 930-805 states that mineral rights consist of the legal right to explore, extract, and retain at least a portion of the benefits from mineral deposits. Mining assets include mineral rights.
Acquired mineral rights are considered tangible assets under ASC 930-805. As a result, the direct costs to acquire mineral rights are initially capitalized as tangible assets. Mineral rights include costs associated with acquiring patented and unpatented mining claims.
When a property reaches the production stage, the related capitalized costs are amortized on a units-of-production basis over the proven and probable reserves following the commencement of production. The Company assesses the carrying costs of the capitalized mineral properties for impairment under ASC 360-10, “Impairment of long-lived assets”, and evaluates the carrying value under ASC 930-360, “Extractive Activities - Mining”, annually. An impairment is recognized when the sum of the expected
13
undiscounted future cash flows is less than the carrying amount of the mineral properties. Impairment losses, if any, are measured as the excess of the carrying amount of the mineral properties over its estimated fair value.
When it is determined that a mineral property can be economically developed as a result of establishing reserves, subsequent mine development is capitalized and are amortized using the units of production method over the estimated life of the ore body based on estimated recoverable tonnage in proven and probable reserves. We may never identify proven and probable reserves.
At the time the Company has a revenue stream from a project, the Company will amortize any capitalized balance each quarter. Companies that have reserves under SEC Industry Guide 7 typically capitalize these costs, and subsequently depreciate or amortize them on a units-of-production basis as reserves are mined. Unlike these other companies, our properties have no reserves and we will depreciate or amortize any capitalized costs based on the most appropriate amortization method, which includes straight-line or units-of-production method over the estimated remaining life of the mine, as determined by our geologist. As we have no reliable information to compute a units of production methodology, we will amortize our capitalized costs on a straight-line basis over the estimated remaining life of the mine as determined by our geologist. Because of these and other differences, our financial statements may not be comparable to the financial statements of mining companies that have proven and probable reserves on their properties.
Reclamation Costs
Reclamation obligations are recognized when incurred and recorded as liabilities at fair value. The liability is accreted over time through periodic charges to accretion expense. The asset retirement cost is capitalized as part of the asset’s carrying value and depreciated over the life of the related asset. Reclamation costs are periodically adjusted to reflect changes in the estimated present value resulting from the passage of time and revisions to the estimates of either the timing or amount of the reclamation costs. The reclamation obligation is based on when spending for an existing disturbance will occur. The Company reviews, on an annual basis, unless otherwise deemed necessary, the reclamation obligation at each mine site in accordance with the provisions of ASC 440, “Asset Retirement and Environmental Obligations”, which establishes the standards for the initial measurement and subsequent accounting for obligations associated with the sale, abandonment, or other disposal of long-lived tangible assets arising from the acquisition, construction or development and for normal operations of such assets. No reclamation costs were required for the three months ended September 30, 2019.
NOTE 3 – PROPERTY AND EQUIPMENT
Property and equipment consist of the following at September 30, 2019 and June 30, 2019:
|
|
|
September 30,
|
|
|
June 30,
|
|
|
|
|
2019
|
|
|
2019
|
|
|
Vehicles
|
$
|
20,725
|
|
$
|
20,725
|
|
|
Small tools
|
|
4,882
|
|
|
—
|
|
|
Mining equipment
|
|
178,871
|
|
|
4,818
|
|
|
Land, non-mineral
|
|
35,000
|
|
|
—
|
|
|
|
|
239,478
|
|
|
25,543
|
|
|
Less Accumulated depreciation
|
|
(6,670
|
)
|
|
—
|
|
|
|
$
|
232,808
|
|
$
|
25,543
|
|
During the three-month periods ended September 30, 2019 and 2018 the Company recognized depreciation expense of $6,670 and $0, respectively.
The Company during the current quarter, began maintenance and repair activities at the Jim Crow mine site along with geological work on the site and related mine ore material. The Company during this quarter purchased the required materials and equipment to perform the required activities under our mine manager. During the quarter our major mining equipment purchases aggregated $174,053. The significant acquisitions were mainly a crusher, generators, wheel loader, conveyors and freight on related heavy equipment purchases. We also purchased a site for a storage yard for our mine inventory for $35,000 and is accessible to our Billali and Jim Crow mines. The property consist of 1.64 acres, has water and electricity to the property, a night security light and security fencing with a truck access gate.
14
NOTE 4 –MINERAL PROPERTIES
The Company has capitalized acquisition costs on mineral properties as follows:
|
|
|
|
September 30,
|
|
|
June 30,
|
|
|
|
|
|
2019
|
|
|
2019
|
|
|
|
Alhambra - Blackhawk project
|
$
|
3,115,365
|
|
$
|
3,115,365
|
|
|
|
Billali – Jim Crow Imperial mineral rights project
|
|
400,000
|
|
|
200,000
|
|
|
|
|
|
3,515,365
|
|
|
3,315,365
|
|
|
|
Less Accumulated amortization
|
|
—
|
|
|
—
|
|
|
|
|
$
|
3,515,365
|
|
$
|
3,315,365
|
|
Exploration Status
We have not established that the Alhambra - Blackhawk project or Billali Mine - Jim Crow mine rights projects contain proven or probably reserves, as defined under Industry Guide 7. Minimal exploration activities have commenced to date and minimal exploration costs have been incurred and expensed. To date, the Company has not (i) commenced or adopted plans to conduct any exploration, (ii) prepared drilling plans, proposals, timetables or budgets for exploration work, or (iii) identified engineers and other personnel that will conduct or assist in any exploration work. The Company will need to raise funds to conduct exploration work and it currently lacks a firm financing commitment for any exploration activities.
The Company commenced development of the Jim Crow mine in late 2019. Work to date has consisted of beginning the upgrading of the surface facilities, rehabilitating the shaft, expanding the hoisting capability and underground development on three levels. A crushing plant was purchased and installed at Duncan, Arizona, in late 2019.
Acquired mineral rights are considered tangible assets under ASC 930-805. ASC 930-805 requires that mineral rights be recognized at fair value as of the acquisition date. Mining assets include mineral rights. The payments made under the Billali Mine - Jim Crow Mine Agreement are capitalized by the Company and when a revenue stream is attained the capitalized balance will amortized.
NOTE 5 – ACCRUED LIABILITIES
Accrued liabilities consist of the following at September 30, 2019 and June 30, 2019:
|
|
September 30,
|
|
|
June 30,
|
|
|
|
2019
|
|
|
2019
|
|
Interest
|
$
|
207,442
|
|
$
|
194,318
|
|
Vacation
|
|
15,771
|
|
|
15,771
|
|
Payroll
|
|
119,794
|
|
|
124,623
|
|
Franchise taxes
|
|
8,697
|
|
|
8,697
|
|
Other
|
|
44,579
|
|
|
29,579
|
|
Audit
|
|
18,557
|
|
|
18,557
|
|
Property taxes
|
|
253,523
|
|
|
253,523
|
|
|
$
|
668,363
|
|
$
|
645,068
|
|
NOTE 6 – NOTES PAYABLE
Installment Note
On June 1, 2012, the Company entered into an installment sales contract for $593,657 to purchase certain equipment. The term of the agreement is for 48 months at an interest rate of 5.75%, with the equipment securing the loan. The balance owed on the note was $398,793 at September 30, 2019 and June 30, 2019. The Company has been unable to make its monthly payments since November 2013, and has been in default since that time. The equipment has been returned to the vendor for sale and remains unsold at September 30, 2019. Interest expense for the three months ended September 30, 2019 and 2018 was $5,733, respectively. Accrued interest on the note at September 30, 2019 and June 30, 2019 was $116,351 and $110,618, respectively.
15
Note Payable
An individual during the prior fiscal year loaned Company $239,750 of which the Company paid back $40,000 during that current fiscal year and $40,000 was paid back during the current quarter. The loan is at an annual interest rate of 6%, has no stated due date and is payable on demand by the lender. Accrued interest on the loan at September 30, 2019 and June 30, 2019 was $10,531 and $7,793, respectively. Interest expense on the loan for the three months ended September 30, 2019 and 2018 is $2,738 and $0, respectively.
The following summarizes notes payable:
|
|
September 30,
|
|
|
June 30,
|
|
|
2019
|
|
|
2019
|
Installment sales contract on equipment, interest at 5.75%, payable in 48 monthly installments of $13,874, including interest through July 2016.
|
$
|
398,793
|
|
$
|
398,793
|
Note payable
|
|
159,750
|
|
|
199,750
|
Notes payable - current
|
$
|
558,543
|
|
$
|
598,543
|
NOTE 7 – FAIR VALUE MEASUREMENTS
The Company follows paragraph 825-10-50-10 of the FASB Accounting Standards Codification for disclosures about fair value of its financial instruments and paragraph 820-10-35-37 of the FASB Accounting Standards Codification (“Paragraph 820-10-35-37”) to measure the fair value of its financial instruments. Paragraph 820-10-35-37 establishes a framework for measuring fair value in generally accepted accounting principles (“GAAP”), and expands disclosures about fair value measurements. To increase consistency and comparability in fair value measurements and related disclosures, Paragraph 820-10-35-37 establishes a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three (3) broad levels. The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The three (3) levels of fair value hierarchy defined by Paragraph 820-10-35-37 are described below:
Level 1
|
|
Quoted market prices available in active markets for identical assets or liabilities as of the reporting date.
|
Level 2
|
|
Pricing inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date.
|
Level 3
|
|
Pricing inputs that are generally observable inputs and not corroborated by market data.
|
Financial assets are considered Level 3 when their fair values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable. A slight change in unobservable inputs such as volatility can significantly have a significant impact on the fair value measurement of the derivatives liabilities.
The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. If the inputs used to measure the financial assets and liabilities fall within more than one level described above, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.
The carrying amounts of the Company’s financial assets and liabilities, such as cash and accounts payable approximate their fair values because of the short maturity of these instruments.
NOTE 8 – CONTINGENCIES AND COMMITMENTS
Billali and Jim Crow/Imperial Mines Project
The Company determined the Agreement on the Billali and Jim Crow/Imperial mines is effectively a lease and is cancellable at any time by the Company. Costs of mineral lease renewals, exploration, carrying and retaining unproven mineral lease properties are expensed as incurred. The Company expenses all mineral exploration costs as incurred as it is still in the exploration stage. If the Company identifies proven and probable reserves in its investigation of its properties and upon development of a plan for operating a mine, it would enter the development stage and capitalize future costs until production is established. The Company can cancel the Agreement at any time as detailed in the Agreement.
As of September 30, 2019, the Company has not established the commercial feasibility of any of our exploration projects; therefore, all exploration costs are being expensed. In the three months ended September 30, 2019, we paid and capitalized $200,000 under the Agreement. Acquired mineral rights are considered tangible assets under ASC 930-805. As a result, the direct
16
costs to acquire mineral rights are initially capitalized as tangible assets. Mineral rights include costs associated with acquiring patented and unpatented mining claims
Payments under the Amended Agreement No. 4 dated effective October 7, 2020, on the Billali and Jim Crow/Imperial project are as follows:
The Total Purchase Price of $10,000,000 will be paid as follows:
(i)Six Hundred Thousand Dollars ($600,000) has been paid by Buyer to Seller as of the date of this Amendment.
(ii)Commencing November 1, 2020 and continuing on the first day of each subsequent month thereafter, a monthly payment of $25,000 will be paid until (A) the mill processing plant to create concentrate is in operation and (B) we received our first payment for shipment of such concentrate from the mill (satisfaction of these two items is referred to as “Milestone”). Upon satisfaction of this Milestone and commencing on the first day of the following month and continuing the first day of each subsequent month thereafter, Buyer will pay to Seller the sum of Fifty Thousand Dollars ($50,000) until a total of One Million Six Hundred Thousand Dollars ($1,600,000 is paid.
(iii)Commencing 30 days after the last payment in (ii) above and continuing with 48 subsequent payments every 30 days thereafter, Buyer will pay to Seller the sum of One Hundred Seventy-Five Thousand Dollars ($175,000.00) per period.
(iv)Each payment made hereunder will be allocated Twenty-Five per cent (25%) to the Billali and Seventy-Five percent (75%) to the Jim Crow, Imperial.
Office and Real Property Leases
On August 1, 2015, the Company moved the office to a single room located in Albuquerque, NM, at the home of the CFO for a monthly rent of $500 until the Company is required to lease increased office space due to additional personnel requirements. Rent expense totaled $1,500 for the three months ended September 30, 2019 and 2018, respectively.
Title to Mineral Properties
Although the Company has taken steps, consistent with industry standards, to verify title to mineral properties in which it has an interest, these procedures do not guarantee the Company’s title. Such properties may be subject to prior agreements or transfers and title may be affected by undetected defects.
NOTE 9 - STOCKHOLDERS' DEFICIT
Common Stock Transactions
For the three months ended September 30, 2019:
|
(i)
|
Issued 181,466 shares of restricted common stock for consulting services at a value of $15,279 on the date of issuance;
|
|
(ii)
|
Issued an aggregate of 12,285,714 shares of restricted common stock to accredited investors for cash proceeds of $860,000.
|
Stock Warrants
During the three months ended September 30, 2019, the Company issued no new warrants and no warrants expired.
Stock Options
During three months ended September 30, 2019, the Company granted no new options and no options expired.
17
Stock option and warrant activity, for the three months ended September 30, 2019, are as follows:
|
Stock Options
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Stock Warrants
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|
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Weighted
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Weighted
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Average
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Exercise
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Shares
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Price
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Shares
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Price
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Outstanding at June 30, 2019
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30,100,000
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$0.05
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100,000
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$0.15
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Granted
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—
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—
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—
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—
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Canceled
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—
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—
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—
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—
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Expired
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—
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—
|
—
|
—
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Exercised
|
—
|
—
|
—
|
—
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Outstanding at September 30, 2019
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30,100,000
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$0.05
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100,000
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$0.15
|
Stock options and warrants outstanding and exercisable at September 30, 2019 are as follows:
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Outstanding and Exercisable Options
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Outstanding and Exercisable
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Warrants
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|
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Weighted
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|
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|
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Weighted
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Average
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Average
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Contractual
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Weighted
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Contractual
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|
Weighted
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Exercise
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Remaining
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|
Average
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Exercise
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Remaining
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Average
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|
Price
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Outstanding
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Exercisable
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|
Life
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Exercise
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Price
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Outstanding
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Exercisable
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|
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Life
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|
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Exercise
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Range
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Number
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Number
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(in Years)
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Price
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Range
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Number
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Number
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(in Years)
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Price
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$0.07
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100,000
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|
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100,000
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|
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.26
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$
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0.07
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$
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0.15
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|
|
100,000
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100,000
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3.21
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$
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0.15
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$0.05
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|
30,000,000
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|
|
30,000,000
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|
|
4.47
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|
$
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0.05
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|
|
—
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|
|
—
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|
|
—
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|
|
—
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|
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—
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30,100,000
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|
|
30,100,000
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|
|
|
|
|
|
|
|
|
|
|
100,000
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|
|
100,000
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|
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|
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|
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Outstanding Options
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|
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4.46
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|
$
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0.05
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|
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Outstanding Warrants
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|
|
|
|
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3.21
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|
$
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0.15
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|
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|
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Exercisable Options
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4.46
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$
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0.05
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Exercisable Warrants
|
|
|
|
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3.21
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$
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0.15
|
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As of September 30, 2019, the aggregate intrinsic value of all stock options and warrants vested was $992,300. The intrinsic value of each option share is the difference between the fair market value of the common stock and the exercise price of such option or warrant share to the extent it is "in-the-money". Aggregate intrinsic value represents the value that would have been received by the holders of in-the-money options had they exercised their options on the last trading day of the quarter and sold the underlying shares at the closing stock price on such day. The intrinsic value calculation is based on the $0.083 closing stock price of the common stock on September 30, 2019.
The total intrinsic value associated with options exercised during the three months ended September 30, 2019, was $0. Intrinsic value of exercised shares is the total value of such shares on the date of exercise less the cash received from the option or warrant holder to exercise the options.
NOTE 10 – RELATED PARTY TRANSACTIONS
On August 1, 2015, the Company leased a home office space from the Company’s CFO for $500 a month for the corporate administrative office in Albuquerque, NM until such time growth requires a larger corporate administrative office. Rent expense for the three months ended September 30, 2019 and 2018 was $1,500 respectively.
The board authorized on June 16, 2016, the hiring of Nataliia Mueller, wife of the Company’s CFO, with a current annual wage of $60,000 as an assistant to the CFO.
During the fiscal year ended June 30, 2019, the CFO for the Company loaned the Company $10,000 and deferred net salary aggregating $51,848 into a note at 6% per annum and during the quarter ended September 30, 2019, loaned an additional $10,000. Accrued interest on the note at September 30, 2019 and June 30, 2019, was $2,680 and $1,650, respectively. Interest expense on the note for the three months ended September 30, 2019 and 2018 was $1,029 and $0, respectively. The loan has no stated due date and is payable on demand by the lender. The combined loan and interest balance at September 30, 2019 and June 30, 2019 was $74,528 and $63,499, respectively.
Transactions involving related parties cannot be presumed to be carried out on an arm's-length basis, as the requisite conditions of competitive, free-market dealings may not exist. Representations about transactions with related parties, if made, shall not imply
18
that the related party transactions were consummated on terms equivalent to those that prevail in arm's-length transactions unless such representations can be substantiated.
NOTE 11 – LEGAL PROCEEDINGS
All legal proceedings were stayed with the filing of Chapter 11 bankruptcy.
Boart Long year Company v. Lordsburg Mining Company, Case No. D-2-2-CV-2015- 06048, County of Bernalillo, NM; Boart Longyear Company v. Lordsburg Mining Company, Case No. D-721-CV-2015- 00058, County of Sierra, NM; and Boart Longyear Company v. Lordsburg Mining Company, Case No. D-608-CV- 201500165, County of Quintero, NM. There are a series of collection cases by Boart Longyear Company, a company that obtained Utah judgments for equipment delivered to Lordsburg Mining Company in the aggregate amounts of $158,480 and has an interest rate of 5.25% per annum. Accrued interest on the obligation at September 30, 2019 and June 30, 2019 was $30,436 and $28,339 respectively. Interest on the obligation for the three months ended September 30, 2019 and 2018 was $2,097 respectively.
Wagner Equipment Co. v. Lordsburg Mining Company, Case No. D-2014-02372, County of Bernalillo, NM 28 is a collection case by Wagner equipment, who obtained judgment for equipment delivered to Lordsburg Mining Company in the amount of $115,789 and has a rate of interest of 8.75% per annum. During the three months ended September 30, 2019 and 2018, Company interest on the obligation was $2,554, respectively. Accrued interest on the obligation at September 30, 2019 and June 30, 2019 was $50,125 and $47,571, respectively.
The bankruptcy court set up a Trust fund that will be funded by the activities of the Summit mine for five (5) years after reopening of the mine and the trust funds will be distributed by an independent trustee to all credit holders on record. Currently all debts at the time of the bankruptcy are currently due and in default. None of the claims have been reopened since June 2016.
In November 2017, the Company entered into substantially identical agreements with Fortune Graphite, Inc. and Worldwide Graphite Producers, Ltd. to acquire a total of four placer claims for aggregate consideration of Can$400,000 and the issuance of 10,000,000 shares of Company common stock. The Company owes the sellers Can$140,000 and 10,000,000 shares of Company common stock. To date, the Company has paid Can$260,000. The Company owes the sellers Can$140,000 and 10,000,000 shares of Company common stock. Based upon our subsequent scrutiny and analysis of the transaction, the Company in February 2019 initiated an arbitration proceeding against the seller to void and rescind the purchase of these British Columbia properties, including requesting additional remedies. The Company cannot predict the outcome of this arbitration, and there can be no assurance that the Company will not lose its interest in these claims, or owe seller the remaining outstanding amounts. In connection with this arbitration, the Company’s legal position is to void the transaction and, due to the uncertainty of the outcome, has provided an impairment of the amount at June 30, 2019, in the amount of $210,116.
In November 2018, Santa Fe filed a complaint in Luna County District Court, State of New Mexico, requesting a $930,000 money judgment against Mr. and Mrs. Laws for misappropriation of Company funds, in addition to foreclosing on the mortgage Mr. and Ms. Laws granted to Santa Fe on real property to secure the promissory note located in Luna County, New Mexico.
In November 2018, Santa Fe filed a similar complaint in Grant County District Court, State of New Mexico, as Mr. and Mrs. Laws and XYZ Ranch Estates, LLC granted Santa Fe a deed of trust and a mortgage, respectively, on several pieces of real property in Grant County, New Mexico. Mr. Laws also granted Santa Fe a security agreement on an airplane located in Grant County, New Mexico. The complaint in Grant County requested a money judgment in the amount of $930,000 against Mr. and Mrs. Laws, in addition to a request to foreclose on the assets pledged to us located in Grant County, New Mexico.
Subsequent professional costs including legal, auditing, forensic accounting and related filing costs related to this event have been added to the amounts owed by Mr. Laws. At the time of filing this report, we have determined costs associated with Mr. Laws action currently aggregates $1,651,263, of which we have collected $485,966 as of the date of filing this report.
As of the filing of this report, Mr. Laws has pleaded guilty to various charges brought against him by the U. S. District Attorney for the District of New Mexico , which include the Company allegations. Mr. Laws is currently awaiting sentencing on the pleaded to charges. The Company attorneys have filed all required documents for future monetary settlements to be determined by the court and the Company does not anticipate receiving a substantial reimbursement of the remaining Laws costs.
The Department of Justice (“DOJ”) and the U.S. Securities and Exchange Commission (“SEC”) have each initiated investigation’s into the Company and certain other individuals, resulting from the Laws transactions and related misappropriation of funds described herein. The SEC has obtained a formal order to investigate the Company. The DOJ investigation is still preliminary. These types of investigations are expensive, time-consuming for management, and unpredictable – often resulting in other aspects of the Company’s
19
operations becoming subject to regulatory scrutiny. These investigations are ongoing and no prediction can be made regarding the timing or outcome of such matters including remedial action pursued against the Company and others, including its officers and directors.
In accordance with accounting standards regarding loss contingencies, the Company accrues an undiscounted liability for those contingencies where the incurrence of a loss is probable and the amount can be reasonably estimated, and the Company discloses the amount accrued and the amount of a reasonably possible loss in excess of the amount accrued, if such disclosure is necessary for its financial statements not to be misleading. The Company does not record liabilities when the likelihood that the liability has been incurred is probable but the amount cannot be reasonably estimated, or when the liability is believed to be only reasonably possible or remote.
We are subject from time to time to litigation, claims and suits arising in the ordinary course of business. Other than the above described litigation, as of September 30, 2019, we were not a party to any material litigation, claim or suit whose outcome could have a material effect on our financial statements.
Because litigation outcomes are inherently unpredictable, the Company’s evaluation of legal proceedings often involves a series of complex assessments by management about future events and can rely heavily on estimates and assumptions. If the assessments indicate that loss contingencies that could be material to any one of its financial statements are not probable, but are reasonably possible, or are probable, but cannot be estimated, then the Company discloses the nature of the loss contingencies, together with an estimate of the range of possible loss or a statement that such loss is not reasonably estimable. While the consequences of certain unresolved proceedings are not presently determinable, and an estimate of the probable and reasonably possible loss or range of loss in excess of amounts accrued for such proceedings cannot be reasonably made, an adverse outcome from such proceedings could have a material adverse effect on its financial statements in any given reporting period. However, in the opinion of Management, after consulting with legal counsel, the ultimate liability related to the current outstanding litigation is not expected to have a material adverse effect on its financial statements.
NOTE 12 – SUBSEQUENT EVENTS
Recent Issuances of Unregistered Securities
In the period from October 1, 2019 through October 14, 2020, the Company sold an aggregate of 24,107,143 restricted shares of common stock to nine existing accredited investors for cash proceeds $1,482,500. During this period the Company sold an aggregate of 6,642,858 restricted shares of common stock to the chairman of the board for cash proceeds $375,000.
In the period from March 2020 through October 14, 2020, the Company issued warrants to existing accredited investors aggregating 6,541,667, and 2,250,000 warrants to the chairman of the board that were attached to restricted stock purchases. The warrants were vested at issuance, have a two or three-year life and an exercise price of $0.05 to $0.07 per share.
During the period from October 1, 2019 through October 14, 2020, the Company issued 797,517 restricted shares of common stock for consulting services at a market value of $62,707 on the date of issuance.
On April 10, 2020, the Company converted $100,000 of accrued salary for the Company’s CFO into 2,000,000 shares of restricted common stock at a market value of $117,000 on the date of grant and recorded a loss on debt conversion of $17,000. Warrants issued in conjunction with the conversion were 1,000,000 vested three-year warrants and have an exercise price of $0.05 per share.
On June 30, 2020, the Company converted a note payable with the Company’s CFO consisting of principal and interest of $42,037 and $6,178, respectively, into 964,299 shares of restricted common stock at $0.05 per share. The market value on the date of conversion was $67,501 and on the date of conversion the Company recorded a loss on debt conversion of $19,286. In conjunction with the conversion, 482,149 vested three-year warrants were granted and have an exercise price of $0.05 per share.
On August 7, 2020, former Chief Financial Officer (“CFO”) of the Company resigned from that position. As the former CFO has significant institutional knowledge and background Company knowledge, the Board offered the individual the position of Managing Director of Mining Operations with a signing bonus of $20,000 and 750,00 shares of restricted common stock and an employment agreement was signed.
Miscellaneous Events
On December 18, 2019, Mr. Daniel Gorski, our consultant geologist, was appointed to our board of directors.
20
As of filing of this report, the Company has determined that Mr. Laws owes the Company $1,651,263, net of funds recovered from Mr. Laws of $485,966. This amount represents an increase consisting of legal, forensic accounting services incurred by the Company and the audit restatement of our fiscal year 2017 that was attributable the misappropriation of funds. The current amount does not include any penalties or interest as provided in the secured promissory note and security agreement signed by Mr. Laws. The Company does not anticipate collecting a material amount due from Mr. Laws and any recovery will be determined by the bankruptcy court.
As of the filing of this report, Mr. Laws has pleaded guilty to various charges brought against him by government officials, which include the Company allegations. Mr. Laws is currently awaiting sentencing on the charges he plead to. The Company attorneys have filed all required documents for future monetary settlements to be determined by the court.
Effective July 7, 2020, the Company retained a new Chief Financial Officer and an employment agreement was signed.
The Company signed employment agreements with the new Chief Financial Officer and Managing Director of Mining Operations. The agreements are a one-year employment agreement with the Company, with automatic successive one-year renewals provided that neither party has provided notice of termination prior to 30 days from the end of such applicable term.