* The weighted average common shares outstanding above considers the retroactive effect of the 1-for-3 stock split that was effective on May 2, 2011.
STEELE RESOURCES CORPORATION
(EXPLORATION STAGE COMANY)
CONSOLIDATED STATEMENT OF CASH FLOWS
FROM MAY 27 (INCEPTION) TO SEPTEMBER 30, 2012
(UNAUDITED)
|
|
|
|
|
|
|
|
|
| |
|
Nine Months Ending
September 30, 2012
|
|
Nine Months Ending
September 30, 2011
|
|
From May 27, 2010
(Inception) Through
September 30, 2012
|
CASH FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
Net loss
|
$
|
(1,675,241)
|
|
$
|
(1,886,009)
|
|
$
|
(5,069,428)
|
Adjustments to reconcile net loss to net cash used
|
|
|
|
|
|
|
|
|
in operating activates:
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
38,172
|
|
|
7,545
|
|
|
51,318
|
|
Amortization of note discount
|
|
294,596
|
|
|
196,280
|
|
|
673,698
|
|
Change in value of derivatives
|
|
-
|
|
|
55,714
|
|
|
-
|
|
Fixed assets issued for services
|
|
7,132
|
|
|
-
|
|
|
7,132
|
|
Shares issued for exploration costs
|
|
210,000
|
|
|
-
|
|
|
315,000
|
|
Shares issued for services
|
|
340,000
|
|
|
94,888
|
|
|
569,888
|
|
Stock-based compensation
|
|
23,642
|
|
|
59,908
|
|
|
145,659
|
Changes in operating assets and liabilities
|
|
|
|
|
|
|
|
|
|
Decrease (increase) in prepaid expenses
|
|
1,618
|
|
|
(3,920)
|
|
|
-
|
|
Increase (decrease) in accounts payable
|
|
(44,402)
|
|
|
106,585
|
|
|
239,025
|
|
Increase in accrued expenses
|
|
250,767
|
|
|
204,794
|
|
|
497,561
|
|
Decrease in other assets
|
|
2,712
|
|
|
-
|
|
|
-
|
|
NET CASH USED IN OPERATING ACTIVITIES
|
|
(551,004)
|
|
|
(1,164,215)
|
|
|
(2,570,147)
|
|
|
|
|
|
|
|
|
|
Investing Activities
|
|
|
|
|
|
|
|
|
|
Purchases of fixed assets
|
|
-
|
|
|
(32,673)
|
|
|
(37,965)
|
|
Proceeds from disposal of assets
|
|
9,700
|
|
|
-
|
|
|
9,700
|
|
NET CASH PROVIDED BY (USED IN)
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES
|
|
9,700
|
|
|
(32,673)
|
|
|
(28,265)
|
|
|
|
|
|
|
|
|
|
|
|
Financing Activities
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock
|
|
295,500
|
|
|
6,000
|
|
|
633,500
|
|
Proceeds from investor advances
|
|
103,649
|
|
|
-
|
|
|
103,649
|
|
Cash acquired in reverse merger
|
|
-
|
|
|
-
|
|
|
19,200
|
|
Cash from joint venture funding
|
|
-
|
|
|
540,000
|
|
|
540,000
|
|
Cash from project funding partners
|
|
-
|
|
|
175,000
|
|
|
195,000
|
|
Payments to project funding partners
|
|
-
|
|
|
-
|
|
|
(25,000)
|
|
Cash from project funding partners - related party
|
|
-
|
|
|
50,000
|
|
|
50,000
|
|
Proceeds from issuance of notes payable
|
|
359,762
|
|
|
437,500
|
|
|
1,632,962
|
|
|
Payments on convertible notes payable
|
|
(306,000)
|
|
|
(15,000)
|
|
|
(631,000)
|
|
Proceeds from issuance of notes payable - related party
|
|
65,800
|
|
|
46,500
|
|
|
139,948
|
|
Payments on notes payable - related party
|
|
(500)
|
|
|
(8,300)
|
|
|
(59,833)
|
NET CASH PROVIDED BY FINANCING ACTIVITIES
|
|
518,211
|
|
|
1,231,700
|
|
|
2,598,426
|
|
|
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN CASH
|
|
(23,093)
|
|
|
34,812
|
|
|
14
|
CASH, BEGINNING
|
|
23,107
|
|
|
623
|
|
|
-
|
CASH ENDING
|
$
|
14
|
|
$
|
35,435
|
|
$
|
14
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
$
|
42,532
|
|
$
|
705
|
|
$
|
51,929
|
|
|
Cash paid for income taxes
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF NON-CASH
|
|
|
|
|
|
|
|
|
|
INVESTING AND FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
Conversion of debt to equity
|
$
|
246,033
|
|
|
$197,750
|
|
|
$472,286
|
|
|
Transfer of P.P.&E. for services
|
|
$7,132
|
|
|
-
|
|
|
-
|
The accompanying notes are an integral part of these financial statements.
9
STEELE RESOURCES CORPORATION
(AN EXPLORATION STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2012
NOTE 1 - NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Business Activity
Steele Resources Corporation (formerly Steele Recording Corporation) ("SRC", the "Company", "we", "us", or "our") is a U.S. exploration and mining company, incorporated in the state of Nevada on February 12, 2007. On June 17, 2010 the Company entered into and consummated a Plan and Agreement of Reorganization between the Company and Steele Resources, Inc. and certain stockholders of Steele Resources, Inc. (the Reorganization). Pursuant to the Reorganization, the Company acquired all of the issued and outstanding shares of Steele Resources, Inc., a Nevada Corporation (SRI), formed in May 2010. From an accounting perspective, SRI was the acquirer.
Steele Resources is a mining and Exploration Company focused on identifying and developing advanced stage precious metal exploration projects which show potential to achieve full production. The overall business strategy is to identify, explore and develop and operate mineral exploration properties in the Western United States. The business strategy is to identify and evaluate properties which have considerable amounts of exploration already completed and potential and inferred resources identified. SRC then selects the properties which offer the best potential for producing significant gold and silver reserves and offer favorable conditions, for the future efficient development of the property to reach a production stage.
The unaudited interim consolidated financial statements of the Company included herein have been prepared in accordance with generally accepted accounting principles for interim financial information and in accordance with the instructions for Form 10-Q under Article 8.03 of Regulation S-X. These statements do not include all of the information and notes to the financial statements required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three and nine month period ended September 30, 2012, are not necessarily indicative of the results that may be expected for the year ending December 31, 2012. The unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the fiscal year ended December 31, 2011, included in the Companys Annual Report on Form 10-K, as filed with Securities and Exchange Commission.
10
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Going Concern
The accompanying consolidated financial statements have been prepared under the assumption that the Company will continue as a going concern. The Company has incurred a net operating loss of $4,660,230 from May 27, 2010 (inception) through September 30, 2012 and had a working capital deficiency of $2,449,222 as of September 30, 2012. The Company does not have sufficient cash at September 30, 2012 to fund normal operations for the next 12 months. The Company has no recurring source of revenue and its ability to continue as a going concern is dependent on the Companys ability to raise capital to fund its future exploration and working capital requirements. The Companys plans for the long-term attainment and continuation as a going concern include financing the Companys future operations through sales of its common stock, entering into debt or line of credit facilities, sales of gold produced in mining activities and the eventual profitable exploitation of its mining properties. Additionally, the current capital markets and general economic conditions in the United States are significant obstacles to raising the required funds. These factors raise substantial doubt about the Companys ability to continue as a going concern. The Company is currently investigating a number of alternatives for raising additional capital with potential investors, lessees and joint venture partners. Should management fail to obtain financing, the Company may curtail its operations.
These conditions raise substantial doubt about the Companys ability to continue as a going concern. Because of our net loss and our negative working capital position, our independent auditors, in their report on our audited financial statements for the fiscal year ended December 31, 2011, expressed substantial doubt about our ability to continue as a going concern. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that could result from the outcome of this uncertainty.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Steele Resources, Inc., a Nevada Corporation. All significant inter-company accounts and transactions have been eliminated in the consolidated financial statements in conformity with U.S. generally accepted accounting principles.
Fair Value Measurements
Assets and liabilities recorded at fair value in the consolidated balance sheet are categorized based upon the level of judgment associated with the inputs used to measure the fair value. Level inputs, as defined by ASC 820-10, are as follows:
·
Level 1
quoted in active markets for identical assets or liabilities.
·
Level 2
other significant observable inputs for the assets or liabilities through cooboration with market data at the measurement date.
·
Level 3
significant unobservable inputs that reflect managements best estimate of what market participants would use to price the assets or liabilities at the measurement date.
11
The following table summarizes fair value measurements by level at September 30, 2012 for assets and liabilities measured at fair value on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
| |
at September 30, 2012
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Derivative liability
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion features
|
$
|
-
|
|
$
|
-
|
|
$
|
90,500
|
|
$
|
90,500
|
|
|
|
|
|
|
|
|
|
|
|
| |
at December 31, 2011
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Derivative liability
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion features
|
$
|
-
|
|
$
|
-
|
|
$
|
128,000
|
|
$
|
128,000
|
Derivative liability for conversion features for the year ended September 30, 2012 and December 31, 2011 were valued using the Black-Scholes Option pricing model with the following assumptions: expected life of 0.5 to 1 year, risk free interest rate of 1%, dividend yield of 0, and expected volatility of 0.1%.
|
| |
Value at December 31, 2011
|
|
$ 128,000
|
Issuance of instruments
|
|
107,000
|
Relief of liability
|
|
(16,500)
|
Payments
|
|
(128,000)
|
Value at September 30, 2012
|
|
$ 90,500
|
For certain of the Companys financial instruments, including cash, prepaid expenses, accounts payable and accrued expenses the carrying amounts approximate fair value due to their short maturities. The carrying amounts of the Companys notes payable approximates fair value based on the prevailing interest rates.
Derivative Financial Instruments
The Company does not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks.
The Company reviews the terms of convertible debt, equity instruments and other financing arrangements to determine whether there are embedded derivative instruments, including embedded conversion options that are required to be bifurcated and accounted for separately as a derivative financial instrument. Also, in connection with the issuance of financing instruments, the Company may issue freestanding options or warrants that may, depending on their terms, be accounted for as derivative instrument liabilities, rather than as equity. The Company may also issue options or warrants to non-employees in connection with consulting or other services.
12
Derivative financial instruments are initially measured at their fair value. For derivative financial instruments that are accounted for as liabilities, the derivative instruments are initially recorded at their fair values and are then re-valued at each reporting date, with changes in the fair values reported as charges or credits to income. For option-based derivative financial instruments, the Company uses the Black-Scholes option pricing model to value the derivative instruments. To the extent that the initial fair values of the freestanding and/or bifurcated derivative instrument liabilities exceed the total proceeds received, an immediate charge to income is recognized, in order to initially record the derivative instrument liabilities at their fair value.
The discount from the face value of a convertible debt or equity instrument resulting from allocating some or all of the proceeds to the derivative instrument, together with the stated interest on the instrument, is amortized over the life of the instrument through periodic charges to income, using the effective interest method.
The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is reassessed at the end of each reporting period. If reclassification is required, the fair value of the derivative instrument, as of the determination date, is reclassified. Any previous charges or credits to income for changes in the fair value of the derivative instrument are not reversed. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within twelve months of the balance sheet date.
Use of Estimates and Assumptions
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company bases its estimates and assumptions on current facts, historical experience and various other factors that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. The actual results experienced by the Company may differ materially and adversely from the Companys estimates. To the extent there are material differences between the estimates and the actual results, future results of operations will be affected. Management believes the assumptions underlying the consolidated financial statements are reasonable.
Exploration Stage Enterprise
The Company is in the exploration stage of operation, as it devotes substantially all of its efforts to acquiring and exploring mining interests that management believes should eventually provide sufficient net profits to sustain the Companys existence.
13
Mining Exploration Costs
Exploration costs are expensed in the period in which they occur. The Company capitalizes costs for acquiring mineral properties and expenses costs to maintain mineral rights and leases as incurred. Should a property reach the production stage, these capitalized costs would be amortized using the units-of-production method on the basis of periodic estimates of ore reserves. Mineral properties are periodically assessed for impairment of value, and any subsequent losses are charged to operations at the time of impairment. If a property is abandoned or sold, its capitalized costs are charged to operations.
Net (Loss) Per Share
The Company calculates net income (loss) per share as required by Accounting Standards Codification subtopic 260-10, Earnings 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.
NOTE 3 - PROPERTIES
Pony Project
: On February 4, 2011, SRI entered into a Mineral Lease Agreement with Option to Purchase (the "Pony Lease") with a group of individual land owners in the state of Montana to acquire rights to 17 patented and 67 unpatented mining claims known as the Pony Exploration project (the Pony Project). The Company has not made the $500,000 lease payment due in February, 2012. On May 17, 2012, the Company received a written notice of default on the Pony Lease Agreement. With this notice, SRI ceased all efforts to acquire the rights to the Pony Project. All pending obligations between SRI and the Lessors of the Pony Project were terminated on that date.
A&P Project
: In February, 2011 SRI entered into a into a Mineral Lease Agreement with Option to Purchase with a group of individual land owners in the state of Montana to acquire two patented mining claims known as the Atlantic and Pacific Mine ("the A&P Lease") located in the Pony Mining District in Montana. On July 24, 2012, the Company notified the Lessors that SRI was terminating the A&P Lease executed on February 22, 2011. SRI exercised its rights under the terms of the A&P Lease to terminate the agreement at any time. With the termination, all right, title and interest of SRI was terminated and SRI was removed from all obligations set forth in the Agreement.
14
Billali Gold Mine
On April 20, 2012, SRI entered into a definitive Purchase Agreement (the Purchase Agreement) for the acquisition of the Billali Gold and Silver Mine (the "Billali Mine") from the Billali Gold Mine, LLC ("Seller"), and an advanced stage epithermal silver-gold quartz vein deposit in the Steeple Rock Mining District of New Mexico. The Purchase Agreement provided for payments to be made over a period of two years with transfer of ownership being completed when SRI has satisfied its financial obligations under the Purchase Agreement. The purchase price for the Billali consists of the issuance of two million shares (2,000,000) of common stock of SRC; an initial payment of $100,000; an additional payment of $500,000 within 45 days of the Purchase Agreement being signed; and SRI delivering six hundred (600) American Eagle One Ounce Gold Coins on the twelfth, eighteenth and twenty-fourth month anniversary of the Purchase Agreement signing, to be delivered to the Seller. Upon satisfaction of these terms, the Seller will complete the transfer of full right and title of ownership of the Billali Mine to SRI. In addition, Seller will be entitled to receive a five percent (5%) Net Smelter Return on any and all future mining activity at the Billali Mine following the transfer of ownership to SRI. The initial deposit of $100,000 and the issuance of 2,000,000 shares of common stock were completed on April 20, 2012.
On June 28, 2012, the Company and Little Gem Life Sciences Capital Management LLC, a Delaware limited liability company (Little Gem), entered into a definitive Agreement (the "Agreement) for the transfer of all rights, title and interests existing under the existing Purchase Agreement, dated April 20, 2012 (the Purchase Agreement), entered into between Billali Mine LLC as seller and Steele Resources Inc. as purchaser. Under the terms of the Agreement, Little Gem assumed all obligations of SRI under the Purchase Agreement including agreeing to pay to Billali Gold Mine LLC, the seller under the Purchase Agreement, the second installment of $500,000 which was paid on July 3, 2012; and, Little Gem agreed to provide additional capital, in such amounts and upon such terms as Little Gem may in its sole discretion determine, for the development of the Billali Mine. SRC will retain a twenty percent (20%) economic interest in the Billali Mine. The aforementioned 20% economic interest in the Billali Mine will vest in SRC as a joint venture qualified carried interest in the net operating profits, if any, of Little Gems ownership and development of the Billali Mine with distributions to occur over time in a manner, and with such reserves, as Little Gem in its sole discretion may determine suitable, appropriate and fair according to circumstances then prevailing. SRCs economic interest will be burdened whereby SRC will be assessed its pro rata share of mining development costs and expenses over time.
Copper Canyon Exploration Project
On June 21, 2011 SRI entered into a Mineral Lease Agreement with Option to Purchase (the "Copper Lease") with from the Salmon Canyon Copper Company near Salmon, ID to acquire rights to 10 unpatented mining claims known as the Salmon Canyon Exploration project (the Copper Canyon Project), which is a historic copper/cobalt mine located in the Mineral Hill Mining District near Salmon, Idaho. On June 6, 2012, SRI and the Salmon Canyon Copper Company mutually agreed to terminate the Mineral Lease Agreement with Option to Purchase the Copper Canyon Project. With the termination, all right, title and interest of SRI was terminated and SRI was removed from all obligations set forth in the Agreement.
15
NOTE 4 - DERIVATIVE INSTRUMENT LIABILITIES AND CONVERTIBLE NOTES
The Company reviews the terms of the conversion features on notes payable and records a discount on the note in an amount equal to the intrinsic value of the conversion feature, not to exceed the face amount of the note, if the embedded conversion feature is not accounted for as a liability. The initial amount of the note discount is recorded in additional paid-in capital on the date of issuance and is amortized to interest expense over the initial term of the note using the interest method. Upon conversion, the entire unamortized discount is recognized as interest expense due to the beneficial nature of the conversion feature.
In January 2012, the Company issued a convertible note for $53,000 to one entity. The note bears interest at 8% per annum and is due November 1, 2012. The conversion price is 50% of the average of the lowest three closing bid prices in the 10 trading days ending one day before notice of conversion is given. The sale was made to one entity in a private, negotiated transaction without any public solicitation.
In January 2012, the Company issued a promissory note to a related party and a relative to a related party for a total of $63,000. The note bears simple interest at an annual rate of 20% per annum and is due July 27, 2012. In conjunction with the Note, 50,000 shares of common stock were issued to the lender. These shares were valued at $5,500 and recorded as a note discount. The lender has the option, at maturity, to convert the note and accrued interest into common at a price of $0.10 per share.
In January 2012, the Company issued a convertible note for $54,000 to one individual. The note bears interest at 8% per annum and is due October 29, 2012. The conversion price is 50% of the average of the lowest three closing bid prices in the 10 trading days ending one day before notice of conversion is given. The sale was made to an individual in a private, negotiated transaction without any public solicitation. On August 9, 2012 the holder of the note converted $9,000 of the note into 2,903,226 shares of the Company's common stock.
As of September 30, 2012, interest payable on these notes totaled $33,727.
These notes were evaluated using ASC 815-40 and it was determined that the embedded conversion should be accounted for as derivative instrument liabilities. Accordingly, they are to be marked to market each reporting period, with the corresponding non-cash gain or loss reflected in the Companys current period statement of operations.
NOTE 5 - NOTES PAYABLE
In March, 2012, the Company issued a note payable for $50,000 to one of the individuals from which we have the lease purchase agreement for as the A&P Lease, covering the balance of the 2012 annual lease payment due. The note bears an interest rate of 12% and was due April 16, 2012.
In March, 2012, the Company issued a note payable for $4,000 to one individual. The note bears interest at 20% per annum and was due May 31, 2012.
16
In March, 2012, the Company issued a note payable for $61,750 to one individual. The note was due on June 30, 2012. The note holder has informed the Company that an interest penalty of $10,000 per month will accrue until the note is paid in full.
In April, 2012, the Company issued a note payable for $100,000 to one individual. The note was due on June 19, 2012. The note bears interest of 20% and interest will continue to accrue until such time as the Company has funds to repay the note.
In July, 2012, the Company issued a master note for up to $50,000 to one individual. The note is due on July 13, 2013. The note bears interest at 12%. The first draw was recorded on September 30, 2012 for $37,500.
During the quarterly period ended September 30, 2012, the Company borrowed $1,300 and $1,500 from two individuals.
As of September 30, 2012, interest payable on these notes totaled $25,561.
The components of notes payable are as follows:
As of September 30, 2012
|
|
|
|
|
| |
|
Principal Amount
|
|
Unamortized Discount
|
|
Net
|
Contractual liabilities
|
$ 200,000
|
|
$ -
|
|
$ 200,000
|
Notes payable
|
463,062
|
|
-
|
|
463,062
|
Convertible notes payable
|
355,500
|
|
(9,906)
|
|
345,594
|
|
Total notes payable
|
$ 1,018,562
|
|
$ (9,906)
|
|
$ 1,008,656
|
NOTE 6 - COMMITMENTS AND CONTINGENCIES
On October 1, 2010, the Company entered into a lease for office space located in Cameron Park, California, for a period of five years. Future minimum lease payments under operating leases are $16,437, $33,369, $34,035 and $25,911 for the years ended December 31, 2012, 2013, 2014, and 2015 respectively. Total rental expense was $46,756 for the six months ended June 30, 2012, $22,022 for the six months ended June 30, 2011, and $110,886 for the period from May 27, 2010 (Inception) through June 30, 2012. On July 23, 2012 the Company notified the landlord for the lease for office space that it is abandoning the lease effective immediately. The range of potential liability is $0 to $109,752.
Legal Matters
SRC was named in an amended complaint filed in District Court, Clark County Nevada, by Phyllis Wynn, individually and as the trustee for the Phyllis Wynn Family Trust. The Complaint appears to name approximately 81 defendants including Steele Resources Corporation. The Amended Complaint was filed September 23, 2009. It alleges 17 causes of actions including breach of contract and fraud against various other defendants and fraudulent conveyance to SRC and its former President and CEO Marlon Steele. The substance of the Complaint involves a real estate transaction not involving SRC. We do not believe the Plaintiff will prevail as to her claims regarding Steele Resources Corporation and have answered with affirmative defenses including but not limited to the following: (1) the injuries and damages complained of did not occur as the result of any action on the part of SRC but as the sole, direct and proximate result of actions by Plaintiff and third parties not otherwise related to SRC. The amount of loss cannot be reasonably estimated. A former officer of SRC has agreed to indemnify the Company from any eventual costs or loss from this lawsuit.
17
Contractual Matters
On February 4, 2011, SRI entered into a Mineral Lease Agreement with Option to Purchase (the "Pony Lease") with a group of individual land owners in the state of Montana to acquire rights to 17 patented and 67 unpatented mining claims known as the Pony Exploration project (the Pony Project). On May 17, 2012, the Company received a written notice of default on the Mineral Lease Agreement with Option to Purchase and the Mineral Lease agreement-Lease Payment Extension for the Pony Lease. With this notice, SRI ceased all efforts to acquire the rights to the Pony Project. All future obligations between SRI and the Lessors of the Pony Project were terminated on that date.
In February, 2011 SRI entered into a into a Mineral Lease Agreement with Option to Purchase with a group of individual land owners in the state of Montana to acquire two patented mining claims known as the Atlantic and Pacific Mine ("the A&P Lease") located in the Pony Mining District in Montana. The A&P Lease provides for a five year lease period with an initial payment of $200,000 and an annual commitment of $100,000 for the next five years. The Lessors will also have a 2% NSR on the property during the lease term. After the lease period expires and all lease payments have been paid, full right and title of ownership of the A&P property shall be transferred to SRI. In May, 2011, the Company issued a note payable for $80,000 to one of the individual land owners covering the balance of the initial lease payment due. The note bears an interest rate of 12% as was due May 31, 2011. The Company paid $34,000 towards interest and principle in December, 2011 and paid the balance of the note and interest in March, 2012. The Company issued a note payable to the Lessor in March, 2012, for $50,000 covering the balance of the lease payment that was due for 2012; the note bears an interest rate of 12% and was due April 16, 2012. On June 24, 2012, the Company notified the Lessors that SRI was terminating its agreement for the Mineral Lease with Option to Purchase Agreement. SRI exercised its rights under the terms of the A&P Lease to terminate the agreement at any time. With the termination, all right, title and interest of SRI was terminated and SRI was removed from all future obligations set forth in the Agreement.
On June 21, 2011 SRI entered into a Mineral Lease Agreement with Option to Purchase (the "Copper Lease") with from the Salmon Canyon Copper Company near Salmon, ID to acquire rights to 10 unpatented mining claims known as the Salmon Canyon Exploration project (the Copper Canyon Project), which is a historic copper/cobalt mine. On June 6, 2012, SRI and the Salmon Canyon Copper Company mutually agreed to terminate the Mineral Lease Agreement with Option to Purchase the Copper Canyon Project. With the termination, all right, title and interest of SRI was terminated and SRI was removed from all obligations set forth in the Agreement.
On August 31, 2011, SRC and Innocent, Inc. negotiated a formal Termination of the Joint Venture Agreement (the Termination Agreement) of the Joint Venture Agreement established to fund the development of the Mineral Hill Project. Pursuant to the Termination Agreement SRC acknowledges its obligation to repay $540,000 paid to date by INCT to SRC under the terms of the JV Agreement. The Termination Agreement also allows SRC the option to assume the $540,000 owed to INCT note holders on terms negotiated between SRC and the note holders. The Termination Agreement does not specify a time period in which the $540,000 must be repaid but does require that SRC caries this obligation as a liability on its balance sheet until repaid.
18
On April 20, 2012, Seller and Steele Resources, Inc. ("SRI"), a wholly-owned subsidiary of SRC, entered into a definitive Purchase Agreement (the Purchase Agreement) for the acquisition of the Billali Mine. The Purchase Agreement provides for payments to be made over a period of two years with transfer of ownership being completed when SRI has satisfied its financial obligations under the Purchase Agreement. The purchase price for the Billali consists of the issuance of two million shares (2,000,000) of common stock of SRC; an initial payment of $100,000; within 45 days of the Purchase Agreement being signed, SRI will make an additional payment of $500,000; and SRI will deliver six hundred (600) American Eagle One Ounce Gold Coins on the twelfth, eighteenth and twenty-fourth month anniversary of the Purchase Agreement signing, to be delivered to the Seller. Upon satisfaction of these terms, the Seller will complete the transfer of full right and title of ownership of the Billali Mine to SRI. In addition, Seller will be entitled to receive a five percent (5%) Net Smelter Return on any and all future mining activity at the Billali Mine following the transfer of ownership to SRI.
On June 28, 2012, SRI and Little Gem Life Sciences Capital Management LLC, a Delaware limited liability company (Little Gem), entered into a definitive Agreement (the Agreement) for the transfer of all rights, title and interests existing under the Purchase Agreement entered into between Billali Mine LLC as seller and Steele Resources Inc. as purchaser. Under the terms of the Agreement, Little Gem assumed all obligations of SRI under the Purchase Agreement including agreeing to pay to Billali Gold Mine LLC, the seller under the Purchase Agreement, the second installment of $500,000 on or before July 3, 2012; and, Little Gem agreed to provide additional capital, in such amounts and upon such terms as Little Gem may in its sole discretion determine, for the development of the Billali Gold and Silver Mine. SRC will retain a twenty percent (20%) economic interest in the Billali Gold and Silver Mine. The aforementioned 20% economic interest in the Billali Gold and Silver Mine will vest in SRC as a joint venture qualified carried interest in the net operating profits, if any, of Little Gems ownership and development of the Billali Gold and Silver Mine with distributions to occur over time in a manner, and with such reserves, as Little Gem in its sole discretion may determine suitable, appropriate and fair according to circumstances then prevailing. SRCs economic interest will be burdened whereby SRC will be assessed its pro rata share of mining development costs and expenses over time.
Tabular Disclosure of Contractual Obligations as of September 30, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Payment due by period
|
|
Total
|
|
Less than 1 year
|
|
1-3 years
|
|
3-5 years
|
|
More than 5 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term Debt Obligations
|
$
|
1,558,562
|
|
$
|
1,558,562
|
|
|
-0-
|
|
|
-0-
|
|
-0-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mineral Lease Obligations
|
|
-0-
|
|
|
-0-
|
|
|
-0-
|
|
|
-0-
|
|
-0-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Lease Obligations
|
|
109,752
|
|
|
16,437
|
|
|
93,315
|
|
|
-0-
|
|
-0-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
1,668,314
|
|
$
|
1,574,999
|
|
$
|
93,315
|
|
$
|
-0-
|
|
-0-
|
19
NOTE 7 - STOCKHOLDERS (DEFICIT)
Issuance of Common Stock
In January, 2012, the Company issued 50,000 shares in conjunction with a note payable issued to a related party for a total of $63,000. These shares were valued at $5,500 and recorded as a note discount.
In February, 2012, the Company issued: 1,000,000 shares in consideration for financial consulting services, the value of the shares issued was $120,000; through a private placement of its common stock, the Company issued 125,000 shares for $12,500 to two individuals; and the Board of Directors authorized the issuance of 500,000 shares of common stock to each of its four Board Members as compensation for services in 2010 and 2011, the total value of the shares issued was $220,000.
Through a private placement of its common stock, the Company issued 125,000 shares of common stock to two individuals for $12,500 in February, 2012.
Through a private placement of its common stock, the Company issued 60,000 shares of common stock to one individual for $6,000 in March, 2012.
Through a private placement of its common stock, the Company issued 3,000,000 shares to two individuals for $270,000 in March, 2012, net of $30,000 in placement costs.
Through a private placement of its common stock, the Company issued 70,000 shares of common stock to one individual for $7,000 in April, 2012.
In April, 2012, the Company issued 2,000,000 shares to the Billali Gold Mine, LLC which was a deposit requirement on the April 20, 2012 Purchase Agreement for the acquisition of the Billali Mine.
As of August 17, 2012, 4,066,668 shares of common stock have not been issued under the terms of the private placement entered into with one individual in May, 2012. The individual investor has instructed the Company to not issue the shares pending the conclusion of additional contemplated investments or conversion of existing convertible notes held by the individual. The liability for the funds accepted is recorded as Advances under the Company's current liabilities.
During SRCs most recent fiscal year ending December 31, 2011, the following common stock was issued pursuant to an exemption from registration pursuant to Rule 144 under the Securities Act. Each of the transactions listed below involved conversions of outstanding Security Purchase Agreements between the Company and the respective note holders.
In April, 2012, the Company issued 4,922,553 shares of common stock to one individual following the conversion of $61,532 of principal and interest of a convertible note issued in October, 2011.
In May, 2012, the Company issued 2,395,304 shares of common stock to one individual following the conversion of $83,836 of principal and interest of a convertible note issued in October, 2011.
In June, 2012, the Company issued 2,404,697 shares of common stock to one individual following the conversion of $84,165 of principal and interest of a convertible note issued in October, 2011.
20
In August, 2012, the Company issued 2,903,226 shares of common stock to one individual following the conversion of $9,000 of principal of a convertible note issued in January, 2011.
In September, 2012, the Company issued 3,260,870 shares of common stock to one individual following the conversion of $7,500 of principal of a convertible note issued in January, 2011.
Stock Options and Warrants
In February, 2011, the Board of Directors of the Company approved the 2011 Equity Compensation Plan (the "Plan"),
t
he purpose of the Plan is to provide a means by whic
h eligible recipients of stock a
wards may be given an opportunity to benefit from in
creases in value of the common s
tock through the granting
of the following stock awards: incentive stock options, nonstatutory stock options, stock bonuses
and rights to acquire restricted stock. The Company, by means of the Plan, seeks to retain the services of the group of persons eligible to receive stock awards, to secure and retain the services of new members of this group and to provide incentives for such persons to exert maximum efforts for the success of the Company and its affiliates.
The Board shall administer the Plan unless and until the Board delegates administration to a Committee.
Subject to the provisions relating to adjustments upon changes in stock, the stock that may be issued pursuant to stock awards shall not exceed in the aggregate three million three hundred thirty-three thousand three hundred and thirty-three (3,333,333) shares of Common Stock.
Stock option and warrant activity, within the 2011 Equity Compensation Plan and outside of the plan, for the nine months ended September 30, 2012, are as follows:
|
|
|
|
|
|
| |
|
Stock Options
|
|
Warrants
|
|
Shares
|
|
Weighted Average
Exercise Price
|
|
Shares
|
|
Weighted Average
Exercise Price
|
Outstanding at December 31, 2011
|
2,066,669
|
|
$0.1204
|
|
1,033,334
|
|
$0.4839
|
Granted
|
0
|
|
0
|
|
0
|
|
0.2000
|
Canceled
|
816,668
|
|
0.1180
|
|
0
|
|
0
|
Expired
|
0
|
|
0
|
|
0
|
|
0
|
Exercised
|
0
|
|
0
|
|
0
|
|
0
|
Outstanding at September 30, 2012
|
1,250,001
|
|
$0.1200
|
|
1,033,334
|
|
$0.4839
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2012
|
688,887
|
|
$0.1268
|
|
|
|
|
Stock Options as of September 30, 2012:
|
|
|
|
|
|
|
| |
Exercise Price
|
|
Shares Outstanding
|
|
Weighted Contractual
Life Remaining (in Years)
|
|
Shares Exercisable
|
|
Weighted Contractual
Life Remaining (in Years)
|
$0.1100
|
|
750,000
|
|
8.73
|
|
250,000
|
|
8.73
|
$0.1210
|
|
250,000
|
|
8.73
|
|
250,000
|
|
8.73
|
$0.1500
|
|
83,334
|
|
8.36
|
|
83,334
|
|
8.36
|
$0.1620
|
|
166,667
|
|
8.53
|
|
105,553
|
|
8.53
|
|
|
2,066,669
|
|
8.68
|
|
688,887
|
|
8.59
|
21
Stock Warrants as September 30, 2012:
|
|
|
|
|
|
|
| |
Exercise Price Range
|
|
Warrants Outstanding
|
|
Warrants Convertible
|
|
Weighted Contractual
Life Remaining (in Years)
|
|
Weighted Average
Exercise Price
|
|
|
|
|
|
|
|
|
|
$0.4500
|
|
1,000,000
|
|
1,000,000
|
|
3.09
|
|
$0.4500
|
$1.5000
|
|
33,334
|
|
33,334
|
|
1.01
|
|
$1.5000
|
|
|
1,033,334
|
|
1,033,334
|
|
2.05
|
|
$0.4839
|
The fair value of the options granted during the ended December 31, 2011 is estimated at $234,000. The fair value of these options was estimated at the date of grant using the Black-Scholes option-pricing model with the following assumptions:
| |
Term
|
10 years
|
Risk-free Interest Rate
|
1%
|
Volatility
|
339%
|
Dividend Yield
|
0%
|
The Company effected a 1-for-3 reverse stock split on May 2, 2011. The accompanying financial statements reflect the retroactive effect of this reverse stock split.
NOTE 9 - SUBSEQUENT EVENTS
On October 8, 2012 the Company and Jeffrey Benison and Little Gem Life Sciences Capital Management LLC (Benison) entered into a non-binding letter of intent with Coyote Moon Mining Company LLC (Coyote Moon) whereby Coyote Moon would expend up to $1,500,000 in the development of the Billali Mine and manage the Billal Mine development in exchange for Benison conveying a 30% ownership interest in the Billali Mine to Coyote Moon. Formal documents are being prepared and a closing on or about December 1, 2012 is anticipated.
22