The accompanying notes
are an integral part of these condensed financial statements.
The accompanying notes are an integral part
of these condensed financial statements.
The accompanying notes are an integral part
of these condensed financial statements.
Notes to Condensed Financial Statements
September 30, 2012
(unaudited)
NOTE 1 - OVERVIEW
Standard Gold, Inc. (“we,”
“us,” “our,” “Standard Gold” or the “Company”) is an exploration stage company
based in Minneapolis, Minnesota.
Standard Gold, Inc. (formerly known as
Princeton Acquisitions, Inc.) was incorporated in the State of Colorado on July 10, 1985, as a blind pool or blank check company.
On September 29, 2009, we completed a share exchange agreement with Hunter Bates Mining Corporation, a Minnesota corporation formed
in April 2008 (“Hunter Bates”) and certain of its shareholders, in which Hunter Bates’ shareholders exchanged
all of their capital securities into similar capital securities of ours (the “Hunter Bates Share Exchange”) and we
adopted the business model of Hunter Bates of minerals exploration and mining. Accordingly, the Hunter Bates Share Exchange represented
a change in control and Hunter Bates became a wholly owned subsidiary of Standard Gold.
Prior to September 29, 2009, Wits Basin
Precious Minerals Inc., a Minnesota corporation and public reporting company quoted on the Pink Sheets under the symbol “WITM”
(“Wits Basin”) was the majority shareholder of Hunter Bates. Hunter Bates acquired the prior producing gold mine properties
(consisting of land, buildings, equipment, mining claims and permits) located in Central City, Colorado, known as the “Bates-Hunter
Mine.” Since August 2008, no exploration activities had been conducted at the Bates-Hunter Mine due to funding. As part of
the Shea Exchange Agreement (described below), we had the right, at our option, at any time prior to June 13, 2011, to transfer
our entire interest in our subsidiary, Hunter Bates, which included the Hunter-Bates Mine and all related obligations and liabilities
back to Wits Basin. On April 29, 2011, the Company’s management exercised its right to transfer our entire ownership interest
in Hunter Bates.
On March 15, 2011, we closed a series of
transactions, whereby we acquired certain assets of Shea Mining & Milling, LLC (“Shea Mining”), which assets include
land, buildings, a dormant milling facility, abandoned milling equipment, water permits, mine tailings, mine dumps and the assignment
of a note payable, a lease and a contract agreement with permits (the “Shea Exchange Agreement”). We completed the
Shea Exchange Agreement to acquire the Shea Mining assets and develop a toll milling services business of precious minerals. Toll
milling is a process whereby mined material is crushed and ground into fine particles to ease the extraction of any precious minerals
contained therein, such as gold, silver, lead, zinc and copper, and rare earth metals.
The Company’s Internet website is
at www.standardgoldmilling.com.
NOTE 2 – SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Principles of Consolidation
The 2011 consolidated financial statements
include the accounts of Standard Gold, Inc., and our wholly owned subsidiary Hunter Bates Mining Corporation (and its wholly owned
subsidiary Gregory Gold Producers, Inc). All significant intercompany transactions and balances have been eliminated in the 2011
consolidation.
Effective April 29, 2011, Standard Gold
transferred its entire ownership in Hunter Bates to Wits Basin and subsequently became a single reporting entity. The 2012 financial
statements include only the accounts of Standard Gold.
Basis of Presentation
The accompanying unaudited condensed financial
statements have been prepared by us in accordance with accounting principles generally accepted in the United States of America
(“US GAAP”), for interim financial information pursuant to the rules and regulations of the Securities and Exchange
Commission (the “SEC”). Accordingly, they do not include all of the information and footnotes required by US GAAP for
complete financial statements. The unaudited condensed financial statements should be read in conjunction with the audited consolidated
financial statements and notes thereto included in our Form 10-K filed May 17, 2012. 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 nine months ended September 30, 2012 are not necessarily indicative of the results that may be expected for the year as
a whole.
Shea Mining and Milling Assets
We have recorded the estimated fair value
of the Shea Mining and Milling assets as an aggregate amount on our condensed balance sheet. The assets include the mine tailings
and dumps, the land, water rights and the milling facility (the buildings and equipment). None of the assets have been put into
production, nor have we performed any repair or updates to any of the equipment or buildings. As such, we will continue to classify
them under a single listing.
Mineral Properties
Mineral property acquisition costs are
recorded at cost and are deferred until the viability of the property is determined. No properties have reached the development
stage at this time. Exploration, mineral property evaluation, option payments, related acquisition costs for mineral properties
acquired under an option agreement, general overhead, administrative and holding costs to maintain a property on a care and maintenance
basis are expensed in the period they are incurred. When reserves are determined for a property and a bankable feasibility study
is completed, subsequent exploration and development costs on the property would be capitalized. If a project were to be put into
production, capitalized costs would be depleted on the unit of production basis.
Management reviews the net carrying value
of each mineral property as changes may materialize with a property or at a minimum, on an annual basis. Where information and
conditions suggest impairment, estimated future net cash flows from each property are calculated using estimated future prices,
proven and probable reserves and value beyond proven and probable reserves, and operating, capital and reclamation costs on an
undiscounted basis. If it is determined that the future cash flows are less than the carrying value, a write-down to the estimated
fair value is made with a charge to loss for the period. Where estimates of future net cash flows are not available and where other
conditions suggest impairment, management assesses if the carrying value can be recovered.
Management's estimates of gold prices,
recoverable reserves, probable outcomes, operating capital and reclamation costs are subject to risks and uncertainties that may
affect the recoverability of mineral property costs.
NOTE 3 – EARNINGS (LOSS) PER
COMMON SHARE
Basic net earnings (loss) per common share
is computed by dividing net earnings (loss) applicable to common shareholders by the weighted average number of common shares outstanding
during the periods presented. Diluted net earnings (loss) per common share is determined using the weighted average number of common
shares outstanding during the periods presented, adjusted for the dilutive effect of common stock equivalents, consisting of shares
that might be issued upon exercise of options, warrants and conversion of convertible debt. In periods where losses are reported,
the weighted average number of common shares outstanding excludes common stock equivalents, because their inclusion would be anti-dilutive.
The following table provides a reconciliation
of the numerators and denominators used in calculating basic and diluted earnings (loss) per share are as follows:
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
Basic earnings (loss) per share calculation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) to common shareholders
|
|
$
|
(387,516
|
)
|
|
$
|
(2,612,242
|
)
|
|
$
|
(1,722,670
|
)
|
|
$
|
(12,331,330
|
)
|
Weighted average of common shares outstanding
|
|
|
45,592,669
|
|
|
|
41,868,043
|
|
|
|
44,471,269
|
|
|
|
36,761,782
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net earnings (loss) per share
|
|
$
|
(0.01
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(0.34
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share calculation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common shareholders
|
|
$
|
(387,516
|
)
|
|
$
|
(2,612,242
|
)
|
|
$
|
(1,722,670
|
)
|
|
$
|
(12,331,330
|
)
|
Basic weighted average common shares outstanding
|
|
|
45,592,669
|
|
|
|
41,868,043
|
|
|
|
44,471,269
|
|
|
|
36,761,782
|
|
Options, convertible debentures and warrants
|
|
|
(1
|
)
|
|
|
(2
|
)
|
|
|
(1
|
)
|
|
|
(2
|
)
|
Diluted weighted average common shares outstanding
|
|
|
45,592,669
|
|
|
|
41,868,043
|
|
|
|
44,471,269
|
|
|
|
36,761,782
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net earnings (loss) per share
|
|
$
|
(0.01
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(0.34
|
)
|
|
(1)
|
As of September 30, 2012, we had (i) 9,319,335 shares of common stock issuable upon the exercise
of outstanding stock options, (ii) 11,126,878 shares of common stock issuable upon the exercise of outstanding warrants, (iii)
reserved an aggregate of 4,223,006 shares of common stock issuable under outstanding convertible debt agreements and (iv) 1,919,000
shares reserved under private options. These 26,588,219 shares, which would be reduced by applying the treasury stock method, were
excluded from diluted weighted average outstanding shares amount for computing the net loss per common share, because the net effect
would be antidilutive for each of the periods presented.
|
|
(2)
|
As of September 30, 2011, we had (i) 13,719,335 shares of common stock issuable upon the exercise
of outstanding stock options, (ii) 11,406,878 shares of common stock issuable upon the exercise of outstanding warrants, (iii)
reserved an aggregate of 4,615,170 shares of common stock issuable under outstanding convertible debt agreements and (iv) 1,919,000
shares reserved under private options. These 31,660,383 shares, which would be reduced by applying the treasury stock method, were
excluded from diluted weighted average outstanding shares amount for computing the net loss per common share, because the net effect
would be antidilutive for each of the periods presented.
|
NOTE 4 – COMPANY’S CONTINUED
EXISTENCE
The accompanying condensed financial statements
have been prepared in conformity with US GAAP, assuming we will continue as a going concern, which contemplates the realization
of assets and satisfaction of liabilities in the normal course of business. For the nine months ended September 30, 2012, we incurred
losses from operations of $1,722,670. At September 30, 2012, we had an accumulated deficit of $27,038,068 and a working capital
deficit of $7,192,781. Our ability to continue as a going concern is dependent on our ability to raise the required additional
capital or debt financing to meet short and long-term operating requirements. We believe that future private placements of equity
capital and debt financing are needed to fund our long-term operating requirements. We may also encounter business endeavors that
require significant cash commitments or unanticipated problems or expenses that could result in a requirement for additional cash.
If we raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership of our current
shareholders could be reduced, and such securities might have rights, preferences or privileges senior to our common stock. Additional
financing may not be available upon acceptable terms, or at all. If adequate funds are not available or are not available on acceptable
terms, we may not be able to take advantage of prospective business endeavors or opportunities, which could significantly and materially
restrict our operations. We are continuing to pursue external financing alternatives to improve our working capital position. If
we are unable to obtain the necessary capital, we may have to cease operations.
NOTE 5 – ACQUISITION OF SHEA
MINING AND MILLING ASSETS
On March 15, 2011, we entered into an exchange
agreement by and between us, Shea Mining, Afignis, LLC, Leslie Lucas Partners, LLC, Wits Basin and Alfred A. Rapetti (the “Shea
Exchange Agreement”) whereby we acquired certain assets from Shea Mining, which assets include those located in Tonopah (financed
through a note payable assigned to us), mine dumps, a property lease and a contract agreement in exchange for 35,000,000 shares
of our unregistered shares. The Shea Exchange Agreement did not include any operable toll milling equipment, employees or operational
processes and therefore has been accounted for as a purchase of a group of assets. We completed the Shea Exchange Agreement to
acquire the Shea assets and develop a toll milling services business of precious minerals.
Pursuant to the assignment of a note payable,
we executed an Assignment and Assumption of Loan Documents and Loan Modification Agreement, by and between us, Shea Mining and
NJB Mining, Inc. (the “Loan Modification Agreement”), dated March 15, 2011, for those assets located in Tonopah, Nevada
(“Tonopah”), consisting of land, buildings, mining tailings, a dormant milling facility, abandoned milling equipment
and water permits. The land encompasses 1,174 deeded acres, one of the largest private land holdings in Esmeralda County, Nevada.
Approximately 334 acres of this land has sitting on it an estimated 2.2 million tons of tailings known as the Millers Tailings
from the historic gold rush of Goldfield and Tonopah, Nevada.
The Tonopah property was subject to an
existing $2.5 million first deed of trust which was in default at the time of the Shea Exchange Agreement and included accrued
interest of $375,645, which was also assumed in the transaction. As part of the assignment, NJB Mining, Inc. (“NJB”)
modified the related note to allow us until May 14, 2011 to refinance this mortgage, which was subsequently extended numerous times.
As of August 31, 2011, we were still in default under the terms of the Loan Modification Agreement, and therefore entered into
a forbearance agreement with NJB, (the “NJB Forbearance Agreement”), in which NJB agreed to forbear from initiating
legal proceedings, including forbearance of the deed of trust and enforcement of its collection remedies. The NJB Forbearance Agreement
further provided for additional extensions up through December 9, 2011. On December 9, 2011, Pure Path Capital Management Company,
LLC. (“Pure Path”) purchased the Loan Modification Agreement and the NJB Forbearance Agreement directly from NJB. On
December 21, 2011, we entered into an amended and restated forbearance agreement with Pure Path (the “A&R Forbearance”),
whereby Pure Path extended the provisions of the NJB Forbearance Agreement. As of September 30, 2012, the principal amount outstanding
on the A&R Forbearance is $2,047,728 (plus accrued interest). Pure Path has provided an additional extension to stay any action
of the A&R Forbearance until November 30, 2012; such extension was provided without additional consideration. We are still
in negotiations with Pure Path in order to complete definitive documents to release the A&R Forbearance and structure a new
note. If such arrangements are not agreed to, we could lose the Tonopah property. Subsequent to September 30, 2012, at a telephonic
meeting of the board of directors on October 9, 2012 the board approved the issuance of 5 million shares of our common stock to
Pure Path Capital Management Group LLC per the Forbearance Agreement.
In connection with the Shea Exchange Agreement,
we also were assigned the ownership of approximately a six square mile section of mine dump material in Manhattan, Nevada (“Manhattan”).
The other assets we acquired consisted
of a property lease, which allowed us the use of an assay lab property and the associated water permits, (with a right to purchase
for $6 million) and a contract agreement, which allowed us the use of processing permits, located in Amargosa Valley, Nevada (“Amargosa”).
We paid a monthly base rent of $17,500 on this lease and $5,000 monthly on the contract agreement. In January 2012, the landlord
of the Amargosa lease caused to have served a Five Day Notice To Pay Rent Or Quit due to default in the monthly $17,500 lease payments.
The Company began immediate communications with the landlord, which resulted in a delay of further actions by the landlord to pursue
any remedies. Then on February 9, 2012, the landlord caused to have served an Order For Summary Eviction (“Eviction”)
due to continued default in lease payments. Effective with the Eviction, a total of $112,500 lease payments remain unpaid as well
as $10,500 of late fees required pursuant to the terms of the lease. On February 10, 2012, the Beatty County Sheriff completed
the Eviction at Amargosa and we as such, no longer have access to the assay lab or permits at Amargosa.
As previously mentioned, pursuant to the
Shea Exchange Agreement, we issued a total of 35 million shares of our common stock to the equity holders of Shea Mining in exchange
for certain of their assets, resulting in those holders owning an ownership interest of approximately 87% of our then currently
outstanding common stock (approximately 56% ownership interest on a fully diluted basis). Alfred A. Rapetti, our Chief Executive
Officer at the time, was granted an irrevocable voting proxy for half of the shares issued to the Shea Mining equity holders, which
continued until the affected shares are publicly sold after a period of at least six months, and thereafter in accordance with
all applicable securities laws. In August 2011, these rights were transferred to Blair Mielke, a director of the Company at that
time. We also agreed to indemnify Shea Mining from any liabilities arising after March 15, 2011 out of the Loan Modification Agreement
or the loan agreements.
The purchase consideration of the assets
acquired was calculated as follows:
Issuance of 35,000,000 shares of common stock with an estimated fair value of $0.89 per share (closing sales price on March 15, 2011)
|
|
$
|
31,150,000
|
|
Cash consideration ($365,000 still payable at September 30, 2012)
|
|
|
700,000
|
|
Assumption of NJB Mining mortgage
|
|
|
2,500,000
|
|
Assumption of accrued interest and other liabilities
|
|
|
463,184
|
|
Legal costs (includes issuance of 100,000 shares of common stock valued at $89,000)
|
|
|
205,258
|
|
Other direct expenses incurred in connection with the Shea Exchange Agreement
|
|
|
140,985
|
|
|
|
$
|
35,159,427
|
|
In conformity with accounting principles
generally accepted in the United States of America, cost of acquiring a group of assets is allocated to the individual assets within
the group based on the relative fair values of the individual assets.
The table below sets forth the final purchase
price allocation. The estimated fair value of the mineral properties and property and equipment was determined based on level 3
inputs using cost and market value approaches.
Tonopah mine tailings
|
|
$
|
24,888,252
|
|
Tonopah dormant milling facility
|
|
|
8,062,875
|
|
Tonopah land
|
|
|
1,760,000
|
|
Tonopah water rights
|
|
|
348,300
|
|
Manhattan mine dumps
|
|
|
100,000
|
|
Total
|
|
$
|
35,159,427
|
|
Simultaneous with these transactions, pursuant
to the Shea Exchange Agreement, Wits Basin exchanged 19,713,544 shares of our common stock it held for 10 million shares of our
newly created non-voting 5% preferred stock, referred to as the “Series A Preferred Stock.” The Series A Preferred
Stock has a liquidation preference of $10 million, payable only upon certain liquidity events or upon achievement of a market value
of our equity equaling $200 million or more. Additional details regarding the Series A Preferred Stock can be found in our Second
Amended and Restated Articles of Incorporation, which were filed with the Colorado Secretary of State on March 15, 2011. Additionally,
on April 29, 2011, we transferred our entire ownership interest in our subsidiary, Hunter Bates, which included the Bates-Hunter
Mine and related debt, to Wits Basin.
Furthermore, Wits Basin had entered into
certain commitments which involved shares of our common stock and as a result of their exchange of substantially all of the Standard
Gold common stock they held for Series A Preferred Stock, they could no longer honor those commitments. In consideration of Wits
Basin agreeing to the exchange, the Company agreed to enter into two stock option agreements as follows: (1) the Company granted
to one of Wits Basin’s major lenders a replacement stock option, on substantially the same terms as the stock option issued
by Wits Basin, to purchase up to 1,299,000 shares of the Company’s common stock at an exercise price of $1.00 per share expiring
on December 14, 2014 (of which the holder exercised on 10,000 shares of the option with a payment of $10,000 during 2011) and (2)
the Company granted to Wits Basin a replacement stock option, expiring on December 19, 2014, to purchase up to 630,000 shares of
the Company’s common stock, at an exercise price of $0.50 per share.
NOTE 6 – PROPERTY, PLANT AND EQUIPMENT
After we consummated the Shea Exchange
Agreement, we purchased some miscellaneous assets for use at the Amargosa property. On February 10, 2012, we were evicted from
the Amargosa property and we have not yet renegotiated different terms with the landlord. Since we no longer have access to any
of our equipment, we may have to forfeit recovery of such equipment, but until such time that we can determine that we can not
come to new terms with the Amargosa landlord, management has decided that no impairment charges will be recognized on these assets.
Depreciation expense recorded on allowable assets was calculated on a straight-line method over the estimated useful life, ranging
from five to seven years. Since all of our depreciable assets are idle and not in use, management did not record any depreciation
for the nine months ended September 30, 2012.
Components of our property, plant and equipment
are as follows:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Equipment
|
|
$
|
41,587
|
|
|
$
|
41,587
|
|
Less accumulated depreciation
|
|
|
(662
|
)
|
|
|
(662
|
)
|
|
|
$
|
40,925
|
|
|
$
|
40,925
|
|
NOTE 7 – DEBT ISSUANCE COSTS
We recorded debt issuance costs with respect
to legal services incurred relating to the various promissory notes issued. Debt issuance costs were being amortized on a straight-line
basis over the term of the corresponding debt (which approximated the effective interest method).
The following table summarizes the amortization
of debt issuance costs:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Debt issuance costs, net, beginning of period
|
|
$
|
275
|
|
|
$
|
13,367
|
|
Add: additional debt issuance costs
|
|
|
—
|
|
|
|
13,365
|
|
Less: debt issuance costs transferred (1)
|
|
|
—
|
|
|
|
(10,025
|
)
|
Less: amortization of debt issuance costs
|
|
|
(275
|
)
|
|
|
(16,432
|
)
|
Debt issuance costs, net, end of period
|
|
$
|
—
|
|
|
$
|
275
|
|
(1) The transfer of our Hunter
Bates subsidiary to Wits Basin occurred on April 29, 2011, requiring these costs directly attributable to the Bates-Hunter Mine
to be transferred.
NOTE 8 – SHORT-TERM NOTES PAYABLE
The following table summarizes the Company’s
short-term notes payable:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Promissory note issued on September 7, 2010, in the principal amount of $25,000 to Stephen Flechner, our President at the time, utilized for a potential mining project; stated interest rate of 5%; accrued interest of $2,649 at September 30, 2012; with a maturity date of November 30, 2010 and currently past due, original terms apply in the default period. (1)
|
|
$
|
25,000
|
|
|
$
|
25,000
|
|
|
|
|
|
|
|
|
|
|
Secured note payable originated in connection with the Shea Exchange Agreement, stated interest rate of 7.5%; accrued interest of $207,710 at September 30, 2012 based on the default interest rate of 12.5%. (2)
|
|
|
2,047,728
|
|
|
|
2,047,728
|
|
|
|
|
|
|
|
|
|
|
Pure Path has advanced, under verbal agreements, an aggregate $328,577 during the nine months ended September 30, 2012. These advances are unsecured, stated interest rate of 12.5%, all with a maturity date of November 30, 2012. On July 30, 2012, Pure Path exercised on warrants to purchase 1,000,000 shares of the Company’s unregistered common stock in exchange for a $250,000 ($237,956 of principal plus $12,044 accrued interest) reduction in their short-term advances. An aggregate accrued interest of $3,019 remains due at September 30, 2012.
|
|
|
90,621
|
|
|
|
—
|
|
Totals
|
|
$
|
2,163,349
|
|
|
$
|
2,072,728
|
|
(1) Secured by a personal
guarantee of Stephen D. King, our CEO at the time.
(2) On December 9, 2011, Pure
Path Capital Management Company, LLC (“Pure Path”) purchased the Loan Modification Agreement and the NJB Forbearance
Agreement directly from NJB. On December 21, 2011, we entered into an amended and restated forbearance agreement with Pure Path
(the “A&R Forbearance”), whereby Pure Path extended the provisions of the NJB Forbearance Agreement. Pure Path
has provided an additional extension to stay any action of the A&R Forbearance until November 30, 2012; such extension was
provided without additional consideration.
The Company has placed in escrow
the following: (i) a Deed in Lieu of Foreclosure, (ii) Water Rights Deed and (iii) a Bill of Sale. Should the Company not meet
the requirements of the November 30, 2012 deadline, Pure Path has the right to take immediate title to the assets located in Tonopah
and interest in all leases, contracts and permits related to ownership, occupancy and operation of said assets. We are still in
negotiations with Pure Path in order to complete definitive documents to release the A&R Forbearance and structure a new note.
If such arrangements are not agreed to, we could lose the Tonopah property. Subsequent to September 30, 2012, at a telephonic meeting
of the board of directors on October 9, 2012 the board approved the issuance of 5 million shares of our common stock to Pure Path
Capital Management Group LLC per the Forbearance Agreement.
Summary
The following table summarizes the short-term
notes payable activity in 2012:
Balance at December 31, 2011
|
|
$
|
2,072,728
|
|
Add: advances from Pure Path
|
|
|
328,577
|
|
Less: principal used for exercise of warrant (see Note 10)
|
|
|
(237,956
|
)
|
Balance at September 30, 2012
|
|
$
|
2,163,349
|
|
The weighted average interest rate on short-term
notes payable at September 30, 2012 was 12.4%.
NOTE 9 – CONVERTIBLE NOTES PAYABLE
Beginning in January 2011 through November
2011, we entered into six-month convertible promissory notes with accredited investors (the “CP Notes”). The terms
of the CP Notes are: (i) accrue interest at 6% per annum (ii) include the right to convert into our common stock at any time, at
a price of $0.50 per share, and (iii) the issuance of a two-year stock purchase warrant, with an exercise price of $0.50 per share,
at a rate of two warrants per $1 of CP Notes.
In June 2012, the Board authorized a reduction
in the exercise of the warrant exercise price, from $0.50 to $0.25 per share for any additional CP Notes entered into, but still
at a rate of two warrants per $1 of CP Notes. The Company entered into one such CP Note during June 2012 of $25,000.
The warrants created an aggregate debt
discount of $1,489,253. In addition, due to proceeds allocated between the debt and warrants, beneficial conversion charges were
created totaling an additional debt discount of $1,074,066. Both discounts are being amortized over the six-month term of each
of the respective CP Notes.
For the nine months ended September 30,
2012, we recorded $131,651 of amortization of the value assigned to the additional beneficial conversion feature of the CP Notes
and $145,759 amortization of warrant debt discount. As of September 30, 2012, there remains $3,422 of unamortized debt discount
to be recognized.
During June 2012, one of the note holders
transferred an aggregate $500,000 of CP Notes and accrued interest to Pure Path in a private transaction. On June 28, 2012, Pure
Path converted the $478,186 of principal and $21,814 of accrued interest into 1,000,000 shares of unregistered common stock.
Through September 30, 2012, convertible
note holders converted $569,936 of principal plus $22,931 accrued interest into 1,185,735 shares of our common stock.
The following table summarizes the Company’s
convertible notes:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Convertible promissory notes net of unamortized discount of $3,422 at September 30, 2012; interest rate of 6%; accrued interest of $192,716 at September 30, 2012 and all but one of these CP Notes are past due and original terms apply in the default period.
|
|
$
|
2,108,081
|
|
|
$
|
2,300,973
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
|
2,108,081
|
|
|
|
2,300,973
|
|
Less: current portion
|
|
|
(2,108,081
|
)
|
|
|
(2,300,973
|
)
|
Long-term portion
|
|
$
|
—
|
|
|
$
|
—
|
|
As of September 30, 2012, the outstanding
principal balance of convertible notes is $2,111,503.
NOTE 10 - SHAREHOLDERS’ EQUITY
Preferred
Stock
Simultaneous with the Shea Exchange Agreement,
Wits Basin exchanged 19,713,544 shares of our common stock it held for 10 million shares ($.001 par value each) of our newly created
non-voting 5% preferred stock, referred to as the "Series A Preferred Stock" with an original issue price of $1.00 per
share. The Series A Preferred Stock has a liquidation preference of $10 million, payable only upon certain liquidity events or
upon achievement of a market value of our equity equaling $200 million or more. As of September 30, 2012, there were undeclared
dividends of approximately $771,000 on the outstanding Series A Preferred Stock. In conformity with accounting principles generally
accepted in the United States of America, these undeclared dividends have not been accrued in the Company’s financial statements
and had no effect on the earnings per share calculation.
Common
Stock Issuances
During the three months ended September
30, 2012, Pure Path exercised on warrants to purchase 1,000,000 shares of the Company’s unregistered common stock in exchange
for a $250,000 reduction in their short-term advances ($237,956 of principal plus $12,044 accrued interest). As an inducement to
exercise the warrants, the Company reduced the exercise price from $0.50 to $0.25 per share. The warrant modification resulted
in an additional charge to interest expense of $54,226. Pure Path received these warrants in a private transaction from Tina Gregerson
(see Note 11 – Related Party Transactions).
Stock
Option Grants
We have one stock option plan: the 2010
Stock Incentive Plan, as amended (the “Plan”). Stock options, stock appreciation rights, restricted stock and other
stock and cash awards may be granted under the Plan. In general, options vest over a period ranging from immediate vesting to five
years and expire 10 years from the date of grant. Effective July 25, 2011, the Plan was amended to increase the total shares of
stock which may be issued under the Plan from 13,500,000 to 14,500,000.
During the three months ended September
30, 2012, no stock options were granted and there remains an aggregate of 5,400,000 shares of our common stock available to be
granted under the Plan.
The Company uses the Black-Scholes pricing
model as a method for determining the estimated fair value for stock awards. Compensation expense for stock awards is recognized
on a straight-line basis over the vesting period of service awards and for performance based awards, the Company recognizes the
expense when the performance condition is probable of being met.
In determining the compensation cost of
the options granted during fiscal 2012 and 2011, the fair value of each option grant had been estimated on the date of grant using
the Black-Scholes pricing model and the weighted average assumptions used in these calculations are summarized below:
|
|
2012
|
|
|
2011
|
|
Risk-free interest rate
|
|
|
1.89%
|
|
|
|
2.00% – 2.25%
|
|
Expected volatility factor
|
|
|
153%
|
|
|
|
146% - 158%
|
|
Expected dividend
|
|
|
—
|
|
|
|
—
|
|
Expected option term
|
|
|
5 years
|
|
|
|
10 years
|
|
The Company reviews its current assumptions
on a periodic basis and adjusts them as necessary to ensure an accurate valuation. The risk-free interest rate is based on the
Federal Reserve Board’s constant maturities of the U.S. Treasury bond obligations with terms comparable to the expected life
of the options at their issuance date. The Company uses historical data to estimate expected forfeitures, expected dividend yield,
expected volatility of the Company’s stock and the expected life of the options.
We recorded $265,000 and $6,825,976 related
to employee stock compensation expense for the nine months ended September 30, 2012 and 2011, respectively. All stock compensation
expense is included in general and administrative expense. The compensation expense had a $0.01 and $0.19 per share impact on the
loss per share for the nine months ended September 30, 2012 and 2011, respectively.
The following table summarizes information
about the Company’s stock options:
|
|
Number of
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
Options outstanding – December 31, 2011
|
|
|
15,638,335
|
|
|
$
|
0.62
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
100,000
|
|
|
|
0.47
|
|
Canceled or expired
|
|
|
(4,500,000
|
)
|
|
|
0.51
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
Options outstanding – September 30, 2012
|
|
|
11,238,335
|
|
|
$
|
0.66
|
|
|
|
|
|
|
|
|
|
|
Options exercisable – September 30, 2012
|
|
|
11,238,335
|
|
|
$
|
0.66
|
|
|
|
|
|
|
|
|
|
|
Weighted average fair value of options granted during the nine months ended September 30, 2012
|
|
|
|
|
|
$
|
0.43
|
|
Weighted average fair value of options granted during the nine months ended September 30, 2011
|
|
|
|
|
|
$
|
0.59
|
|
The following tables summarize information
about stock options outstanding and exercisable at September 30, 2012:
|
|
|
Options Outstanding and Exercisable
|
|
Range of
Exercise Prices
|
|
|
Number
Outstanding
|
|
|
Weighted
Remaining
Contractual
Life
|
|
Weighted
Average
Exercise
Price
|
|
|
Aggregate
Intrinsic
Value(1)
|
|
$
|
0.47 to $0.60
|
|
|
|
7,649,335
|
|
|
7.7 years
|
|
$
|
0.52
|
|
|
$
|
—
|
|
$
|
0.72 to $0.90
|
|
|
|
2,000,000
|
|
|
7.6 years
|
|
$
|
0.86
|
|
|
$
|
—
|
|
$
|
1.00 to $1.50
|
|
|
|
1,589,000
|
|
|
3.3 years
|
|
$
|
1.09
|
|
|
$
|
—
|
|
$
|
0.47 to $1.50
|
|
|
|
11,238,335
|
|
|
7.1 years
|
|
$
|
0.66
|
|
|
$
|
—
|
|
(1) The aggregate intrinsic
value in the table represents the difference between the closing stock price on September 30, 2012 and the exercise price, multiplied
by the number of in-the-money options that would have been received by the option holders had all option holders exercised their
options on September 30, 2012. No options were exercised during the nine months ended September 30, 2012.
Stock
Warrants
During the three months ended September
30, 2012, Pure Path exercised on warrants to purchase 1,000,000 shares of the Company’s unregistered common stock in exchange
for a $250,000 reduction in their short-term advances ($237,956 of principal plus $12,044 accrued interest). Pure Path received
these warrants in a private transaction from Tina Gregerson (see Note 11 – Related Party Transactions).
The following table summarizes information
about the Company’s stock warrants outstanding:
|
|
Number
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Range
of
Exercise
Price
|
|
|
Weighted
Remaining
Contractual
Life
|
|
Outstanding at December 31, 2011
|
|
|
12,076,878
|
|
|
$
|
0.62
|
|
|
$
|
0.50 – 1.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
50,000
|
|
|
$
|
0.25
|
|
|
$
|
0.25
|
|
|
|
|
Cancelled or expired
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
Exercised
|
|
|
(1,000,000
|
)
|
|
$
|
0.25
|
|
|
$
|
0.25
|
|
|
|
|
Warrants outstanding at September 30, 2012
|
|
|
11,126,878
|
|
|
$
|
0.63
|
|
|
$
|
0.25 – 1.00
|
|
|
1.9 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants exercisable at September 30, 2012
|
|
|
11,126,878
|
|
|
$
|
0.63
|
|
|
$
|
0.25 – 1.00
|
|
|
|
|
The aggregate intrinsic value of the 11,126,878
outstanding and exercisable warrants at September 30, 2012, was $0. The intrinsic value is the difference between the closing stock
price on September 30, 2012 and the exercise price, multiplied by the number of in-the-money warrants had all warrant holders exercised
their warrants on September 30, 2012.
NOTE 11 – RELATED PARTY TRANSACTIONS
Afignis, LLC
Pursuant to the Shea Exchange Agreement
on March 15, 2011, by and between us, Shea Mining, Afignis, LLC, Leslie Lucas Partners, LLC, Wits Basin and Alfred A. Rapetti,
we acquired certain assets from Shea Mining in exchange for 35,000,000 shares of our unregistered shares. Those shares were issued
equally to the Shea Mining members of Afignis, LLC and Leslie Lucas Partners, LLC. Sharon Ullman, our Chief Executive Officer and
a member of our Board, is the Manager of Afignis, LLC.
Midwest Investment Partners LLC
Blair Mielke, a former member of our Board,
is also a Managing Member of Midwest Investment Partners LLC (“Midwest”). Through September 27, 2012, Midwest was holding
the voting rights of the 17,500,000 Leslie Lucas Partners, LLC shares of our common stock until such time as the shares were sold
in the public markets in accordance with all applicable Federal and state securities laws. Some of these proxy shares have been
revoked. At September 30, 2012, Mr. Mielke still controls 12,048,334 shares. Additionally, during 2011, the Company entered into
two six-month 6% convertible promissory notes (as described in Note 9 – Convertible Promissory Notes) with Midwest, aggregating
$75,000. At September 30, 2012, the aggregate outstanding balance on these notes was $75,000. In connection with
these notes, Midwest was also granted two-year stock purchase warrants to purchase up to 150,000 shares of the Company’s
common stock at $0.50 per share.
Tina Gregerson/Pure Path
Tina Gregerson was appointed to our
board of directors on October 1, 2012 and was appointed to chair the Company’s Compensation Committee. Ms. Gregerson is
also a member and director of Pure Path. Ms. Gregerson holds 170,000 shares of our common stock, which she received as a
distribution from Leslie Lucas Partners, LLC. Ms. Gregerson transferred all of her convertible promissory notes and the
associated warrants to Pure Path in a private transaction in June 2012. Pure Path currently holds an aggregate 2,000,000
shares of our common stock: (1) During the three months ended June 30, 2012, Pure Path converted $478,186 of principal and
$21,814 of accrued interest into 1,000,000 shares and (2) During the three
months ended September 30, 2012, Pure Path received 1,000,000 shares from the exercise of warrants in exchange
for a $250,000 reduction in their short-term advances ($237,956 of principal plus $12,044 accrued interest); of which Pure
Path still has $90,621 due in short-term advances and $3,019 of accrued interest as of September 30, 2012. Additionally, as of September 30, 2012, the Company is indebted to Pure Path in
the amount of $21,814 and $336 related to convertible promissory notes and associated accrued interest, respectively. Also
see Note 5 – Acquisition of Shea Mining and Milling Assets regarding the pending issuance of an additional 5,000,000
shares of our common stock.
Michael Markiewicz
Michael Markiewicz was appointed to our
board of directors on July 2, 2012 and was appointed to serve on the Company’s Compensation and Audit Committees. Mr. Markiewicz
is a partner with Fogel Neale Partners, LLC and is the Chief Financial Officer of Pure Path. Mr. Markiewicz holds the voting rights
for Pure Path’s 2,000,000 shares of common stock.
NOTE 12 – COMMITMENTS AND
CONTINGENCIES
In May 2011, the Company entered into an
agreement with a consultant to operate and manage a future toll milling facility in Clark County, Nevada as well as to perform
other services, as requested by the Company. The term of the agreement is for two years and may be renewed by mutual agreement
of the parties. In return for these services, the Company has agreed to the following compensation throughout the term of
this agreement:
|
(1)
|
Issue 300,000 shares of its unregistered common stock, valued at $564,000 or $1.88 per share, the
closing price of the Company’s stock on the date the agreement was entered into;
|
|
(2)
|
pay the consultant a cash payment of $10,000 per month plus certain living accommodation expenses
for a residence in Clark County;
|
|
(3)
|
pay the consultant 25% of the calculated monthly net profits, as defined in the agreement, of the
Clark County toll milling facility; and
|
|
(4)
|
pay the consultant 10% of the Company’s net profits derived from those contracts originated
by the consultant.
|
As of September 30, 2012, the Company has
not yet constructed a toll milling facility in Clark County, Nevada. To date, the Company has not issued any stock to the
consultant and made only one of the $10,000 monthly payments due the consultant. At September 30, 2012, the Company has accrued
$387,750 and $145,940 for the future issuance of the common stock and unpaid monthly cash payments, respectively.
NOTE 13 – SUBSEQUENT EVENT
At a telephonic meeting of the board of directors
on October 9, 2012 the board approved the issuance of 5 million shares of our common stock to Pure Path Capital Management Group
LLC per the Forbearance Agreement.