|
Notes to Condensed Consolidated Financial Statements
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NOTE 1 – DESCRIPTION OF BUSINESS AND BASIS OF FINANCIAL STATEMENT PRESENTATION
Golden Phoenix Minerals, Inc. (the “Company” or “Golden Phoenix”) is a mineral exploration and development company engaged in acquiring and consolidating mineral properties with potential production and future growth through exploration discoveries. Pending requisite funding, our current growth strategy is focused on the expansion of our operations through the development of mineral properties into joint ventures or royalty mining projects.
We have embarked upon an acquisition plan targeting mineral projects with near-term production potential throughout North, Central and South America. As funding allows, we anticipate analyzing several prospective properties, with a view towards optioning a select group of properties on acceptable terms and conditions. From the optioned properties, we hope to identify those projects that can be advanced toward commercial production.
The Company was formed in Minnesota on June 2, 1997. On May 30, 2008, the Company reincorporated in Nevada.
On April 14, 2011, we, through a wholly-owned subsidiary, Ra Minerals, Inc. (“Ra Minerals”), closed the acquisition of 100% of the issued and outstanding shares of Ra Resources Ltd., a corporation incorporated under the laws of the Province of Ontario. Our accompanying condensed consolidated financial statements include the accounts of the Company and the accounts of Ra Minerals from April 14, 2011 forward. All intercompany accounts and balances have been eliminated in consolidation.
The interim financial information of the Company as of June 30, 2013 and for the three months and six months ended June 30, 2013 and 2012 is unaudited, and the balance sheet as of December 31, 2012 is derived from audited financial statements. The accompanying condensed consolidated financial statements have been prepared in accordance with U. S. generally accepted accounting principles for interim financial statements. Accordingly, they omit or condense notes and certain other information normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles. The accounting policies followed for quarterly financial reporting conform with the accounting policies disclosed in Note 2 to the Notes to Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2012. In the opinion of management, all adjustments that are necessary for a fair presentation of the financial information for the interim periods reported have been made. All such adjustments are of a normal recurring nature. The results of operations for the three months and six months ended June 30, 2013 are not necessarily indicative of the results that can be expected for the fiscal year ending December 31, 2013. The unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2012.
Certain amounts in the condensed consolidated financial statements for the three months and six months ended June 30, 2012 have been reclassified to conform to the current period presentation.
NOTE 2 – GOING CONCERN
Our condensed consolidated financial statements are prepared using accounting principles generally accepted in the United States of America applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. However, we have a history of operating losses since our inception in 1997, and have an accumulated deficit of $62,359,991 and a total stockholders’ deficit of $3,620,352 at June 30, 2013. A significant portion of these deficits result from our accounting policy of expensing exploration and evaluation costs for our mineral properties, including acquisition of exploration mineral properties and interests in joint ventures with mineral properties in the exploration and evaluation stage, due to the uncertainty as to the recoverability of these costs. Our only source of operating revenues for the recent past has been minimal rental income from our drilling equipment. We have sold or are currently offering for sale the assets of our drilling division, and will have no more revenues from this source.
As more fully described in these Notes to Condensed Consolidated Financial Statements and elsewhere in this quarterly report, we currently own or have entered into options and agreements for the acquisition of certain mineral properties. None of these mineral properties currently have proven or probable reserves. We will be required to raise significant additional capital to fund our operations and to complete the acquisition of the interests in and further the exploration, evaluation and development of our existing mineral properties and other prospects. There can be no assurance that we will be successful in raising the required capital or that any of these mineral properties will ultimately attain a successful level of operations.
In September 2011, we entered into a senior, secured gold stream debt facility for up to $15.5 million (the “Gold Stream Facility”), secured by substantially all our assets, with Waterton Global Value, L.P. (“Waterton”). On January 24, 2012, we received a Notice of Default and Acceleration, and subsequently received supplemental Notices of Default, and a Notice of Disposition of Collateral from Waterton under the Gold Stream Facility. We refuted each assertion of default. Through April 30, 2012, we had borrowed an aggregate principal amount of $6,000,000 from the Gold Stream Facility. On April 30, 2012, our 30% interest in Mineral Ridge Gold, LLC (the “Mineral Ridge LLC”) was foreclosed upon by Waterton and sold at a public auction, at which the only bidder present was Waterton. Our interest in the Mineral Ridge LLC was sold to Waterton and indebtedness to Waterton with a total book value of $6,209,912 was extinguished.
Effective July 23, 2012 and subsequently amended effective July 30, 2012, we entered into a Rescission and Release Agreement (the “Rescission Agreement”) with Silver Global, S.A. (“Silver Global”) and Golden Phoenix Panama, S.A. (the “JV Company”) (collectively the “Parties”) whereby the Parties agreed to resolve outstanding disputes and rescind the Definitive Acquisition Agreement entered into on September 16, 2011 to develop the Santa Rosa mining project in Panama. In accordance with the terms of the Rescission Agreement, Silver Global is to return and pay to us a total of $4,100,000 in scheduled payments over twelve months, subject to a discount of $750,000 as consideration for timely payments, and return to us for cancellation of 25,000,001 shares of our common stock. We are to transfer our 15% ownership interest in the JV Company to Silver Global via release of our 15 shares of JV Company common stock in tranches concurrent with our receipt of the scheduled payments over twelve months. We received the first payment from Silver Global of $350,000 in August 2012 and the 25,000,001 shares of our common stock were returned to us in October 2012. However, Silver Global elected not to make the scheduled January 2013 payment of $1,000,000, forfeiting its right to the $750,000 discount, and elected not to make further payments in July 2013 as scheduled in the Rescission Agreement. As a result, we currently own a 10% interest in the JV Company.
Because of the negative impact of disputes and litigation on our fund raising efforts, including the foreclosure and sale of our interest in the Mineral Ridge LLC and the rescission of the joint venture in Panama, we have been unable to raise the capital necessary to continue our mineral property exploration and evaluation activities and fund our operations. As a result, we have significantly scaled back our mineral property acquisition and development plans and reduced the level of our operations. There can be no assurance that we will be successful in our efforts to obtain financing, or that we will be successful in our efforts to continue to raise capital at favorable rates or at all. If we do not receive further payments from Silver Global, and if we are unable to raise sufficient capital to meet our current obligations, we may be forced to further reduce or terminate operations and file for reorganization or liquidation under the bankruptcy laws. These factors and our negative working capital position together raise doubt about our ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
NOTE 3 – MINERAL PROPERTIES
We currently hold interests in or have plans to pursue the mineral property opportunities discussed below. These exploration projects currently do not have proven or probable reserves.
Nevada Properties and Projects
Duff Claims Block, Humboldt County, Nevada
We own the Duff claims block comprised of 103 mineral claims located along the western flank of the Pine Forest Range, 20 miles south of Denio, Humboldt County, Nevada. The claims block, which was acquired in 2007, extends from Oakly Canyon south of the Ashdown Mine to the border of the Blue Lake Wilderness Study Area. Metals historically mined in the general region include gold, molybdenum, copper, tungsten, and antimony.
The major mine feature of the Duff claims is the Adams Mine, which at one time produced silica. However, there are historical reports that substantial gold was also extracted from the quartz rock. Gold has also been mined in the Vicksburg, Ashdown, and Cherry Creek canyons to the north, and Leonard Canyon to the south of the Duff claims.
We received a notification from an individual claiming overlapping ownership and priority of certain claims comprising the Duff claims block and Adams Mine. We are looking into the facts surrounding the potential dispute. Although we do not anticipate a material change as a result of this matter, we may be required to revise our description of our claim holdings or expend additional funds to maintain the interest we currently believe we hold.
For financial reporting purposes, we have no historical cost basis in the Duff claims block; therefore, no amounts related to this mineral property are included in the accompanying consolidated financial statements.
Vanderbilt, Coyote Fault and Coyote Fault Extension Properties, Esmeralda County, Nevada
Vanderbilt
The Vanderbilt property is within 4 miles of the town of Silver Peak, Nevada and highway 265 via Coyote Road. It is comprised of 44 claims, plus 3 patented claims and is located on the southern flank of Mineral Ridge and is within the Silver Peak Range. The Vanderbilt property is within the middle of the Walker Lane tectonic belt with the Sierra uplift to the west and the Basin and Range to the east. Phase I geologic mapping and outcrop sampling (above ground) was completed in October 2010, resulting in average grades of 2.1 g/t gold and 58.6 g/t silver. Phase II exploration program (below ground) in the old mine workings was commenced during the first quarter of 2011 to help identify drill targets, with an exploratory drill program expected to begin in the near term as funding permits.
Coyote Fault/Coyote Fault Extension
The Coyote Fault/Coyote Fault Extension claims are within nine miles of Silver Peak, Nevada and Hwy 265 via Coyote Road. They are comprised of 110 contiguous claims and are also located in the middle of the Walker Lane tectonic belt with Sierra Block uplift to the west and the Basin and Range to the east. The property is on the northern flank of Mineral Ridge and is along the eastern edge of the Silver Peak Range. Phase I geologic mapping and outcrop sampling (above ground) was completed on the Coyote Fault claim group (38 claims) in December, 2010, which identified a new potential gold exploration target. Geological mapping of the Coyote Extension claim group (72 claims) is planned for the near term as funding permits.
Original Asset Purchase and Option Agreements
In July 2010, we entered into two separate agreements with Mhakari Gold (Nevada), Inc. (“Mhakari”), an Asset Purchase Agreement and an Option Agreement, which provide us the ability to acquire an 80% interest in each of the historic Vanderbilt silver/gold mine and Coyote Fault gold and silver project, both in Esmeralda County, Nevada (collectively, the “Mhakari Properties”). Subsequently, in July 2011, we entered into an Option Agreement with Mhakari to acquire an 80% interest in that certain property referred to as the “Coyote Extension” that extends and augments the Coyote Fault property. These agreements required us to make certain cash payments, issue shares of our common stock and warrants to purchase shares of our common stock and incur defined minimum exploration and development expenditures.
Further, upon satisfaction of certain of the above-referenced milestones, we were to receive a 51% interest in the Mhakari Properties in the form of a joint venture with Mhakari, such 51% interest to automatically increase to 80% upon satisfaction of the overall exploration and development expenditure obligations.
Through the year ended December 31, 2012, we had only partially met our obligation to expend no less than $150,000 in exploration and development expenditures in the first 12 months on the Coyote Fault property and Mhakari had not completed an obligation to exercise certain warrants.
Amended and Restated Option Agreement
On February 26, 2013, we entered into an Amended and Restated Option Agreement with Mhakari with respect to the Mhakari Properties, which terminated all rights and obligations under the prior agreements and restated the parties’ agreement with respect to each of the Mhakari Properties.
Mhakari granted us an option to acquire up to an undivided 80% interest in the Mhakari Properties for the following consideration to be paid by us to Mhakari:
Cash payments: $25,500, payable $20,000 upon execution of the agreement (which amount was paid) and $5,500 within 60 days thereafter; $20,000 payable on the 3 month anniversary of the agreement; $15,000 on the 6 month anniversary of the agreement; and $50,000 on the 15 month anniversary of the agreement. We currently are in default on the $5,500 60-day payment and the $20,000 3-month payment.
Equity payments: 8,000,000 shares of our common stock upon the execution of the agreement (which shares were issued April 22, 2013); an additional 7,000,000 shares of our common stock on the 4 month anniversary of the agreement (which shares were issued July 2, 2013); and an additional 5,000,000 shares on the 12 month anniversary of the agreement.
Work commitment: $500,000 in exploration and development expenditures on the Mhakari Properties within 18 months of the date of the agreement; an additional $500,000 in exploration and development expenditures between 18 months and 30 months from the date of the agreement; with no less than $2,000,000 in exploration and development expenditures in the aggregate within 48 months from the date of the agreement. Inclusive in this work commitment, we are to earmark no less than $10,000 per contract year for 4 years to enhancing safety on the Mhakari Properties.
Upon satisfying the consideration payable under the agreement, we shall receive an 80% undivided interest in the Mhakari Properties and the parties shall enter into a joint venture to further develop the Mhakari Properties, with us retaining an 80% interest in the joint venture. In the event that we fail to satisfy the entire purchase price by completing all cash, equity and work commitment payments within the required time frames, the agreement will be deemed to have been terminated and all payments made to date will be forfeited to Mhakari with no interest earned by us in the Mhakari Properties.
North Springs Properties
Under the terms of an Exploration and Mining Lease with Options to Purchase Agreement effective June 17, 2013 (the “North Springs Agreement”), we acquired the rights to 16 unpatented lode mining claims on BLM lands in Esmeralda County, Nevada, located near the operating Mineral Ridge gold project (the “North Springs Properties”). As required by the North Springs Agreement, we made advance royalty payments of $5,000 cash in June 2013 and issued 1,000,000 shares of our common stock in July 2013. We are further obligated to make the following payments under the terms of the North Springs Agreement:
|
Date
|
|
Cash Payment
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|
Common Share Payment
|
|
|
|
|
|
|
|
First Anniversary of Effective Date
|
|
$
|
10,000
|
|
1,000,000 shares
|
|
|
|
|
|
|
|
|
Second Anniversary of Effective Date
|
|
$
|
15,000
|
|
1,000,000 shares
|
|
|
|
|
|
|
|
|
Third Anniversary of Effective Date
|
|
$
|
20,000
|
|
1,000,000 shares
|
|
|
|
|
|
|
|
|
Fourth Anniversary of Effective Date
|
|
$
|
25,000
|
|
1,000,000 shares
|
|
|
|
|
|
|
|
|
Fifth Anniversary of Effective Date
|
|
$
|
30,000
|
|
|
|
|
|
|
|
|
|
|
Six through Tenth Anniversary of
Effective Date
|
|
$
|
50,000
|
|
|
|
|
|
|
|
|
|
|
Eleventh through Fifteenth Anniversary of
Effective Date
|
|
$
|
75,000
|
|
|
|
|
|
|
|
|
|
|
Sixteenth and Each Subsequent Anniversary
of Effective Date
|
|
$
|
100,000
|
|
|
Subject to prior termination, the term of the North Springs Agreement shall be for a period of twenty years commencing on the effective date. The Company is obligated to pay a production royalty equal to three percent of the Net Smelter Returns (“NSR”) from the production or sale of minerals from the North Springs Properties and meet defined minimum annual work commitments ranging from $10,000 in the first year to $100,000 beginning in the fifth year and thereafter
Canadian Properties and Projects
Northern Champion Property, Ontario, Canada
The Northern Champion property consists of approximately 880 acres in Griffith and Brougham Townships in the Province of Ontario, Canada (“Northern Champion Property”). On April 18, 2006, we executed a Purchase Agreement with four individuals (collectively, the “Vendors”) to acquire 5 registered claims totaling 22 units on the Northern Champion Property together with a NI 43-101 Technical Report and Feasibility Study describing a molybdenite deposit within the area of the claims. The agreement reserved a collective 3.3% Net Smelter Return (“NSR”) for the Vendors on the sales of minerals taken from the Northern Champion Property. We will have the right of first refusal to purchase 1.65% of said NSR from the Vendors for $1,650,000. In 2007, we completed all of our payment obligations under the Purchase Agreement and now own 100% of the Northern Champion Property, subject to the NSR reserved by the Vendors.
During 2010 and 2011, we began mapping the geologic surface features and topography of the Northern Champion Property, into a single, regional metric scale map, in preparation to advance this molybdenum property. Once the mapping is complete and as funding allows, we expect to begin Phase II planning for trenching, geochemical sampling and/or drilling of previously identified zones to the east of the current open-cut mine. An IP (induced polarization) anomaly to the north of the open-cut zone is also expected to be investigated.
North Williams Township Option Agreement
On March 1, 2011, we entered into an option agreement with four individuals to acquire a 100% undivided interest in 61 unpatented mining claim units in North Williams Township in the Province of Ontario, Canada. In order to maintain in force the working right and option granted to us, we must make the following payments to the optionors: down payment on signing the option agreement – cash payment of $20,000 and 100,000 shares of our common stock (which payment was made in March 2011 with a total value of $18,500 assigned to the common shares issued); 12 months from signing – cash payment of $40,000 and 100,000 shares of our common stock; 24 months from signing – cash payment of $80,000 and 100,000 shares of our common stock; and 36 months from signing – cash payment of $160,000 and 100,000 shares of our common stock. Due to our lack of funding, we are not current with these payment obligations.
Shining Tree Properties, Ontario, Canada
The mineral properties purchased in the Ra Resources acquisition in April 2011 are located within the Shining Tree District in Northern Ontario. The historic Shining Tree area is currently undergoing a resurgence of exploration where five other companies have been preparing and engaging in drill programs.
Peru Property Interests
During 2011, we executed and amended certain agreements with Sala-Valc S.A.C., a Peruvian corporation (“SV”) pursuant to which we will acquire a 100% interest in certain gold and molybdenum properties in Peru, including: the Porvenir tungsten molybdenum stockpile, the Porvenir tungsten molybdenum exploration property (collectively, the “Porvenir Properties”), the Alicia gold exploration area near and abutting Porvenir and two large gold exploration plays in the Pataz District, Group of the Eight and the Tornitos (collectively, the “Gold Properties”) (the Porvenir Properties and Gold Properties are collectively referred to herein as the “Peru Properties”). The Peru Properties total approximately 6,200 hectares of prospective exploration ground, or approximately 25 square miles.
SV and the Company have not finalized the transfer agreements to be filed with Peruvian governmental authorities to affect the transfer of the Peru Properties to us, and there can be no assurance that we will finalize such transfer agreements and resolve related matters with SV in the near term.
We entered into a Membership Interest Purchase Agreement effective March 7, 2011 (the “Molyco Agreement”) with Pinnacle Minerals Corporation (“Pinnacle”) and Salwell International, LLC (“Salwell”) pursuant to which we were to acquire Pinnacle’s 32.5% membership interest in Molyco, LLC (“Molyco”). Molyco owns or controls approximately 30,000 tons of the molybdenum stockpile comprising a portion of the Porvenir property in Peru. The remaining interest in Molyco is to be transferred to us by Salwell as part of the agreements with SV, referenced above.
We are to pay Pinnacle $750,000 for the membership interest as follows: (i) a non-refundable deposit of $75,000 no later than two business days after the effective date of the agreement; (ii) a payment of $175,000 no later than two business days after the closing of the agreement (as defined); and the issuance of a promissory note in the principal amount of $500,000, with payments to be made in twelve equal monthly installments on the first of each month commencing on May 1, 2011.
On October 31, 2011, we closed the Molyco Agreement pursuant to an Amendment to Membership Interest Purchase Agreement dated October 28, 2011 (the “Molyco Amendment”). Pursuant to the Molyco Amendment, we acquired Pinnacle’s 32.5% membership interest in Molyco for the previously agreed purchase price consisting of: (i) a cash payment of $250,000 (which amount was paid; and (ii) issuance of two non-interest bearing promissory notes as follows:
(i) Note 1 in the amount of $250,000 with two monthly payments of $15,000 in each of November 2011 and December 2011; one monthly payment of $30,000 in January 2012; two monthly payments of $20,000 in each of February 2012 and March 2012; and increasing to $30,000 per month thereafter until payment in full, subject to reduction in principal for early repayment as may be mutually agreed upon by the parties; and
(ii) Note 2 in the amount of $250,000, such note to be convertible, and repaid based on conversion into 1,000,000 shares of our common stock, which conversion right shall vest 12 months from Closing, subject to our first right of refusal to repurchase some or all of the shares at a per share price of $0.25, which repurchase right shall expire on the date that is 24 months from the closing date of October 31, 2011.
Because the documents required to transfer ownership of the Peru Properties to us have not been finalized, we have made only partial payments on these notes payable. There can be no assurance that we will complete the acquisition of Molyco. Pinnacle has initiated legal action related to these unpaid obligations (see Note 14).
Mina Santa Rosa
During the year ended December 31, 2011, extensive efforts were directed toward the acquisition and advancement of the Santa Rosa, Panama project. The Santa Rosa gold deposit is located near the city of Cañazas in Veraguas Province, Panama, approximately 300 kilometers southwest of Panama City. On July 9, 2011, we entered into a letter of intent with Silver Global, S.A. (“Silver Global”) to acquire an interest in the Santa Rosa gold mine (“Santa Rosa” or “Mina Santa Rosa”). On September 16, 2011, we entered into a Definitive Acquisition Agreement to acquire a 60% interest, with an option to buy an additional 20% interest, in the Santa Rosa gold mine, via ownership in Golden Phoenix Panama S.A. (the “JV Company”), in consideration for $20,500,000 in cash over a period of approximately 12 to 15 months (with the final earn-in to occur upon achieving commercial production) and $4,500,000 in shares of our common stock (at an agreed upon value of $0.18 per share). We subsequently completed a Joint Venture Operating Agreement with Silver Global and effected transfer of all concessions to JV Company. We made payments in the aggregate amount of $4,500,000 in cash and issued 25,000,001 shares of our common stock in consideration for a 15% interest in the JV Company.
Effective July 23, 2012 and subsequently amended effective July 30, 2012, we entered into a Rescission and Release Agreement (the “Rescission Agreement”) with Silver Global and the JV Company (collectively the “Parties”) whereby the Parties agreed to resolve their disputes and rescind the Definitive Acquisition Agreement.
In accordance with the terms of the Rescission Agreement, Silver Global agreed to return and pay to us a total of $4,100,000 in scheduled payments over twelve months, subject to a discount of $750,000 as consideration for timely payments, and return to us for cancellation 25,000,001 shares of our common stock. We are to transfer our 15% ownership interest in the JV Company to Silver Global in tranches concurrent with scheduled payments. In the event of any default in the scheduled payments, we will keep the unpaid portion of the 15% interest in the JV Company, allowing us to either hold the interest or sell it to a third party. Further, as part of the Rescission Agreement, all rights and obligations of the parties under the Santa Rosa Acquisition Agreement were immediately terminated, including the extinguishment of the outstanding loan for $500,000 payable to Silver Global.
Concurrent with the execution of the Rescission Agreement and our receipt of the first payment of $350,000 on August 8, 2012, the arbitration proceedings previously filed by us against Silver Global and pending before the International Chamber of Commerce were dismissed, without prejudice. As a result of the $350,000 payment from Silver Global and the extinguishment of the $500,000 note payable, less related bank and legal fees of $6,305, we recorded an $843,695 gain on rescission of the joint venture.
In October 2012, Silver Global returned to us the 25,000,001 shares of our common stock and we cancelled these shares. However, Silver Global elected not to make the scheduled January 2013 payment of $1,000,000, forfeiting its right to the $750,000 discount, and elected not to make further payments in July 2013 as scheduled in the Rescission Agreement. As a result, we currently own a 10% interest in the JV Company. We intend to either participate as a 10% owner in the Santa Rosa project, or sell all or a part of our interest in the JV Company to a third party.
As previously described, because of lack of funding we currently are unable to significantly advance the exploration and evaluation activities on our mineral properties. Exploration and evaluation expenses included in our condensed consolidated statements of operations and comprehensive loss were comprised of expenses incurred for the following exploration mineral properties opportunities:
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mhakari Properties
|
|
$
|
70,300
|
|
|
$
|
-
|
|
|
$
|
110,900
|
|
|
$
|
-
|
|
|
North Springs Properties
|
|
|
11,400
|
|
|
|
-
|
|
|
|
11,400
|
|
|
|
-
|
|
|
Mina Santa Rosa
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
64,516
|
|
|
General and other
|
|
|
-
|
|
|
|
81,075
|
|
|
|
-
|
|
|
|
165,686
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
81,700
|
|
|
$
|
81,075
|
|
|
$
|
122,300
|
|
|
$
|
230,202
|
|
NOTE 4 – MARKETABLE SECURITIES
Our marketable securities consist of 1,250,000 shares of American Mining Corporation common stock (“AMC”) and the 3,000,000 shares of Win-Eldrich Mines Ltd (“WEX”) common stock received in October 2011 in the settlement of a promissory note resulting from the sale of our interest in the Ashdown Project LLC. The marketable securities are recorded at market value, with market value based on market quotes and reduced by estimated impairment losses. We have classified these marketable securities as securities held-for-sale in accordance with Accounting Standards Update (“ASU”) Topic 320,
Investments – Debt and Equity Securities
. Unrealized gains and losses resulting from changes in market value are recorded as other comprehensive income, a component of stockholders’ equity in our consolidated balance sheet.
On May 9, 2012, trading of WEX common shares was halted on the Toronto Stock Exchange due to WEX not timely filing its annual report and audited financial statements. This trading suspension has not been resolved by WEX and no market for the WEX common shares has developed.
There is limited trading of the AMC shares and no market for the AMC shares has developed.
After considering the nature of the operations of AMC and WEX, the lack of trading volume of the shares, the number of shares held by us, and other factors, we have concluded that the recorded value of marketable securities at June 30, 2013 and December 31, 2012 should be fully impaired and that the impairment loss is other-than-temporary.
NOTE 5 – PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at:
|
|
|
June 30,
2013
|
|
|
December 31,
2012
|
|
|
|
|
|
|
|
|
|
|
Computer equipment
|
|
$
|
5,466
|
|
|
$
|
7,924
|
|
|
Drilling equipment
|
|
|
141,601
|
|
|
|
141,601
|
|
|
Support equipment
|
|
|
39,932
|
|
|
|
39,932
|
|
|
Office furniture and equipment
|
|
|
7,459
|
|
|
|
7,459
|
|
|
|
|
|
194,458
|
|
|
|
196,916
|
|
|
Less accumulated depreciation and amortization
|
|
|
(126,785
|
)
|
|
|
(124,532
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
67,673
|
|
|
$
|
72,384
|
|
Substantially all our drilling and support equipment was idle and held for sale at June 30, 2013 and December 31, 2012.
NOTE 6 – ACCRUED LIABILITIES
Accrued liabilities consisted of the following at:
|
|
|
June 30,
2013
|
|
|
December 31,
2012
|
|
|
|
|
|
|
|
|
|
|
Accrued payroll and related
|
|
$
|
99,740
|
|
|
$
|
124,112
|
|
|
Liabilities assumed in Ra acquisition
|
|
|
168,690
|
|
|
|
178,018
|
|
|
Put option liability
|
|
|
120,000
|
|
|
|
120,000
|
|
|
Legal and consulting fees
|
|
|
199,350
|
|
|
|
275,760
|
|
|
Other
|
|
|
92,743
|
|
|
|
41,042
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
680,523
|
|
|
$
|
738,932
|
|
NOTE 7 – NOTES PAYABLE
Our notes payable consisted of the following at:
|
|
|
June 30,
2013
|
|
|
December 31,
2012
|
|
|
Note payable to Komatsu Equipment Company,
with principal payments of $58,486 on June 30,
2008, $58,486 on June 30, 2009, and $58,485 on
June 30, 2010, with interest at 8%, unsecured
|
|
$
|
175,457
|
|
|
$
|
175,457
|
|
|
Convertible note payable to an institutional investor,
with interest at 8% per annum, payable
March 6, 2014, net of discount of $38,327
|
|
|
4,173
|
|
|
|
-
|
|
|
Convertible note payable to SV, non-interest
bearing, payable September 30, 2012
|
|
|
500,000
|
|
|
|
500,000
|
|
|
Convertible note payable to SV, non-interest
bearing, payable September 30, 2012
|
|
|
413,223
|
|
|
|
413,223
|
|
|
Note payable to Pinnacle, non-interest bearing,
payable in scheduled monthly payments ranging
from $15,000 to $30,000 through August 2012
|
|
|
190,000
|
|
|
|
190,000
|
|
|
Convertible note payable to Pinnacle, non-interest
bearing, payable October 31, 2013
|
|
|
250,000
|
|
|
|
250,000
|
|
|
Capital lease payable to Heartland Wisconsin Corp.,
repaid in 2013
|
|
|
-
|
|
|
|
5,595
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,532,853
|
|
|
$
|
1,534,275
|
|
Convertible Note Payable to Institutional Investor
On June 4, 2013 we entered into a convertible promissory note payable to an institutional investor (“investor”) for $42,500 (“Convertible Note”), which bears interest at an annual rate of 8% and matures on March 6, 2014.
The investor has the right, after the first 180 days of the note, to convert the Convertible Note and accrued interest in whole or in part into shares of our common stock at a price per share equal to 58% (representing a discount rate of 42%) of the average of the lowest three trading prices for our common stock during the ten trading day period ending one trading day prior to the date of the conversion notice.
At any time for the period beginning on the date of the Convertible Note and ending on the date which is 30 days following the date of the Convertible Note, we may prepay the Convertible Note upon payment of an amount equal to the outstanding principal multiplied by 110%, together with accrued and unpaid interest. The amount of the prepayment increases every subsequent 30 days to 115%, 120%, 125%, 130% and 135% of the outstanding principal together with accrued and unpaid interest. After the expiration of 180 days following the date of the Convertible Note, we will have no right of prepayment.
At the inception of the Convertible Note, we recorded debt issuance costs of $3,000 and a debt discount and a derivative liability of $42,093 related to the conversion feature. Interest expense for the amortization of the debt discount is calculated on a straight-line basis over the life of the Convertible Note. As of June 30, 2013, accrued interest payable on the Convertible Note was $242.
During the three months and six months ended June 30, 2013, we had the following activity in the accounts related to the Convertible Note:
|
|
|
Derivative
Liability
|
|
|
Debt
Discount
|
|
|
Loss on
Derivative
Liability
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liability at inception of the note
|
|
$
|
42,093
|
|
|
$
|
42,093
|
|
|
$
|
-
|
|
|
Loss on derivative liability
|
|
|
57,701
|
|
|
|
407
|
|
|
|
(57,294
|
)
|
|
Amortization of debt discount to interest expense
|
|
|
-
|
|
|
|
(4,173
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2013
|
|
$
|
99,794
|
|
|
$
|
38,327
|
|
|
$
|
(57,294
|
)
|
At June 30, 2013, we estimated the fair value of the derivative for the conversion feature at $99,794 and recorded a loss on derivative liability of $57,294. The estimated fair values at the inception of the Convertible Note and at June 30, 2013 were calculated using the Black-Scholes pricing model with the following assumptions:
|
|
|
Inception
|
|
|
June 30,
2013
|
|
|
|
|
|
|
|
|
|
|
Risk-free interest rate
|
|
|
0.11%
|
|
|
|
0.13%
|
|
|
Expected life in years
|
|
|
0.75%
|
|
|
|
0.68%
|
|
|
Dividend yield
|
|
|
0%
|
|
|
|
0%
|
|
|
Expected volatility
|
|
|
204.08%
|
|
|
|
274.36%
|
|
Other Notes Payable
The two convertible notes payable to SV resulted from an Amendment to Mining Asset Purchase and Strategic Alliance Agreement related to the Peru Properties, and are more fully described in Note 3.
The two notes payable to Pinnacle resulted from an Amendment to Membership Interest Purchase Agreement whereby we purchased Pinnacle’s membership interest in Molyco, LLC, which owns or controls portions of the Peru Properties, and are more fully described in Note 3. As described in Notes 3 and 14, we have made only partial payments on the notes payable to Pinnacle. Pinnacle has initiated legal action related to these unpaid obligations (see Note 14).
As discussed in Note 3, we have not finalized the transfer agreements to be filed with Peruvian governmental authorities to affect the transfer of the Peru Properties to us, and the ultimate disposition of the convertible notes payable to SV and the notes payable to Pinnacle is dependent on our finalizing such transfer agreements and our resolving related matters with SV.
NOTE 8 – AMOUNTS DUE RELATED PARTY
Amounts due to related party include a note due to Robert P. Martin, former Chairman of our Board of Directors, resulting from a debt settlement agreement entered into in April 2010. The repayment terms of the note were restructured as part of a consulting agreement entered into with Mr. Martin effective September 1, 2011. The obligation was paid 50% in November 2011, with the remaining 50% payable on or before February 27, 2012. The remaining note payable balance and related accrued interest payable were still outstanding as of the date of filing this report. At June 30, 2013 and December 31, 2013, the note payable had a principal balance of $115,066, and related accrued interest payable was $10,933 and $7,509, respectively.
NOTE 9 – STOCKHOLDERS’ DEFICIT
We have 50,000,000 shares of no par value, non-voting convertible preferred stock authorized. As of June 30, 2013 and December 31, 2012, there were no shares of preferred stock outstanding.
We also have 800,000,000 shares of $0.001 par value common stock authorized.
During the six months ended June 30, 2013, we issued a total of 14,200,000 shares of our common stock: 6,200,000 shares valued at $116,000 to Jeffrey Dahl, a member of our Board of Directors, for services in accordance with our Consulting Agreement with him (Note 13) and 8,000,000 shares valued at $44,000 for exploration and evaluation expenses.
During the six months ended June, 2012, we issued a total of 26,617,377 shares of our common stock, including: 24,136,364 shares for cash of $412,500 ($425,000 less $12,500 in finder’s fees) and 2,481,013 shares issued upon cashless exercise of warrants recorded at par value of $2,481.
As of June 30, 2013 and December 31, 2012, we had 415,392 shares of our common stock acquired in a previous stock repurchase program that were recorded as treasury shares at a cost of $49,008.
NOTE 10 – STOCK WARRANTS
We have issued warrants to purchase shares of our common stock in connection with equity financing agreements and pursuant to certain consulting agreements.
A summary of the status of our stock warrants as of June 30, 2013, and changes during the six months then ended is presented below:
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2012
|
|
|
34,083,333
|
|
|
$
|
0.08
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
|
|
|
Canceled / Expired
|
|
|
(4,083,333
|
)
|
|
$
|
0.19
|
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding and exercisable,
June 30, 2013
|
|
|
30,000,000
|
|
|
$
|
0.07
|
|
The following summarizes the exercise price per share and expiration date of our outstanding warrants to purchase common stock at June 30, 2013:
|
Expiration Date
|
|
Price
|
|
|
Number
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
$
|
0.125
|
|
|
|
1,500,000
|
|
|
2013
|
|
$
|
0.15
|
|
|
|
1,750,000
|
|
|
2014
|
|
$
|
0.12
|
|
|
|
1,000,000
|
|
|
2014
|
|
$
|
0.125
|
|
|
|
2,750,000
|
|
|
2014
|
|
$
|
0.04
|
|
|
|
8,500,000
|
|
|
2015
|
|
$
|
0.05
|
|
|
|
4,000,000
|
|
|
2017
|
|
$
|
0.06
|
|
|
|
2,500,000
|
|
|
2017
|
|
$
|
0.04
|
|
|
|
4,000,000
|
|
|
2017
|
|
$
|
0.08
|
|
|
|
4,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,000,000
|
|
NOTE 11 – STOCK-BASED COMPENSATION
We account for stock-based compensation in accordance with ASU Topic 718,
Compensation – Stock Compensation.
Under the fair value recognition provisions of this standard, stock-based compensation cost is measured at the grant date based on the estimated value of the award granted, using the Black-Scholes option pricing model, and recognized over the period in which the award vests in general and administrative expenses.
Stock-based compensation expense included in general and administrative expenses for the three months and six months ended June 30, 2013 was $2,283. We had no stock-based compensation expense for the three months and six months ended June 30, 2012. There was no stock compensation expense capitalized during the three months and six ended June 30, 2013 and 2012.
During the six months ended June 30, 2013, we granted to an officer and director stock options to purchase a total of 600,000 shares of our common stock at an exercise price of $0.0042 per share. We estimated the grant date fair value of these options at $0.0038 per share using the Black-Scholes option pricing model with the following assumptions:
|
|
|
|
|
|
Risk-free interest rate
|
|
|
0.41
|
%
|
|
Expected life in years
|
|
|
5.0
|
|
|
Dividend yield
|
|
|
0
|
%
|
|
Expected volatility
|
|
|
149.42
|
%
|
The following table summarizes the stock option activity during the six months ended June 30, 2013:
|
|
|
Options
|
|
|
Weighted Average
Exercise
Price
|
|
Weighted Average
Remaining Contract
Term
|
|
Aggregate
Intrinsic Value
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2012
|
|
|
7,850,000
|
|
|
$
|
0.11
|
|
|
|
|
|
Granted
|
|
|
600,000
|
|
|
$
|
0.004
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Expired or cancelled
|
|
|
(2,350,000
|
)
|
|
$
|
0.13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, vested and exercisable at June 30, 2013
|
|
|
6,100,000
|
|
|
$
|
0.09
|
|
2.80
|
|
$ 1,260
|
The
aggregate intrinsic value in the preceding table represents the total pretax intrinsic value, based on our closing stock price of $0.006 as of June 30, 2013 which would have been received by the holders of in-the-money options had the option holders exercised their options as of that date.
As of June 30, 2013, there was no future compensation cost related to non-vested stock-based awards not yet recognized in our condensed consolidated statements of operations and comprehensive loss.
NOTE 12 – EARNINGS (LOSS) PER SHARE
The computation of basic earnings per common share is based on the weighted average number of shares outstanding during the period. The computation of diluted earnings per common share is based on the weighted average number of shares outstanding during the period plus the weighted average common stock equivalents which would arise from the exercise of stock options, warrants and rights outstanding using the treasury stock method and the average market price per share during the period.
For the three months and six months ended June 30, 2013 and 2012, there were no common stock equivalents outstanding and, therefore, the computation of basic and diluted earnings per share were the same. At June 30, 2013, we had outstanding options and warrants to purchase a total of 36,100,000 common shares that could have a future dilutive effect on the calculation of earnings per share.
NOTE 13 – CONSULTING AGREEMENTS
Robert P. Martin
Effective as of September 30, 2011, we entered into a Consulting Agreement with Robert P. Martin, together with an Amendment to Consulting Agreement dated September 28, 2011 (collectively, the “Martin Agreement”). Pursuant to the terms of the Martin Agreement, in consideration for Mr. Martin’s services as Chairman of the Board, he was to receive a consulting fee of $3,000 per month, accruing from the Effective Date. The consulting fee was to be reviewed by our Compensation Committee on an annual basis. For so long as Mr. Martin remained a member of our Board of Directors, he was also eligible for any compensation program in place for directors, which currently consists of a monthly stipend of $1,000.
Mr. Martin agreed to be bound by certain confidentiality and indemnification provisions, as well as a full and final release of any and all obligations under a prior employment agreement. Mr. Martin resigned as Chairman and a member of our Board of Directors in March 2013, effectively terminating the Martin Agreement.
Donald B. Gunn
On December 7, 2011, we entered into a Consulting Agreement (the “Gunn Consulting Agreement with Donald Gunn, whereby Mr. Gunn is to provide services to the Company in his role as President of the Company. Mr. Gunn was appointed President of the Company effective March 15, 2011. Pursuant to the Gunn Consulting Agreement, the Company has accrued monthly compensation to Mr. Gunn of $3,000 from July through November 2011 and $6,000 from December 31, 2011 forward.
Dennis P. Gauger
On January 15, 2013, the Board of Directors appointed Dennis P. Gauger as our Chief Financial Officer and Corporate Secretary. Pursuant to an Independent Contractor Agreement, Mr. Gauger is to perform the agreed upon duties for a period of one year and will be paid $5,000 per month through June 2013 and $7,500 per month for the remainder of the contract. Mr. Gauger is eligible to participate in our stock option plan as approved by the Board of Directors.
Jeffrey Dahl
In March 2011, we entered into a Consulting Agreement (the “2011 Dahl Consulting Agreement”) with Jeffrey Dahl, a member of our Board of Directors (“Dahl”), whereby Mr. Dahl was to develop, coordinate, manage and execute a comprehensive corporate finance and business transaction campaign for us. The 2011 Dahl Consulting Agreement had an initial term of twelve months and could be extended for subsequent terms of twelve months upon mutual written agreement of the parties.
In consideration for services rendered under the 2011 Dahl Consulting Agreement, we issued Mr. Dahl two-year warrants to purchase 250,000 shares of our common stock at an exercise price of $0.125 in each of the months of April 2011 through March 2012.
In April 2012, we entered into a Consulting Agreement (the “2012 Dahl Consulting Agreement”) with Mr. Dahl, whereby Mr. Dahl was to provide certain services to us in seeking out financing and other advisory services. The 2012 Dahl Consulting Agreement had an initial term of twelve months and was not extended upon its expiration in April 2013.
In consideration for services rendered under the 2012 Dahl Consulting Agreement, we were to issue Mr. Dahl 2,000,000 shares of our common stock upon signing and 350,000 shares of our common stock for each of the months of April 2012 through March 2013. In March 2013, we issued 6,200,000 shares of our common stock to Mr. Dahl for services valued at $116,000, based on the estimated market value of the shares, in full payment of our obligation under the 2012 Consulting Agreement.
NOTE 14 – LEGAL MATTERS
From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may have an adverse material financial impact on the Company.
We currently are involved in litigation relating to efforts by a vendor and a former employee seeking to collect amounts alleged to be owed to them by us. A judgment favorable to the former employee has been granted. We believe we have accrued sufficient amounts in our condensed consolidated financial statements for the ultimate outcome of these claims; however, our current financial position will make it difficult to fund any payments that may be required for these matters.
As discussed in Note 3, the documents required to transfer ownership of the Peru Properties to us have not been finalized. As a result, we have made only partial payments on notes payable owed to Pinnacle Minerals Corporation (previously defined as “Pinnacle”) related to our acquisition of an interest in Molyco, LLC, an entity which controls a portion of the Peru Properties. Pinnacle has initiated legal action to collect the balances of the notes payable that we have recorded in our condensed consolidated financial statements (see Note 7). This matter has moved to binding arbitration as called for in the note agreements, and the ultimate outcome is uncertain.
NOTE 15 – SUPPLEMENTAL STATEMENT OF CASH FLOWS INFORMATION
During the six months ended June 30, 2013 and 2012, we made no cash payments for income taxes.
During the six months ended June 30, 2013 and 2012, we made cash payments for interest totaling $1,763 and $33,226, respectively.
During the six months ended June 30, 2013, we had the following non-cash financing and investing activities:
|
·
|
Decreased accrued liabilities by $160,000, increased common stock by $14,200 and increased additional paid-in capital by $145,800 for common shares issued in payment of accrued consulting fees and exploration and evaluation expenses.
|
During the six months ended June 30, 2012, we had the following non-cash financing and investing activities:
|
·
|
Increased marketable securities and decreased other comprehensive loss by $87,800 for unrealized gain on marketable securities.
|
|
|
|
|
·
|
Increased common stock and decreased additional paid-in capital by $2,481 for cashless exercise of warrants.
|
NOTE 16 – RECENT ACCOUNTING PRONOUNCEMENTS
In April 2013, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2013-07,
Presentation of Financial Statements (Topic 205): Liquidation Basis of Accounting.
Under the new standard, an organization will be required to prepare its financial statements using the liquidation basis of accounting when liquidation is “imminent.” Liquidation is considered imminent when the likelihood is remote that the organization will return from liquidation and either (a) a plan for liquidation is approved by the person or persons with the authority to make such a plan effective and the likelihood is remote that the execution of the plan will be blocked by other parties or (b) a plan for liquidation is being imposed by other forces (for example, involuntary bankruptcy). In addition, the new standard provides principles for the recognition and measurement of assets and liabilities and requirements for financial statements prepared using the liquidation method of accounting. The new standard is effective for entities that determine liquidation is imminent during annual periods beginning after December 15, 2013, and interim reporting periods therein. Entities are to apply the requirements prospectively from the day that liquidation becomes imminent, and early adoption is permitted. We are currently unable to determine the impact on our consolidated financial statements of the new standard should we be required to adopt it in the future.
NOTE 17 – SUBSEQUENT EVENTS
In July 2013, we issued 7,000,000 shares of our common stock to Mhakari pursuant to the Amended and Restated Option Agreement discussed in Note 3.
In July 2013, we issued a total of 1,000,000 shares of our common stock to two parties pursuant to the North Springs Agreement discussed in Note 3.
As of the date of filing this report, we had not made the $5,500 cash payment due Mhakari in April 2013 and the $20,000 cash payment due Mhakari in May 2013 pursuant to the Amended and Restated Option Agreement. We are currently in discussions with Mhakari and anticipate making payments in the near future.
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
FORWARD LOOKING STATEMENTS
Except for historical information, the following Management’s Discussion and Analysis contains forward-looking statements based upon current expectations that involve certain risks and uncertainties. Such forward-looking statements include statements regarding, among other things, (a) our estimates of mineral reserves and mineralized material, (b) our growth strategies, (c) our expectations regarding property acquisitions or exploration plans, (d) anticipated trends in our industry, (e) our future financing plans, (f) our anticipated needs for working capital, (g) our lack of operational experience and (h) the benefits related to ownership of our common stock. Forward-looking statements, which involve assumptions and describe our future plans, strategies, and expectations, are generally identifiable by use of the words “may,” “will,” “should,” “expect,” “anticipate,” “estimate,” “believe,” “intend,” or “project” or the negative of these words or other variations on these words or comparable terminology. This information may involve known and unknown risks, uncertainties, and other factors that may cause our actual results, performance, or achievements to be materially different from the future results, performance, or achievements expressed or implied by any forward-looking statements. These statements may be found under “Management’s Discussion and Analysis of Financial Condition” as well as in this Report generally. Actual events or results may differ materially from those discussed in forward-looking statements as a result of various factors, including, without limitation, the risks outlined under “Risk Factors” described in our Annual Report on Form 10-K for the year ended December 31, 2012 filed with the Securities and Exchange Commission (the “SEC”) and matters described in this Report generally. In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained in this Report will in fact occur as projected.
OVERVIEW
Golden Phoenix Minerals, Inc. (the “Company,” “Golden Phoenix,” “we,” “us” or “our”) was formed in Minnesota on June 2, 1997. On May 30, 2008, we reincorporated in Nevada. We are a mineral exploration and development company engaged in acquiring and consolidating mineral properties with potential production and future growth through exploration discoveries. Pending requisite funding, our current growth strategy is focused on the expansion of our operations through the development of mineral properties into joint ventures or royalty mining projects.
We have embarked upon an acquisition plan targeting stage mineral projects with near-term production potential throughout North, Central and South America. As funding allows, we anticipate analyzing several prospective properties, with a view towards optioning a select group of properties on acceptable terms and conditions. From the optioned properties, we hope to identify those projects that can be advanced toward commercial production.
Our mineral properties currently include: the Adams Mine and Duff Claim Block near Denio, Nevada; the Northern Champion molybdenum property in Ontario, Canada; and four gold and base metal properties in the Shining Tree District in Ontario, Canada. As more fully described in the Notes to Consolidated Financial Statements, we have entered into agreements to acquire: an 80% interest in the Vanderbilt Silver and Gold Project, the Coyote Fault Gold and Silver Project, and claims that are an extension to the Coyote Fault property, all located adjacent to the Mineral Ridge property near Silver Peak, Nevada; rights to the North Springs Properties consisting of unpatented lode mining claims on BLM lands in Esmeralda County, Nevada, located near the operating Mineral Ridge gold project, a 100% interest in five gold and molybdenum properties in Peru; a 10% interest in the Mina Santa Rosa gold mine located in Panama; and an option to acquire a 100% undivided interest in 61 unpatented mining claims in North Williams Township in Ontario, Canada.
On April 14, 2011, we, through a wholly-owned subsidiary, Ra Minerals, Inc. (“Ra Minerals”), closed the acquisition of 100% of the issued and outstanding shares of Ra Resources Ltd., a corporation incorporated under the laws of the Province of Ontario. Through this acquisition, we acquired a 100% interest in four gold and base metal properties within the Shining Tree Mining District in Eastern Ontario, Canada. The historic Shining Tree area is currently undergoing a resurgence of exploration where five other companies have been preparing and engaging in drill programs. Our accompanying consolidated financial statements include the accounts of the Company and the accounts of Ra Minerals from April 14, 2011 forward. All intercompany accounts and balances have been eliminated in consolidation.
GOING CONCERN UNCERTAINTY
Our condensed consolidated financial statements are prepared using accounting principles generally accepted in the United States of America applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. However, we have a history of operating losses since our inception in 1997, and have an accumulated deficit of $62,359,991 and a total stockholders’ deficit of $3,620,352 at June 30, 2013. A significant portion of these deficits result from our accounting policy of expensing exploration and evaluation costs for our mineral properties, including acquisition of exploration mineral properties and interests in joint ventures with mineral properties in the exploration and evaluation stage, due to the uncertainty as to the recoverability of these costs. Our only source of operating revenues for the recent past has been minimal rental income from our drilling equipment. We have sold or are currently offering for sale the assets of our drilling division, and will have no more revenues from this source.
As more fully described in the Notes to Condensed Consolidated Financial Statements and elsewhere in this quarterly report, we currently own or have entered into options and agreements for the acquisition of certain mineral properties. None of these mineral properties currently have proven or probable reserves. We will be required to raise significant additional capital to fund our operations and to complete the acquisition of the interests in and further the exploration, evaluation and development of our existing mineral properties and other prospects. There can be no assurance that we will be successful in raising the required capital or that any of these mineral properties will ultimately attain a successful level of operations.
In September 2011, we entered into a senior, secured gold stream debt facility for up to $15.5 million (the “Gold Stream Facility”), secured by substantially all our assets, with Waterton Global Value, L.P. (“Waterton”). On January 24, 2012, we received a Notice of Default and Acceleration, and subsequently received supplemental Notices of Default, and a Notice of Disposition of Collateral from Waterton under the Gold Stream Facility. We refuted each assertion of default. Through April 30, 2012, we had borrowed an aggregate principal amount of $6,000,000 from the Gold Stream Facility. On April 30, 2012, our 30% interest in Mineral Ridge Gold, LLC (the “Mineral Ridge LLC”) was foreclosed upon by Waterton and sold at a public auction, at which the only bidder present was Waterton. Our interest in the Mineral Ridge LLC was sold to Waterton and indebtedness to Waterton with a total book value of $6,209,912 was extinguished.
Effective July 23, 2012 and subsequently amended effective July 30, 2012, we entered into a Rescission and Release Agreement (the “Rescission Agreement”) with Silver Global, S.A. (“Silver Global”) and Golden Phoenix Panama, S.A. (the “JV Company”) (collectively the “Parties”) whereby the Parties agreed to resolve outstanding disputes and rescind the Definitive Acquisition Agreement entered into on September 16, 2011 to develop the Santa Rosa mining project in Panama. In accordance with the terms of the Rescission Agreement, Silver Global is to return and pay to us a total of $4,100,000 in scheduled payments over twelve months, subject to a discount of $750,000 as consideration for timely payments, and return to us for cancellation of 25,000,001 shares of our common stock. We are to transfer our 15% ownership interest in the JV Company to Silver Global via release of our 15 shares of JV Company common stock in tranches concurrent with our receipt of the scheduled payments over twelve months. We received the first payment from Silver Global of $350,000 in August 2012 and the 25,000,001 shares of our common stock were returned to us in October 2012. However, Silver Global elected not to make the scheduled January 2013 payment of $1,000,000, forfeiting its right to the $750,000 discount, and elected not to make further payments in July 2013 as scheduled in the Rescission Agreement. As a result, we currently own a 10% interest in the JV Company.
Because of the negative impact of disputes and litigation on our fund raising efforts, including the foreclosure and sale of our interest in the Mineral Ridge LLC and the rescission of the joint venture in Panama, we have been unable to raise the capital necessary to continue our mineral property exploration and evaluation activities and fund our operations. As a result, we have significantly scaled back our mineral property acquisition and development plans and reduced the level of our operations. There can be no assurance that we will be successful in our efforts to obtain financing, or that we will be successful in our efforts to continue to raise capital at favorable rates or at all. If we do not receive further payments from Silver Global, and if we are unable to raise sufficient capital to meet our current obligations, we may be forced to further reduce or terminate operations and file for reorganization or liquidation under the bankruptcy laws. These factors and our negative working capital position together raise doubt about our ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make a variety of estimates and assumptions that affect: (1) the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements, and (2) the reported amounts of revenues and expenses during the reporting periods covered by the financial statements. Our management routinely makes judgments and estimates about the effect of matters that are inherently uncertain. As the number of variables and assumptions affecting the future resolution of the uncertainties increases, these judgments become even more subjective and complex. We have identified certain accounting policies that are most important to the portrayal of our current financial condition and results of operations. Our significant accounting policies are disclosed in Note 1 of the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2012, and several of these critical accounting policies are as follows:
Marketable Securities
Marketable securities consist of investments in common stock of two publicly held mining companies. The marketable securities are stated at market value, with market value based on market quotes. Unrealized gains and losses resulting from changes in market value are recorded as other comprehensive income, a component of stockholders’ equity in our consolidated balance sheet. Realized gains and losses resulting from the sale or disposition of marketable securities are reflected in net income or loss for the period. Estimated impairment losses that are determined to be other-than-temporary are included in net income or loss for the period.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization are calculated using the straight-line method over estimated useful lives ranging from 3 to 7 years.
Mine development costs are capitalized after proven and probable reserves have been identified. Amortization of mine development costs will be calculated using the units-of-production method over the expected life of the operation based on the estimated proven and probable reserves. As of June 30, 2013 and December 31, 2012, we had no mineral properties with proven or probable reserves and no amortizable mine development costs.
Mineral Property Acquisition Costs
Mineral property acquisition costs are recorded at cost and capitalized where an evaluation of market conditions and other factors imply the acquisition costs are recoverable. Such factors may include the existence or indication of economically mineable reserves, a market for the subsequent sale of the mineral property, the stage of exploration and evaluation of the property, historical exploration or production data, and the geographic location of the property. Once a determination has been made that a mineral property has proven or probable reserves that can be produced profitably, depletion of the capitalized acquisition costs will be computed at the commencement of commercial production on the units-of-production basis using estimated proven and probable reserves. As of June 30, 2013 and December 31, 2012, we had no capitalized mineral property acquisition costs.
Where an evaluation of market conditions and other factors results in uncertainty as to the recoverability of exploration mineral property acquisition costs, the costs are expensed as incurred and included in exploration and evaluation expenses.
Exploration and Evaluation Expenses
Exploration expenses relating to the search for resources suitable for commercial production, including researching and analyzing historic exploration data, conducting topographical, geological, geochemical and geophysical studies, exploratory drilling, trenching and sampling are expensed as incurred.
Evaluation expenses relating to the determination of the technical feasibility and commercial viability of a mineral resource, including determining volume and grade of deposits, examining and testing extraction methods, metallurgical or treatment processes, surveying transportation and infrastructure requirements and conducting market and finance studies are expensed as incurred.
Mineral Property Development Costs
Mineral property development costs relate to establishing access to an identified mineral reserve and other preparations for commercial production, including infrastructure development, sinking shafts and underground drifts, permanent excavations, and advance removal of overburden and waste rock.
When it is determined that commercially recoverable reserves exist and a decision is made by management to develop the mineral property, mineral property development costs are capitalized and carried forward until production begins. The capitalized mineral property development costs are then amortized using the units-of-production method using proven and probable reserves as the mineral resource is mined.
Proven and Probable Ore Reserves
On a periodic basis, management reviews the reserves that reflect estimates of the quantities and grades of metals at our mineral properties which management believes can be recovered and sold at prices in excess of the total cost associated with mining and processing the mineralized material. Management’s calculations of proven and probable ore reserves are based on, along with independent consultant evaluations, in-house engineering and geological estimates using current operating costs, metals prices and demand for the metals. Periodically, management obtains external determinations of reserves.
Reserve estimates will change as existing reserves are depleted through production, as well as changes in estimates caused by changing production costs and/or metals prices. Reserves may also be revised based on actual production experience once production commences. Declines in the market price of metals, as well as increased production or capital costs or reduced recovery rates, may render ore reserves uneconomical to exploit. Should that occur, restatements or reductions in reserves and asset write-downs in the applicable accounting periods may be required. Reserves should not be interpreted as assurances of mine life or of the profitability of current or future operations. No assurance can be given that the estimate of the amount of metal or the indicated level of recovery of these metals will be realized.
We currently have no proven or probable ore reserves.
Closure, Reclamation and Remediation Costs
Current laws and regulations require certain closure, reclamation and remediation work to be done on mineral properties as a result of exploration, development and operating activities. We periodically review the activities performed on our mineral properties and make estimates of closure, reclamation and remediation work that will need to be performed as required by those laws and regulations and make estimates of amounts that are expected to be incurred when the closure, reclamation and remediation work is expected to be performed. Future closure, reclamation and environmental related expenditures are difficult to estimate in many circumstances due to the early stages of investigation, uncertainties associated with defining the nature and extent of environmental contamination, the uncertainties relating to specific reclamation and remediation methods and costs, application and changing of environmental laws, regulations and interpretation by regulatory authorities, the country where the project is located, and the possible participation of other potentially responsible parties.
As of June 30, 2013 and December 31, 2012, we had no mining projects which had advanced to the stage where closure, reclamation and remediation costs were required to be accrued in our consolidated financial statements.
Property Evaluations and Impairment of Long-Lived Assets
We review and evaluate the carrying amounts of our mineral properties, capitalized mineral property development costs and related buildings and equipment, and other long-lived assets when events or changes in circumstances indicate that the carrying amount may not be recoverable. Estimated future net cash flows, on an undiscounted basis, from a property or asset are calculated using estimated recoverable minerals (considering current proven and probable reserves and mineralization expected to be classified as reserves where applicable); estimated future mineral price realization (considering historical and current prices, price trends and related factors); operating, capital and reclamation costs; and other factors beyond proven and probable reserves such as estimated market value for the property in an arms-length sale. Reduction in the carrying value of property, plant and equipment, or other long-lived assets, with a corresponding charge to earnings, are recorded to the extent that the estimated future net cash flows are less than the carrying value.
Estimates of future cash flows are subject to risks and uncertainties. It is reasonably possible that changes in circumstances could occur which may affect the recoverability of our properties and long-lived assets.
Debt Issuance Costs
Costs incurred with closing certain debt are capitalized and amortized to interest expense through the life of the debt.
Derivative for Conversion Feature
We estimate the fair value of the derivative for the conversion feature of our Convertible Note using the Black-Scholes pricing model at the inception of the Convertible Note and at each reporting date, recording a derivative liability and a gain or loss on derivative liability as applicable.
Revenue Recognition
Revenue from the sale of precious metals is recognized when title and risk of ownership passes to the buyer and the collection of sales proceeds is assured.
Revenue from the rental of drilling equipment is recognized when the agreed upon rental period is completed and the collection of rental proceeds is assured.
Income Taxes
We recognize a liability or asset for deferred tax consequences of all temporary differences between the tax bases of assets and liabilities and their reported amounts in the financial statements that will result in taxable or deductible amounts in future years when the reported amounts of the assets and liabilities are recovered or settled. Deferred tax items mainly relate to net operating loss carry forwards and accrued expenses. These deferred tax assets or liabilities are measured using the enacted tax rates that will be in effect when the differences are expected to reverse. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred tax assets are reviewed periodically for recoverability, and valuation allowances are provided when it is more likely than not that some or all of the deferred tax assets may not be realized. As of June 30, 2013 and December 31, 2012, we had fully reduced our net deferred tax assets by recording a 100% valuation allowance.
Stock-Based Compensation and Equity Transactions
In accordance with ASC Topic 718,
Compensation – Stock Compensation,
we measure the compensation cost of stock options and other stock-based awards issued to employees and directors pursuant to stock-based compensation plans at fair value at the grant date and recognize compensation expense over the requisite service period for awards expected to vest.
Except for transactions with employees and directors that are within the scope of ASC Topic 718, all transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. Additionally, in accordance with ASC Topic 505-50,
Equity-Based Payments to Non-Employees
, we have determined that the dates used to value the transaction are either: (1) the date at which a commitment for performance by the counter party to earn the equity instruments is established; or (2) the date at which the counter party’s performance is complete.
RECENT ACCOUNTING PRONOUNCEMENTS
In April 2013, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2013-07,
Presentation of Financial Statements (Topic 205): Liquidation Basis of Accounting.
Under the new standard, an organization will be required to prepare its financial statements using the liquidation basis of accounting when liquidation is “imminent.” Liquidation is considered imminent when the likelihood is remote that the organization will return from liquidation and either (a) a plan for liquidation is approved by the person or persons with the authority to make such a plan effective and the likelihood is remote that the execution of the plan will be blocked by other parties or (b) a plan for liquidation is being imposed by other forces (for example, involuntary bankruptcy). In addition, the new standard provides principles for the recognition and measurement of assets and liabilities and requirements for financial statements prepared using the liquidation method of accounting. The new standard is effective for entities that determine liquidation is imminent during annual periods beginning after December 15, 2013, and interim reporting periods therein. Entities are to apply the requirements prospectively from the day that liquidation becomes imminent, and early adoption is permitted. We are currently unable to determine the impact on our consolidated financial statements of the new standard should we be required to adopt it in the future.
RESULTS OF OPERATIONS
Sales
We had no rental income during the three months and six months ended June 30, 2013 and rental income of $1,100 and $25,900 during the three months and six months ended June 30, 2012, respectively. Our only source of operating revenues for the past several months has been the occasional rental of drilling equipment. We have sold or are currently offering for sale the assets of our drilling division, and will have no more revenues from this source.
Operating Costs and Expenses
Because of our lack of funding, we have significantly reduced the level of our operating costs and expenses during the three months and six months ended June 30, 2013 compared to the comparable periods in 2012.
Our exploration and evaluation expenses consisting of expenses for the following exploration mineral properties opportunities:
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mhakari Properties
|
|
$
|
70,300
|
|
|
$
|
-
|
|
|
$
|
110,900
|
|
|
$
|
-
|
|
|
North Springs Properties
|
|
|
11,400
|
|
|
|
-
|
|
|
|
11,400
|
|
|
|
-
|
|
|
Mina Santa Rosa
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
64,516
|
|
|
General and other
|
|
|
-
|
|
|
|
81,075
|
|
|
|
-
|
|
|
|
165,686
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
81,700
|
|
|
$
|
81,075
|
|
|
$
|
122,300
|
|
|
$
|
230,202
|
|
Our exploration projects currently do not have proven or probable reserves. More detailed explanations of these mineral properties are provided in Note 3 to our Condensed Consolidated Financial Statements. We will be unable to advance the exploration, evaluation and development of our mineral properties until we can obtain the necessary funding. There can be no assurance that we will be successful in these efforts.
General and administrative expenses were $149,528 and $688,214 for the three months ended June 30, 2013 and 2012, and $304,135 and $1,317,989 for the six months ended June 30, 2013 and 2012, respectively. General and administrative expenses include investor relations, salaries and wages of officers and office and accounting personnel, legal and professional fees, outside consulting fees, travel and stock-based compensation expense. General and administrative expenses in prior periods were at higher levels to support the acquisition and development of new exploration property projects and business opportunities.
Depreciation and amortization expense is not currently material to our consolidated financial statements and was $628 and $15,678 for the three months ended June 30, 2013 and 2012, and $4,711 and $34,946 for the six months ended June 30, 2013 and 2012, respectively. The decrease in depreciation and amortization expense resulted from the sale and disposal of vehicles, office furniture and drilling equipment.
Other Income (Expense)
Interest and other income are currently not material to our consolidated financial statements, and totaled $14 and $435 for the three months ended June 30, 2013 and 2012, and $48 and $1,286 for the six months ended June 30, 2013 and 2012, respectively.
Interest expense was $11,115 and $132,101 for the three months ended June 30, 2013 and 2012, and $17,408 and $509,773 for the six months ended June 30, 2013 and 2012, respectively. The decrease in interest expense during the current year was due primarily to the inclusion in the three months and six months ended June 30, 2012 of interest on our senior, secured Gold Stream Facility that we entered into in September 2011 and which was repaid in April 2012.
We reported a loss on derivative liability of $57,294 for the three months and six months ended June 30, 2013 related to a convertible promissory note payable to an institutional investor of $42,500 dated June 4, 2013. We have estimated the fair value of the derivative for the conversion feature of the note at the inception of the note and at June 30, 2013 using the Black-Scholes pricing model, resulting in the loss on derivative liability. We had no such loss for the three months and six months ended June 30, 2012.
We reported a foreign currency gain of $7,446 and $12,135 in the three months and six months ended June 30, 2013, respectively, and a foreign currency loss of $52,099 and $71,967 in the three months and six months ended June 30, 2012, respectively. The amount of the foreign currency gain or loss will fluctuate from period to period depending on the balance maintained in our Canadian bank account, our foreign investments, and changes in foreign exchange rates. As further discussed in the notes to our condensed consolidated financial statements, we have fully impaired our foreign investments, resulting in substantially less foreign currency gain or loss in the current year.
We reported a loss on disposition of property and equipment of $439 in the three months and six months ended June 30, 2012. We had no gain or loss on disposition of property and equipment in the current year.
We reported a gain on extinguishment of debt of $1,600 and $35,039 during the three months and six months ended June 30, 2013, respectively, resulting from favorable settlements with certain creditors. We had no gain on extinguishment of debt during the three months or six months ended June 30, 2012.
LIQUIDITY AND CAPITAL RESOURCES
We have a history of operating losses since our inception in 1997, and had an accumulated deficit of $62,359,991 and a total stockholders’ deficit of $3,620,352 at June 30, 2013. At June 30, 2013, we had current assets of $41,289 and current liabilities of $3,732,030, resulting in a working capital deficit of $3,690,741. Included in current assets at June 30, 2013 was cash of $36,213.
We currently have no operating revenues, and as of June 30, 2013, our cash was not sufficient to fund our operating needs for the next twelve months. As further discussed above, and in the notes to our condensed consolidated financial statements, we have entered into agreements resulting in substantial obligations to acquire exploration properties and fund mineral property exploration and evaluation activities. We will be required to raise significant additional capital to complete the acquisition of the interests in and further the exploration, evaluation and development of these mineral properties. There can be no assurance that we will be successful in raising the required capital or that any of these mineral properties will ultimately attain a successful level of operations. In addition, if we are unable to meet the financial obligations related to our mineral properties, we may forfeit our ownership rights or options to acquire the mineral properties. In addition, our general and administrative and support expenses will increase over current levels as we move forward with our planned expansion and development activities.
On January 24, 2012, we received a Notice of Default and Acceleration, and subsequently received supplemental Notices of Default and a Notice of Disposition of Collateral from Waterton under our senior, secured gold stream debt facility. We refuted all assertions of default. On April 30, 2012, our 30% interest in the Mineral Ridge LLC was foreclosed upon and sold to Waterton.
During 2011, we entered into an agreement to acquire a 60% interest in the Mina Santa Rosa gold mine located in Panama. However, effective July 23, 2012 and subsequently amended effective July 30, 2012, we entered into a Rescission and Release Agreement (the “Rescission Agreement”) with Silver Global to resolve outstanding disputes and rescind this agreement. In accordance with the terms of the Rescission Agreement, Silver Global is to return and pay to us a total of $4,100,000 in scheduled payments over twelve months, subject to a discount of $750,000 as consideration for timely payments and return to us for cancellation 25,000,001 shares of our common stock. We are to transfer our 15% ownership in the JV Company to Silver Global via release of our 15 shares of JV Company common stock as payments are received by us from Silver Global. We received the first cash payment of $350,000 in August 2012 and the 25,000,001 shares of common stock were returned to us in October 12, 2012. However, Silver Global elected not to make the scheduled January 2013 payment of $1,000,000, forfeiting its right to the $750,000 discount and elected not to make further payments in July 2013 as scheduled in the Rescission Agreement. As a result, we currently own a 10% interest in the JV Company. We intend to either participate as a 10% owner in the Santa Rosa project, or sell all or a part of our interest in the JV Company to a third party.
As a result of these developments, our fund raising ability has been hampered, and we have scaled back our mineral property exploration and evaluation activities and reduced the level of our operations. We currently have no source of operating revenues. We recently obtained limited funding from a convertible note payable; however, we are largely dependent on the receipt of further cash payments from the Rescission Agreement or other sources related to our 10% interest in the JV Company to fund our operations.
Convertible Note Payable to Institutional Investor
On June 4, 2013 we entered into a convertible promissory note payable to an institutional investor (previously defined as “investor”) for $42,500 (previously defined as “Convertible Note”), which bears interest at an annual rate of 8% and matures on March 6, 2014. The investor has the right, after the first 180 days of the note, to convert the Convertible Note and accrued interest in whole or in part into shares of our common stock at a price per share equal to 58% (representing a discount rate of 42%) of the average of the lowest three trading prices for our common stock during the ten trading day period ending one trading day prior to the date of the conversion notice.
At any time for the period beginning on the date of the Convertible Note and ending on the date which is 30 days following the date of the Convertible Note, we may prepay the Convertible Note upon payment of an amount equal to the outstanding principal multiplied by 110%, together with accrued and unpaid interest. The amount of the prepayment increases every subsequent 30 days to 115%, 120%, 125%, 130% and 135% of the outstanding principal, together with accrued and unpaid interest. After the expiration of 180 days following the date of the Convertible Note, we will have no right of prepayment.
We have estimated the fair value of the derivative for the conversion feature of the Convertible Note at inception and at June 30, 2013 using the Black-Scholes pricing model, resulting in a derivative liability of $99,794 at June 30, 2013. As of June 30, 2013, accrued interest payable on the Convertible Note was $242.
Other Notes Payable
During the year ended December 31, 2011, we incurred indebtedness in connection with the acquisition of interests in the Peru Properties or settlement agreements to restructure debt or other obligations related to our mineral property development activities. The documents required to transfer ownership of the Peru Properties to us have not been finalized. As a result, we are in arrears on making certain payments required by these agreements.
Sala-Valc S.A.C.
Effective as of October 7, 2011, we and Sala-Valc S.A.C (“SV”) entered into an Amendment to Mining Asset Purchase and Strategic Alliance Agreement dated September 30, 2011 (the “Amendment”), and a side letter agreement regarding the Amendment (the “Side Amendment,” and together with the Amendment the “Amendments”) in order to amend certain terms, conditions and provisions of a Mining Asset and Strategic Alliance Agreement dated June 1, 2011.
Pursuant to the Amendments, among other things, the strategic alliance provisions contemplated in the June 1, 2011 agreement were eliminated, resulting in our acquiring 100% interest in the mineral properties in Peru. In addition, the obligations due to SV were restructured (subject to and including a net smelter return royalty) to include two promissory notes payable to SV: (i) a convertible note in the principal amount of $500,000, with no interest to accrue thereon, which shall be repaid by conversion into restricted shares of the our common stock, at a conversion price of $0.10 per share, or 5,000,000 shares, such conversion right to vest as of January 1, 2012 or upon transfer of the Peru Properties, which note shall automatically convert on or before the maturity date of September 30, 2012; and (ii) a convertible note in the amount of $413,223, with no interest to accrue thereon, which shall be repaid by conversion into restricted shares of our common stock, at a conversion price of $0.10 per share, or 4,132,228 shares, such conversion right to vest as of January 1, 2012 or upon transfer of the Peru Properties, which note shall automatically convert on or before the maturity date of September 30, 2012. As of the date of filing this report, we have not finalized the transfer agreements to be filed with Peruvian governmental authorities to affect the transfer of the Peru Properties, and the ultimate disposition of the convertible notes payable to SV is dependent on our finalizing such transfer agreements and our resolving related matters with SV.
Molyco
.
On October 31, 2011, we closed an agreement with Pinnacle Minerals Corporation (“Pinnacle”) and Salwell International, LLC (“Salwell”) pursuant to which we acquired Pinnacle’s 32.5% membership interest in Molyco, LLC (“Molyco”). Molyco owns or controls approximately 30,000 tons of the Molybdenum stockpile comprising a portion of the Porvenir property in Peru. The remaining interest in Molyco is to be transferred to us by Salwell as part of our agreement with SV, as described above. Pursuant to this agreement, we paid Pinnacle a cash payment of $250,000 and issued two non-interest bearing promissory notes as follows:
(i) Note 1 in the amount of $250,000 with two monthly payments of $15,000 in each of November 2011 and December 2011; one monthly payment of $30,000 in January 2012; two monthly payments of $20,000 in each of February 2012 and March 2012; and increasing to $30,000 per month thereafter until payment in full (with a balance of $190,000 at June 30, 2013); and
(ii) Note 2 in the amount of $250,000, such note to be convertible, and repaid based on conversion into 1,000,000 shares of Golden Phoenix common stock, which conversion right shall vest 12 months from the closing, subject to our first right of refusal to repurchase some or all of the shares at a per share price of $0.25, which repurchase right shall expire on the maturity date of the note of October 31, 2013.
In the year ended December 31, 2012, we made payments totaling $30,000 on Note 1. Due to the uncertainty related to the transfer documents for the Peru Properties discussed above and elsewhere in this report, we have made only partial payments on these obligations, and there can be no assurance that we will complete the acquisition of Molyco. As discussed in the notes to the condensed consolidated financial statements and elsewhere in this report, Pinnacle has initiated legal action related to these unpaid amounts.
Net Cash Provided By or Used In Operating, Investing and Financing Activities
During the six months ended June 30, 2013, we used net cash of $285,396 in operating activities as a result of our net loss of $458,626 and non-cash gain on extinguishment of debt of $35,039, partially offset by non-cash costs and expenses totaling $68,745, decrease in prepaid expenses and other current assets of $4,678, and increases in accounts payable of $22,571 and accrued liabilities of $112,275.
During the six months ended June 30, 2012, we used net cash of $542,704 in operating activities as a result of our non-cash gain on disposition of interest in LLC of $6,209,912, partially offset by our net income of $4,071,782, non-cash costs and expenses totaling $452,183, decrease in prepaid expenses and other current assets of $87,663, and increases in accounts payable of $786,733 and accrued liabilities of $268,847.
During the six months ended June 30, 2013, we had no net cash provided by or used in investing activities. During the six months ended June 30, 2012, net cash provided by investing activities was $14,265, comprised of proceeds from the disposition of property and equipment of $17,000, partially offset by the purchase of property and equipment of $2,735.
During the six months ended June 30, 2013, net cash provided by financing activities was $33,905, comprised of proceeds from the issuance of debt of $42,500, partially offset by payment of debt issuance costs of $3,000 and payments of notes payable and long-term debt of $5,595. During the six months ended June 30, 2012, net cash provided by financing activities of $392,684, comprised of net proceeds from the sale of common stock of $412,500 and proceeds from the issuance of warrants of $20,000, partially offset by payments of notes payable and long-term debt of $39,816.
Off-Balance Sheet Arrangements
As of June 30, 2013, we had no material operating lease commitments in excess of twelve months or other material off-balance sheet arrangements. Our office lease commitment, for which we currently pay $900 per month, expires in September 2013.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not Applicable.
Item 4T. Controls and Procedures
Disclosure Controls and Procedures
Our management, under the supervision and with the participation of our principal executive officer and chief financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of June 30, 2013. Based on that evaluation, our principal executive officer and chief financial officer concluded that the disclosure controls and procedures employed at the Company were effective to ensure that the information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms.
Change in Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting during the fiscal quarter ended June 30, 2013 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may have an adverse material financial impact on the Company.
We currently are involved in litigation relating to efforts by a vendor and a former employee seeking to collect amounts alleged to be owed to them by us. A judgment favorable to the former employee has been granted. We believe we have accrued sufficient amounts in our condensed consolidated financial statements for the ultimate outcome of these claims; however, our current financial position will make it difficult to fund any payments that may be required for these matters.
As discussed in Note 3 to our condensed consolidated financial statements, the documents required to transfer ownership of the Peru Properties to us have not been finalized. As a result, we have made only partial payments on notes payable owed to Pinnacle Minerals Corporation (previously defined as “Pinnacle”) related to our acquisition of an interest in Molyco, LLC, an entity which controls a portion of the Peru Properties. Pinnacle has initiated legal action to collect the balances of the notes payable that we have recorded in our condensed consolidated financial statements. This matter has moved to binding arbitration as called for in the note agreements, and the ultimate outcome is uncertain.
Item 1A. Risk Factors
Not Applicable.
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
Recent Sales of Unregistered Securities
In April 2013, we issued 8,000,000 shares of our common stock to Mhakari Gold Corp. for exploration and evaluation expenses valued at $44,000.
The issuance of the common stock was conducted in reliance upon the exemption from registration requirements provided by Section 4(2) of the Securities Act of 1933, as amended, and from various similar state exemptions.
Item 3. Defaults Upon Senior Securities
Not applicable for the three months ended June 30, 2013.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None
Item 6. Exhibits
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Exhibit No.
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Description
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3.1
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Articles of Incorporation of Golden Phoenix Minerals, Inc.
(1)
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3.2
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Bylaws of Golden Phoenix Minerals, Inc.
(1)
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3.3
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Amended and Restated Articles of Incorporation of Golden Phoenix, Minerals, Inc.
(2)
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3.4
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Amended and Restated Articles of Incorporation of Golden Phoenix Minerals, Inc.
(3)
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3.5
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Certificate of Amendment to Articles of Incorporation of Golden Phoenix Minerals, Inc.
(4)
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3.6
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Amended and Restated Bylaws of Golden Phoenix Minerals, Inc.
(3)
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4.1
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Specimen Common Stock Certificate of Golden Phoenix Minerals, Inc.
(3)
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4.2
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Form of Warrant of Golden Phoenix Minerals, Inc.
(5)
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4.3
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Form of Warrant of Golden Phoenix Minerals, Inc. – Lincoln Park Capital private placement, February 29, 2012
(6)
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10.1
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Convertible Promissory Note to Institutional Investor dated June 4, 2013*
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31.1
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Certification of Principal Executive Officer Pursuant to Section 302.*
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31.2
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Certification of Chief Financial Officer Pursuant to Section 302.*
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32.1
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Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350.*
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101.INS
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XBRL Instance**
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101.SCH
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XBRL Schema**
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101.CAL
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XBRL Calculations**
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101.DEF
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XBRL Definitions**
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101.LAB
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XBRL Label**
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101.PRE
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XBRL Presentation**
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*
Filed herewith.
** The XBRL related information in Exhibit 101 shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability of that section
and shall not be incorporated by reference into any filing or other document pursuant to the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such filing or document.
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(1)
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Incorporated by reference from Form 10SB12G filed with the SEC on July 30, 1997.
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(2)
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Incorporated by reference from Form SB-2/A filed with the SEC on June 29, 2007.
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(3)
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Incorporated by reference from Form 8-K filed with the SEC on June 5, 2008.
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(4)
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Incorporated by reference from Form 8-K filed with the SEC on December 8, 2010.
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(5)
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Incorporated by reference from Exhibit A to Exhibit 10.1 of Form 8-K filed with the SEC on April 25, 2007.
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(6)
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Incorporated by reference from Form 8-K filed with the SEC on March 7, 2012.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934 the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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GOLDEN PHOENIX MINERALS, INC.
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Date: August 14, 2013
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By:
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/s/ Donald Gunn
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Name: Donald Gunn
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Title: President and Chairman of Interim Governing Board, Principal Executive Officer
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Date: August 14, 2013
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By:
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/s/ Dennis P. Gauger
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Name: Dennis P. Gauger
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Title: Chief Financial Officer
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37