Notes to Condensed Consolidated Financial Statements
September 30, 2012
(unaudited)
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a)
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Description of Business
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Shamika 2 Gold, Inc. is engaged in the business of acquiring and exploring gold and mineral properties with the objective of identifying gold and mineralized deposits economically worthy of continued production and/or subsequent development, mining or sale.
The accompanying financial statements have been prepared assuming the Company will continue as a going concern. The Companys financial statements are prepared using generally accepted accounting principles applicable to a going concern which contemplates the realization of assets and liquidation of liabilities in the normal course of business.
As shown in the accompanying financial statements, the Company has $149 cash on hand, current liabilities of $387,475, no immediate borrowing capacity, and has incurred a net loss of $512,577 for the nine months ended September 30, 2012. These factors result in substantial doubt about the ability to continue as a going concern. The future of the Company is dependent upon its ability to obtain additional financing and upon future profitable operations from the development of acquisitions. Management has plans to seek additional capital through a private placement and public offering of its common stock. The financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts of and classification of liabilities that might be necessary in the event the Company cannot continue in existence. The accompanying financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
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2.
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Significant Accounting Policies
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These consolidated financial statements are prepared in accordance with generally accepted accounting principles (GAAP) in the United States of America and include our accounts and the accounts of our majority-owned controlled subsidiary. As the Company has not generated any revenues from is principal intended activity of mining operations, the Company is considered to be in the exploration stage. The Company currently operates in one reportable segment. Summarized below are those policies considered particularly significant to the Company.
The preparation of financial statements in conformity with United States generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of any contingent assets and liabilities as of the date of the financial statements, as well as the reported amounts of revenues earned and expenses incurred during the period. Actual results could differ from those estimates. Evaluation of the potential impairment of mining properties is an estimate that is particularly sensitive to judgments and market conditions.
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c)
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Financial Instruments and Financial Risk
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The Companys financial instruments consists of cash, prepaid expenses, accounts payable and accrued liabilities, the fair values of which approximate their carrying amounts due to the short-term nature of these instruments. The fair value of the Companys debt instruments are calculated based upon the availability of debt instruments with similar terms, rates, privileges and credit quality.
5
Shamika 2 Gold, Inc.
An Exploration Stage Company
Notes to Condensed Consolidated Financial Statements
September 30, 2012
(unaudited)
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2.
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Significant Accounting Policies continued
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d)
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Cash and Concentrations
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Financial instruments, which could potentially subject the Company to credit risk, consist primarily of cash and accounts payable.
From inception to September 30, 2011, cash was managed for the Company by a related party, Shamika Resources, Inc. During the second quarter of 2012, the Company opened its own bank account. Cash balances at September 30, 2012 are held in this cash account.
The Companys operations are all related to the minerals and mining industry. A reduction in mineral prices, political unrest in the countries in which the Company operates or other disturbances in the minerals market could have an adverse effect on the Companys operations.
Environmental expenditures that relate to current operations are charged to operations or capitalized as appropriate. Expenditures that relate to an existing condition caused by past operations, and which do not contribute to current or future revenue generation, are charged to operations. Liabilities are recorded when environmental assessments and/or remedial efforts are probable, and the cost can be reasonably estimated. Generally, the timing of these accruals coincides with the earlier of completion of a feasibility study or the Companys commitments to plan of action based on the then known facts. Management has determined that no liability exists pertaining to environmental expenditures as of September 30, 2012.
Basic loss per share is computed by dividing net loss by the weighted average number of common shares outstanding for the year. Diluted loss per share is computed by dividing net loss by the weighted average number of common shares outstanding plus common stock equivalents (if dilutive) related to warrants and convertible notes.
The Company has excluded all common equivalent shares outstanding for warrants and convertible notes from the calculation of diluted net loss per share because all such securities are anti-dilutive for the periods presented. As of September 30, 2012, 458,337 warrants had been issued which represent potential shares which may be issued resulting from the provisions of convertible notes and approximately 1,477,347,058 common shares that may be issued upon the conversion of convertible notes.
The Company accounts for income taxes under ASC 740, Income Taxes. Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss carry-forwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. ASC 740 also requires that uncertain tax positions are evaluated in a two-step process, whereby (1) it is determined whether it is more likely than not that the tax positions will be sustained based on the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, the largest amount of tax benefit that is greater than fifty percent likely of being realized upon ultimate settlement with the related tax authority would be recognized.
6
Shamika 2 Gold, Inc.
An Exploration Stage Company
Notes to Condensed Consolidated Financial Statements
September 30, 2012
(unaudited)
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2.
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Significant Accounting Policies (continued)
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The Company plans to recognize revenue from the sale of product when an agreement of sale exists, product delivery has occurred, title has transferred to the customer and collection is reasonably assured. The price to be received is based upon terms of a sales contract. The Company has not generated revenue activity for the periods presented in the consolidated financial statements.
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i)
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Stock Based Compensation
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The Company has adopted ASC 718, Stock Compensation, which requires the Company to measure the compensation cost of stock options and other stock-based awards to employees and directors at fair value at the grant date and recognize compensation expense over the requisite service period for awards expected to vest.
The Company may periodically issue stock for payment of certain professional fees and these stock issuances are expensed based on the market value of the stock on the date granted. The Company expenses these professional fees at the time of stock issuance as the stock issuance date approximates the date the services are performed.
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j)
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Asset Retirement Obligation
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The Company follows ASC 410-20, which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated retirement costs. The standard applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and normal use of the asset.
ASC 410-20 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The fair value of the liability is added to the carrying amount of the associated asset and this additional carrying amount is depreciated over the life of the asset. The liability is accreted at the end of each period through charges to operating expense. If the obligation is settled for other than the carrying amount of the liability, the Company will recognize a gain or loss on settlement. The Company has no mining projects in production as of September 30, 2012, and the asset retirement obligations are usually created as part of the production process. Accordingly, at September 30, 2012, the Company had no asset retirement obligations.
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k)
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Mineral Properties, Mineral Claim Payments and Exploration Expenses
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The Company expenses all costs related to the maintenance and exploration of the unproven mineral properties to which it has secured exploration rights. If and when proven and probable reserves are determined for a property and a feasibility study is completed, then subsequent development costs of the property are capitalized. Once capitalized, such costs will be amortized using the units-of-production method over the estimated life of the probable reserves.
The Company assesses the carrying costs for impairment under ASC 930 Extractive Activities Mining (ASC 930) annually. An impairment is recognized when the sum of the expected undiscounted future cash flows is less than the carrying amount of the mineral property. Impairment losses, if any, are measured as the excess of the carrying amount of the mineral property over its estimated fair value. If mineral properties are subsequently abandoned or impaired, any capitalized costs will be charged to operations.
7
Shamika 2 Gold, Inc.
An Exploration Stage Company
Notes to Condensed Consolidated Financial Statements
September 30, 2012
(unaudited)
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2.
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Significant Accounting Policies (continued)
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l)
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Convertible Instruments
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The Company reviews the terms of convertible debt and equity instruments to determine whether there are conversion features or embedded derivative instruments including embedded conversion options that are required to be bifurcated and accounted for separately as a derivative financial instrument. In circumstances where the convertible instrument contains more than one embedded derivative instrument, including conversion options that are required to be bifurcated, the bifurcated derivative instruments are accounted for as a single compound instrument. Also, in connection with the sale of convertible debt and equity instruments, the Company may issue free standing warrants that may, depending on their terms, be accounted for as derivative instrument liabilities, rather than as equity. When convertible debt or equity instruments contain embedded derivative instruments that are to be bifurcated and accounted for separately, the total proceeds allocated to the convertible host instruments are first allocated to the fair value of all the bifurcated derivative instruments. The remaining proceeds, if any, are then allocated to the convertible instruments themselves, usually resulting in those instruments being recorded at a discount from their face amount. When the Company issues debt securities, which bear interest at rates that are lower than market rates, the Company recognizes a discount, which is offset against the carrying value of the debt. Such discount from the face value of the debt, together with the stated interest on the instrument, is amortized over the life of the instrument through periodic charges to income.
In addition, certain conversion features are recognized as beneficial conversion features to the extent the conversion price as defined in the convertible note is less than the closing stock price on the issuance of the convertible notes.
Fees incurred in the placement of the convertible notes are deferred and recognized over the life of the debt agreement as an adjustment to interest expense using the interest method.
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m)
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Recent Accounting Pronouncements
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Fair Value Measurements and Disclosures ASC 820, Improving Disclosures about Fair Value Measurements: In January 2010, the Financial Accounting Standards Board (FASB) issued accounting guidance intended to improve disclosures related to fair value measurements. This guidance requires significant transfers in and out of Level 1 and Level 2 fair value measurements to be disclosed separately along with the reasons for the transfers. Additionally, in the reconciliation for the fair value measurements using significant unobservable inputs (Level 3), information about purchases, sales, issuances and settlements must be presented separately (cannot net as one number). This guidance also provides clarification for existing disclosures on (i) level of disaggregation and (ii) inputs and valuation techniques. In addition, this guidance includes conforming amendments for employers disclosure of postretirement benefit plan assets. The Company adopted January 1, 2011 and the adoption of ASC 820 did not have a material impact on the Companys consolidated results of operations or financial position.
In May 2011, the FASB issued an Accounting Standards Update on fair value measurements that clarifies the application of existing guidance and disclosure requirements, changes certain fair value measurement principles, and requires additional disclosures about fair value measurements. The adoption of this guidance did not have a material impact on its financial statements.
Certain amounts for the three and nine months ended September 30, 2011 have been reclassified to conform to the current operating format.
8
Shamika 2 Gold, Inc.
An Exploration Stage Company
Notes to Condensed Consolidated Financial Statements
September 30, 2012
(unaudited)
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3.
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Discontinued Operations
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Congo
During the fourth quarter of 2010, the Company decided to abandon its efforts on the Congo property. The Company incurred a gain on disposal of $3,497 during the three months ended June 30, 2011 and a net loss of $22,503 relating to this discontinued operation during the nine months ended September 30, 2011.
Cambodia
In the fourth quarter of 2011, due to the inability of the Company to raise the required financing needed to obtain the permits and further the Cambodia project, the Share Exchange Agreement was nullified and the project was discontinued.
Quebec
In the third quarter of 2012, due to the inability of the Company to raise the required financing needed to renew the permits and further the Montclerg project, the project was discontinued.
As of September 30, 2012 and December 31, 2011 there were no assets or liabilities of discontinued operations.
The following table shows the results of operations of the disposal subsidiaries for the three and nine month periods ended September 30, 2012 and 2011:
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For the
three months ended
September 30,
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For the
nine months ended
September 30,
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2012
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2011
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2012
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2011
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Revenues
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$
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-
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$
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-
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$
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-
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$
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-
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Permits & licenses
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-
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-
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-
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20,000
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Other administrative costs
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-
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-
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-
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6,000
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Gain on disposal
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-
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(3,497
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)
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(3,497
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)
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Acquisition cost
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350,000
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-
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350,000
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350,000
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Net (Gain) Loss
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$
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350,000
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$
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(3,497
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)
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$
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350,000
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$
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372,503
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No tax benefits were recorded on results of discontinued operations as realization of such does not meet recognition criteria.
9
Shamika 2 Gold, Inc.
An Exploration Stage Company
Notes to Condensed Consolidated Financial Statements
September 30, 2012
(unaudited)
Montclerg-Quebec this project was acquired in 2011 in exchange for the issuance of $350,000 worth of common shares of the Company. The initial value was calculated as the number of shares issued multiplied by the market value on the issue date and was based on the preliminary information about the claims and the underlying mineral deposits and as a result the acquisition cost was capitalized. The Company had planned to perform additional exploration to prove reserves, but as no proven and probable reserves have been documented to date, no further costs have been capitalized to date. As of September 30, 2012, the Company has discontinued this project due to lack of financing and the acquisition cost related to the project have been written off.
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5.
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Related Party Balances and Transactions
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From inception to September 30, 2011, the Company operated under a management agreement with a related party Shamika Resources, Inc., which is controlled by the Companys former CEO, Robert Vivian. The Company had no employees or office expenses as such were provided by consultants through the management agreement with Shamika Resources, Inc. The agreement with Shamika Resources, Inc. was informal. For the nine months ended September 30, 2011, the Company incurred management fees expense of $684,821 under the agreement with Shamika Resources, Inc. As of September 30, 2012 and December 31, 2011, there were no outstanding amounts due to Shamika Resources Inc.
Beginning October 1, 2011, the Company is operating under an informal consulting agreement with Henry Riedl, the Companys current CEO. During the nine months ending September 30, 2012, the Company incurred expense of $84,000 under the consulting agreement with Henry Riedl. As of September 30, 2012 and December 31, 2011, $95,397 and $33,625, respectively, is recorded as accounts payable-related party under the agreement with Mr. Riedl.
Related party payables are recorded at cost, are non-interest bearing, unsecured and have no specific terms for repayment.
From January 3, 2012 to January 9, 2012 Asher Enterprises converted a portion of Convertible Note (Asher #4), face value $13,200, into Common stock. The conversion resulted in the Company issuing 60,419,397 Common shares.
From January 3, 2012 to January 6, 2012 Coventry Enterprises converted a portion of a Convertible Note, face value $15,656, into Common stock. The conversion resulted in the Company issuing 61,423,285 Common shares.
On May 10, 2012, the Company issued an aggregate of 50,000 shares of the Companys Series A Convertible Preferred Stock in consideration for past unpaid services and valuable contributions of certain officers and directors. The Series A Preferred Stock convert at the rate of 10 shares of Common Stock for each share of Series A Preferred Stock converted. Each holder of Series A Preferred stock shall be entitled to vote on all matters to which shareholders of the Corporation are entitled to vote and shall be entitled to 10,000 votes for each share of Series A Preferred stock held. The fair value of the convertible preferred stock issuance was determined to be approximately $600.
On May 17, 2012 the Company increased its authorized capital stock from 310,000,000 shares, consisting of 300,000,000 shares of common stock, par value $0.00001 (the Common Stock) and 10,000,000 shares of preferred stock, par value $0.00001 per share (the Preferred Stock) to 2,010,000,000 shares of capital stock, consisting of 2,000,000,000 shares of Common Stock and 10,000,000 shares of Preferred Stock.
10
Shamika 2 Gold, Inc.
An Exploration Stage Company
Notes to Condensed Consolidated Financial Statements
September 30, 2012
(unaudited)
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6.
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Share Capital (continued)
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On June 20, 2012, the Company filed a Certificate of Amendment to its Articles of Incorporation increasing the number of authorized shares of the Companys capital stock which the Company is authorized to issue from 310,000,000 shares, consisting of 300,000,000 shares of common stock, par value $0.00001 (the Common Stock) and 10,000,000 shares of preferred stock, par value $0.00001 per share (the Preferred Stock) to 2,010,000,000 consisting of (a) 2,000,000,000 shares of Common Stock and (b) 10,000,000 shares of Preferred Stock (the Amendment).
From June 21, 2012 to June 28, 2012 Coventry Enterprises converted a portion of a Convertible Note, face value $11,448, into Common stock. The conversion resulted in the Company issuing 45,585,436 Common shares.
From June 21, 2012 to June 28, 2012 Asher Enterprises converted a portion of Convertible Note (Asher #4), face value $5,700, into Common stock. The conversion resulted in the Company issuing 29,085,714 Common shares.
From July 2, 2012 to July 17, 2012 Coventry Enterprises converted a portion of a Convertible Note, face value $13,349, into Common stock. The conversion resulted in the Company issuing 96,406,429 Common shares.
From July 2, 2012 to July 23, 2012 Asher Enterprises converted a portion of Convertible Note (Asher #4), face value $15,500 and interest of $2,000, into Common stock. The conversion resulted in the Company issuing 160,277,779 Common shares.
From July 25, 2012 to September 19, 2012 Asher Enterprises converted a portion of Convertible Note (Asher #5), face value $26,380, into Common stock. The conversion resulted in the Company issuing 339,726,985 Common shares.
On September 21, 2012 the Company issued 950,000 Series A Preferred shares to Henry Riedl in consideration for expenses incurred and paid for personally by Henry Riedl and valuable contributions as an officer and director of the Company including locating and securing valuable opportunities and transactions for the Company. The Company evaluates the market value of this issuance at $950.
Summary of Warrants Outstanding
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Warrants
Outstanding
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Weighted
Average
Exercise Price
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Aggregate
Intrinsic
Value
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Outstanding December 31, 2011
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458,337
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.46
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-
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Issued
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-
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-
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-
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Exercised
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-
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-
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-
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Forfeited
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-
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-
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-
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Outstanding September 30, 2012
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458,337
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.46
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-
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The remaining average contractual life of warrants outstanding is 1.48 years. All warrants are exercisable as of September 30, 2012 and December 31, 2011.
11
Shamika 2 Gold, Inc.
An Exploration Stage Company
Notes to Condensed Consolidated Financial Statements
September 30, 2012
(unaudited)
The Company had convertible promissory notes outstanding at September 30, 2012 and December 31, 2011 as follows:
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Notes Outstanding as of
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September 30,
2012
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December 31,
2011
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Asher Enterprises #4
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$
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-
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$
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34,400
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Asher Enterprises #5
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23,620
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50,000
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Asher Enterprises #6
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8,500
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8,500
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Asher Enterprises #7
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22,500
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-
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Asher Enterprises #8
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55,000
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-
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Coventry
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16,552
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40,883
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9134-2402 Quebec Inc.
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20,493
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-
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133,316
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133,783
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Less Debt Discount
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38,499
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33,326
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$
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94,817
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$
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100,457
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The Company has issued various convertible notes. The notes bear interest at the rate of 0% to 8% per annum and mature between January 2012 and April 2013. The Company has the option to repay the note at a premium or to pay all outstanding principal and interest at maturity. If not repaid prior to or upon maturity, the notes will automatically convert into common shares. Under the convertibility terms of the convertible promissory notes, the principal, plus accrued interest can be converted at any time or upon maturity, at the option of the holder, either in whole, or in part, into fully paid common shares of the Company. The notes contain a beneficial conversion feature which allows the holders of the notes to convert the notes into common shares of the Company at a price less than fair market value at date of conversion. This amount is recorded as a discount to the principal amount of the notes and is amortized to interest expense utilizing the straight-line method over the term of the related note as the results are not materially different from those which would result from the interest method. As of September 30, 2012 and December 31, 2011 $38,499 and $33,326, respectively, remained in unamortized discount associated with the beneficial conversion feature. During the nine months ended September 30, 2012, the Company recognized interest expense on the notes of $67,500 which was comprised of $2953 in contractual interest, $61,147 in amortization of the debt discount and $3,400 in amortization of financing costs. During the nine months ended September 30, 2011, the Company recognized interest expense on the notes of $288,143 which was comprised of $37,660 in contractual interest, $229,791 in amortization of the debt discount and $20,692 in amortization of financing costs.
In April 2012, the Company received $20,493 in convertible note proceeds from 9134-2402 Quebec Inc. The note bears interest at 8% and is due in 9 months. The note is convertible at a 50% discount to market value, with a minimum conversion price of $0.01 per share if not repaid in full prior to maturity. If not repaid in full at maturity or converted into shares, the note will continue to accrue interest at 8% until it is repaid or converted.
12
Shamika 2 Gold, Inc.
An Exploration Stage Company
Notes to Condensed Consolidated Financial Statements
September 30, 2012
(unaudited)
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7.
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Convertible Notes (continued)
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On May 1, 2012 the Company issued a Secured Convertible Note in the amount of $22,500 to Asher Enterprises Inc. due January 30, 2013 and bearing interest at the rate of 8% per annum. The note is convertible into common shares of the Company at any time from May 1, 2012 and ending on the complete satisfaction of the Note. The conversion price shall equal the Variable Conversion Price defined as 58% multiplied by the Market Price defined as the average of the lowest 3 Trading Prices on the OTCBB during the 10 day trading period ending one day prior to the date of Conversion Notice. In the event of default, the Note is immediately payable. The minimum amount due in default is 150% x (outstanding principal + unpaid interest).
On June 21, 2012 the Company issued a Secured Convertible Note in the amount of $55,000 to Asher Enterprises Inc. due March 22, 2013 and bearing interest at the rate of 8% per annum. The note is convertible into common shares of the Company at any time from June 21, 2012 and ending on the complete satisfaction of the Note. The conversion price shall equal the Variable Conversion Price defined as 55% multiplied by the Market Price defined as the average of the lowest 3 Trading Prices on the OTCBB during the 10 day trading period ending one day prior to the date of Conversion Notice. In the event of default, the Note is immediately payable. The minimum amount due in default is 150% x (outstanding principal + unpaid interest).
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8.
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Commitments and Contingencies
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From time to time, we are involved in claims and suits that arise in the ordinary course of our business. Although management currently believes that resolving any such claims against us will not have a material adverse impact on our business, financial position or results of operations, these matters are subject to inherent uncertainties and managements view of these matters may change in the future.
On October 4, 2012 Asher Enterprises converted a portion of Convertible Note (Asher #5), face value $3,280 into Common stock. The conversion resulted in the Company issuing 65,600,000 Common shares.
13