NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 2014
(Unaudited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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1.
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NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
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Nature of Operations
U.S. Precious Metals, Inc. was incorporated in the state of Delaware in 1998 as a mineral exploration company. U.S. Precious Metals, Inc. and its wholly owned Mexican subsidiary company, U.S. Precious Metals de Mexico, S.A. de C.V, (“U.S. Precious Metals Mexico”), (collectively “the Company”, “We” or “Us”) are engaged in the acquisition, exploration and development of mineral properties. We currently focus on gold and base minerals primarily located in the State of Michoacan, Mexico where we own exploration and exploitation concessions to approximately 37,000 contiguous acres of land (the “Solidaridad Property”).
Original Transaction With RTC
On May 11, 2013, the Company entered into a Share Exchange Agreement with Resource Technology Corp., a newly formed Florida corporation (“RTC”), and the RTC shareholders to acquire all of the issued and outstanding shares of RTC in exchange for 300 million shares of common stock of the Company. The agreement was subject to shareholder approval along with shareholder approval to increase the authorized number of shares of common stock to 480 million. The total number of shares issuable to the RTC shareholders may be reduced as described below. RTC maintains three ore supply contracts with third party suppliers, and a Plasmafication™ Toll Processing Agreement with Plasma Processing, LP., a Florida limited partnership (“PP LP”) and an affiliated entity of RTC. The ore supply agreements and the Toll Processing Agreement enable RTC to receive 1/3rd of the revenues derived from the plasma processing of ore concentrates from the ore supply agreements.
The Plasma Plant and Plasma Processing.
PP LP owns the right to operate a plasma processing facility located in 29 Palms, California. The plant took three years to build and is permitted to process ore concentrate. Plasmafication™ or plasma processing employs extreme temperatures (in excess of 7,000 F) to dissociate ore concentrates into their basic elemental state. The plant is not currently in commercial production. The parties believe that initial upgrades to the facility will commence within 90 to 120 days which will enable the facility to process concentrates at the rate of approximately 9 tons/day. PP LP expects to make further upgrades to the facility which would increase its capacity to approximately 27 tons/day. These upgrades are subject to PP LP raising funds sufficient to complete necessary improvements to its plasma processing plant.
Ore Supply Agreements
.
RTC holds ore supply agreements and arrangements with three separate third parties, two of whom are from domestic mining properties and the third is from a mining property located in the Far East. Each of the ore concentrate suppliers has agreed to split the revenues of post plasma processing three equal ways among the ore supplier, RTC and PP LP. Under the Plasmafication Toll Processing Agreement discussed below, PP LP will bear the cost and expense of the plasma processing.
Plasmafication™ Toll Processing Agreement
.
The Toll Processing Agreement between PP LP and RTC provides that PP LP will provide a range of services, including the Plasmafication™
of the RTC concentrate from the ore supply contracts. These services will be provided at the sole cost and expense of PP LP. The agreement further provides for an initial processing capacity of 5 tons/day of RTC concentrate for approximately 200 days per annum. PP LP will be required to upgrade its current plant to achieve this processing rate which as mentioned above is expected to occur within 90 to 120 days. These upgrades are expected to bring the total processing rate of the plant to about 9 tons/day. The agreement allows for an increased capacity to process 10 tons/day of RTC concentrate for approximately 300 days per annum. In order to achieve this rate, total plant capacity will have to be increased to about 29 tons/day.
PP LP guaranteed a benchmark run of 5 tons/day for 20 consecutive days (“Benchmark Run”) with a minimum value of $50,000 (net to RTC) per ton using the RTC concentrate (or a total of $5,000,000 in net proceeds to RTC) from the existing ore supply contracts. The guarantee is limited to the proportionate reduction of the number of shares of USPR common stock issuable to the RTC shareholders (as described below). The benchmark run must be completed prior to June 1, 2014.
US PRECIOUS METALS, INC.
(An Exploration Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 2014
(Unaudited)
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1.
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NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES CONT.
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Nature of Operations Cont.
PP LP and RTC have agreed to split any costs required to ship the RTC concentrate to the plasma facility in California, among other terms and conditions.
Share Exchange Agreement
.
As stated above, pursuant to the Share Exchange Agreement, the Company has agreed to acquire all of the issued and outstanding shares of RTC (“RTC Shares”) from the RTC shareholders in exchange for 300 million shares of common stock of the Company (“USPR Shares”). The RTC Shares and the USPR Shares issuable to the respective parties will be held in escrow and the USPR shares issuable to the RTC shareholders may be reduced as stated herein. While the shares are in escrow, voting rights will remain with the named party. The agreement provides that if the Benchmark Run does not yield net cash proceeds of Five Million Dollars ($5,000,000) to RTC, then the number of Exchange Shares in total will be proportionately reduced. The closing of the transactions contemplated by the Agreement will occur no later than June 1, 2014. The agreement contains customary representations and warranties by all parties.
On September 10, 2013, the Company amended the
Share Exchange Agreement
with RTC
and the RTC shareholders. Under the amendment, the parties agreed to reduce the number of “Exchange Shares” as defined in Section 4.01 of the Agreement (issuable to the RTC shareholders) from 300,000,000
shares of USPR common stock
to 290,000,000
shares of USPR common stock.
The RTC shareholders are Wolz International, LLC (“Wolz”), Titan Productions, Inc. (“Titan”), and Mercury6, LP (“Mercury6”). Assuming a completion of the transaction without further proportionate reduction in the USPR Shares, Wolz, Titan and Mercury will receive 145 million shares, 72.5 million shares and 72.5 million shares, of common stock of USPR, respectively. Mr. Gennaro Pane, our Chairman and Chief Executive Officer, is the sole officer and member of Wolz (and will own approximately 51% of the shares of the Company), and Chad Altieri, our Board member, is the sole owner of Mercury. In addition, Messrs Pane and Altieri own or control limited partnership interests in PP LP.
Restructuring Agreement With RTC
.
On January 30, 2014, the Company entered into a Restructuring Agreement with RTC, the RTC Shareholders, and Plasmafication Technology Holding, LLC, a Florida limited liability company (“PTH”). PTH is an affiliate of RTC and owns and operates a plasma processing plant located in 29 Palms, California which employs the Plasmafication™ technology (“Plasma Plant”).
Pursuant to the Restructuring Agreement, the Company, RTC and the RTC Shareholders terminated ab initio the Share Exchange Agreement, and the Company entered into new agreements and instruments with the counter parties described below. These new agreements and instruments consist of (i) the Restructuring Agreement, the Technology License Agreement by and between the Company and PTH (“License Agreement”), (ii) An Equipment Purchase and Sale Agreement by and between the Company and PTH (“Equipment Purchase Agreement”), (iii) A Promissory Note issued by PTH in favor of the Company in the amount $5,000,000 (“Promissory Note”), and (iv) A Certificate of Designations relating to 1,250,000 shares of Preferred Stock (defined below) issued to RTC in connection with the transaction (“Certificate of Designations”). The closing of the Restructuring Agreement occurred on February 4, 2014 (“Closing”).
As the Company was contractually bound by the terms of the Restructuring Agreement on January 30, 2014, when it entered into the Restructuring Agreement, the terms of the Restructuring Agreement have been recognized in the accompanying financial statements effective January 30, 2014.
US PRECIOUS METALS, INC.
(An Exploration Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 2014
(Unaudited)
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1.
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NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES CONT.
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Nature of Operations Cont
The Restructuring Agreement and related agreements and instruments provide the following material terms and conditions, among others:
Processing Rights
. Under the terms of the Restructuring Agreement, PTH will process the Company’s ore concentrate at its Plasma Plant five (5) days per month for each month during a term agreed by the parties. The term begins with the date that the Plasma Plant is ready to commence commercial operations at the processing rate of 5 tons/day and terminating on the date that the Company Plasma Facility (defined below) is fully permitted and ready to commence commercial operations at a processing rate of 10 tons/day. PTH has informed the Company that it expects to be fully operational during the third calendar quarter of 2014. The Company has agreed to pay its ratable share of PTH overhead and direct costs as set forth in the agreement, and apart from the foregoing, PTH will not receive any royalty or other fee.
Licensing Rights.
Under the Technology Licensing Agreement, PTH granted the Company a non-exclusive, royalty free license to use PTH’s Plasmafication™ technology for a term of 25 years. The technology covers and relates to the construction and use of a Company owned plasma plant described below. The Licensing Agreement is subject to other customary terms and conditions.
Construction of a Company Owned Plasma Plant.
Under the Equipment Purchase Agreement, PTH has agreed to construct, on behalf of the Company, a 10 ton/day plasma processing plant on its premises located in 29 Palms, California (“Company Facility”). The plant will be constructed on an actual costs basis without markup by PTH, and PTH also has agreed to pay for 1/3rd of the construction costs. The estimated costs of construction for the Company Facility is approximately $18 million. The parties will formulate in the near future a draw schedule which will detail construction and payment milestones, however, in order to initiate the construction process, the Company will be required to pay a down payment of $1.5 million. In addition to other terms and conditions therein, PTH will assist in obtaining the necessary Federal, state and local permits and licenses to construct and operate the Company Plasma facility, however, the Company will be required to bear the related costs. Upon completion of the facility, the Company will own 100% of the Company Facility, however, any Licensed Technical Information will be subject to the Licensing Agreement. In addition, the parties will be required to enter into a operating and maintenance agreement which address the operation and maintenance of the Company Owned Plasma Plant.
Promissory Note.
PTH has delivered to the Company a Promissory Note in the principal amount is $5 million. The note is payable on or before January 30, 2015, and bears no interest prior to the payment due date. The promissory note may be offset under certain conditions set forth therein.
No value has been assigned to the Processing Rights, Licensing Rights, PTH’s assistance to Construct a Company Owned Plant or Promissory Note in these financial statements. Effective as the date of this report, the Company, RTC and PTH, are all development stage companies, none of which have the existing financials resources, established business operating processes or ongoing profitable business operations to meet their obligations under the terms of these agreements at this time. The Company, RTC and PTH’s ability to meet their obligations under the terms of these agreements is dependent on their ability to raise the future funding required and to successfully develop and implement their business plans which cannot be guaranteed at this time. Accordingly the realization of any future value from these rights and notes is highly uncertain at this time and accordingly no value has been assigned to them.
US PRECIOUS METALS, INC.
(An Exploration Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 2014
(Unaudited)
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1.
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NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES CONT.
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Nature of Operations Cont.
Preferred Stock and Certificate of Designation. In connection with the Restructuring Agreement, the Company issued to RTC 1,250,000 shares of its newly created Class A Super Voting Preferred Stock (“Preferred Stock”). The Preferred Stock has the rights privileges and preferences as is set forth in the Certificate of Designations filed with the Delaware Secretary of State. As stated in the Certificate of Designations, each share of the Preferred Stock has identical rights as 100 shares of the Company’s common stock. These rights, privileges and preferences include among others; (i). each share of Preferred Stock has 100 to 1 voting rights, voting along with the Company’s common stock, (ii). each share of Preferred Stock has 100 to 1 rights upon liquidation and distribution of the Company, (iii). each share of Preferred Stock has the right to convert into 100 shares of common stock of the company. The Company intends to increase its authorized shares of common stock from 150 million to 325 million in order to allow for the conversion of the Preferred stock.
The market value of the 1,250,000 shares of its newly created Class A Super Voting Preferred Stock is assumed to equate to the value of 125,000,000 shares of the common stock which was $16,250,000 on January 30, 2014 when the Company became contractually obligated to issue these shares.
In addition, under the Restructuring Agreement, the Company and RTC and its shareholders granted mutual releases, and provided customary representations and warranties.
The share exchange agreement was adopted by the unanimous consent of the Board of Directors of the Company, RTC, each RTC shareholders and PTH. All of the shareholders of RTC were signatories to the agreement.
The RTC shareholders are Wolz International, LLC (“Wolz”) owning 50% of RTC, Titan Productions, Inc. (“Titan”) owning 25% of RTC, and Mercury6, LP (“Mercury6”) owning 25% of RTC. Assuming the issuance of the Preferred Stock to its shareholders, Wolz will receive 625,000 shares of Preferred Stock convertible into 62.5 million shares of common stock (or approximately 24% of the Company’s issued and outstanding common stock), and each of Titan and Mercury will receive 312,500 shares of Preferred Stock convertible into 31.5 million shares of common stock (or approximately 12% of the Company’s issued and outstanding common stock for each entity). Mr. Gennaro Pane, our Chairman and Chief Executive Officer, is an officer and member of Wolz and owns approximately 51% of Wolz, and Chad Altieri, our Board member, is the sole owner of Mercury. In addition, Messrs Pane and Altieri own or control approximately 20% and 8% respectively, of PTH, and Mr. Pane is an officer of PTH.
Unregistered Sale of Securities
.
At Closing, the Company issued to RTC 1,250,000 shares of Preferred Stock. Each share of Preferred Stock has identical rights as 100 shares of common stock except that each share Preferred Stock is convertible to 100 shares of common stock (or a total of 125 million shares of common stock of the Company).
These securities qualified for exemption under Section 4(2) of the Securities Act and the rules and regulations promulgated thereunder. The offering was not a “public offering” as defined in Section 4(2) due to the insubstantial number of persons involved in the offering, manner of the offering and number of securities offered. These shareholders made certain representations and warranties, including their investment intent. They also agreed to and received share certificates bearing a legend stating that such securities are restricted pursuant to Rule 144 of the Securities Act.
US PRECIOUS METALS, INC.
(An Exploration Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 2014
(Unaudited)
1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES CONT.
Nature of Operations Cont.
Material Modification to Rights of Security Holders.
On January 31, 2014, the Company filed the Certificate of Designations with the Delaware Secretary of State. The Certificate of Designation allows for the creation and issuance of the 1,250,000 shares of Preferred Stock. As stated in the Certificate of Designations, each share of the Preferred Stock has identical rights as 100 shares of the Company’s common stock. These rights, privileges and preferences include among others; (i) each share of Preferred Stock shall have 100 to 1 voting rights, voting along with the Company’s common stock, (ii) each share of Preferred Stock shall have 100 to 1 rights upon liquidation and distribution of the Company, (iii) each share of Preferred Stock shall have the right to convert into 100 shares of common stock of the Company. On January 29, 2014, the Company’s Board of Directors approved the Certificate of Designations, the filings of the Certificate of Designations with the Delaware Secretary of State and the issuance of the Preferred stock created thereby to RTC.
Change of Control of Registrant.
At Closing of the Restructuring Agreement, the Company issued to RTC 1,250,000 shares of Preferred Stock. Each share of Preferred Stock has identical rights as 100 shares of common stock except that each share Preferred Stock is convertible to 100 shares of common stock (or a total of 125 million shares of common stock of the Company). As a result, a change of control occurred with respect to the Company. Immediately prior to Closing, the Company had 150 million shares of common stock authorized, of which 135,259,321 shares were issued and outstanding and 10 million shares of preferred stock, of which no shares were outstanding. Immediately after Closing, the authorized, issued and outstanding shares of common stock of the Company were unchanged and the Company had 10 million shares of preferred stock authorized, of which the Company had 1,250,000 shares of preferred stock issued and outstanding designated the Series A Super Voting Preferred Stock referred to herein as the “Preferred Stock.”
After giving effect to the conversion of the Preferred Stock by RTC, RTC will own approximately 125 million shares of common stock or approximately 48% of the common stock of the Company after giving effect to the conversion of the Preferred Stock to common stock. The RTC shareholders are Wolz International, LLC (“
Wolz
”) owning 50% of RTC, Titan Productions, Inc. (“
Titan
”) owning 25% of RTC, and Mercury6, LP (“
Mercury6
”) owning 25% of RTC. Assuming the issuance of the Preferred Stock to its shareholders, Wolz will receive 625,000 shares of Preferred Stock convertible into 62.5 million shares of common stock (or approximately 24% of the Company’s issued and outstanding common stock), and each of Titan and Mercury will receive 312,500 shares of Preferred Stock convertible into 31.25 million shares of common stock (or approximately 12% of the Company’s issued and outstanding common stock for each entity). Mr. Gennaro Pane, our Chairman and Chief Executive Officer, is an officer and a member of Wolz owning 51% of that company, and Chad Altieri, our Board member, is the sole owner of Mercury. Mr. Pane due to his officer position with RTC may be deemed to own or control 100% of the Preferred Stock held by RTC, however, he disclaims ownership of any shares of Preferred Stock other than the amount attributable to Wolz 312,500 shares of Preferred Stock convertible into 31.5 million shares of common stock (or 24% of the Company’s issued and outstanding common stock). In addition, Messrs. Pane and Altieri own or control 20% and 8% of PTH, and Mr. Pane is an officer of PTH.
US PRECIOUS METALS, INC.
(An Exploration Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 2014
(Unaudited)
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1.
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NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES CONT.
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Nature of Operations Cont.
Mining Services Agreement With Mesa Acquisition Group LLC
On May 22, 2013, US Precious Metals, Inc. (“Company”) entered into a Mining Services Agreement with Mesa Acquisitions Group, LLC, a Florida limited liability company (“Contractor”), in association with Alba Petroleos De El Salvador Sem De CV, a Venezuelan company. Under the agreement, Contractor has agreed to perform certain mining services on a portion of the Company’s Mexican mining concessions. The Company maintains approximately 37,000 acres of mining concessions located in the State of Michoacán, Mexico, and the agreement covers the Solidaridad I & II mining concessions (or approximately 5,000 acres). Under the agreement, Contractor has agreed to perform the various mining services in three, separate phases described below:
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Ø
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Phase 1 entails the immediate commission of high-tech satellite imaging to identify mineralization and confirm the two previous drilling campaigns on the mining concessions known as Solidaridad I and/or Solidaridad II.
|
The estimated costs of Phase 1 is approximately $400,000.
|
|
Ø
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Phase 2 entails the development of the necessary infrastructure to conduct full scale mining operations on the Solidaridad I and/or Solidaridad II mining concessions, including limited exploration, establishment of roads, water, power (electricity) and staging area for employees on site.
|
The estimated costs of Phase 2 is approximately $10 million.
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Ø
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Phase 3 entails the construction of a processing plant to process the ore, which will be owned by the Company.
|
The estimated costs for the construction of the processing plant is approximately $40 million.
As of February 28, 2014 Phase I was substantially complete.
Contractor will be responsible for the costs and expenses of; the satellite imaging described in Phase 1, the limited exploration and build out of the infrastructure described in Phase 2, and the construction of the processing plant described in Phase 3. The obligation of contractor to proceed to Phases 2 and 3 will be dependent upon the company receiving positive results of the satellite imaging. The size and capacity of the processing plant to be constructed by the Contractor will be determined by the parties, subject however to the results of the satellite imaging. Actual mining and processing expenses will be allocated between the parties in proportion to their revenue allocation described below (70% for Company/30% for Contractor).
As consideration for the mining services, Contractor will receive the following consideration from the Company:
Phase 1 and Phase 2. As consideration for Phases 1 and 2, the Company has issued to Contractor 10 million shares of its common stock.
Phase 3. As consideration for completion of Phase 3, Contractor will earn a 30% revenue interest in the revenues resulting from the sale of the ore, subject to it paying its proportionate share of the mining and milling expenses. If Contractor fails to perform or elects not to perform Phase 3 for any reason within 12 months from the completion of Phase 2, Contractor will forfeit all rights to the project.
US PRECIOUS METALS, INC.
(An Exploration Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 2014
(Unaudited)
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1.
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NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES CONT.
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Nature of Operations Cont
In addition to the consideration stated above, as a further inducement for Contractor to enter into the Mining Services Agreement, the Company’s Chairman has agreed to issue to Contractor an additional 5 million shares of our common stock. This is not a Company obligation but will be treated as a capital contribution and will occur after completion of development under separate agreement.
The parties will be obligated to share in the mining and processing costs and revenues generated from any ore processing on a proportionate basis that is 70% to the Company and 30% to Contractor. The Mining Services Agreement contains extensive terms and obligations regarding the performance of the mining services by Contractor. Accordingly, the descriptions of the Mining Services Agreement are not complete, and are qualified in their entirety by reference to each agreement which are filed as an exhibit to our Annual Report on Form 10-K/A for the fiscal year ended May 31, 2013, filed with the Securities and Exchange Commission on September 16, 2013.
Mr. George Mesa, the sole owner of Contractor, has been the Company’s Director of Security for the Company’s Mexican mining concessions since September 2012. On September 21, 2012, Mr. Mesa received stock options to acquire 1 million share of our common stock at an exercise price of $0.12 in connection with that appointment.
On September 19, 2013, the Company in conjunction with its Mining Services partners Mesa Acquisition Group LLC/Alba Petroleos De El Salvador Sem De Cv, reported the results of the Phase 1 Satellite Imaging program under the Mining Services Agreement.
Amendments to Articles of Incorporation or Bylaws;
On January 31, 2014, the Company filed the Certificate of Designations with the Delaware Secretary of State. The Certificate of Designation allows for the creation and issuance of the 1,250,000 shares of Preferred Stock. As stated in the Certificate of Designations, each share of the Preferred Stock has identical rights as 100 shares of the Company’s common stock. These rights, privileges and preferences include among others; (i). each share of Preferred Stock shall have 100 to 1 voting rights, voting along with the Company’s common stock, (ii). each share of Preferred Stock shall have 100 to 1 rights upon liquidation and distribution of the Company, (iii). each share of Preferred Stock shall have the right to convert into 100 shares of common stock of the Company. On January 29, 2014, the Company’s Board of Directors approved the Certificate of Designations, the filings of the Certificate of Designations with the Delaware Secretary of State and the issuance of the Preferred stock created thereby to RTC.
The conversion privilege of the preferred stock contains a provision restricting conversion until such time as there are adequate common shares authorized to allow full conversion of the preferred. On April 14, 2014, our certificate of incorporation was amended to increase to 335,000,000 the number of authorized common shares.
Significant Accounting Policies
Basis of Presentation
: Our accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In our opinion the financial statements include all adjustments (consisting of normal recurring accruals) necessary to make the financial statements not misleading. Operating results for the three months and nine month periods ended February 28, 2014 are not necessarily indicative of the results that may be expected for the year ended May 31, 2014. For more complete financial information, these unaudited condensed consolidated financial statements should be read in conjunction with the audited financial statements for the year ended May 31, 2013 included in our Form 10-K filed with the SEC.
US PRECIOUS METALS, INC.
(An Exploration Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 2014
(Unaudited)
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1.
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NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES CONT.
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Significant Accounting Policies Cont
Exploration Stage Company
: We are considered an exploration stage company under the criteria set forth by the Securities and Exchange Commission (“SEC”) since we have not yet demonstrated the existence of proven or probable reserves, as defined by the SEC, at our Solidaridad Property. As a result, and in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for exploration stage companies, all expenditures for exploration and evaluation of our property are expensed as incurred and, unless mineralized material is classified as proven or probable reserves, substantially all expenditures for mine and mill construction have been and will continue to be expensed as incurred. Certain expenditures, such as for rolling stock or other general-purpose equipment, may be capitalized, subject to evaluation of the possible impairment of the asset. We will not exit the exploration stage unless and until we demonstrate the existence of proven or probable reserves that meet the SEC guidelines.
Proven and Probable Reserves
: The definition of proven and probable reserves is set forth in SEC Industry Guide 7. Proven reserves are reserves for which (a) quantity is computed from dimensions revealed in outcrops, trenches, workings or drill holes; (b) grade and/or quality are computed from the results of detailed sampling; and (c) the sites for inspection, sampling and measurement are spaced so closely and the geologic character is so well defined that size, shape, depth and mineral content of reserves are well-established. Probable reserves are reserves for which quantity and grade and/or quality are computed from information similar to that used for proven reserves, but the sites for inspection, sampling, and measurement are farther apart or are otherwise less adequately spaced. The degree of assurance, although lower than that for proven reserves, is high enough to assume continuity between points of observation. In addition, reserves cannot be considered proven and probable until they are supported by a feasibility study, indicating that the reserves have had the requisite geologic, technical and economic work performed and are economically and legally extractable at the time of the reserve determination. As of February 28, 2014, none of our mineralized material met the definition of proven or probable reserves
Use of Estimates
: The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management routinely makes judgments and estimates about the effects of matters that are inherently uncertain. Estimates that are critical to the accompanying unaudited consolidated financial statements include, but are not limited to, the identification and valuation of proven and probable reserves; estimates related to asset impairments of long lived assets and investments; classification of expenditures as either an asset or an expense; stock-based compensation expenses; valuation of deferred tax assets; and the likelihood of loss contingencies. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.
Estimates and assumptions are revised periodically and the effects of revisions are reflected in the financial statements in the period it is determined to be necessary. Actual results could differ from these estimates.
US PRECIOUS METALS, INC.
(An Exploration Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 2014
(Unaudited)
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NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES CONT.
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Significant Accounting Policies Cont
Foreign Currency Translation:
The operations and assets of U.S. Precious Metals Mexico are in Mexico. U.S. Precious Metals Mexico depends on the ability of U.S. Precious Metals, Inc. to raise cash which is transferred to U.S. Precious Metals Mexico to meet its operating cash needs. Therefore, our management has determined that the functional currency of U.S. Precious Metals Mexico is the US dollar. U.S. Precious Metals Mexico financial statements are denominated in Mexican Pesos. Since that is the case, we remeasure U.S. Precious Metals Mexico financial statements in US dollars. Any gains or losses arising on the remeasurement are reflected in the Statements of Operations.
The accounts of U.S. Precious Metals Mexico are remeasured in US dollars as follows:
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(a)
|
Current assets, current liabilities, and long-term monetary assets and liabilities are translated based on the rates of exchange in effect at the balance sheet dates (13.3219 pesos per US dollar at February 28, 2014 and 12.8317 at February 28, 2013.)
|
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(b)
|
Non-monetary assets, liabilities, and equity accounts are translated at the exchange rates prevailing at the times of acquisition of assets, assumption of liabilities or equity investments.
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(c)
|
Revenues and expenses are translated at the average exchange rates for each period, (13.014 pesos per US dollar for the nine month period ending February 28, 2014 and 13.0713 for February 28, 2014.) except for charges for amortization and depreciation of non-monetary assets which are translated at the rates associated with the assets.
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Cash and cash equivalents
: Cash and cash equivalents consist of cash and highly liquid debt instruments with original maturities of less than three months.
Property and equipment
:
Property and equipment are stated at cost. Depreciation of property and equipment is calculated using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized using the straight-line method over the shorter of their estimated useful lives or the related reasonably assured lease term. The estimated useful lives are as follows:
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Vehicles
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4 years
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Machinery and equipment
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3-10 years
|
We review our property and equipment for impairment whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable.
Maintenance and repairs of property and equipment are charged to operations. Major improvements are capitalized. Upon retirement, sale or other disposition of property and equipment, the cost and accumulated depreciation are eliminated from the accounts and any gain or loss is included in operations.
Investments in Mining Rights:
Mining rights held for development are recorded at the cost of the rights, plus related acquisition costs. These costs will be amortized when extraction begins.
US PRECIOUS METALS, INC.
(An Exploration Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 2014
(Unaudited)
1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES CONT
Significant Accounting Policies Cont
Mine development costs:
include engineering and metallurgical studies, drilling and other related costs to delineate an ore body, the removal of overburden to initially expose an ore body at open pit surface mines and the building of access ways, shafts, lateral access, drifts, ramps and other infrastructure at underground mines. Costs incurred before mineralized material is classified as proven and probable reserves are expensed as mine development costs. At the point we reach our operating stage, such costs will be capitalized and will be written off as depletion expense as the mineralized material is mined.
Deferred Costs and Other
: Offering costs with respect to issue of common stock, warrants or options by us were initially deferred and ultimately offset against the proceeds from these equity transactions if successful or expensed if the proposed equity transaction is unsuccessful.
Impairment of Long-Lived and Intangible Assets
: In the event that facts and circumstances indicated that the cost of long-lived and intangible assets may be impaired, an evaluation of recoverability will be performed. If an evaluation was required, the estimated future undiscounted cash flows associated with the asset would be compared to the asset's carrying amount to determine if a write-down to market value or discounted cash flow value was required. No impairment was recorded during the three and nine periods ended February 28, 2014 or 2013.
Financial Instruments
: The estimated fair values for financial instruments were determined at discrete points in time based on relevant market information. These estimates involved uncertainties and could not be determined with precision. The carrying amounts of notes receivable, accounts receivable, accounts payable and accrued liabilities approximated fair value because of the short-term maturities of these instruments. The fair value of notes payable approximated to their carrying value as generally their interest rates reflected our effective annual borrowing rate.
Fair Value Measurements
:
ASC Topic 820, Fair Value Measurements and Disclosures (“ASC 820”), provides a comprehensive framework for measuring fair value and expands disclosures which are required about fair value measurements. Specifically, ASC 820 sets forth a definition of fair value and establishes a hierarchy prioritizing the inputs to valuation techniques, giving the highest priority to quoted prices in active markets for identical assets and liabilities and the lowest priority to unobservable value inputs. ASC 820 defines the hierarchy as follows:
Level 1 – Quoted prices are available in active markets for identical assets or liabilities as of the reported date. The types of assets and liabilities included in Level 1 are highly liquid and actively traded instruments with quoted prices, such as equities listed on the New York Stock Exchange.
Level 2 – Pricing inputs are other than quoted prices in active markets, but are either directly or indirectly observable as of the reported date. The types of assets and liabilities in Level 2 are typically either comparable to actively traded securities or contracts, or priced with models using highly observable inputs.
Level 3 – Significant inputs to pricing that are unobservable as of the reporting date. The types of assets and liabilities included in Level 3 are those with inputs requiring significant management judgment or estimation, such as complex and subjective models and forecasts used to determine the fair value of financial transmission rights.
Our financial instruments consist of cash and cash equivalents, short-term trade prepaid expenses, payables, accruals and convertible notes payable. The carrying values of cash and cash equivalents, short-term trade prepaid expenses, payables, accruals and convertible notes payable approximate their fair value due to their short maturities
.
US PRECIOUS METALS, INC.
(An Exploration Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 2014
(Unaudited)
1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES CONT
Significant Accounting Policies Cont
Income Taxes:
We account for income taxes under the liability method, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statements and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Current tax benefits are offset by a valuation reserve as they are considered not likely to be realized in the foreseeable future.
Derivative Financial Instruments:
We do not use derivative instruments to hedge exposures to cash flow, market or foreign currency risks. We evaluate all of our financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the statements of operations. For stock-based derivative financial instruments, the Company used a Black Scholes valuation model to value the derivative instruments at inception and on subsequent valuation dates. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement or conversion of the instrument could be required within 12 months of the balance sheet date.
Discount and Amortization of Debt Discount:
Debt discount represents costs incurred in obtaining the debt funding and the fair value of embedded conversion options of various convertible debt instruments and attached convertible equity instruments issued in connection with debt instruments. The debt discount is amortized over the earlier of (i) the term of the debt or (ii) conversion of the debt, using the straight-line method which approximates the interest method. The amortization of debt discount is included as a component of other expenses in the accompanying statements of operations.
Revenue Recognition Policy
:
Revenue will be recognized when persuasive evidence of an arrangement exists, such as when a purchase order or contract is received from a customer, the price is fixed, title to the goods has passed, and there is reasonable assurance of collection. We have not yet entered into any contractual arrangement to deliver product or services.
Advertising costs
: Advertising costs are expensed as incurred. No advertising costs were incurred during the three and nine month periods ended February 28, 2014 or 2013.
Comprehensive Income (Loss)
: Comprehensive income is defined as all changes in stockholders' equity (deficit), exclusive of transactions with owners, such as capital investments. Comprehensive income includes net income or loss, changes in certain assets and liabilities that are reported directly in equity such as translation adjustments on investments in foreign subsidiaries and unrealized gains (losses) on available-for-sale securities. From our Inception there have been no differences between our comprehensive loss and net loss.
Our comprehensive loss was identical to our net loss for the three and nine month periods ended February 28, 2014 or 2013.
US PRECIOUS METALS, INC.
(An Exploration Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 2014
(Unaudited)
|
1.
|
NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES CONT
|
Significant Accounting Policies Cont
Net Income (Loss) Per Share
: Basic net income (loss) per share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during each period. Diluted income per share reflects the potential dilution that could occur if potentially dilutive securities, as determined using the treasury stock method, are converted into common stock. Potentially dilutive securities, such as stock options, warrants, and convertible preferred shares are excluded from the calculation when their inclusion would be anti-dilutive, such as periods when a net loss is reported or when the exercise price of the instrument exceeds the fair market value. During the three and nine month periods ended February 28, 2014 or 2013, there were warrants and options outstanding to purchase shares of our common stock, and conversion privileges attached to convertible notes. The common share equivalents of these securities have not been included in the calculations of loss per share because such inclusions would have anti-dilutive effects.
Stock-Based Compensation
:
We have adopted ASC Topic 718, “Accounting for Stock-Based Compensation”, which establishes a fair value method of accounting for stock-based compensation plans. In accordance with guidance now incorporated in ASC Topic 718, the cost of stock options and warrants issued to employees and non-employees is measured on the grant date based on the fair value. The fair value is determined using the Black-Scholes option pricing model. The Black-Scholes option model requires management to make various estimates and assumptions, including expected term, expected volatility, risk-free rate, and dividend yield.
Business Segments
:
We believe that our activities during the three and nine month periods ended February 28, 2014 or 2013, comprised a single segment.
Recently Issued Accounting Standards:
We have reviewed all recently issued, but not yet effective, accounting pronouncements and do not believe the future adoption of any such pronouncements may be expected to cause a material impact on our financial condition or the results of our operations.
2. GOING CONCERN AND LIQUIDITY
As shown in the accompanying financial statements, we have experienced continuing losses since Inception (January 21, 1998), and as of February 28, 2014 have a working capital deficit of $4,514,647, accumulated losses of $49,079,424 since Inception (January 21, 1998), recurring negative cash flows from operations and presently do not have sufficient resources to meet our outstanding liabilities or to accomplish our objectives during the next twelve months.
As of February 28, 2014, we were in default on repayment of convertible promissory notes with principal balances of $550,000 together with accrued interest of $408,734 totaling $958,734.
On September 30, 2013, we were served with a lawsuit by a holder of our convertible notes. The lawsuit demanded repayment of a total of $632,666 in principal and interest due under the convertible notes. The lawsuit is discussed further under
Note 6. Commitments and Contingencies
below.
Moreover, effective May 23, 2012, we amended our Settlement Agreement and Payment Agreement with our former attorneys. As result of the amendment, the payment of the initial installment of $403,554, originally due on May 24, 2012, was extended to July 24, 2012. In addition, commencing May 23, 2012, interest accrued on the amount due, which is $1,614,216, at the rate of 5% per annum. We were unable to make the scheduled payment of $403,554 and accrued interest on July 24, 2012 and defaulted under the terms of this agreement, and the entire amount, including interest, became due and payable. On October 1, 2012, we entered into a second amendment to our Settlement Agreement and Payment Agreement with our former attorneys effective July 23, 2012. As a result of the second amendment, the date for the payment of the initial installment of $403,554 was extended to December 1, 2012.
US PRECIOUS METALS, INC.
(An Exploration Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 2014
(Unaudited)
2. GOING CONCERN AND LIQUIDITY CONT.
We have failed to make this schedule payment on December 1, 2012. Thus, our former attorneys have the ability to avail themselves of all rights and privileges under the existing agreements with us and under the laws of Mexico and the United States. The total balance due to our former attorneys, including accrued interest, at February 28, 2014 was $1,755,294.
We owe another former attorney the sum of approximately $90,000 under an arbitration award. The attorney has initiated efforts to effect a judgment against the Company.
At the time of this report, we do not have the funding available to repay the convertible promissory notes, make the payment required under the amended agreement with our former attorneys or pay the arbitration award to the other former attorney.
These conditions raise substantial doubt about our ability to continue as a going concern.
In our audited financial statements for the fiscal years ended May 31, 2013 and 2012, contained in our Annual Report, the Report of the Independent Registered Public Accounting Firm included an explanatory paragraph that describes substantial doubt about our ability to continue as a going concern.
Our present plans to overcome these difficulties, the realization of which cannot be assured, include, but are not limited to, continuing efforts to raise new funding in the public and private markets, to sell some or all of our assets and to initiate a renegotiation of the terms of scheduled repayments to our creditors.
3. SUPPLEMENTAL CASH FLOW INFORMATION
|
|
|
Nine Months Ended
February 28,
|
|
|
|
|
2014
|
|
|
2013
|
|
|
Income taxes paid
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities issued for services
|
|
|
|
|
|
|
|
|
|
1,750,000 shares of common stock issued to directors as compensation
|
|
$
|
-
|
|
|
$
|
315,000
|
|
|
2,250,000 shares of common stock issued to directors as compensation
|
|
|
382,500
|
|
|
|
-
|
|
|
Cancellation of 3,000,000 shares of common stock issued to a consultant in May 2011
|
|
|
-
|
|
|
|
(180,000
|
)
|
|
9,000,000 shares issued under consulting agreement
|
|
|
1,530,000
|
|
|
|
|
|
|
1,500,000 stock options issues as director’s and officer’s compensation
|
|
|
302,083
|
|
|
|
-
|
|
|
1,000,000 stock options issued as director’s compensation
|
|
|
|
|
|
|
114,682
|
|
|
Additional expense to vest previously issued options
|
|
|
-
|
|
|
|
71,257
|
|
|
14,105,485 warrants issued as an investment banking fee
|
|
|
-
|
|
|
|
3,228,097
|
|
|
Total shares and warrants issued for services
|
|
$
|
2,214,583
|
|
|
$
|
3,549,036
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities settled for shares of common stock
|
|
$
|
308,457
|
|
|
$
|
23,107
|
|
|
|
|
|
|
|
|
|
|
|
US PRECIOUS METALS, INC.
(An Exploration Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 2014
(Unaudited)
4. PROPERTY AND EQUIPMENT
As at February 28, 2014 and May 31, 2013 property and equipment consisted of the following:
|
|
|
February 28,
2014
|
|
|
May 31,
2013
|
|
|
Vehicles
|
|
$
|
41,877
|
|
|
$
|
41,877
|
|
|
Machinery and equipment
|
|
|
92,515
|
|
|
|
92,515
|
|
|
Total property and equipment
|
|
|
134,392
|
|
|
|
134,392
|
|
|
|
|
|
|
|
|
|
|
|
|
Less accumulated depreciation
|
|
|
(106,322
|
)
|
|
|
(98,739
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total property and equipment net
|
|
$
|
28,070
|
|
|
$
|
35,653
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense for the three and nine months ended February 28, 2014 was $2,528 (2013 - $2,528) and $7,583 (2013-$7,582), respectively.
5. CONVERTIBLE NOTES PAYABLE
|
|
|
Principal Balance
|
|
|
Loan Discount
|
|
|
Accrued Interest
|
|
|
Total
|
|
|
May 31, 2013
|
|
$
|
575,000
|
|
|
$
|
-
|
|
|
$
|
355,923
|
|
|
$
|
930,923
|
|
|
Issued in the period
|
|
|
525,000
|
|
|
|
(300,000
|
)
|
|
|
-
|
|
|
|
225,000
|
|
|
Converted into shares of common stock
|
|
|
(175,000
|
)
|
|
|
23,000
|
|
|
|
(16,536
|
)
|
|
|
(168,536
|
)
|
|
Amortization of loan discount
|
|
|
-
|
|
|
|
92,024
|
|
|
|
-
|
|
|
|
92,024
|
|
|
Interest adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
1,769
|
|
|
|
1,769
|
|
|
Interest accrued in the period
|
|
|
-
|
|
|
|
-
|
|
|
|
81,770
|
|
|
|
81,770
|
|
|
February 28, 2014
|
|
$
|
925,000
|
|
|
$
|
(184,976
|
)
|
|
$
|
422,926
|
|
|
$
|
1,162,950
|
|
|
Less short term
|
|
|
(725,000
|
)
|
|
|
20,822
|
|
|
|
(414,430
|
)
|
|
|
(1,118,608
|
)
|
|
Long Term
|
|
$
|
200,000
|
|
|
$
|
(164,155
|
)
|
|
$
|
8,496
|
|
|
$
|
44,341
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As at February 28
,
2014, we were in default on repayment of various convertible promissory notes included in the above table with principal balances of $550,000 together with accrued interest of $408,734
,
totaling $958,734
.
The notes in default bear simple interest at an annual rate of 16% and may be converted into the shares of our common stock at the option of the note holder or automatically, if we complete any financing that results in proceeds of at least $10 million to us, or upon the occurrence of a change in control of us.
On September 30, 2013, we were served with a lawsuit by a holder of our convertible notes. The lawsuit demanded repayment of a total of $632,666 in principal and interest due under the convertible notes. The lawsuit was dismissed by court due to lack of jurisdiction, as noted in Note 6 on Commitments and Contingencies.
US PRECIOUS METALS, INC.
(An Exploration Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 2014
(Unaudited)
5. CONVERTIBLE NOTES PAYABLE CONT
Effective October 7, 2013, a noteholder converted a $25,000 convertible note and accrued interest of $14,422 into 183,074 shares of our common stock.
During the current fiscal year, the Company issued four convertible debentures to third parties. The terms of each instrument is discussed below.
|
A.
|
On July 12, 2013, we issued a convertible debenture for $100,000. The convertible debenture has a 6 month term and bears interest of 12%. The convertible debenture may be prepaid at a rate of 150% of the principal balance outstanding along with accrued interest. At any time after the maturity date of the convertible loan, if any principal balance is still outstanding, the balance shall be convertible into shares of the common stock at a 42% discount to the lowest closing price of the prior 20 trading days. As the conversion feature only applies after the maturity of the convertible debenture, no value has been assigned to it and no loan discount has been recognized on the convertible debenture. This convertible debenture was due on January 12, 2014 and the holder converted the entire principal amount of the note as described further below.
We evaluated the terms of the conversion features of the convertible debenture in accordance with ASC Topic No. 815- 40, Derivatives and Hedging - Contracts in Entity’s Own Stock. Since the conversion price can change with reductions in the price of Company common stock, the conversion feature meets the definition of a derivative. Wetherefore bifurcated the conversion feature and accounted for it as a separate derivative liability. We valued the conversion feature at default at $86,860 using the Black Scholes valuation model with the following assumptions: dividend yield of zero, 3 month to maturity, risk free interest rate of 0.05% and annualized volatility of 50%. The balance of $86,860 was recognized as origination interest on the derivative liability and expensed on default
.
Between January 15, 2014 and February 19, 2014, the holder made 9 separate conversion requests and converted the entire principal amount of the note receiving a total of 1,479,439 shares of our common stock. The holder waived their right to charge interest on this loan. The note has been satisfied in full.
On each partial settlement, we revalued the proportionate amount of the derivative liability to its fair value and recognized any gain or loss on the change in fair value of the derivative liability as other income or expense in the statement of operations. On issuance of shares of our common stock upon each partial conversion of the note, we transferred the proportionate balance of the derivative liability to additional paid in capital.
|
|
B.
|
On July 31, 2013, we issued a convertible debenture for $100,000. The convertible debenture has a 12 month term and bears interest of 12%. The convertible debenture may be prepaid at rates of between 125 - 142% of the principal balance outstanding along with accrued interest. At any time after six months, the convertible debenture is convertible into shares of the Company’s common stock at a 42% discount to the lowest closing price of the prior 20 trading days.
We paid commissions to a FINRA broker/dealer in the amount of $8,000 in respect of this loan and accounted for this payment as a discount on the convertible debenture. The debt discount was recorded as reduction (contra-liability) to the convertible debenture and is being amortized over the life of the convertible debenture.
We evaluated the terms of the conversion features of the convertible debenture in accordance with ASC Topic No. 815 - 40, Derivatives and Hedging - Contracts in Entity’s Own Stock. Since the conversion price can change with reductions in the price of Company common stock, the conversion feature meets the definition of a derivative. We therefore bifurcated the conversion feature and accounted for it as a separate derivative liability.
|
US PRECIOUS METALS, INC.
(An Exploration Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 2014
(Unaudited)
5. CONVERTIBLE NOTES PAYABLE CONT.
|
|
We valued the conversion feature at origination at $171,767 using the Black Scholes valuation model with the following assumptions: dividend yield of zero, 6 month to maturity, risk free interest rate of 0.11% and annualized volatility of 140%. $92,000 of the value assigned to the derivative liability was recognized as a debt discount on the convertible debenture. The debt discount was recorded as reduction (contra-liability) to the convertible debenture and is being amortized over the life of the convertible debenture. The balance of $79,767 of the value assigned to the derivative liability was recognized as origination interest and expensed
.
ASC 815 requires we assess the fair market value of derivative liability at the end of each reporting period and recognize any change in the fair market value as another income or expense item.
At November 30, 2013, we further revalued the conversion feature of the convertible debenture using the Black Scholes valuation model with the following assumptions: 6 month, risk free interest rate of 0.12% and annualized volatility of 121% and determined that, since origination, the fair value of our derivative liability had decreased by $59,769 to $159,906. Accordingly we recognized a corresponding gain on derivative liability in conjunction with this revaluation
.
Between January 31, 2014 and February 22, 2014, the holder made 3 separate conversion requests and converted the $50,000 of the principal and $2,113.98 in accrued interest receiving a total of 764,105 shares of our common stock upon such conversions.
On each partial settlement, we revalued the proportionate amount of the derivative liability to it fair value and recognized any gain or loss on the change in fair value of the derivative liability as other income or expense in the statement of operations. On issuance of shares of our common stock on partial settlement of the note, we transferred the proportionate balance of the derivative liability together with the proportionate balance of unamortized debt discount to additional paid in capital.
At February 24, 2014, we further revalued the conversion feature of the convertible debenture relating to the remaining balance of $50,000 using the Black Scholes valuation model with the following assumptions: 5 month term
,
risk free interest rate of 0.070% and volatility of 69%
.
Subsequent to the date for the financial statements, but prior to the issuance of this report, the holder made 2 additional conversion requests and converted the remaining principal balance of the note ($50,000) and $4,500, in accrued interest receiving a total of 854,237 shares of our common stock upon such conversions. The note has been satisfied in full. See Note 10. Subsequent Events below.
|
|
C.
|
On September 26, 2013, we entered into a convertible promissory note with a maximum amount of $300,000, to be fund during a two year term, bearing interest at 12%. The maximum proceeds to be received under the note is $270,000 with the balance of $30,000 representing a discount on issue. We received $150,000 upon closing the note. The lender may convert the convertible promissory note into shares of our common stock at any time after six months at a 40% discount to the lowest trade price in the 25 trading days prior to conversion.
The $150,000 advance was received net of a debt discount of $16,667 and the principal balance to be repaid is $166,667. The $16,667 debt discount was recorded as reduction (contra-liability) to the convertible debenture and is being amortized over the life of the convertible debenture.
|
US PRECIOUS METALS, INC.
(An Exploration Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 2014
(Unaudited)
5. CONVERTIBLE NOTES PAYABLE CONT.
We evaluated the terms of the conversion features of the convertible debenture in accordance with ASC Topic No. 815 - 40, Derivatives and Hedging - Contracts in Entity’s Own Stock and determined it is indexed to the Company’s common stock and that the conversion features meet the definition of a liability and therefore bifurcated the conversion feature and accounted for it as a separate derivative liability.
We valued the conversion feature at origination at $452,332 using the Black Scholes valuation model with the following assumptions: dividend yield of zero, 18 month to maturity, risk free interest rate of 0.34% and annualized volatility of 143%. $150,000 of the value assigned to the derivative liability was recognized as a debt discount on the convertible debenture. The debt discount was recorded as reduction (contra-liability) to the convertible debenture and is being amortized over the life of the convertible debenture. The balance of $302,332 of the value assigned to the derivative liability was recognized as origination interest on the derivative liability and expensed on origination.
ASC 815 requires we assess the fair market value of derivative liability at the end of each reporting period and recognize any change in the fair market value as another income or expense item.
At November 30, 2013, we revalued the conversion feature of the convertible debenture using the Black Scholes valuation model with the following assumptions: 6 month risk free interest rate of 0.25% and annualized volatility of 133% and determined that, since origination, the fair value of our derivative liability had decreased by $111,511 to $340,821 Accordingly we recognized a corresponding gain on derivative liability in conjunction with this revaluation.
On February 20, 2014 we received a further net advance for 30,000 under the terms of the note.
The $30,000 advance was received net of a debt discount of $3,333 and the principal balance to be repaid is $33,333. The $3,333 debt discount was recorded as reduction (contra-liability) to the convertible debenture and is being amortized over the life of the convertible debenture.
We evaluated the terms of the conversion features of the convertible debenture in accordance with ASC Topic No. 815 - 40, Derivatives and Hedging - Contracts in Entity’s Own Stock and determined it is indexed to the Company’s common stock and that the conversion features meet the definition of a liability and therefore bifurcated the conversion feature and accounted for it as a separate derivative liability.
US PRECIOUS METALS, INC.
(An Exploration Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 2014
(Unaudited)
|
5.
|
CONVERTIBLE NOTES PAYABLE CONT.
|
We valued the conversion feature at origination at $47,163 using the Black Scholes valuation model with the following assumptions: dividend yield of zero, 18 month to maturity, risk free interest rate of 0.1842% and annualized volatility of 128%. $30,000 of the value assigned to the beneficial conversion feature was recognized as a debt discount on the convertible debenture. The debt discount was recorded as reduction (contra-liability) to the convertible debenture and is being amortized over the life of the convertible debenture. The balance of $17,163 of the value assigned to the beneficial conversion feature was recognized as origination interest on the derivative liability and expensed on origination.
ASC 815 requires we assess the fair market value of derivative liability at the end of each reporting period and recognize any change in the fair market value as another income or expense item.
At February 28, 2014, we revalued the conversion feature of the entire $200,000 convertible debenture using the Black Scholes valuation model with the following assumptions: 18 month term, risk free interest rate of 0.1783% and annualized volatility of 128%
.
|
D.
|
On February 2, 2014, we issued a convertible debenture for $125,000 to a former lender described in note (A) above. The convertible debenture has a 6 month term and bears interest of 10%. The convertible debenture may be prepaid at a rate of 150% of the principal balance outstanding along with accrued interest. At any time after the maturity date of the convertible loan, if any principal balance is still outstanding, the balance shall be convertible into shares of the common stock at a 42% discount to the lowest closing price of the prior 20 trading days. As the conversion feature only applies after the maturity of the convertible debenture, no value has been assigned to it and no loan discount has been recognized on the convertible debenture. This convertible debenture is due on August 2, 2014
|
The effect of changes in value of the derivatives described in this note are summarized in the following table.
|
|
|
Three Month Period Ended
|
|
|
Nine Month Period Ended
|
|
|
|
|
February 28 2014
|
|
|
February 28, 2014
|
|
|
Beginning value
|
|
$
|
500,727
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Value acquired during the period
|
|
|
134,023
|
|
|
|
728,122
|
|
|
|
|
|
|
|
|
|
|
|
|
Settled on issuance of common stock
|
|
|
(139,921
|
)
|
|
|
(139,921
|
)
|
|
Total value
|
|
|
494,829
|
|
|
|
618,201
|
|
|
|
|
|
|
|
|
|
|
|
|
Revaluation on settlement on issuance of common stock or at end of period
|
|
|
364,493
|
|
|
|
364,493
|
|
|
Income (expense)
|
|
$
|
129,336
|
|
|
$
|
252,708
|
|
|
|
|
|
|
|
|
|
|
|
US PRECIOUS METALS, INC.
(An Exploration Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 2014
(Unaudited)
6. COMMITMENTS AND CONTINGENCIES
Lease – Head Office
We rent office space in Marlboro New Jersey under a 12 month lease, with an option to extend the term of the lease for a further 12 months, at $1,300 per month plus operating expenses. This lease is personally guaranteed by our Chairman and Chief Executive Officer. .
Leases – Mexican Operation
The Company leases a warehouse (storage) facility in the city of Morelia, Michoacán, Mexico at a monthly rental of $2,234. This lease expired on February 1, 2014 and was extended for a further twelve month period on the same terms. Effective February 1, 2014 we extended the terms of the lease for a further twelve months on the same terms as before.
Effective January 1, 2014 we entered into a new rental agreement with the landowner of the land on which our mining concessions are located. Under the terms of the new agreement we agreed to pay a monthly rental of approximately $5,400 on a going basis to be able to have access to our mining concessions.
Mining rights
The Company is required to make payments to the Mexican government on a bi-annual basis to maintain its mining concessions.
The Company subsequently made the $94,000 payment due on January 31, 2014.
Legal
Convertible Note Payable
On September 30, 2013, we were served with a lawsuit by a holder of our convertible notes. The lawsuit, filed in New Jersey Superior Court, Monmouth County, demanded repayment of a total of $632,666 in principal and interest due under the convertible notes. The Company filed an answer to the lawsuit and in addition, filed a motion to dismiss the matter due to the lack of proper jurisdiction. On December 20, 2013, the Court dismissed the action, without prejudice, due to lack of jurisdiction pursuant to the Company’s motion. Plaintiff subsequently filed a motion to vacate the dismissal which was granted by the Court. On January 14, 2014, the Court heard the motion to dismiss and dismissed the case for lack of jurisdiction.
US PRECIOUS METALS, INC.
(An Exploration Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 2014
(Unaudited)
7. STOCKHOLDERS’ DEFICIT
Preferred Stock
The Company is authorized to issue 10,000,000 shares of preferred stock with a par value of $0.00001 per share.
Unregistered Sale of Securities
.
On January 30, 2014, the Company entered into a Restructuring Agreement with RTC, the RTC Shareholders, and Plasmafication Technology Holding, LLC, a Florida limited liability company (“PTH”). Under the terms of the agreement, the Company was contracted to issue at Closing 1,250,000 shares of Class A Preferred Stock to RTC. Each share of this Class A Preferred Stock has identical rights as 100 shares of common stock except that each share of this Class A Preferred Stock is convertible to 100 shares of common stock (or a total of 125 million shares of common stock of the Company).
The market value of the 1,250,000 shares of its newly created Class A Super Voting Preferred Stock is assumed to equate to 125,000,000 shares of the common stock which was $16,250,000 on January 30, 2014 when the Company became contractually obligated to issue these shares.
These securities qualified for exemption under Section 4(2) of the Securities Act and the rules and regulations promulgated thereunder. The offering was not a “public offering” as defined in Section 4(2) due to the insubstantial number of persons involved in the offering, manner of the offering and number of securities offered. These shareholders made certain representations and warranties, including their investment intent. They also agreed to and received share certificates bearing a legend stating that such securities are restricted pursuant to Rule 144 of the Securities Act.
US PRECIOUS METALS, INC.
(An Exploration Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 2014
(Unaudited)
7. STOCKHOLDERS’ DEFICIT CONT.
Material Modification to Rights of Security Holders.
On January 31, 2014, the Company filed the Certificate of Designations with the Delaware Secretary of State. The Certificate of Designation allows for the creation and issuance of the 1,250,000 shares of Preferred Stock. As stated in the Certificate of Designations, each share of the Preferred Stock has identical rights as 100 shares of the Company’s common stock. These rights, privileges and preferences include among others; (i) each share of Preferred Stock shall have 100 to 1 voting rights, voting along with the Company’s common stock, (ii) each share of Preferred Stock shall have 100 to 1 rights upon liquidation and distribution of the Company, (iii) each share of Preferred Stock shall have the right to convert into 100 shares of common stock of the Company. On January 29, 2014, the Company’s Board of Directors approved the Certificate of Designations, the filings of the Certificate of Designations with the Delaware Secretary of State and the issuance of the Preferred stock created thereby to RTC.
Common Stock and Warrants
The Company is authorized to issue 150,000,000 shares of common stock with a par value of $0.00001 per share. On or about February 25, 2014, a majority of the Company’s shareholders approved the increase of the authorized common stock from 150,000,000 to 325,000,000 shares. The Board of Directors previously approved the stated corporate action. On March 26, 2014, the Company filed with the Securities and Exchange Commission and mailed to its shareholders a Definitive Schedule 14C with respect to the stated increase in authorized shares.
The following shares of common stock and warrants were issued and warrants cancelled in the nine month period ending February 28, 2014:
|
|
|
Common Stock
|
|
|
Warrants
|
|
|
May 31, 2013
|
|
|
121,781,244
|
|
|
|
7,827,180
|
|
|
Issued for cash proceeds of $190,000
|
|
|
1,900,000
|
|
|
|
950,000
|
|
|
Issued as compensation to directors
|
|
|
2,250,000
|
|
|
|
-
|
|
|
Issued as compensation under a consulting agreement
|
|
|
9,000,000
|
|
|
|
-
|
|
|
Issued on conversion of loan notes and accrued interest
|
|
|
2,426,598
|
|
|
|
-
|
|
|
Issued on exercise of warrants
|
|
|
866,667
|
|
|
|
(866,667
|
)
|
|
Warrants expired, unexercised
|
|
|
-
|
|
|
|
(5,985,716
|
)
|
|
February 28, 2014
|
|
|
138,224,509
|
|
|
|
1,924,797
|
|
Between June 13, 2013 and August 23, 2013, the Company issued 1.9 million shares of its common stock, together with 950,000 warrants for proceeds of $190,000. The warrants had terms of 6 or 12 months and exercise prices of $0.15 or $0.20.
On September 4, 2013, we issued 2,250,000 shares of our common stock valued as $382,500 as compensation to our directors.
On September 4, 2013, we issued 9,000,000 shares of our common stock valued as $1,530,000 as compensation under a consulting agreement to Hertell Group, a company owned by our President.
Under the Consulting Agreement, among other terms, the Hertell Group will provide general business consulting services including but not limited to business development strategy, introduction of prospective business acquisitions or joint venture participation, deal-making, introduction to capital markets, marketing strategies, and other duties as mutually agreed upon by the parties. As consideration or the services, the Hertell Group has been awarded 9,000,000 shares of our common stock, valued at $1,530,000. The shares are fully vested. The term of the Consulting Agreement is three years.
Effective October 7, 2013, a convertible noteholder converted a $25,000 convertible note and accrued interest of $14,422 into 183,074 shares of our common stock.
The conversion privilege of the preferred stock contains a provision restricting conversion until such time as there are adequate common shares authorized to allow full conversion of the preferred. On April 14, 2014, our certificate of incorporation was amended to increase to 335,000,000 the number of authorized common shares.
US PRECIOUS METALS, INC.
(An Exploration Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 2014
(Unaudited)
7. STOCKHOLDERS’ DEFICIT CONT.
Common Stock and Warrants Cont.
Between October 16 and November 19, 2013, four warrants holders exercised a total of 866,667 warrants at $0.10 and $0.125 per share for total proceeds of $103,333.
Between January 14, 2014 and February 28, 2014 we issued 2,243,524 shares of common stock as settlement for $150,000 of convertible debentures and accrued interest of $4,500. Combined with the
183,074 shares of our common stock
which we issued
effective October 7, 2013 in settlement of a $25,000 convertible note and accrued interest of $14,422, we issued a total of 2,426,598 shares of our common stock in settlement of $175,000 of convertible debentures and accrued interest of $18,922.
During the nine months ended February 28, 2014
,
5,985,716 warrants expired unexercised.
The following table summarizes information about warrants outstanding at February 28, 2014:
|
Exercise Price
|
|
|
Warrants Outstanding
|
|
|
Weighted Average Life of
Outstanding Warrants In Months
|
|
|
$0.15
|
|
|
|
325,000
|
|
|
|
3.3
|
|
|
$0.16
|
|
|
|
924,797
|
|
|
|
17.8
|
|
|
$0.20
|
|
|
|
675,000
|
|
|
|
5.5
|
|
|
Total
|
|
|
|
1,924,797
|
|
|
|
11.1
|
|
Stock Options
In August 2008, our shareholders approved a Stock Option Plan (the “Plan”). Under the terms of the Plan, options to purchase up to 20,000,000 shares of Company common stock may be issued to officers, directors, key employees and consultants.
|
|
|
Stock Options
Outstanding and Exercisable
|
|
|
Weighted Average
Exercise Price
|
|
|
May 31, 2013
|
|
|
16,500,000
|
|
|
$
|
0.13
|
|
|
Granted
|
|
|
1,500,000
|
|
|
|
0.21
|
|
|
Cancelled
|
|
|
(500,000
|
)
|
|
|
(0.18
|
)
|
|
Cancelled or forfeited
|
|
|
-
|
|
|
|
-
|
|
|
February 28, 2014
|
|
|
17,500,000
|
|
|
$
|
0.13
|
|
|
|
|
|
|
|
|
|
|
|
US PRECIOUS METALS, INC.
(An Exploration Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 2014
(Unaudited)
7. STOCKHOLDERS’ DEFICIT CONT.
Stock Options Cont.
The following table summarizes information about stock options outstanding and exercisable at February 28, 2014
|
Exercise Price
|
|
|
Stock Options
Issued and Exercisable
|
|
|
Intrinsic Value of Stock Options
Issued and Exercisable
|
|
|
Weighted Average Life of Stock Options
Issued and Exercisable
in Years
|
|
|
$
|
0.065
|
|
|
|
6,000,000
|
|
|
$
|
390,000
|
|
|
|
2.1
|
|
|
$
|
0.07
|
|
|
|
1,000,000
|
|
|
|
60,000
|
|
|
|
1.6
|
|
|
$
|
0.12
|
|
|
|
1,000,000
|
|
|
|
10,000
|
|
|
|
3.6
|
|
|
$
|
0.16
|
|
|
|
3,500,000
|
|
|
|
-
|
|
|
|
3.2
|
|
|
$
|
0.18
|
|
|
|
1,000,000
|
|
|
|
-
|
|
|
|
2.9
|
|
|
$
|
0.185
|
|
|
|
1,000,000
|
|
|
|
-
|
|
|
|
2.7
|
|
|
$
|
0.19
|
|
|
|
1,000,000
|
|
|
|
-
|
|
|
|
4.4
|
|
|
$
|
0.20
|
|
|
|
500,000
|
|
|
|
-
|
|
|
|
2.6
|
|
|
$
|
0.22
|
|
|
|
1,000,000
|
|
|
|
-
|
|
|
|
4.2
|
|
|
$
|
0.25
|
|
|
|
1,000,000
|
|
|
|
-
|
|
|
|
4.3
|
|
|
|
|
|
|
|
17,500,000
|
|
|
$
|
460,000
|
|
|
|
2.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value represents the difference between our closing stock price of $0.13 per share as of February 28, 2014 and the exercise price multiplied by the number of options outstanding and exercisable as of that date.
8. RELATED PARTY TRANSACTIONS
In July and August 2013, the Company paid a total of $125,000 to
a company controlled by Mr. George Mesa, our Director of Security, and owner of Mesa Acquisitions Group LLC. Mr. Mesa had previously advanced a like amount of funds to Resource Technology Corp. (“RTC”) in connection with the transportation of ore supply, and related costs. As mentioned above, in May 2013, we entered into a Share Exchange Agreement with RTC and its shareholders, which includes our Chairman and a director, to acquire the issued and outstanding shares of RTC from the RTC shareholders
On September 4, 2013, we issued 2,250,000 (2012- 1,750,000) shares of our common stock valued as $382,500 (2012 - $315,000) as compensation to our directors.
On September 4, 2013, we issued 9,000,000 shares of our common stock valued as $1,530,000 as compensation under a consulting agreement to a company owned by our President.
US PRECIOUS METALS, INC.
(An Exploration Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 2014
(Unaudited)
8. RELATED PARTY TRANSACTIONS CONT
On January 30, 2014, the Company entered into a Restructuring Agreement with RTC, the RTC Shareholders, and Plasmafication Technology Holding, LLC, a Florida limited liability company (“PTH”). Pursuant to the Restructuring Agreement 1,250,000 shares of our a designated Class of Preferred stock, valued at $16,250,000 was issued to the RTC shareholders. The RTC shareholders are Wolz International, LLC (“Wolz”) owning 50% of RTC, Titan Productions, Inc. (“Titan”) owning 25% of RTC, and Mercury6, LP (“Mercury6”) owning 25% of RTC. Assuming the issuance of the Preferred Stock to its shareholders, Wolz will receive 625,000 shares of Preferred Stock convertible into 62.5 million shares of common stock (or approximately 24% of the Company’s issued and outstanding common stock), and each of Titan and Mercury will receive 312,500 shares of Preferred Stock convertible into 31.5 million shares of common stock (or approximately 12% of the Company’s issued and outstanding common stock for each entity). Mr. Gennaro Pane, our Chairman and Chief Executive Officer, is an officer and member of Wolz and owns approximately 51% of Wolz, and Chad Altieri, our Board member, is the sole owner of Mercury. In addition, Messrs Pane and Altieri own or control approximately 20% and 8% respectively, of PTH, and Mr. Pane is an officer of PTH.
9. INCOME TAXES
We have had losses since our Inception, and therefore are not subject to federal or state income taxes.
10. SUBSEQUENT EVENTS
On March 5, 2014, a holder of an outstanding convertible note converted the remaining $50,000 balance of the promissory note and $4,500 in accrued interest and received
764,105
shares of our common stock upon such conversion. The promissory note was satisfied in full.
This increase in the number of authorized common shares was approved by the shareholders at a meeting on February 25, 2014 with a record date of March 3, 2014.
On March 26, 2014, the Company filed with the Securities and Exchange Commission and mailed to its shareholders a Definitive Schedule 14C with respect to the increase in authorized shares of common stock from 150,000,000 to 325,000,000.
On April 4, 2014,
we issued a convertible debenture for $150,000. The convertible debenture has a 6 month term and bears interest of 12%. The convertible debenture may be prepaid at a rate of 150% of the principal balance outstanding along with accrued interest. At any time after the maturity date of the convertible loan, if any principal balance is still outstanding, the balance shall be convertible into shares of the common stock at a 42% discount to the lowest closing price of the prior 20 trading days. As the conversion feature only applies after the maturity of the convertible debenture, no value has been assigned to it and no loan discount has been recognized on the convertible debenture.
Between April 8 – 11. 2014 we issued 1,666,667 shares and 833,334 twelve month warrants with an exercise price of $0.125 for cash consideration of $125,000.
On April 14, 2014 the certificate of incorporation of the Company was amended to increase to 335,000,000 the number of authorized common shares.
The Company evaluated subsequent events through the date these financial statements were issued. Other than those set out above, there have been no events subsequent to February 28, 2014 for which disclosure is required.