Notes
to Condensed Consolidated Financial Statements
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
AND ORGANIZATION
(A) Basis of Presentation
The accompanying unaudited condensed
financial statements have been prepared by the Company in accordance with Article 8 of U.S. Securities and Exchange Commission
Regulation S-X and with the instructions to Form 10-Q. In the opinion of management, all adjustments (which include only normal
recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows at April 30, 2014
and 2013 and for the periods then ended have been made. Certain information and footnote disclosures normally included in financial
statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted. Management
suggests these condensed financial statements be read in conjunction with the July 31, 2013 audited financial statements and notes
thereto included in the Company’s Form 10-K. The results of operations for the periods ended April 30, 2014 and 2013 are
not necessarily indicative of the operating results for the full year.
On May 1, 2013, the Company filed
Articles of Merger with the Secretary of State of the State of Nevada pursuant to which its wholly-owned subsidiary, Inception
Mining Inc., a Nevada Corporation, was merged into the Company effective May 1, 2013. As a result of the filing of the Articles
of Merger, the Company’s corporate name was changed from Gold American Mining Corp. to Inception Mining Inc.
(B) Going Concern
As reflected in the accompanying
unaudited condensed consolidated financial statements, the Company is in the exploration stage with minimal operations, has a
net loss since inception of $5,795,895 and used cash in operations of $1,945,103 from inception. In addition, there is a working
capital deficiency (excess of current liabilities over current assets) of $876,987 as of April 30, 2014. This raises substantial
doubt about its ability to continue as a going concern. The ability of the Company to continue as a going concern is dependent
on the Company’s ability to raise additional capital and implement its business plan. The financial statements do not include
any adjustments that might be necessary if the Company is unable to continue as a going concern.
(C) Fair Value of Financial Instruments
The Company adopted the provisions
of Accounting Standards Codification subtopic 825-10, Financial Instruments (“ASC 825-10”) on January 1, 2008. ASC
825-10 defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities
required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it
would transact and considers assumptions that market participants would use when pricing the asset or liability, such as inherent
risk, transfer restrictions, and risk of nonperformance. ASC 825-10 establishes a fair value hierarchy that requires an entity
to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 825-10 establishes
three levels of inputs that may be used to measure fair value:
Level 1 – Quoted prices
in active markets for identical assets or liabilities.
Level 2 – Observable inputs
other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets with insufficient
volume or infrequent transactions (less active markets); or model-derived valuations in which all significant inputs are observable
or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or
liabilities.
Level 3 – Unobservable inputs
to the valuation methodology that are significant to the measurement of fair value of assets or liabilities.
All items required to be recorded
or measured on a recurring basis are based upon level 3 inputs.
To the extent that valuation is
based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more
judgment. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy.
In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement is disclosed
and is determined based on the lowest level input that is significant to the fair value measurement.
Upon adoption of ASC 825-10, there
was no cumulative effect adjustment to beginning retained earnings and no impact on the financial statements.
The carrying value of the Company’s
cash and cash equivalents, accounts receivable, accounts payable, short-term borrowings (including convertible notes payable),
and other current assets and liabilities approximate fair value because of their short-term maturity.
Inception Mining, Inc.
(An Exploration Stage Company)
Notes
to Condensed Consolidated Financial Statements
As of April 30, 2014 or July 31,
2013, the Company did not have any items that would be classified as level 1 or 2 disclosures.
The Company recognizes its derivative
liabilities as level 3 and values its derivatives using the methods discussed below. While the Company believes that its valuation
methods are appropriate and consistent with other market participants, it recognizes that the use of different methodologies or
assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at
the reporting date. The primary assumptions that would significantly affect the fair values using the methods discussed below
are that of volatility and market price of the underlying common stock of the Company.
As of April 30, 2014 and July
31, 2013, the Company did not have any derivative instruments that were designated as hedges.
The derivative liability as of
April 30, 2014, in the amount of $137,138 has a level 3 classification.
The following table provides a
summary of changes in fair value of the Company’s Level 3 financial liabilities as of April 30, 2014:
|
|
Warrant
Liability
|
|
Balance, July 31, 2013
|
|
$
|
-
|
|
Initial
fair value of debt
|
|
$
|
124,871
|
|
Mark-to-market at April 30, 2014:
|
|
|
12,267
|
|
Balance, April 30, 2014
|
|
$
|
137,138
|
|
Net (Loss) Gain for the
period included in earnings relating to the liabilities held at April 30, 2014
|
|
$
|
(12,267
|
)
|
The fair value of the embedded
derivatives at April 30, 2014, in the amount of $137,138, was determined using the Binomial Option Pricing Model based on the
following assumptions: (1) dividend yield of 0%; (2) expected volatility of 74.94 to 110.62%, (3) weighted average risk-free interest
rate of 0.01 to 0.12%, (4) expected life of 0.81 to 0.97 years, and (5) estimated fair value of the Company’s common stock
of $0.94 per share. The Company recorded a loss on change in derivative liabilities of $12,267 during the three months ended April
30, 2014.
Liabilities measured at fair value
on a recurring basis are summarized as follows:-
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value
of derivatives at April 30, 2014
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
137,138
|
|
|
$
|
137,138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of derivatives
at July 31, 2013
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Inception Mining, Inc.
(An Exploration Stage Company)
Notes to Condensed Consolidated
Financial Statements
NOTE
2 CONVERTIBLE NOTES PAYABLE
UP
and Burlington Gold Mine
On February 25, 2013, the Company,
its majority shareholder, and its wholly-owned subsidiary, Inception Development Inc. (the “Subsidiary”), entered
into an Asset Purchase Agreement with Inception Resources, LLC, a Utah corporation, pursuant to which the Company purchased the
U.P. and Burlington Gold Mine in consideration of 16,000,000 shares of common stock valued at $160 (valued at par value of $0.00001
because of the entities being under common control), the assumption of promissory notes in the amount of $800,000 and $150,000
and the assignment of a 3% net royalty. The Asset Purchase Agreement closed on February 25, 2013. As of April 30, 2014, the outstanding
balances on these notes were $630,000 and $30,000, respectively. On November 1, 2013, one of the notes was renegotiated with the
note holder. The original note was restructured and treated as an extinguishment and as such is now convertible into shares of
the Company’s common stock at $0.45 per share. All the other points of the note remained the same. A beneficial conversion
feature on the new note was recorded for $630,000. On February 11, 2014, the Company converted $130,000 of principal into 288,888
shares of common stock.
Iconic
Holdings
On February 18, 2014, the Company
entered into a unsecured Note Purchase Agreement for the sale of an 10% convertible promissory note in which the Company will
receive advances up to the principal amount of $220,000 with an original issue discount of 10% of loaned funds. Through April
30, 2014, the Company has received funds totaling $75,000 and recorded additional principal due to the original issue discount
totaling $7,500. The note bears interest at the rate of 10% per annum and all interest and principal must be repaid on February
18, 2015. The note is convertible into common stock, at the holder’s option, at the lower of $0.45 or 60% of the lowest
three daily volume weighted average price of the Company’s common stock during the 20 consecutive trading days prior to
the date of conversion. If the Company is placed on “chilled” status with the Depository Trust Company, the discount
will be increased by 10% until such chill is remedied. The note may not be prepaid in whole or in part by the Company. All
of the proceeds received from the note have been allocated to the embedded derivative and the Company recorded an additional $42,371
as interest expense from the amount of the initial derivative fair value in excess of proceeds received. Due to the allocation
of proceeds, the Company recorded discounts on the note totaling $82,500 through April 30, 2014. During the nine months ended
April 30, 2014 and 2013, respectively, the Company recorded interest expense of $9,451 and $0 for accretion of the discounts on
the note. As of April 30, 2014, accrued interest on the note was $919.
During
the nine months ended April 30, 2014 $639,000 of debt discount was amortized for the above notes.
NOTE 3 COMMON STOCK-(tie
to equity rollforward)
(A) Common Stock Issuances
Effective August 1, 2013, the
Company issued 15,000 shares of common stock for services valued at $6,750. These shares were issued for the settlement of accounts
payable.
On August 5, 2013, the Company
issued 295,611 shares of common stock and 112,250 common stock purchase warrants for aggregate consideration of $101,025 in cash.
The cash for these shares and warrants was received prior to July 31, 2013 and had been recorded as common stock subscribed.
On October 30, 2013, the Company
entered into a retainer agreement with a law firm in exchange for legal services pursuant to which the law firm was issued an
aggregate of 211,111 shares of common stock of the Company in consideration of legal services valued at $242,778. This transaction
satisfied accounts payable of $80,000 with $15,000 recorded as prepaid legal fees. The prepaid legal fees were expensed during
the three months ended October 31, 2013 and a loss on settlement of accounts payable was recognized of $147,778. There shares
were issued for the settlement of accounts payable.
On January 31, 2014, the Company
entered into a consulting services agreement with an individual in exchange for 50,000 shares of common stock for services to
be rendered over the next 12 months. These services were valued at $25,500 based on the quoted market price of the stock on that
day. These shares have yet to be issued.
In January 2014, the Company issued
258,887 shares of common stock and 129,445 common stock purchase warrants for aggregate consideration of $116,500 in cash.
In January 2014, the Company issued
150,000 shares of common stock for services valued at $76,500. The services are being provided over a 12-month period.
In February 2014, the Company
issued 288,889 shares of common stock upon the conversion of $130,000 of note payable principal.
In February and March 2014, the
Company issued 100,000 shares of common stock and 104,000 common stock purchase warrants for aggregate consideration of $51,000
in cash.
In March 2014, the Company issued
100,000 shares of common stock for services valued at $102,000. The services are being provided over a 12-month period.
In April 2014, the Company issued
40,000 shares of common stock for services valued at $46,000.
Inception Mining, Inc.
(An Exploration Stage Company)
Notes to Condensed Consolidated
Financial Statements
NOTE 3 COMMON STOCK (CONTINUED)
(B) Warrants
The following tables summarize
the warrant activity during the nine months ended April 30, 2014:
|
|
Number
of Options
|
|
|
Weighted
Average
Exercise Price
|
|
Balance at July 31, 2013
|
|
|
-
|
|
|
|
-
|
|
Granted
|
|
|
345,695
|
|
|
|
0.90
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
Balance at April 30, 2014
|
|
|
345,695
|
|
|
$
|
0.90
|
|
Outstanding
Warrants
|
|
|
Warrants
Exercisable
|
|
|
Range
of
Exercise Price
|
|
|
|
Number
Outstanding at
April 30, 2014
|
|
|
|
Weighted Average
Remaining
Contractual Life
|
|
|
|
Weighted
Average
Exercise Price
|
|
|
|
Number
Exercisable at
April 30, 2014
|
|
|
|
Weighted
Average
Exercise Price
|
|
$
|
0.90
|
|
|
|
345,695
|
|
|
|
2.62
years
|
|
|
$
|
0.90
|
|
|
|
345,695
|
|
|
$
|
0.90
|
|
NOTE 4 RELATED PARTY TRANSACTIONS
(A) Acquisition of Mining
Rights
On February 25, 2013, the Company,
its majority shareholder, and its wholly-owned subsidiary, Inception Development Inc. (the “Subsidiary”), entered
into an Asset Purchase Agreement with Inception Resources, LLC, a Utah corporation, pursuant to which the Company purchased the
U.P. and Burlington Gold Mine in consideration of 16,000,000 shares of common stock valued at $160 (valued at par value of $0.00001
because of the entities being under common control), the assumption of promissory notes in the amount of $800,000 and $150,000
and the assignment of a 3% net royalty. The Asset Purchase Agreement closed on February 25, 2013. As of April 30, 2014, the outstanding
balances on these notes were $500,000 and $30,000, respectively. On November 1, 2013, one of the notes was renegotiated with the
note holder. The original note was restructured and treated as an extinguishment and as such is now convertible into shares of
the Company’s common stock at $0.45 per share. All the other points of the note remained the same. A beneficial conversion
feature on the new note was recorded for $630,000. During the nine and three months ended April 30, 2014, $630,000 and 0, respectively,
of the beneficial conversion feature was accreted as interest expense.
(B) Advances
Through April 30, 2014, a stockholder/director
has loaned to the Company or paid expenses on behalf of the Company. The advances are unsecured, due on demand, and bear interest
at a rate of 15% per annum. As of April 30, 2014, the Company owes $274,886 for loans and payments, plus an additional $9,803
in accrued interest. During the nine months ended April 30, 2014, the Company recorded interest expense on the advances of $28,588.
(C) Consulting Agreement
In February 2014, the Company
entered into a consulting agreement with a stockholder/director. The Company agreed to pay $18,000 per month for twelve months.
As of April 30, 2014, the Company owed $72,000 to the stockholder/director in accrued consulting fees.
Inception Mining, Inc.
(An Exploration Stage Company)
Notes to Condensed Consolidated
Financial Statements
NOTE 4 RELATED PARTY TRANSACTIONS
(CONTINUED)
(D) Employment Agreements
On February 25, 2013, the Company
entered into an employment agreement with Michael Ahlin pursuant to which he was appointed as the Chief Executive Officer, President,
Treasurer, Secretary and Director of the Company. Under the terms of his employment agreement, Mr. Ahlin will become eligible
to receive an annual salary, bonus and stock option upon the Company achieving positive earnings before interest, taxes, depreciation,
and amortization (“EBITDA”) in two consecutive quarters as reflected in its filings with the Securities and Exchange
Commission (“SEC”).
On February 25, 2013, the Company
entered into an employment agreement with Whit Cluff pursuant to which he was appointed as the Chief Financial Officer and Director
of the Company. Under the terms of his employment agreement, Mr. Cluff will become eligible to receive an annual salary, bonus
and stock option upon the Company achieving positive EBITDA in two consecutive quarters as reflected in its filings with the SEC.
On February 25, 2013, the Company
entered into an employment agreement with Brian Brewer pursuant to which he was appointed as the Chief Operating Officer and Director
of the Company. Under the terms of his employment agreement, Mr. Brewer will become eligible to receive an annual salary, bonus
and stock option upon the Company achieving positive EBITDA in two consecutive quarters as reflected in its filings with the SEC.
NOTE 5 AGREEMENTS AND COMMITMENTS
Crawford Agreement
On August 30, 2013, the Company
entered into an Agreement (the “Crawford Agreement”) with Crawford Cattle Company LLC (“Crawford”), a
Nevada limited liability company, pursuant to which the Company was to acquire from Crawford certain mineral rights including
the right to extract gold, silver and other minerals, but excluding oil, gas and coal (the “Mineral Rights”) contained
in approximately 16,183 acres located in Humboldt and Elko Counties, Nevada (the “Mineral Properties”). Crawford advised
that it owns a portion of the Mineral Properties and was in the process of acquiring the balance of the Mineral Properties. Under
the terms of the Crawford Agreement, Crawford granted the Company an exclusive, three month evaluation period in order to perform
due diligence on the Mineral Properties. The Crawford Agreement has expired and the parties are presently in discussions to amend
the Crawford Agreement of which there is no guarantee. In the event the Company elects to purchase the Mineral Rights from Crawford
after amending the Crawford Agreement, the Company would purchase the Mineral Rights for a to-be-determined purchase price to
be paid to Crawford in the form of shares of restricted common stock of the Company at a to-be determined per share price.
On April 8, 2014, the Company
informed Crawford that the Crawford Agreement terminated on November 30, 2013, that the Company has elected to terminate all discussions
with Crawford and that the Company will not be pursuing any transaction with Crawford as contemplated in the Crawford Agreement
or otherwise.
Barwicki Investor Relations
Agreement
On September 26, 2013,the Company
entered into a Letter of Agreement with Andrew Barwicki Incorporated (“
Barwicki”
), pursuant to which Barwicki
was retained for the purposes of providing investor relations services, for 3 month, in consideration of $3,600 per month.
Rick Thurman Consulting Agreement
On November 5, 2013, the Company
entered into an Advisory Agreement with Rick Thurman pursuant to which Mr. Thurman was issued 20,000 shares of common stock of
the Company in consideration of corporate advisory services. The Agreement with Mr. Thurman was 45-days, originally, but extended
through April 1, 2014.
Inception Mining, Inc.
(An Exploration Stage Company)
Notes to Condensed Consolidated
Financial Statements
David Rees Agreement
On January 31, 2014, the Company
entered into a Consulting Agreement with David Rees pursuant to which Mr. Rees will receive 50,000 shares of common stock of the
Company, which such shares have been registered on a Registration Statement File No. 333-191244 in consideration of providing
general corporate advisory and M&A services. The term of the Agreement is for 1 year.
Chienn Consulting Agreement
On January 31, 2014, the Company
entered into a Consulting Agreement with Chienn Consulting Company, LLC (“Chienn”) pursuant to which Chienn will receive
100,000 shares of restricted common stock of the Company in consideration of providing marketing, sales and business development
services for a period of one year
Elliott Foxcroft Agreement
On
March 27, 2014, the Company entered into an Advisory Agreement with Elliott Foxcroft (“Forcroft”) pursuant to which
Foxcroft will receive 300,000 shares of restricted common stock of the Company, of which 100,000 shares have been issued, in consideration
for providing/assist the Company with general legal, corporate advisory and M&A matters. Mr. Foxcroft will help the Company
source, identify and evaluate potential acquisition targets (the “Target Acquisitions”) for a period of 90 days.
NOTE 6 CONCENTRATION OF RISK
Financial instruments that potentially
subject the Company to credit risk consist principally of cash. The cash balance identified in the balance sheet is held in an
account with a financial institution and insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000. At times,
cash maintained on deposit may be in excess of FDIC limits. Cash may also be maintained at commercial financial institutions which
are not insured by the FDIC.