Notes to Consolidated Financial Statements
NOTE 1 – NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Nature of Business
Bullfrog Gold Corp. (the “Company”) is a junior
exploration company engaged in the acquisition and exploration of properties that may contain gold, silver and other metals in
the United States. The Company’s target properties are those that have been the subject of historical exploration. The Company
owns, controls or has acquired mineral rights on State lands, private lands and Federal patented and unpatented mining claims in
the state of Nevada for the purpose of exploration and potential development of gold, silver and other metals on a total of approximately
6,240 acres. The Company plans to review opportunities and acquire additional mineral properties with current or historic precious
and base metal mineralization with meaningful exploration potential.
The Company’s properties do not have any reserves.
The Company plans to conduct exploration programs on these properties with the objective of ascertaining whether any of its properties
contain economic concentrations of precious and base metals that are prospective for mining.
Basis of Presentation
The consolidated unaudited financial statements included
in this Form 10-Q have been prepared in accordance with generally accepted accounting principles in the United States of America
for interim financial information and with the instructions to Form 10-Q. Accordingly, these financial statements do not include
all of the disclosures required by U.S. generally accepted accounting principles for complete financial statements. These consolidated
unaudited interim financial statements should be read in conjunction with the audited financial statements for the fiscal year
ended December 31, 2013 in our Annual Report on Form 10-K. The financial information furnished herein reflects all adjustments
consisting of normal, recurring adjustments which, in the opinion of management, are necessary for a fair presentation of our financial
position, the results of operations and cash flows for the periods presented. Operating results for the quarterly period and six
months ended June 30, 2014 are not necessarily indicative of results for future quarters or periods in the fiscal year ending December
31, 2014.
Principles of Consolidation
The consolidated financial statements include the accounts
of Bullfrog Gold Corp. and its wholly owned subsidiaries, Standard Gold Corp. (“Standard Gold”) a Nevada corporation
and Rocky Mountain Minerals Corp. (“Rocky Mountain Minerals”) a Nevada corporation. All significant inter-entity balances
and transactions have been eliminated in consolidation.
Going Concern and Management’s Plans
The Company has incurred losses from operations since inception
and has an accumulated deficit of approximately $8,411,000 as of June 30, 2014. Additionally, the Company had a negative working
capital of approximately $2,423,000 at June 30, 2014. The Company’s financial statements have been prepared on the basis
that it is a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course
of business. The Company’s continuation as a going concern is dependent upon attaining profitable operations through achieving
revenue growth.
The Company has no revenues and does not expect to have revenues
in 2014. Should we be unable to continue as a going concern, we may be unable to realize the carrying value of our assets and to
meet our obligations as they become due. To continue as a going concern, we are dependent on continued fund raising. However, we
have no commitment from any party to provide additional capital and there is no assurance that such funding will be available when
needed, or if available, that its terms will be favorable or acceptable to us. The Company is currently exploring various financing
alternatives to refinance or repay the amount outstanding to RMB Australia Holdings Limited (“RMB”). To do so, the
Company will have to raise additional funds from external sources. There can be no assurance that additional financing will be
available at all or on acceptable terms. If additional financing is not available, we may have to substantially reduce or cease
operations. Further, if the Company fails to restructure or refinance its RMB indebtedness or should any of RMB’s indebtedness
be accelerated, the Company will not have adequate liquidity to fund its operations, meet its obligations (including its debt payment
obligations) and we may
not be able to continue as a going concern, and will likely
be forced to surrender our ownership interest in the Bullfrog Project as part of the Facility.
Cash and Cash Equivalents and Concentration
The Company considers all highly liquid investments with
a maturity of three months or less when acquired to be cash equivalents. The Company places its cash with a high credit quality
financial institution. The Company’s account at this institution is insured by the Federal Deposit Insurance Corporation
up to $250,000. At June 30, 2014, the Company’s cash balance was approximately $72,000. To reduce its risk associated with
the failure of such financial institution, the Company will evaluate at least annually the rating of the financial institution
in which it holds deposits.
Restricted Cash
Restricted cash is excluded from other cash. Restricted cash
is maintained in connection with requirements in the RMB Facility. RMB authorized the Company to apply the $500,000 restricted
cash balance to the quarterly interest payment and the principal balance and close the restricted cash account.
Use of Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America requires management to make estimates and assumptions
that affect the reported amounts 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. Actual results could differ
from those estimates.
Mineral Property Acquisition and Exploration Costs
Mineral property acquisition and exploration costs are expensed
as incurred until such time as economic reserves are quantified. To date, the Company has not established any proven or probable
reserves on its mineral properties. Costs of lease, exploration, carrying and retaining unproven mineral lease properties are expensed
as incurred. The Company has chosen to expense all mineral exploration costs as incurred given that it is still in the exploration
stage. Once the Company has identified proven and probable reserves in its investigation of its properties and upon development
of a plan for operating a mine, it would enter the development stage and capitalize future costs until production is established.
When a property reaches the production stage, the related capitalized costs will be amortized over the estimated life of the probable-proven
reserves. When the Company has capitalized mineral properties, these properties will be periodically assessed for impairment of
value and any diminution in value. To date, the Company has not established the commercial feasibility of any exploration prospects;
therefore, all costs are being expensed. During the six months ended June 30, 2014 and 2013, the Company incurred exploration costs
of approximately $291,000 and $463,000, respectively. Costs of property acquisitions are being capitalized.
The Company entered an Option to Purchase the Newsboy Gold
Project in September 2011, at which time the gold price was near $1,900 per ounce. Since then the Company completed four exploration
programs that included 27,201 feet of drilling in 160 holes to test potential expansions to an open pit mine proposed in 1992 and
at priority exploration targets within 3 miles of the Main deposit. An independent technical report was completed in February 2014
that showed the project was not economic under reasonably foreseeable gold prices. Based on that report and option payments deemed
too high under current circumstances, the Company concluded it was in the best interest of its shareholders to terminate the Newsboy
Project and apply its resources and expertise on other endeavors.
Deferred Financing Fees
RMB Facility
In conjunction with a Facility Agreement evidencing the Facility
with RMB, the Company paid financing fees of approximately $1,300,000 in cash and warrants in 2012. These fees were capitalized
as deferred financing fees and will be amortized over the life of the Facility using the effective interest method.
NPX Convertible Note
In conjunction with the NPX Convertible Note (as discussed
in Note 4) the Company paid financing fees of approximately $22,000 in cash in April 2014. These fees were capitalized as deferred
financing fees and will be amortized over the life of the Note using the effective interest method.
Total amortization
of deferred financing fees included in interest expense during the six months ended June 30, 2014 and 2013 was approximately
$329,000 and $327,000, respectively.
Fair Value Measurement
Fair value is defined as the exchange price that would be
received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset
or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that
may be used to measure fair value:
Level 1
–
Valuation based on quoted
market prices in active markets for identical assets and liabilities.
Level 2
–
Valuation based on quoted
market prices for similar assets and liabilities in active markets.
Level 3
–
Valuation based on unobservable
inputs that are supported by little or no market activity, therefore requiring management’s best estimate of what market
participants would use as fair value.
The Company does not have any assets or liabilities measured
using Level 1 or 2 inputs. The Company’s Level 3 financial liabilities measured at fair value consisted of the warrant liability
as of June 30, 2014 and December 31, 2013. See Note 3.
Fair Value of Financial Instruments
The respective carrying value of certain on-balance-sheet
financial instruments approximated their fair values due to the short-term nature of these instruments. These financial instruments
include cash, accounts payable, and other liabilities. The warrant liability, a long-term liability, is already recorded at fair
value. The fair values of the Company’s notes payable are not practicable to calculate due to the unique terms of the notes.
Income Taxes
Income taxes are accounted for under the asset and liability
method in accordance with ASC 740
, "Income Taxes".
Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial carrying amounts of existing assets and liabilities and
their respective tax bases as well as operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the periods in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date. Deferred tax assets are reduced by a valuation allowance to the extent that the recoverability
of the asset is unlikely to be recognized.
The Company reports a liability, if any, for unrecognized
tax benefits resulting from uncertain tax positions taken, or expected to be taken, in an income tax return. The Company has elected
to classify interest and penalties related to unrecognized income tax benefits, if and when required, as part of income tax expense
in the statement of operations. No liability has been recorded for uncertain income tax positions, or related interest or penalties
as of June 30, 2014 or December 31, 2013. The periods ended December 31, 2013, 2012 and 2011 are open to examination by taxing
authorities.
Long Lived Assets
The Company assesses the impairment of long-lived assets
whenever events or changes in circumstances indicate that the carrying value may not be recoverable. When the Company determines
that the carrying value of long-lived assets may not be recoverable based upon the existence of one or more indicators of impairment
and the carrying value of the asset cannot be recovered from projected undiscounted cash flows, the Company records an impairment
charge. The Company measures any impairment based on a projected discounted cash flow method using a discount rate determined by
management to be commensurate with the risk inherent in the current business model. Significant management judgment is required
in determining whether an indicator of impairment exists and in projecting cash flows.
Preferred Stock
The Company accounts for its preferred stock under the provisions
of the ASC on
Distinguishing Liabilities from Equity
, which sets forth the standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and equity. This standard requires an issuer to classify
a financial instrument that is within the scope of the standard as a liability if such financial instrument embodies an unconditional
obligation to redeem the instrument at a specified date and/or upon an event certain to occur. The Company has determined that
its preferred stock does not meet the criteria requiring liability classification as its obligation to redeem these
instruments is not based on an event certain to occur. Future
changes in the certainty of the Company’s obligation to redeem these instruments could result in a change in classification.
Derivative Financial Instruments
The Company accounts for derivative instruments in accordance
with Financial Accounting Standards Board (“FASB”) ASC 815,
Derivatives and Hedging
(“ASC 815”),
which requires additional disclosures about the Company’s objectives and strategies for using derivative instruments, how
the derivative instruments and related hedged items are accounted for, and how the derivative instruments and related hedging items
affect the financial
statements. The Company does not use derivative instruments
to hedge exposures to cash flow, market or foreign currency risk. Terms of convertible debt and equity instruments are reviewed
to determine whether or not they contain embedded derivative instruments that are required under ASC 815 to be accounted for separately
from the host contract, and recorded on the balance sheet at fair value. The fair value of derivative liabilities, if any, is
required to be revalued at each reporting date, with corresponding
changes in fair value recorded in current period operating results. Pursuant to ASC 815, an evaluation of specifically identified
conditions is made to determine whether the fair value of warrants issued is required to be classified as equity or as a derivative
liability.
Stock-Based Compensation
Stock-based compensation is accounted for based on the requirements
of the Share-Based Payment Topic of ASC 718 which requires recognition in the consolidated financial statements of the cost of
employee and director services received in exchange for an award of equity instruments over the period the employee or director
is required to perform the services in exchange for the award (presumptively, the vesting period). This ASC also requires measurement
of the cost of employee and director services received in exchange for an award based on the grant-date fair value of the award.
The estimated fair value of each stock option as of the date
of grant was calculated using the Black-Scholes pricing model. The Company estimates the volatility of its common stock at the
date of grant based on the volatility of a comparable peer company which is publicly traded. The Company determines the expected
life based on historical experience with similar awards, giving consideration to the contractual terms, vesting schedules and post-vesting
forfeitures. The Company uses the risk-free interest rate on the implied yield currently available on U.S. Treasury issues with
an equivalent remaining term approximately equal to the expected life of the award. The Company has never paid any cash dividends
on its common stock and does not anticipate paying any cash dividends in the foreseeable future. The shares of common stock subject
to the stock-based compensation plan shall consist of unissued shares, treasury shares or previously issued shares held by any
subsidiary of the Company, and such number of shares of common stock are reserved for such purpose.
Net Loss per Common Share
Net losses were reported during the quarterly period and
six months ended June 30, 2014 and 2013. As such, the Company excluded the following from computation as their effect would be
anti-dilutive:
|
6/30/14
|
6/30/13
|
Stock options
|
4,460,000
|
4,060,000
|
Warrants
|
21,612,285
|
21,152,285
|
Preferred stock
|
400,000
|
2,692,100
|
Convertible note payable warrants
|
880,000
|
-
|
Risks and Uncertainties
Our limited operating history makes it difficult for potential
investors to evaluate our business or prospective operations. Since our formation, we have not generated any revenues. As an early
stage company, we are subject to all the risks inherent in the initial organization, financing, expenditures, complications and
delays inherent in a new business. Investors should evaluate an investment in us in light of the uncertainties encountered by developing
companies in a competitive environment. Our business is dependent upon the implementation of our business plan. There can be no
assurance that our efforts will be successful or that we will ultimately be able to attain profitability.
Natural resource exploration, and exploring for gold in particular,
is a business that by its nature is very speculative. There is a strong possibility that we will not discover gold or any other
resources which can be mined or extracted at a profit. Even if we do discover gold or other deposits, the deposit may not be of
the quality or size necessary for us or a potential purchaser of the property to make a profit from actually mining it. Few properties
that are explored are ultimately developed into producing mines. Unusual or unexpected geological formations, geological formation
pressures, fires, power outages, labor disruptions, flooding, explosions, cave-ins, landslides and the inability to obtain suitable
or adequate machinery, equipment or labor are just some of the many risks involved in mineral exploration programs and the subsequent
development of gold deposits.
Our business is exploring for gold and other minerals. In
the event that we discover commercially exploitable gold or other deposits, we will not be able to make any money from them unless
the gold or other minerals are actually mined or we sell all or a part of our interest. Accordingly, we will need to find some
other entity to mine our properties on our behalf, mine them ourselves or sell our rights to mine to third parties. Mining operations
in the United States are subject to many different federal, state and local laws and regulations, including stringent environmental,
health and safety laws. In the event we assume any operational responsibility for mining our properties, it is possible that we
will be unable to comply with current or future laws and regulations, which can change at any time. It is possible that changes
to these laws will be adverse to any potential mining operations. Moreover, compliance with such laws may cause substantial delays
and require capital outlays in excess of those anticipated, adversely affecting any potential mining operations. Our future mining
operations, if any, may also be subject to liability for pollution or other environmental damage. It is possible that we will choose
to not be insured against this risk because of high insurance costs or other reasons.
Recent Accounting Pronouncements
There are several new accounting pronouncements issued by
the FASB which are not yet effective. Management does not believe any of these accounting pronouncements will be applicable and
therefore will not have a material impact on the Company's financial position or operating results.
The FASB issued Accounting Standard Updates (“ASU”)
to amend the authoritative literature in ASC. ASU 2014-10,
Development Stage Entities (Topic 915) Elimination of Certain Financial
Reporting Requirements, Including an Amendment to Variable Interest Entities Guidance in Topic 810, Consolidation
in June
2014 aims to improve financial reporting by reducing the cost and complexity associated with the incremental reporting requirements
for development stage entities by removing all incremental financial reporting requirements from development stage entities. Users
of financial statements of development stage entities determined that the development stage entity distinction, the inception-to-date
information and certain other disclosures have limited relevance and are generally not useful. ASU 2014-10 is effective for annual
reporting periods beginning after December 15, 2014. We have elected early adoption of ASU 2014-10 for this filing. We have provided
additional disclosures as described in the paragraphs under ASC 275 “Risks and Uncertainties” as required by the ASU.
Reclassifications
Certain items in these consolidated financial statements
have been reclassified to conform to the current year’s presentation.
NOTE 2 - STOCKHOLDER’S EQUITY
February 2013 Private Placement
On February 4, 2013, the Company sold an aggregate of 1,800,060
February 2013 Units with gross proceeds to the Company of $450,015 to February 2013 Investors pursuant to the February 2013 Subscription
Agreement. The proceeds from this offering will be used primarily for a future investor relations campaign. Each February 2013
Unit was sold for a purchase price of $0.25 per February 2013 Unit and consisted of: (i) one share of the Company’s Common
Stock and (ii) a four-year February 2013 Warrant to purchase one hundred (100%) percent of the number of shares of Common Stock
purchased at an exercise price of $0.35 per share, subject to adjustment upon the occurrence of certain events such as stock splits
and dividends. In connection with the private placement, the Company issued an aggregate of 1,800,060 shares of its Common Stock.
The shares were issued in reliance upon an exemption from registration provided by Rule 506 of Regulation D of the Securities Act
of 1933 since no general solicitation or advertising was conducted by us in connection with the offering of any of the shares,
all shares purchased in the offering were restricted in accordance with Rule 144 of the Securities Act and each of these shareholders
were either accredited as defined in Rule 501 (a) of Regulation D promulgated under the Securities Act or sophisticated as defined
in Rule 506(b)(2)(ii) of Regulation D promulgated under the Securities Act.
The February 2013 Warrants contains limitations on the holder’s
ability to exercise the Warrant in the event such exercise causes the holder to beneficially own in excess of 4.99% of the Company’s
issued and outstanding Common Stock, subject to a discretionary increase in such limitation by the holder to 9.99% upon 61 days’
notice.
The Company paid placement agent fees of $12,000 in cash
to a placement agent in connection with the sale of the February 2013 Units. The placement agent also received the February 2013
Warrants to acquire 48,000 shares of the Company’s Common Stock.
The Company entered into registration rights agreements with
the February 2013 Investors, pursuant to which the Company agreed to file a “resale” registration statement with the
SEC covering all shares of the Common Stock sold in the Offering and underlying any February 2013 Warrants, as well as Common Stock
underlying the warrants issued to the placement agent(s) on or prior to April 4, 2013 (the “February 2013 Filing Date”).
The Company agreed to maintain the effectiveness of the registration statement from the effective date until all securities have
been sold or are otherwise able to be sold pursuant to Rule 144. The Company agreed to use its reasonable best efforts to have
the registration statement declared effective within 60 days (the “Effectiveness Deadline”). The Company and holders
of the majority of Registerable Securities (as defined in the February 2013 Registration Rights Agreement) agreed to amend the
definition of “February 2013 Filing Date”, as such term is defined in the February 2013 Registration Rights Agreement,
such that “February 2013 Filing Date” shall mean the date that is 30 days after the Form S-1 filed September 24, 2012
(the “Registration Statement”) and subsequent amendments has been declared effective. On May 29, 2013, the Company
withdrew the Registration Statement filed with the SEC pertaining to the February 2013 Private Placement. At the time of this filing
the units from the February 2013 Private Placement are Rule 144 eligible and therefore are no longer considered registerable securities.
Accordingly, the Company has determined there is no longer an obligation to file a registration statement for the February 2013
Private Placement units at this time.
June 2013 Private Placement
On June 21, 2013, the Company sold an aggregate of 100,000
June 2013 Units with gross proceeds to the Company of $25,000 to the June 2013 Investor pursuant to the June 2013 Subscription
Agreement. The proceeds from this offering will be used primarily for general corporate expenses. Each June 2013 Unit was sold
for a purchase price of $0.25 per June 2013 Unit and consisted of: (i) one share of the Company’s Common Stock and (ii) a
three-year June 2013 Warrant to purchase one hundred (100%) percent of the number of shares of Common Stock purchased at an exercise
price of $0.35 per share, subject to adjustment upon the occurrence of certain events such as stock splits and dividends. The shares
were issued in reliance upon an exemption from registration provided by Rule 506 of Regulation D of the Securities Act of 1933,
as amended (the “Securities Act”) since no general solicitation or advertising was conducted by us in connection with
the offering of any of the shares, all shares purchased in the offering were restricted in accordance with Rule 144 of the Securities
Act and each of these shareholders were either accredited as defined in Rule 501 (a) of Regulation D promulgated under the Securities
Act or sophisticated as defined in Rule 506(b)(2)(ii) of Regulation D promulgated under the Securities Act.
August 2013 Private Placement
On August 15, 2013, the Company sold an aggregate of 200,000
August 2013 Units with gross proceeds to the Company of $50,000 to the August 2013 Investor pursuant to the August 2013 Subscription
Agreement. The
proceeds from this offering will be used primarily for general
corporate expenses. Each August 2013 Unit was sold for a purchase price of $0.25 per August 2013 Unit and consisted of: (i) one
share of the Company’s Common Stock and (ii) a three-year August 2013 Warrant to purchase one hundred (100%) percent of the
number of shares of Common Stock purchased at an exercise price of $0.35 per share, subject to adjustment upon the occurrence of
certain events such as stock splits and dividends. The shares were issued in reliance upon an exemption from registration provided
by Rule 506 of Regulation D of the Securities Act since no general solicitation or advertising was conducted by us in connection
with the offering of any of the shares, all shares purchased in the offering were restricted in accordance with Rule 144 of the
Securities Act and each of these shareholders were either accredited as defined in Rule 501 (a) of Regulation D promulgated under
the Securities Act or sophisticated as defined in Rule 506(b)(2)(ii) of Regulation D promulgated under the Securities Act. On December
2, 2013 the August 2013 Subscription Agreement and Warrant were amended to be consistent with the February 2013 Private Placement.
This resulted in price protection provisions that will expire two years after the closing date for the shares and three years after
the closing date for the Warrants.
October 2013 Private Placement
On October 9, 2013, the Company sold an aggregate of 40,000
October 2013 Units with gross proceeds to the Company of $10,000 to the October 2013 Investor pursuant to the October 2013 Subscription
Agreement. The proceeds from this offering will be used primarily for general corporate expenses. Each October 2013 Unit was sold
for a purchase price of $0.25 per October 2013 Unit and consisted of: (i) one share of the Company’s Common Stock and (ii)
a three-year October 2013 Warrant to purchase one hundred (100%) percent of the number of shares of Common Stock purchased at an
exercise price of $0.35 per share, subject to adjustment upon the occurrence of certain events such as stock splits and dividends.
The shares were issued in reliance upon an exemption from registration provided by Rule 506 of Regulation D of the Securities Act
since no general solicitation or advertising was conducted by us in connection with the offering of any of the shares, all shares
purchased in the offering were restricted in accordance with Rule 144 of the Securities Act and each of these shareholders were
either accredited as defined in Rule 501 (a) of Regulation D promulgated under the Securities Act or sophisticated as defined in
Rule 506(b)(2)(ii) of Regulation D promulgated under the Securities Act. On December 2, 2013 the August 2013 Subscription Agreement
and Warrant were amended to be consistent with the February 2013 Private Placement. This resulted in price protection provisions
that will expire two years after the closing date for the shares and three years after the closing date for the Warrants.
Recent Sales of Unregistered Securities
On January 8, 2013, the Company issued 250,000 shares of
common stock, to MockingJay, Inc. for future investor relations and consulting services. The shares were issued in reliance on
an exemption from the registration requirements of the Securities Act afforded by Section 4(2) thereof based on the lack of any
general solicitation or advertising in connection with the sale of the shares; the investor is purchasing the shares for its own
account and without a view to distribute them; and the Company's issuance of the shares with a restrictive legend.
On January 16, 2013, the Company issued 150,000 shares of
common stock, to Verge Consulting for future investor relations and consulting services. The shares were issued in reliance on
an exemption from the registration requirements of the Securities Act afforded by Section 4(2) thereof based on the lack of any
general solicitation or advertising in connection with the sale of the shares; the investor is purchasing the shares for its own
account and without a view to distribute them; and the Company's issuance of the shares with a restrictive legend.
On June 4, 2013, the Company issued Arden Larson 80,000 units
(“Larson Units”), with each Larson Unit consisting of one (1) share of the Company’s Common Stock and a warrant
at a purchase price of Twenty Five Cents ($0.25) per Larson Unit for a total of $20,000. Each Larson Unit consists of: (i) one
(1) share of the Company’s Common Stock and (ii) a three (3) year warrant to purchase one share at a per share exercise price
of $0.35. The Larson Units were issued along with cash of $10,000 in settlement of an option payment to purchase the Klondike Project.
Convertible Preferred Stock
In August 2011, the Board of Directors of the Company (the
“Board of Directors”) designated 5,000,000 shares of its Preferred Stock as Series A Preferred Stock. Each share of
Series A Preferred Stock is convertible into one share of common stock at the option of the preferred holder. The Series A Preferred
Stock in not entitled to receive
dividends and does not possess redemption rights. The Company
is prohibited from effecting the conversion of the Series A Preferred Stock to the extent that, as a result of the conversion,
the holder of such shares beneficially owns more than 4.99% (or, if this limitation is waived by the holder upon no less than 61
days prior notice to us, 9.99%)
in the aggregate of the issued and outstanding shares of
our common stock calculated immediately after giving effect to the issuance of shares of common stock upon conversion of the Series
A Preferred Stock. The holders of the Company’s Series A Preferred Stock are also entitled to certain liquidation preferences
upon the liquidation, dissolution or winding up of the business of the Company.
As of June 30, 2014 all issued shares of Series A Preferred
Stock have been converted into common stock.
In October 2012, the Board of Directors designated 5,000,000
shares of its Preferred Stock as Series B Preferred Stock. Each share of Series B Preferred Stock is convertible into one share
of common stock at the option of the preferred holder. The Series B Preferred Stock is not entitled to receive dividends and does
not possess redemption rights. The Company is prohibited from effecting the conversion of the Series B Preferred Stock to the extent
that, as a result of the conversion, the holder of such shares beneficially owns more than 4.99% (or, if this limitation is waived
by the holder upon no less than 61 days prior notice to us, 9.99%) in the aggregate of the issued and outstanding shares of our
common stock calculated immediately after giving effect to the issuance of shares of common stock upon conversion of the Series
B Preferred Stock. For a period of 24 months from the issue date the holder of Series B Preferred Stock is entitled to price protection
as determined in the subscription agreement. The Company has evaluated this embedded lower price issuance feature in accordance
with ASC 815 and determined that is clearly and closely related to the host contract and is therefore accounted for as an equity
instrument. The holders of the Company’s Series B Preferred Stock are also entitled to certain liquidation preferences upon
the liquidation, dissolution or winding up of the business of the Company.
As of June 30, 2014 there have been 1,604,600 shares of Series
B Preferred Stock converted into common stock, leaving a total of 400,000 shares of Series B Preferred Stock remaining.
Common Stock Options
On September 30, 2011, the Board of Directors and stockholders
adopted the 2011 Stock Incentive Plan (the “2011 Plan”). Under the 2011 Plan, options may be granted which are intended
to qualify as Incentive Stock Options under Section 422 of the Internal Revenue Code of 1986 (the "Code") or which are
not intended to qualify as Incentive Stock Options thereunder. In addition, direct grants of stock or restricted stock may be awarded.
The 2011 Plan has reserved 4,500,000 shares of common stock for issuance.
There were a total of 4,060,000 options granted in September
2011 (the “September 2011 Options”), these options issued are nonqualified stock options as amended on December 19,
2011. The modification to the option agreements increased the vesting period for only certain option agreements from one year to
two years. The incremental cost associated with the differential in fair value at the modification date was not material. As of
September 30, 2013 the option agreements are fully vested and all compensation expense related to these stock options has been
recognized.
A summary of the September 2011 Options is presented below:
September 2011 Options
|
Options
|
Strike Price
|
Term
|
|
Officer
|
1,250,000
|
$0.40
|
10 years
|
(1)
|
Officer
|
200,000
|
$0.40
|
10 years
|
|
Consultant
|
50,000
|
$0.40
|
10 years
|
|
Consultant
|
160,000
|
$0.40
|
10 years
|
|
Consultant
|
600,000
|
$0.40
|
10 years
|
|
Consultant
|
600,000
|
$0.40
|
10 years
|
|
Director
|
1,200,000
|
$0.40
|
10 years
|
(2)
|
TOTAL
|
4,060,000
|
|
|
|
|
|
|
|
|
(1) Issued to David Beling, the Company's Chief Executive Officer and President.
|
(2) Issued to Alan Lindsay, the Company's Chairman of the Board of Directors.
|
There were a total of 400,000 options granted in December
2013 (the “December 2013 Options”), these options issued are nonqualified stock options and were 100% vested on grant
date. The December 2013 Options were issued
in lieu of a year end cash bonus for work performed during
2013 and all compensation expense related to these stock options has been recognized.
A summary of the December 2013 Options is presented below:
December 2013 Options
|
Options
|
Strike Price
|
Term
|
|
Officer
|
250,000
|
$0.15
|
10 years
|
(1)
|
Officer
|
100,000
|
$0.15
|
10 years
|
|
Consultant
|
50,000
|
$0.15
|
10 years
|
|
TOTAL
|
400,000
|
|
|
|
|
|
|
|
|
(1) Issued to David Beling, the Company's Chief Executive Officer and President.
|
The Black Scholes option pricing model was used to estimate
the fair value of $31,610 of the December 2013 Options with the following inputs:
Options
|
Exercise Price
|
Term
|
Volatility
|
Risk Free Interest Rate
|
Fair Value
|
400,000
|
$0.15
|
5 years
|
69.3%
|
1.68%
|
$31,610
|
A summary of the stock options as of June 30, 2014 and changes
during the period are presented below:
|
|
Number of Options
|
|
|
Weighted Average Exercise Price
|
|
|
Weighted Average Remaining Contractual Life (Years)
|
|
Aggregate
Intrinsic
Value
|
Balance at December 31, 2013
|
|
|
4,460,000
|
|
|
$
|
0.38
|
|
|
|
7.95
|
|
-
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
-
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
-
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
-
|
Cancelled
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
-
|
Balance at June 30, 2014
|
|
|
4,460,000
|
|
|
$
|
0.38
|
|
|
|
7.45
|
|
-
|
Options exercisable at June 30, 2014
|
|
|
4,460,000
|
|
|
$
|
0.38
|
|
|
|
7.45
|
|
-
|
Options vested at June 30, 2014
|
|
|
4,460,000
|
|
|
|
|
|
|
|
|
|
-
|
The intrinsic value of each option share is the difference
between the fair market value of the common stock and the exercise price of such option to the extent it is "in-the-money".
Aggregate intrinsic value represents the value that would have been received by the holders of in-the-money options had they exercised
their options on the last trading day of the reporting period and sold the underlying shares at the closing stock price on such
day. The intrinsic value calculation is based on the $0.07 closing stock price of the common stock on June 30, 2014. There were
no options in-the-money on June 30, 2014 and therefore no intrinsic value.
NOTE 3 – DERIVATIVE FINANCIAL INSTRUMENTS
In applying current accounting standards to the financial
instruments issued in the 2011 Private Placement, 2012 Private Placement, February 2013 Private Placement, June 2013 Private Placement,
August 2013 Private Placement and October 2013 Private Placement, the Company first considered the classification of the Series
A and Series B Preferred Stock under ASC 480
Distinguishing Liabilities from Equity
, and the Warrants under ASC 815
Derivatives
and Hedging
. The Series A and Series B Preferred Stock is perpetual preferred stock without redemption or dividend provisions,
contingent or otherwise. Further, the Series A and Series B Preferred Stock is convertible into a fixed number of shares of Common
Stock with adjustments to the conversion price solely associated with equity restructuring events such a stock splits and recapitalization.
Generally redemption provisions that provide for the mandatory payment of cash to the Investor to settle the contract or certain
provisions that cause the number of linked shares of Common Stock to vary result in liability classification; and, in some instances,
classification outside of stockholders’ equity. There being no such provisions associated with the Series A or Series B Preferred
Stock, it is classified as a component of stockholders’ equity.
The warrants were also evaluated for purposes of classification.
The warrants issued contain a feature that is not consistent with the concept of stockholders’ equity. The exercise price
of the warrants is subject to adjustment upon the issuance of common stock or common share linked contracts at prices below the
contractual exercise prices. The 2011 Private Placement warrants were subject to price adjustment until October 1, 2012, therefore
the 2011 Private Placement warrants have been reclassified to stockholders’ equity as of October 1, 2012. The 2012 Private
Placement and February 2013 Private Placement warrants price adjustment expires four years after the date of issuance, and the
June 2013 Private Placement warrants price adjustment expires three years after the date of issuance. The August 2013 Private Placement
and October 2013 Private Placement warrants were amended on December 2, 2013 and allows for a price adjustment that expires three
years after the date of original issuance. Current accounting standards provide that such provisions are not consistent with the
concept of stockholders’ equity. As a result, all warrants with price adjustment features require classification in liability
as derivative warrants. Derivative warrants are carried initially at fair value (up to the value of cash received) and subsequently
at fair value with changes in fair value reflected in income.
|
|
Closing date of private placement
|
|
|
|
|
11/19/12
|
|
12/17/12
|
|
02/04/13
|
|
06/21/13
|
|
08/15/13
|
|
10/09/13
|
|
Total warrant liability
|
Ending balance at December 31, 2013
|
|
$
|
169,601
|
|
|
$
|
61,796
|
|
|
$
|
60,136
|
|
|
$
|
2,298
|
|
|
$
|
5,593
|
|
|
$
|
1,196
|
|
|
$
|
300,620
|
|
Issuance of derivative warrants
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Exercise or expiration
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Change in fair value of warrant liability
|
|
|
(144,900
|
)
|
|
|
(52,435
|
)
|
|
|
(49,535
|
)
|
|
|
(2,051
|
)
|
|
|
(5,050
|
)
|
|
|
(1,040
|
)
|
|
|
(255,011
|
)
|
Ending balance at June 30, 2014
|
|
$
|
24,701
|
|
|
$
|
9,361
|
|
|
$
|
10,601
|
|
|
$
|
247
|
|
|
$
|
543
|
|
|
$
|
156
|
|
|
$
|
45,609
|
|
The derivative warrants were calculated using Black-Scholes
valuation technique. Significant inputs into this technique are as follows:
2012 Private Placement
|
12/31/2013
|
6/30/2014
|
Fair market value of common stock
|
$0.14
|
$0.07
|
Exercise price
|
$0.35
|
$0.35
|
Term (1)
|
(4)
|
(6)
|
Volatility range (2)
|
(5)
|
(7)
|
Risk-free rate (3)
|
0.78%
|
0.88%
|
February 2013 Private Placement
|
12/31/2013
|
6/30/2014
|
Fair market value of common stock
|
$0.14
|
$0.07
|
Exercise price
|
$0.35
|
$0.35
|
Term (1)
|
3.11 Years
|
2.62 Years
|
Volatility range (2)
|
69.20%
|
70.04%
|
Risk-free rate (3)
|
0.78%
|
0.88%
|
June 2013 Private Placement
|
12/31/2013
|
6/30/2014
|
Fair market value of common stock
|
$0.14
|
$0.07
|
Exercise price
|
$0.35
|
$0.35
|
Term (1)
|
2.48 Years
|
1.99 Years
|
Volatility range (2)
|
71.10%
|
66.43%
|
Risk-free rate (3)
|
0.78%
|
0.88%
|
August 2013 Private Placement
|
12/31/2013
|
6/30/2014
|
Fair market value of common stock
|
$0.14
|
$0.07
|
Exercise price
|
$0.35
|
$0.35
|
Term (1)
|
2.63 Years
|
2.14 Years
|
Volatility range (2)
|
70.50%
|
65.40%
|
Risk-free rate (3)
|
0.78%
|
0.88%
|
October 2013 Private Placement
|
12/31/2013
|
6/30/2014
|
Fair market value of common stock
|
$0.14
|
$0.07
|
Exercise price
|
$0.35
|
$0.35
|
Term (1)
|
2.78 Years
|
2.29 Years
|
Volatility range (2)
|
70.40%
|
68.36%
|
Risk-free rate (3)
|
0.78%
|
0.88%
|
|
(1)
|
The term is the remaining years until expiration of warrants.
|
|
(2)
|
The Company does not have a trading market value upon which to base its forward-looking volatility. Accordingly, the Company selected a peer company that provided a reasonable basis upon which to calculate volatility.
|
|
(3)
|
The risk-free rate used represents the yield on zero coupon US Government Securities with a period to maturity consistent with the interval described in (2), above.
|
|
(4)
|
The remaining term for the 2012 Private Placement with a November 19, 2012 closing date was 2.88 years, and the December 17, 2012 closing date was 2.96 years.
|
|
(5)
|
The volatility for the 2012 Private Placement with a November 19, 2012 closing date was 69.7%, and the December 17, 2012 closing date was 69.2%.
|
|
(6)
|
The remaining term for the 2012 Private Placement with a November 19, 2012 closing date was 2.39 years, and the December 17, 2012 closing date was 2.47 years.
|
|
(7)
|
The volatility for the 2012 Private Placement with a November 19, 2012 closing date was 68.8%, and the December 17, 2012 closing date was 68.6%.
|
Warrants contain limitations on exercise, including the limitation
that the holders may not convert their warrants to the extent that upon exercise the holder, together with its affiliates, would
own in excess of 4.99% of our outstanding shares of common stock (subject to an increase upon at least 61-days’ notice by
the subscriber to us, of up to 9.99%).
The second classification-related accounting consideration
related to the possibility that the conversion option embedded in the Series A and Series B Preferred Stock may require classification
outside of stockholders’ equity. Generally, an embedded feature in a hybrid financial instrument (such as the Series A and
Series B Preferred Stock) that both meets the definition of a derivative financial instrument and is not clearly and closely related
to the host contract in term of risks would require bifurcation and accounting under derivative standards. The embedded conversion
option is a feature that embodies risks of equity. The Company has concluded that the Series A and Series B Preferred Stock is
a contract that affords solely equity risks.
NOTE 4 – NOTES PAYABLE
RMB Facility
On December 10, 2012 (the “Closing
Date”), the Company entered into the Facility with RMB, as the lender, in the amount of $4.2 million. The loan proceeds
from the Facility will be used to fund an agreed work program relating to the Newsboy gold project located in Arizona and for
agreed general corporate purposes. Standard Gold the Company’s wholly owned subsidiary is the borrower under the
Facility and the Company is the guarantor of Standard Gold’s obligations under the Facility. Standard Gold paid an
arrangement fee of 7% of the Facility amount due upon the first draw down of the Facility. The Facility funds were available
to drawdown until March 31, 2014 with the final repayment date due 24 months after the Closing Date, which is December 10,
2014. Standard Gold has the option to prepay without penalty any portion of the Facility at any time subject to 30 day
notice, any broken period costs and minimum prepayment amounts of $500,000. The Facility bears interest at the rate of LIBOR
plus 7% with interest payable quarterly in cash. As of June 30, 2014 the $500,000 restricted cash account was applied to the
quarterly interest payment and the principal balance. This resulted in an RMB note payable balance of approximately
$2,453,000 as of June 30, 2014. As previously discussed, the Newsboy Project was terminated, and therefore the only collateral
remaining for the RMB note is the Bullfrog Project with a June 30, 2014 carrying value of approximately $100,000.
In connection with the Facility, the Company issued 7,000,000
warrants to purchase shares of the Company’s Common Stock for $0.35 per share to be exercisable for 36 months after the Closing
Date, with the proceeds from the exercise of the warrants to be used to repay the Facility. The Company met all of the conditions
precedent to complete the closing for the Facility.
In applying current accounting standards to the warrants
issued in the Facility with RMB, the Company considered the warrants under ASC 815
Derivatives and Hedging
. Under these
standards the warrants would qualify as equity
The fair value of the warrants were calculated to be $1,063,592
and are classified as deferred financing fees that will be amortized for 24 months from the Closing Date of the RMB Facility.
NPX Convertible Note
On April 25, 2014 (“NPX Closing Date”), the Company
entered into a Securities Purchase Agreement (“SPA”) for an unsecured 12.5% convertible promissory note (the “Note”)
with NPX Metals, Inc (“NPX”), as the lender, in the amount of $220,000. The Note proceeds will be used to fund the
Klondike Project located in Nevada and for general corporate purposes. The Company paid an arrangement fee of 10% of the Note and
issued 220,000 warrants to purchase one full share at a price of $0.35 within three years from the NPX Closing Date. The Note principal
and unpaid accrued interest will be due and payable 24 months from the NPX Closing Date. The president of NPX is Johnathan Lindsay,
the son of the chairman of the board of the Company, Alan Lindsay.
During the term of the Note, NPX may elect by giving five
days to convert their Note and any accrued but unpaid interest thereon, into shares of the Company’s common shares at a conversion
price equal to $0.25 per common share. Additionally, for each common share purchased there will be a three year warrant to purchase
one hundred percent of the number of shares purchased at a per share exercise price of $0.35.
The ability of NPX to exercise the warrants is not contingent
upon the conversion of the Note and, accordingly, we determined that the warrant was “detachable” from the Note. The warrant also contains
a provision that the warrant will be adjusted under certain conditions in the event future warrants are issued with more favorable
terms. The
estimated fair value of the warrant was calculated on the date of issuance using the Black-Scholes pricing model, however we concluded
the estimated fair value of the warrant was not material.
We concluded that the conversion feature of the Note
met the criteria of an embedded derivative and should be bifurcated from the Note (host contract) and accounted for as a
derivative liability and calculated at fair value. The Company estimated the fair value of the conversion feature of the Note
on the date of issuance using the Black-Scholes pricing model, however the Company concluded the estimated fair value of the
conversion feature was not material. If the Note is converted the warrants that will be issued on the conversion date will be
accounted for as a derivative liability.
NOTE 5 - COMMITMENTS
On June 11, 2012, the Company entered into an option agreement
with Arden Larson to purchase a 100% interest in the Klondike Project (“Klondike”) that included 64 unpatented mining
claims, to which the Company staked an additional 168 claims. Klondike is located in the Alpha Mining District about 40 miles north
of Eureka, Nevada.
The remaining amount due to Mr. Larson of the original price
of $575,000 is payable on the following schedule:
Klondike Project - Payment Date
|
Payment Amount
|
June 11, 2015
|
$40,000
|
June 11, 2016
|
$45,000
|
June 11, 2017
|
$50,000
|
June 11, 2018
|
$55,000
|
June 11, 2019
|
$60,000
|
June 11, 2020
|
$65,000
|
June 11, 2021
|
$70,000
|
June 11, 2022
|
$75,000
|
The Company has the option to buy-down the royalty component
by making payments of $500,000 per 0.25% of base net smelter return royalties for gold, silver and other products to Mr. Larson
based on the following schedule:
Product
|
Base net smelter return royalty
|
Average market price
|
Maximum buy-down net smelter return royalty
|
GOLD
|
1.00
|
Less than $1,200/troy oz.
|
0.50
|
|
1.50
|
$1,201 to $1,600/troy oz.
|
0.75
|
|
2.00
|
$1,601 to $2,000/troy oz.
|
1.00
|
|
2.50
|
$2,001 to $2,400/troy oz.
|
1.25
|
|
3.00
|
$2,401 to $2,800/troy oz.
|
1.50
|
|
3.50
|
$2,801 to $3,200/troy oz.
|
1.75
|
|
4.00
|
Greater than $3,200/troy oz.
|
2.00
|
|
|
|
|
SILVER
|
1.00
|
Less than $15/troy oz.
|
0.50
|
|
1.50
|
$15.01 to $30/troy oz.
|
0.75
|
|
2.00
|
$30.01 to $45/troy oz.
|
1.00
|
|
2.50
|
$45.01 to $60/troy oz.
|
1.25
|
|
3.00
|
$60.01 to $75/troy oz.
|
1.50
|
|
3.50
|
$75.01 to $90/troy oz.
|
1.75
|
|
4.00
|
Greater than $90/troy oz.
|
2.00
|
|
|
|
|
OTHER
|
2.00
|
As determined by products
|
1.00
|
In addition, the Company is committed to spend no less than
$850,000 for the benefit of the Klondike Project on the following schedule:
|
1.
|
$100,000 prior to June 11, 2013
|
|
2.
|
An additional $150,000 prior to June 11, 2014
|
|
3.
|
An additional $200,000 prior to June 11, 2015
|
|
4.
|
An additional $200,000 prior to June 11, 2016
|
|
5.
|
An additional $200,000 prior to June 11, 2017
|
Should the Company choose not to maintain the work commitment
and option to the property the Company can forego future payments to Mr. Larson without penalty. As of June 11, 2013 the Company
spent approximately
$86,000 on the Klondike Project, therefore in accordance
with the option agreement the Company paid Mr. Larson half of the work commitment shortage. The 2014 work commitment was met therefore
no additional payment was due to Mr. Larson.