On August 27, 2014, the Company's Board of Directors appointed a Mexican national to its advisory board to assist the Company with its operations in Mexico, including regulatory affairs and granted 1,000,000 stock options to this individual under the newly created 2014 Stock Option Plan. The option exercise price of the option was $0.23 per share.
The following table summarizes information about stock options outstanding at August 31, 2014:
(1) Based on closing share price of $0.24 at close of business on August 29, 2014
The total fair value of options issued during the three month periods ended August 31, 2014 and 2013 were $206,958 and $0 respectively.
The fair value of options granted under the Plan are estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions during the twelve months ending August 31, 2014:
The Company expects to issue shares upon exercise of these options from its authorized shares of common stock.
During the three months ended August 31, 2014, we issued 2,250,000 shares of our common stock valued as $495,000 as compensation to our directors. Each of our nine directors at the time received 250,000 shares of common stock. In addition, 1,000,000 fully vested stock options with an exercise price of $0.23, valued at $206,958, were issued to a Mexican national appointed to our advisory board to assist the Company with its operations in Mexico, including regulatory affairs.
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 which were used by 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.
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 will receive 9,000,000 shares of our common stock. The term of the Consulting Agreement is three years. The shares were issued, and the associated expense recognized, during the three months ended November 30, 2013.
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 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, Mr. Pane is a managing member of PTH and Messrs Pane and Altieri own or control approximately 20% and 8%, respectively of PTH.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NOTE REGARDING FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for certain forward-looking statements. This quarterly report on Form 10-Q (this "Quarterly Report") contains certain forward-looking statements that are subject to risks and uncertainties. The statements contained in this Quarterly Report that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. When used in this Quarterly Report, the words "anticipate," "believe," "plan," "target," "estimate," "intend," "expect" and similar expressions are intended to identify such forward-looking statements. Such forward-looking statements include, but are not limited to, statements regarding our strategy, future plans for exploration and production, future expenses and costs, future liquidity and capital resources, and estimates of mineralized material. All forward-looking statements in this Quarterly Report are based upon information available to our management on the date of this Quarterly Report.
Forward-looking statements are subject to a number of risks and uncertainties and there can be no assurance that such statements will be accurate. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may differ materially and adversely from those described herein as anticipated, believed, planned, targeted, estimated, intended or expected. Although we believe the assumptions underlying and expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity or achievements. Actual results could differ materially and adversely from those discussed in this Quarterly Report.
Substantial risks exist with respect to an investment in us. These risks include but are not limited to, those factors discussed in our Annual Report on Form 10-K/A for the fiscal year ended May 31, 2014, filed with the Securities and Exchange Commission (" Commission ") on September 10, 2014 (the " Annual Report ") including the section entitled " Item 1A. Risk Factors." More broadly, these factors include, but are not limited to:
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Our current financial condition and immediate need for capital;
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Potential dilution resulting from the issuance of new securities for any funding;
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Unexpected changes in business and economic conditions;
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Change in interest rates and currency exchange rates;
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Timing and amount of production, if any;
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Technological changes in the mining industry;
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Changes in exploration and overhead costs;
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Access to and availability of materials, equipment, supplies, labor and supervision, power and water;
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Results of future feasibility studies, if any;
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The level of demand for our products;
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Changes in our business strategy;
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Interpretation of drill hole results and the geology, grade and continuity of mineralization;
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The uncertainty of mineralized material estimates and timing of development expenditures;
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Commodity price fluctuations; and
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Changes in exploration results.
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We qualify all of our forward-looking statements by the cautionary statements listed above, as well as those factors described in our Annual Report including the referenced "Item 1A. Risk Factors." The list above, together with the factors described in our Annual Report under "Item 1A. Risk Factors," is not exhaustive of the factors that may affect the accuracy of our forward-looking statements. You should read this Quarterly Report completely and with the understanding that our actual future results may be materially and adversely different from what we expect. These forward-looking statements represent our beliefs, expectations and opinions only as of the date of this Quarterly Report. Except as required by applicable law, including the securities laws of the United States, we assume no obligation to update any such forward-looking statements.
Management's discussion and analysis of financial condition, changes in financial condition and results of operations is provided as a supplement to the accompanying consolidated financial statements and notes to help provide an understanding of the Company's financial condition and results of operations.
Overview
We were formed as a mineral exploration company on January 21, 1998. We are engaged in the acquisition, exploration and development of mineral properties. We focus on gold and base minerals primarily located in the State of Michoacán, Mexico where we own exploration and exploitation concessions to approximately 37,000 acres of land (the "Solidaridad Property"). Mineral exploration requires significant capital and our assets and resources are limited. We have never earned revenue from our operations and have relied on equity and debt financing to fund our operations to date.
We are considered an exploration stage company for accounting purposes because we have not demonstrated the existence of proven or probable reserves. In accordance with accounting principles generally accepted in the United States of America, all expenditures for exploration and evaluation of our properties have been expensed as incurred. Furthermore, unless our mineralized material is classified as proven or probable reserves, substantially all expenditures have been or will be expensed as incurred. Since substantially all of our expenditures to date have been expensed, most of our investment in mining properties do not appear as an asset on our balance sheet.
RTC Transactions.
As previously reported by the Company on its Form 8-K filed with the Commission on May 17, 2013 and as stated above, 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 transaction included three ore supply contracts with third party suppliers, and a Plasmafication™ Toll Processing Agreement with Plasma Processing, LP., a Florida limited partnership ("PP LP"). The ore supply agreements and the Toll Processing Agreement enabled RTC to receive 1/3rd of the revenues derived from the plasma processing of ore concentrates from the ore supply agreements.
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. The parties believed that initial upgrades to the facility would commence within 90 to 120 days which will enable the facility to process concentrates at the rate of approximately 9 tons/day. PP LP expected to make further upgrades to the facility which would increase its capacity to approximately 27 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 agreement provided 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 completion date for the Benchmark Run was June 1, 2014.
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 a completion of the transaction without further proportionate reduction in the USPR Shares, Wolz, Titan and Mercury would have received a proportionate amount of the 300 million shares of our common stock Mr. Gennaro Pane, our Chairman and Chief Executive Officer, is the sole officer and member of Wolz (and will own approximately 51% of such shares), 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.
The Share Exchange Agreement was approved by an independent committee of Directors, subject however to shareholder approval. In addition to normal closing conditions, the Company would have been required to obtain shareholder approval of the transaction, as well as shareholder approval to an increase in its authorized shares necessary to complete the transaction.
No approval was obtained as this Agreement was terminated and replaced by Restructuring Agreement (described below).
The above description is a summary of the May 11, 2013 transactions with RTC. For more complete information, please refer to the above stated Form 8-K filed with the Commission on May 17, 2013.
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 consisting 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"), and (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").
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 concentrate2 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 fourth 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 Facility. 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 Owned 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 Facility.
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.
The above descriptions of the Restructuring Agreement, the Licensing Agreement, the Equipment Purchase Agreement, the Promissory Note and the Certificate of Designations are not complete, and are qualified in their entirety by reference to each respective agreement which are filed as Exhibits to the Form 8-K filed with the Commission on February 5, 2014.
No value has been assigned to the Processing Rights, Licensing Rights, PTH's assistance to construct a Company owned plant or the 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 the future ability to raise the future funding required and to successful development 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.
Preferred Stock and Certificate of Designation. 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. 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, and (iii). each share of Preferred Stock shall have the right to convert into 100 shares of common stock of the company. The Company has increased its authorized shares of common stock from 150 million to 325 million to allow for the conversion of the Preferred Stock, among other reasons.
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.
In addition, under the Restructuring Agreement, the Company and RTC and its shareholders granted mutual releases, and provided customary representations and warranties.
The Restructuring 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 and sole officer of Mercury. In addition, Mr. Pane is a managing member of PTH and Messrs Pane and Altieri own or control approximately 20% and 8% respectively, of PTH.
Mining Services Agreement.
On May 22, 2013, the 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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Phase 1 entailed 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.
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The estimated costs of Phase 1 is approximately $400,000.
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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.
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The estimated costs of Phase 2 is approximately $10 million.
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Phase 3 entails the construction of a processing plant to process the ore, which will be owned by the Company, and the performance of all surface and underground mining operations.
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The estimated costs for the construction of the processing plant is approximately $40 million.
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 and all mining costs. 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 parties, subject however to the results of the satellite imaging. Actual mining costs will be paid for by Contractor and milling 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 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 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.
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 held by the Chairman. This is not a Company obligation 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 is not complete, and is 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. Mr. Mesa received stock options to acquire 1 million shares of our common stock at an exercise price of $0.12 in connection with that appointment.
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.
Corporate Matters.
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.
On April 16, 2014, the Company filed a Certificate of Amendment to Amended and Restated Certificate of Incorporation with the Delaware Secretary of State ("Certificate of Amendment"). The Certificate of Amendment increases the authorized shares of common stock, $0.00001 par value, of the Company from 150,000,000 to 325,000,000 shares. The Company previously filed a Schedule 14C Definitive Information Statement with respect to the Certificate of Amendment on March 26, 2014, and mailed the Information Statement to its shareholders on that same date.
During the three months ended August 31, 2014, the Company issued:
i) 5,046,667 shares of its common stock, together with warrants to buy 2,523,334 shares of its common stock for proceeds of $455,975. The warrants had terms of 12 months and exercise prices of $0.125 or $0.20.
ii) 3,040,622 shares of commons stock in settlement of convertible notes payable, accrued interest, debt discount and derivative liabilities totaling $462,591
iii) 2,250,000 shares valued at $495,000 as compensation to its nine directors.
In addition, 100,000 warrants with an exercise price of $0.15 were exercised for cash proceeds of $15,000 and 800,000 warrants expired, unexercised.
On June 24, 2014, the Company and Dr. Edgar Choueiri entered into a Consulting Agreement, pursuant to which Dr. Choueiri agreed to provide certain consulting services to the Company with respect to plasma processing. The agreement is on a month to month basis, and Dr. Choueiri, among other terms, will receive a remuneration of $4,000 per month. In addition, in connection with the agreement, Dr. Choueiri resigned from the Board of Directors of the Company.
On August 27, 2014, the Board of Directors approved the following:
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the establishment of a 2014 Stock Option Plan for up to 20,000,000 shares of common stock, and
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the creation of an advisory board, and appointed a Mexican national to its advisory board to assist the Company with its operations in Mexico, including regulatory affairs. The Company also granted 1,000,000 stock options to this individual under the newly created 2014 Stock Option Plan. The option exercise price is $0.23 per share.
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Liquidity and Capital Resources
As shown in the accompanying financial statements, we have experienced continuing losses since Inception (January 21, 1998), and as at August 31, 2014, have a working capital deficit of $4,778,113, accumulated losses of $51,184,512, recurring negative cash flows from operations and presently do not have sufficient resources to meet our outstanding liabilities or accomplish our objectives during the next twelve months.
As at August 31, 2014, we were in default on repayment of convertible promissory notes with principal balances of $550,000 together with accrued interest of $453,096 totaling $1,003,096.
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. 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. During the twelve months ended May 31, 2014 we made a single payment of $25,000 in respect of this liability. The total balance due to our former attorneys, including accrued interest, at August 31, 2014 was $1,770,560.
In addition, 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, 2014 and 2013, contained in our Annual Report, the Report of the Independent Registered Public Accounting Firm includes an explanatory paragraph that describes substantial doubt about our ability to continue as a going concern.
Since we do not anticipate generating any revenue for the foreseeable future, we will have to continue to seek additional funding from outside sources. However, we are facing volatile financial markets that may make it difficult to satisfy our need for additional capital to finance our plan of operations for fiscal 2015 through either debt or equity. As a result, we continue to seek appropriate opportunities that are likely to provide us with adequate fiscal resources to execute our plan of operations in the current fiscal year and beyond.
Depending on market conditions and the options available to us, we may attempt to enter into a joint venture with an operating company or permit an operating company or third party to undertake exploration work on the Solidaridad Property, we may attempt to sell all or part of our Solidaridad Property, or we may seek equity or debt financing (including borrowing from commercial lenders) or we may consider a sale of ourselves or our assets.
To date, we have raised capital through the sale of shares of our common stock and sales of convertible promissory notes.
During the three months ended August 31, 2014, we sold 5,046,667 shares of our common stock, together with warrants to buy 2,523,334 shares of our common stock for proceeds of $455,975. The warrants had terms of 12 months and exercise prices of $0.125 or $0.20.We further issued 3,040,622 shares of commons stock in settlement of convertible notes payable, accrued interest, debt discount and derivative liabilities totaling $462,591. We also received $15,000 from the exercise of 100,000 warrants with an exercise price of $01.5.
As mentioned above, we must obtain additional funding to continue our operations. There can be no guarantee that we will be able to obtain additional funding on terms that are favorable to us or at all. As an exploration stage company, we have no current ability to generate revenue and no plans to do so in the foreseeable future. Our assets consist of cash, prepaid expenses, nominal equipment and certain mineral property interests. There can be no assurance that we will obtain sufficient funding to continue operations, or if, we do receive funding, to generate revenues in the future or to operate profitably in the future. We have incurred net losses in each fiscal year since Inception of our operations. These conditions raise substantial doubt about our ability to continue as a going concern.
Because of the exploratory nature of our current business plan, we anticipate incurring operating losses for the foreseeable future. Our future financial results also are uncertain due to a number of factors, some of which are outside our control. These factors include, but are not limited to:
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Our ability to raise sufficient additional funding;
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The results of our proposed exploration programs on the Solidaridad Property; and
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Assuming significant mineral deposits, our ability to be successful in commercially producing mineral deposits, find joint venture partners for the development of our property interests or find a purchaser for the property interests.
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RESULTS OF OPERATIONS
THREE MONTHS ENDED AUGUST 31, 2014 COMPARED TO THE THREE MONTHS ENDED AUGUST 31, 2013
Revenue
We earned no revenue in either the three months ended August 31, 2014 or 2013 and as an exploration stage company we do not anticipate earning revenue in the foreseeable future.
General and administrative expenses
During the three months ended August 31, 2014, we incurred general and administrative expenses of $1,423,394, compared to the $462,716 incurred in the three months ending August 31, 2013, an increase of $960,678. The increase relates primarily relates to increased salary and compensation between the two periods. Specifically, during the three months ended August 31, 2014, we issued 2,250,000 shares of our common stock valued at $494,000, as compensation to our nine directors and 1,000,000 stock options valued $206,938 to a member of our advisory board.
There were no similar equity or stock option issuances during the three months ended August 31, 2013.
Change in derivative liability
During the three months ended August 31, 2014, we recognized a loss on revaluation of derivative liabilities of $34,151, compared to the $47,908 incurred in the three months ending August 31, 2013, a decrease of $13,757. The decrease arose because there no derivatives outstanding throughout the three months ended August 31, 2014 while there were during the three months ended August 31, 2013 and consequently more variance during the three month ended August 31, 2013 as compared to the three months ended August 31, 2014.
Interest expense (net)
During the three months ended August 31, 2014, we incurred interest expense (net) of $173,211 compared to $146,331 during the three months ended August 31, 2013, an increase of $26,880.
The increase reflects the increased level of Company's borrowings between the two periods.
Net loss
The net loss for the three months ended August 31, 2013 was $1,639,756 compared to $656,955 during the three months ended August 31, 2013, an increase of $982,801.
CASH FLOW INFORMATION FOR THE THREE MONTHS ENDED AUGUST 31, 2014 COMPARED TO THE THREE MONTHS ENDED AUGUST 31, 2013
Net cash flow used in operations in the three months ended August 31, 2014 was $439,396 compared to $385,167 for the three months ended August 31, 2013, an increase of $54,229
In the three months ended August 31, 2014, our net loss was $1,639,756 which was offset by $857,930 in non- cash items and an increase in our net operating liabilities of $342,429 to arrive at net cash used in operations of $439,396. By comparison, in the three months ended August 31, 2013, our net loss was $656,955 which was offset by $138,969 in non-cash items and an increase in our net operating liabilities of $132,819 to arrive at net cash used in operations of $385,167.
No cash flow was provided by, or used in, investing activities during the three months ended August 31, 2014 or 201
Net cash flow generated from financing activities was $470,975 in the three months ended August 31, 2014 compared to $382,000 for the three months ended August 31, 2013, an increase of $88,975.
In the three months ended August 31, 2014, we received $455,975 from the sale of shares of our common stock and warrants and $15,000 from the exercise of warrants. By comparison, in the three months ended August 31, 2013, we received $190,000 from the sale of shares of our common stock and warrants and $192,000 from the issuance of convertible notes payable.
ITEM 3. QUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
As a "smaller reporting company" as defined by Item 10 of Regulation S-K, we are not required to provide information required by this Item.
ITEM 4. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures.
Our management team, under the supervision and with the participation of our principal executive officer and our principal financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as such term is defined under Rule 13a-15(e) or 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the " Exchange Act "), as of the last day of the fiscal period covered by this report, August 31, 2014.The term disclosure controls and procedures means our controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to management, including our principal executive and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were not effective as of August 31, 2013. Specifically, we concluded that we had identified a significant deficiency with respect to the operation of our internal controls relating to the documentation and authorization procedures of certain travel and entertaining expenses incurred by certain directors, officers and non-Company individuals as of August 31, 2014. In order to correct the above described deficiency, the Company established an Ad Hoc Committee, consisting of two directors who also are attorneys. The committee has been authorized to review and approve all Company related expenses.
Changes in Internal Control over Financial Reporting.
During the fiscal quarter ended August 31, 2014, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART 2: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On April 3, 2012, as we have previously reported, Mr. Israel Tentory Garcia filed an action against our Mexican subsidiary, US Precious Metals SA de CV, wherein the plaintiff asserted a number of claims against us, including a demand for the return of one of our concessions (Solidaridad I) for failure to develop the concession. The case was filed in a local court in the Federal District of Mexico City. On May 21, 2013, the Court ruled that the Plaintiff did not prove the claims asserted in the lawsuit, and that our subsidiary is not liable to for any of such claims.
On June 12, 2014, our Mexican subsidiary, US Precious Metals SA de CV was served with another lawsuit from Mr. Israel Tentory Garcia along with seven other plaintiffs. The lawsuit was filed in a commercial court in Mexico City. The claims of the new lawsuit essentially restate the claims of the original lawsuit filed in April 2012.
By way of background, the plaintiffs obtained the exploration rights to the concession known as Solidaridad I from the Mexican government on November 24, 1996. These exploration rights expired on November 23, 2001 under the terms of the concession from the government and as prescribed by the governing statute. On March 13, 2003, we entered into an agreement with the plaintiffs pursuant to which they assigned their rights to this (expired) concession to our Mexican subsidiary. In July 2003, our Mexican subsidiary then applied for and obtained a new exploration and exploitation concession from the Mexican government covering Solidaridad I. The new concession expires July 2053.
Pursuant to this 2003 agreement with the plaintiffs, we issued 1.5 million shares of our common stock to them. The agreement further provided for the payment of $1 million to the plaintiffs upon the occurrence of a sale of the concession for exploitation purposes. In the original action filed in 2012 and in the current action, plaintiff(s) claim that under the agreement the $1 million payment was due and payable no later than 2009 and ownership of the mining concession should revert back to the plaintiff(s) due to the non-payment.
We have retained counsel in Mexico to represent our subsidiary in this matter. We strongly dispute the allegations raised in the lawsuit and intend to vigorously defend the lawsuit. Our defense will include, among other positions, the fact that plaintiffs had no concession rights to assign under the March 2003 agreement as their concession expired 16 months earlier, we independently obtained the rights to a new (and current) concession from the Mexican government in July 2003, the agreement is ambiguous as to the payment requirement in 2009 and the matter was previously adjudicated in our favor in earlier action, albeit in a different court. We have filed an answer to the above complaint.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
During the three months ended August 31, 2013, we received $455,950 from the sale of 5,046,667 units. Each unit consists of one share of our common stock, and one half of a warrant. The warrants had terms of 12 months and exercise prices of $0.125 or $0.20. The transaction was exempt under Section 4(2) and 3(b) of the Securities Act of 1933, as amended, and the rules and regulations promulgated there under, including Regulations D, due to the facts that the investor was an accredited investor, had acquired the shares for investment purposes and not with a view for re-distribution, had access to sufficient information concerning the Company, and the certificate(s) representing such shares will bear a restrictive legend.
During the three months ended August 31, 2013, we received $190,000 from the sale of 1,900,000 units. Each unit consists of one share of our common stock, and one half of a warrant. The warrants had terms of 6 or 12 months and exercise prices of $0.15 or $0.20. The transaction was exempt under Section 4(2) and 3(b) of the Securities Act of 1933, as amended, and the rules and regulations promulgated there under, including Regulations D, due to the facts that the investor was an accredited investor, had acquired the shares for investment purposes and not with a view for re-distribution, had access to sufficient information concerning the Company, and the certificate(s) representing such shares will bear a restrictive legend.
ITEM 3. DEFAULT OF SENIOR SECURITIES.
As at August 31, 2014, we were in default on repayment of convertible promissory notes with principal balances of $550,000 together with accrued interest of $453,096 totaling $1,003,096.
As of the date of this report, we have not paid the holders of these notes as required under their terms.
ITEM 4. MINING SAFETY DISCLOSURES
Mining operations and properties in the United States are subject to regulation by the Federal Mine Safety and Health Administration ("MSHA") under the Federal Mine Safety and Health Act of 1977 (the "Mine Act"). Pursuant to Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the "Dodd-Frank Act"), issuers are required to disclose specified health and safety violations, orders and citations, related assessments and legal actions, and mining-related fatalities.
During the three month periods ending August 31, 2013 and, 2012, we did not conduct mining operations nor maintain any mining properties in the US. Consequently we were not subject to any health or safety violations, orders and citations, related assessments and legal actions, and mining-related fatalities during the three month periods ending August 31, 2013 and 2012.
ITEM 5. OTHER INFORMATION.
None.
Exhibit Number
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Exhibit Description
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Incorporation by Reference
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Filed herewith
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Form
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File
Number
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Exhibit
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File
Date
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31.1
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Certification of Principal Executive Officer as required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended
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X
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31.2
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Certification of Principal Financial Officer as required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended
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|
|
|
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X
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32.1
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Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350)
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|
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X
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32.2
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Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350)
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X
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101.INS
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XBRL Instance Document (1)
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X
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101.SCH
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XBRL Taxonomy Extension Schema Document (1)
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|
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X
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101.CAL
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XBRL Taxonomy Extension Calculation Linkbase Document (1)
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|
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X
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101.DEF
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XBRL Taxonomy Extension Definition Linkbase Document (1)
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|
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X
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101.LAB
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XBRL Taxonomy Extension Label Linkbase Document (1)
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|
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X
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101.PRE
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XBRL Taxonomy Extension Presentation Linkbase Document (1)
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|
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X
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(1)
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Pursuant to Rule 406T of Regulation S-T, this interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections.
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Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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U.S. Precious Metals, Inc.
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By:
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/s/ Gennaro Pane
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Name: Gennaro Pane
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Title: Chief Executive Officer
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Date: October 14, 2014
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U.S. Precious Metals, Inc.
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By:
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/s/ David J Cutler
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Name: David J Cutler
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Title: Chief Financial Officer
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Date: October 14, 2014
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